Follow my Leader? Bob Moxon Browne looks at the decision in Scottish Coal v. Royal and Sun Alliance Insurance
Expertise: Insurance & Reinsurance
Follow my Leader? Bob Moxon Browne looks at the decision in Scottish Coal v. Royal and Sun Alliance Insurance, and the implications for following market insurers
It is very common for following market insurers to take a share of a risk on the basis of a decision made by the lead underwriter: what is good enough for him is deemed good enough for those who follow. But can non-disclosure or misrepresentation to a leading underwriter be relied on by the following market as a ground to avoid the policy, in the absence of any evidence that the non-disclosure or misrepresentation ever came to their knowledge? This point, which is obviously of considerable practical importance, is, surprisingly, free from direct authority.
In Pan Atlantic v. Pine Top (1994) 3 All ER 581 the House of Lords certainly made it clear that the insurance contract is only voidable for misrepresentation upon proof from the relevant underwriter that his decisions were influenced by the information given to him. But in practice, this rule has been attenuated in a number of cases, where it has been held that a failure to make a fair presentation to the lead underwriter is itself material to disclose to the following market, who can avoid the contract if they can show that their relevant decisions were based on a belief that the lead underwriter had been accurately informed. However a different view was taken by Longmore J in Sirius International v. Oriental Assurance (1999) Ll Rep 343, who held, without reference to Aneco, that the following market have no right to avoid the policy if they have not themselves been on the receiving end of misrepresentation or non-disclosure. Longmore J stressed the importance in this context of the need to scratch documents to show they have been seen by each relevant insurer.
The conflict on the authorities was considered by HHJ Dean QC in International Lottery Management v. Dumas 2002 Ll Rep 237, who followed Aneco in a decision which has since been criticised by academic writers as containing some doubtful reasoning.
The same point arose in Scottish Coal v. Royal and Sun Alliance and Ors(2008) EWHC 880, a decision by Steel J, the Commercial Court’s senior judge. In a 54 page judgment handed down on 28th April 2008, Steel J found for Scottish Coal in their claim against Royal and Sun Alliance as lead insurer, and various other companies in the following market. Points at issue concerned the extent to which Scottish Coal’s mining methods, leading directly to a serious mining collapse, should have been disclosed to insurers. The Judge found that the chosen mining technique had not been disclosed as it ought to have been. However he saw “significant obstacles” to insurers’ defence because the following market insurers (who held most of the risk, but who gave no evidence) had not shown that their underwriting decisions had been influenced by the non-disclosure. At any rate in the absence of any expert evidence, the Judge was not prepared to assume that these insurers would have reached the same conclusion as the lead insurers about the significance of the mining method proposed, if they had been told about it.
However it was unnecessary for the Judge to reach a concluded view on this interesting point. He also found that the insurance contract had been affirmed (by its temporary extension before insurers went off cover). Again, the absence of any evidence from the following market, for example as to any reservation of their position, influenced his conclusion that the decision of all insurers to extend the insurance was only consistent with their intention to affirm it. Scottish Coal – privatised in the mid-nineties – was the last of the traditional deep mines in Scotland, extracting coal from the Longannet mine and supplying it to the nearby Longannet power station on the north shore of the Firth of Forth. The enterprise was insured by RSA and others offering total cover of around £100m.
The risk was obviously extremely large and very complex, and was the subject of annual surveys by specialist engineers known as IMIU, who reported to RSA. RSA took a close interest in IMIU’s reports and based their insurance decisions (e.g. as to premiums, sums insured, deductibles etc) on these. However, by contrast, the other insurers involved seem to have done no more than follow RSA’s lead in sharing the risk with them – at any rate the evidence in the case did not suggest that this following market made any enquiries at all of its own.
In early 2000 the roof of part of the mine collapsed in the course of mining operations, causing the loss of valuable equipment and consequent interruption to production, although happily there was no loss of life. An insurance claim followed, which after prolonged investigation lead to insurers’ refusal to offer any indemnity. Various grounds were put forward for the refusal to pay, all of which were variants on the theme that when the collapse occurred Scottish Coal had been engaged on a novel and highly risky mining operation, the nature of which had never been disclosed to IMIU, and which had the effect of materially changing the nature of the risk which RSA and the following market had agreed to insure.
After a lengthy trial Steel J found a set of facts broadly conforming to the evidence of IMIU and RSA’s witnesses, to the effect that when the collapse occurred Scottish Coal had indeed been engaged in an unusual and very risky operation, and he rejected Scottish Coal’s evidence that IMIU had been duly informed of what the mine intended to do, and in the event did. This involved findings that Scottish Coal had removed a pillar of coal which was performing a vital support function, in doing so ignoring or overriding specialist advice from their own consultants about the risks involved.
In addition to the plea of non-disclosure, the Defendants relied on a policy clause permitting an election to avoid the contract in the event of a material change in the risk insured. In relation to this defence, it was unnecessary to go into the question of inducement: it would suffice for insurers to show that they had insured one type of risk (i.e., as they alleged, mining by conventional methods); whereas in the event the insured ran a different risk (mining by unconventional and dangerous methods). This defence failed. The Judge held that Scottish Coal’s mining technique certainly increased the risk, but it did not change the risk, which remained the risk of collapse resulting from mining operations.
Finally, the insurers made a determined effort to show that Scottish Coal were in breach of a policy condition requiring them “to take all reasonable steps to safeguard their property, prevent accidents and minimise loss or damage”. This was ambitious. Obviously the policy covered accidents, including those caused by the insured’s own negligence or stupidity. Insurers had to show that the insured’s conduct was “at least reckless, that is to say carried out with actual recognition by the insured himself that a danger exists, not caring whether or not it is averted”.
The Defendants thought they were on strong ground here: there was plenty of evidence that Scottish Coal’s conduct, especially in failing to incur the cost of following good advice, was entirely deliberate. However the Judge concluded that “the explanation for the shortfall in design and performance was a lack of understanding of the relevant engineering principles” – thus reiterating the important distinction between deliberate conduct which deliberately increases risk, and deliberate conduct which inadvertently increases risk. The application of this principle to domestic insurance claims when the insured has failed to take basic precautions to safeguard his property (many of which are the subject of complaints to the insurance Ombudsman) is obvious.
BOB MOXON BROWNE
Bob Moxon Browne QC is a member of 2tg’s specialised insurance group. He appeared for Scottish Coal in the litigation discussed above, leading Andrew Miller. Bob and Andrew were instructed by McClure Naismith.
 See Aneco Reinsurance v. Johnson & Higgins 1998 1 Ll Rep 569.
 See e.g. Colinvaux 8th Edit. at 6-118.
 See Kansar v. Eagle Star (2000) 2 Ll Rep 154; and Swiss Re v. United India Insurance (2005) EWHC 237.
 See Frazer v. Furman Productions (1967) 2 Ll Rep. 1.
 See on the same point Sofi v. Prudential Assurance (1993) 2 Ll Rep 559 and Devco Holden Ltd v. Legal and General (1993) 2 Ll Rep 567.