The Regional Influence of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd

The House of Lords’ decision of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd^[430] has had a fundamental effect on Caribbean jurisprudence in the region’s acceptance of the broad test of materiality and in the recognition of inducement so that the non-disclosed material fact must be seen to have induced the underwriter to enter into a contract.

First it is perhaps trite to observe that regional jurisprudence accepts that materiality is an essential ingredient of the duty of utmost good faith. As Justice Hamel-Smith in the High Court decision of Hosein & Co v Goodwill Life & General Insurance Co Ltd opined: �non-disclosure does not exist in isolation...the crucial qualification [on the duty of uberrimae fidei] is the right to avoid a contract on the basis of non-disclosure hinges on materiality.’^[431] Indeed, the relevance of materiality is well settled; the test of materiality being a question of law, while the actual determination of the issue in any particular case involves the resolution of a question of fact.^[432] Being a question of fact, it is generally a question solely for the trial judge or arbitrator and not subject to appeal, and, furthermore, strictly no decision is actually binding in a later case under the doctrine of precedent.^[433] But as John Birds notes, �much of the criticism of the wide ranging nature of the duty has been directed at the central question of the test for determining materiality.’^[434] Disputes as to the test to be applied, stem from the phrase �influence the judgment’ in section 18 of the Marine Insurance Act of 1906. A narrow interpretation of the phrase �would influence the judgment of a prudent insurer,’ equates the meaning of the term �judgment’ with the final decision, i.e., �would have a decisive influence in the determination of the premium.’ The broader test on the other hand is that all that is required is that the prudent or reasonable insurer would have wished to know about the fact when reaching his decision.^[435] The stringent approach — equating �affecting’ the mind with those considerations which will ultimately determine whether or not the insurer will accept insurance and if so at what premium and on what condition - was applied in the decisions of Lambert v Cooperative Insurance Society Ltd,^[436] and Barclays Holdings (Australia) Pty Ltd v British National Insurance Co Ltd.^[437] In the Caribbean, although the narrow test briefly made appearance with the judgment of Justice Hamel-Smith in Hosein & Co v Goodwill Life & General Insurance Co Ltd,^[438] Pan Atlantic has firmly shut the door on this option as the House of Lords by a majority of three to two rejected the decisive influence test with the result that materiality does not depend on what the ordinary insured would or would not be expected to disclose, but on what a prudent underwriter would take into account when assessing the risks.^[439]

The other aspect of the Pan Atlantic decision which certainly adds to the complexity of the doctrine is that the House of Lords, by a unanimous decision, held that there must be a causal connection between the non­disclosure and the making of the contract if the insurer is to be entitled to avoid the contract.

The presumption of a causative effect in the Caribbean^{[442] [443] is confirmed by several cases including Solomon Ghany,91 Bowe,[444] and Alleyne.[445] It is cautiously suggested that the test of inducement may be satisfied, as opposed to being presumed, where there is strong evidence of materiality}

— for as is often stated, inducement cannot be inferred in law from proved materiality.

The question therefore becomes how strong must the evidence be? In Insurance Corporation of the Channel Islands v Royal Hotel Ltd,^[446] the falsification of the hotel’s occupancy rates to inflate the sums payable under a business’ interruption policy, easily amounted to inducement. Similarly, in Bowe, the non-disclosure of the insured’s chronic alcoholism easily satisfied the test; in Joseph, the insured’s non-compliance with an express clause obviously rendered the question of materiality redundant. On the other side of the coin are instances where the actual insurer failed to establish inducement. So that in Drake Insurance plc v Provident Insurance plc,^[447] a case of motor insurance, where it was common ground that the non-disclosure was objectively material due to an elaborate point system and the question hinged on inducement, the Court of Appeal found that the insurer had no right to avoid the policy as it had not been induced to enter into the contract by reason of the speeding conviction.

The next question to be addressed is on which insurer’s shoulders does the inducement test lie? Is it the reasonable insurer, the prudent insurer, or the actual insurer? While it is clear that the test is not to be satisfied by the reasonable insurer, the prudent insurer and the actual insurer are inextricably intertwined. According to Pan Atlantic, the non-disclosed fact must be material in the opinion of the prudent insurer but must have actually induced the actual insurer to enter into the contract. It seems, therefore, that with regard to materiality, an objective standard applies

— the prudent insurer — while with inducement, a subjective test of the actual insurer applies. This distinction is not clearly upheld in Caribbean common law. In the complex marine insurance case, Marc Rich & Co AG v Portman,^[448] the extremely poor claims record of the insured led to a presumption of inducement. Longmore J stated that the presumption of inducement can only operate where the actual underwriter cannot, for very good reason, give evidence and there is no reason to suppose that he acted other than prudently for at the end of the day it is for the insurer to establish inducement (a position upheld by the Court of Appeal without any clarification of the issue). According to Clarke LJ in the subsequent decision of Assicurazoni Generali Spa v Arab Insurance Group (BSC),^[449] in order to be entitled to avoid a contract of insurance, an insurer must prove on the balance of probabilities that he was induced.

A sense of the regional approach can be gleaned from Solomon Ghany,^[450] where Justice Moosai concluded at page 31:

(i) That appears to me to satisfy the test of inducement as propounded in Pan Atlantic. (ii) Inducement cannot be inferred in law from proved materiality, although there may be cases where the materiality is so obvious as to justify an inference of fact that the representee was actually induced, but, even in such exceptional circumstances, the inference is only a prima facie one, and may be rebutted by counter-evidence. (iii) On the facts of the case, the materiality was so obvious as to justify an inference that the representee was actually induced entitling the defendant insurer to avoid the contract.

Although there is difficulty in understanding how an insurer can be induced to enter into a contract due to a circumstance of which he was unaware,^[451] materiality does not automatically lead to a presumption of inducement but that the particular facts may give rise to such an inference.^{[452] [453] The requirement of inducement prompts further inquiry since the House of Lords rejected the narrow test of materiality because it required reading more into the Marine Insurance Act than is apparent on its face but surely the majority by concluding �that there is to be implied in the Act of 1906, a requirement that a material misrepresentation will only entitle the insurer to avoid the policy if it induced the making of the contract’ amounts to the same offence given that there is no mention of �inducement’ in section 21(1).107 Apart from the academic concern, unfortunately, the insured cannot take comfort in the view that, by attaching inducement to the requirement of uberrimae fidei, an additional burden has been placed on the insurer since such hopes are effectively dashed due to the ease with which inducement, it being presumed, can be established.}

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