What if the insurer ends up charging less premium and non-disclosure of material facts is a contributory factor? Could it be said in that case that inducement is established as a matter of law? This was essentially the thrust of the insurer’s appeal in Zurich Insurance plc v. Niramax Group Ltd  EWCA Civ 590 against the judgment of Mrs Justice Cockerill, J (which also was reported on this blog last year). Reminding readers the facts briefly: the assured ran a waste collection and waste recycling centre and obtained an insurance policy from the insurer in December 2014. In September 2015 a fixed shredding machine, known as Eggersmann plant, was added to the policy with an endorsement. On 4 December 2015, a fire broke out at the assured’s premises and the Eggersmann plant along with the other plant was destroyed. The assured made a claim, which, at trial was valued at around £ 4.5 million, under the Policy. The majority of the claim related to the loss of the Eggersmann plant, which was valued around £ 4.3 million. The insurer refused to pay stating that the assured’s non-compliance with risk requirements under the buildings policy with another insurer and the fact that special terms under that policy were imposed on the assured were materials facts which needed to be disclosed under s. 18(1) of the MIA 1906. Mrs Justice Cockerill agreed that these were material facts and needed to be disclosed. However, it was held that the insurer failed to demonstrate that, if the facts had been fully disclosed, the original Policy for the plant (effected in December 2014) would not have been renewed. On the other hand, the insurer was able to demonstrate that, if the facts had been fully disclosed (especially imposition of special circumstances for the assured company by another insurer), the extension of cover for the Eggersmann plant would have been refused. Accordingly, it was held that the insurer was entitled to avoid the cover for the endorsement under the Policy and no indemnity was due for the loss of the Eggermanns plant. Otherwise, the original Policy stood and the insurer was bound to indemnify the assured for the items of mobile plant which were covered by the original Policy (as renewed in December 2014) and damaged in the fire.
On appeal, the assured was essentially arguing that they should have been allowed to avoid the original policy as well as the Eggersmann endorsement as they ended up charging less premium as a result of the assured’s non-disclosure with regard to special conditions imposed on them by another insurer due to non- compliance with risk requirements. Before evaluating the legal position on “inducement”, it is worth highlighting facts that led the insurer to charge premium less than it would have normally done. When rating risks, the particular insurer normally apply a “commoditised and streamlined” process that take into account three aspects, namely the amount of the cover, the nature of the trade, and the claims experience. A junior employee of the insurer when entering these variables, instead of categorising the risk as waste, with an automatic premium of 6 %, categorised it as contractor’s portable plant, with a premium of 2.25, to which a loading of 40 % was applied. The argument of the insurer is that if full disclosure had been made, the risk would have been referred to the head underwriter who would have noticed the mistake and accordingly priced the premium correctly. The non-disclosure therefore fulfills a “but for” test of causation in that it provided the opportunity for a mistake to be made in the calculation of premium that would not otherwise have been made.
Popplewell, LJ stressed in his judgment, at , that
“in order for non-disclosure to induce an underwriter to write the insurance on less onerous terms than would have been imposed if disclosure had been made, the non-disclosure must have been an efficient cause of the difference in terms. If that test of causation is not fulfilled, it is not sufficient merely to establish that the less onerous terms would have not been imposed but for the non-disclosure.”
To support this finding, he made reference to several legal authorities, including the judgment of the House of Lords in Pan Atlantic Insurance Ltd v. Pine Top Ltd  1 AC 501, but perhaps the words of Clarke, LJ, in Assicurazioni Generali SpA v. Arab Insurance Group  EWCA 1642, at  emphasised in the clearest fashion the accurate legal position:
“In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of doing so.”
The Court of Appeal’s judgment in the present case, and the line of authority on the subject of inducement, is a good reminder that in most cases if an insurer cannot satisfy the effective cause test he will also be unable to satisfy the “but for test”. But the opposite is not always true. There could be cases, like the present one, where it is possible to satisfy the “but for test” but the non-disclosure or misrepresentation could still not be the effective cause leading the insurer to enter into the contract on the terms it did. Here, the reason for the insurer charging less premium for the risk underwritten in December 2014 was the error of the junior employee mistakenly categorising the risk. The insurer has, therefore, failed to prove that non-disclosure of the condition imposed by another insurer had any impact on the premium charged or the decision to insure the assured. Accordingly, the judgment of the trial judge on this point (lack of inducement to enable the insurer to avoid the original policy) was upheld.
The case was considered under the Marine Insurance Act 1906 (s. 18). The law in this area was reformed by the Insurance Act 2015 especially with regard to remedies available in case of breach of the duty to make a fair representation. There is no indication, however, that the law reform intended to alter the “inducement” requirement (and in fact the Law Commissions stated clearly in the relevant reports published that this was not the case). It can, therefore, be safely said that the decision would have been the same has the case been litigated under the Insurance Act 2015.