The House of Lords gave its long-awaited judgment in Pan Atlantic v Pine Top in July 1994. In a 67-page ruling with serious and immediate implications for insurers and reinsurers, 200 years of insurance case law have been reviewed and reinterpreted. Key parts of the 1994 decision of the Court of Appeal in CTI v Oceanus have been overruled. The balance and burden between insured and insurer, cedant and reinsurer have shifted.

The Pan Atlantic dispute arose from efforts by reinsurer Pine Top to avoid a policy covering Pan Atlantic's 1977-1982 Casualty Account. Argument centred on disclosure of Pan Atlantic's claims history prior to the 1982 year of account.

The House of Lords upheld Pine Top's right to avoid for the 1982 year, but introduced into the law a rule allowing the insured to defeat the underwriter's right to avoid by proving that, had the underwriter known the true full facts, he would probably have offered the business anyway on the same terms as he in fact did.

In summary, avoidance for non-disclosure or misrepresentation of a material fact or facts will now be justified if:

  • (a) the fact or circumstances alleged to have been misrepresented
  • or withheld was "material" in the sense that a prudent underwriter
  • would have wanted to know the full and true position in order to
  • take it into account in deciding whether, and if so on what terms,
  • to write the business; and
  • (b) the requirement to make full and accurate disclosure has not been
  • waived by the underwriter in the particular case; and
  • (c) the misrepresentation or non-disclosure in question actually
  • "inducted" the particular underwriter to subscribe to the particular
  • risk on the particular terms offered; and
  • (d) the right to avoid has not been lost by waiver, affirmation,
  • estoppel or some other bar.
The key to the greatest reform wrought by the Pan Atlantic judgment lies in (c). Once "materiality" under the test in (a) is proven, then "inducement" will be presumed, and the burden will lie on the insured to prove that, even had the true full position been known to the underwriter in question at the time he agreed to take the risk, he would probably have written the business anyway on the same terms as those which he in fact offered. This will not be an easy task in many cases.

Some practical consequences for underwriters
  • 1 Underwriters to the cover sought to be avoided must be prepared to
  • testify as to what induced them to write the particular risk and
  • whether, had they known the true facts at the time they took it,
  • they would probably have declined it altogether or altered the
  • terms offered. They may fact searching cross-examination about
  • their underwriting practices and criteria and how closely they
  • adhered to them at the time;
  • 2 Insureds and reinsureds are likely to make sweeping requests for
  • disclosure and inspection of underwriting files, not just on the
  • cover sought to be avoided, but on similar risks, in efforts to
  • prove that the underwriter would in fact have offered the same
  • terms even had the full true facts been known to him;
  • 3 Contemporaneous records of an underwriter's reasons for accepting
  • a risk and for offering cover on particular terms, become vital
  • evidence. If they are incomplete or flawed, the insured may
  • succeed in showing that the non-disclosure or misrepresentation
  • in question probably had no effect on the decision of the
  • particular underwriter on the particular risk.
Robert Viney

Robert Viney is an insurance litigation partner with City solicitors Davies Arnold Cooper.

The contents of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances from Robert Viney (Tel.071 936 2222) of Davies Arnold Cooper's London office or Nicholas Rudgard (Tel. 061 839 8396) of Davies Arnold Cooper's Manchester office.

Copyright Mondaq Ltd 1995 Tel +44 171 820 7733.