Asia Insurance Briefing

Profession:Herbert Smith
 
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Article by Gareth Thomas and Tommy Tong

'Moral Hazard'

Brotherton v Aseguradora Colseguros

(Transcript 22nd May 2003, Court of Appeal (Eng))

Arising from the judgment of Colman J. in Strive Shipping Corp. v Hellenic Mutual War Risks Association (The 'Grecia Express') [2002] EWHC 203, there has been much debate about the extent to which an insured can mitigate his failure prior to the inception of an insurance policy to disclose allegations of misconduct by demonstrating later that the allegations were false. That debate may have been laid to rest by the Judgment of the Court of Appeal in Brotherton.

Facts

In Brotherton, the claimant reinsurers are seeking to avoid their policy of reinsurance with the defendants, who insured a Columbian state-owned bank under a bankers blanket bond policy, which covered, amongst other things, losses caused by the dishonest or fraudulent acts of bank employees. The basis of their avoidance was the failure by the defendants to disclose news bulletins and newspaper articles carrying reports of allegations of misconduct on the part of the president of the bank, which had led to his suspension and arrest. In short, the reinsurers alleged that the defendants had failed to disclose a 'moral hazard' of their insured.

The defendants had sought leave to call evidence at the trial to prove that all the undisclosed allegations made against the president had either been dropped or disproved. They did so in reliance on the reasoning of Colman J. in The 'Grecia Express', in which he held that " I do not consider that failure to disclose allegations which on the evidence before the Court are proved to have been false entitles underwriters to avoid the policy".

Judgment

At first instance, Moore-Bick J., consistent with his earlier judgment in Drake Insurance v Provident Insurance, rejected this reasoning and struck out that part of the defence which raised these issues, thereby preventing the defendants from calling evidence as to the president's innocence of the allegations at trial.

Unanimously, the Court of Appeal upheld the decision. Giving the leading judgment, Mance LJ, who had left the point open in ICCI v Royal Hotel [1998] LRLR 151, held that it would be an unsound step to introduce a principle of law which would enable an insured either not to disclose allegations which a prudent insurer would regard as material or subsequently resist avoidance by insisting on a trial in circumstances where, if the insurers never found out about the allegations the insured would face no difficulties in obtaining payment for his losses, however directly relevant the allegations were...

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