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High Court appeal upheld as FSO erred in home insurance policy case
In the recent case of Earls v Financial Services Ombudsman, the High Court considered whether the Financial Services Ombudsman (FSO) had erred in law in determining that an insurer was entitled to avoid a home insurance policy for material non-disclosure.
In March 2008 a taxi was stolen in Limerick City. It was driven into St Mary's Park and a machine gun used to fire bullets indiscriminately from the car. Although the complainant's house was not the target of the shooting, it was struck by the bullets. The complainant was on holiday at the time of the incident and made a preliminary call to AXA, her home insurer at the time. On her return, she discovered that the damage to her property was minimal and did not proceed to make a claim.
In November 2010 the complainant switched her home insurance to FBD. When asked on the FBD website "how many accidents or claims have you had in the past five years?", the complainant's partner entered zero. The policy documentation arrived a couple of days later, which the complainant signed and returned to FBD.
In August 2013, almost three years later, the complainant's house was set on fire while she was away. In October 2013 FBD avoided the policy on the basis that the complainant had failed to disclose a previous claim with AXA in respect of damage caused to her property by gunfire in March 2008. However, the complainant complained to the FSO and in August 2014 the deputy FSO concluded that the shooting incident was a material fact which ought to have been disclosed to FBD at the time of proposing cover in November 2010. The complaint was not upheld.
Judge Barrett posed the question:
"if a couple of random bullets grazed my property and the damage is so utterly trivial that I never make an insurance claim, and the event is so haphazard that I put it from my mind, is that a fact that my new home insurer can rely upon lawfully to disallow my home insurance policy when my house is years later destroyed by fire?"
However, Barrett also noted that this question was not to be determined by the court; rather, the question to be determined was whether the FSO had erred in law.
In considering whether the FSO had erred in its finding, the court examined previous case law on the duty of disclosure and in particular the cases of Chariot Inns Limited v Assicurazion Generali, Aro Road and Land Vehicles Limited v The Insurance Corporation of Ireland and Kelleher v Irish Life Assurance Company Limited. The court also noted that the case concerned a consumer contract and thus all comments and findings of the court were made exclusively in that context.
The court summarised the principles arising from Chariot Inns, Aro Road and Kelleher as follows:
- Utmost good faith:
- A contract of insurance is a contract of the utmost good faith on both sides (Aro Road).
- Disclosure of material matters:
- Answering questions correctly is not the sole duty of the insured. The insured must disclose all matters which might reasonably be thought to be material risks against which indemnity is sought (Chariot, Aro Road).
- The duty involves exercising a general effort to achieve accuracy using all reasonable sources available (to require disclosure of all material facts may require an impossible level of performance (Aro Road).
- The form of questions asked in a proposal form may make the applicant's duty to disclose stricter than general duty. However, it is more likely that the questions will limit the duty of disclosure. The litmus test is whether a reasonable person reading the proposal form would conclude that information over and above that which is an issue is required (Kelleher).
- Test of materiality:
- Materiality fails to be gauged by reference to the hypothetical prudent insurer (Chariot).
- In the absence of a question directed towards the disclosure of a particular fact, the arbiter must consider what a reasonable insured would think relevant – relevance in this context is not determined by reference to an insurer alone (Aro Road).
- Over-the-counter insurance:
- In case of over-the-counter insurance of the type identified in Aro Road, the insurer is not entitled in the absence of fraud to repudiate on grounds of non-disclosure (Aro Road).
- Determiner of materiality:
- The sole and final determiner of materiality is the arbiter, not the insurer (Chariot, Aro).
The court concluded that the deputy FSO had erred in law on at least five grounds:
- It was unclear to the court that due regard was given to the fact that a contract of insurance is a contract of the utmost good faith on both sides. No regard appears to have been given to the issue of whether, based on the facts, FBD had manifested the utmost good faith. In this respect, the court suggested that the FSO may wish to consider the possibility that a reasonably assertive claims policy may have strayed across into an unreasonably avaricious claims policy which sought to dislodge a genuine claim on specious grounds under the ostensibly legitimising umbrella of utmost good faith.
- It appeared to the court that the deputy FSO had proceeded on the basis that if a material fact is not disclosed then, by the very fact itself, the duty of disclosure has been breached. The deputy FSO had no regard to the fact that the duty of an insured is to exercise a genuine effort to achieve accuracy using all reasonably available sources (Aro Road).
- It was not apparent to the court that the deputy FSO had considered the possibility that the form of questions asked in a proposal form may (Kelleher style) limit the duty of disclosure arising, even though it appeared from the pleadings that the form of questions had been raised as an issue.
- It was not apparent that the deputy FSO had regard to the fact that in the absence of a question directed towards a disclosure of a particular fact, the arbiter must consider what a reasonable insured would think relevant (Aro Road). Relevance in this context is not determined by reference to an insurer alone. The court suggested that the FSO may wish to have regard to the issue of whether in the apparent absence of any question of whether a particular property has been subject of criminality, a general reliance on any other material facts satisfies the particularity that the court saw as expressly requiring the disclosure of a certain fact.
- There was no acknowledgment in the deputy FSO's decision as to whether she was dealing with over-the-counter style insurance and the consequences of this.
The appeal was upheld and the complaint remitted to the FSO.
This article first appeared in the International Law Office Insurance newsletter, 20 October 2015.