England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CCRTF 96/0589/C

(MR RECORDER STEPHEN HOCKMAN QC )

Royal Courts of Justice

Strand

London WC2

Thursday, 22nd May 1997

B e f o r e:

LORD JUSTICE SIMON BROWN

LORD JUSTICE PETER GIBSON

SIR IAIN GLIDEWELL

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ECONOMIDES

Appellant

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COMMERCIAL UNION ASSURANCE CO PLC

Respondent

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(Transcript of the Handed-down Judgment of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR R BARTLETT (instructed by Messrs Protopapas, London W1P 9LE) appeared on behalf of the Appellant/Plaintiff.

MS M L KINSLER (instructed by Messrs Kennedys, London EC1Y 4TY) appeared on behalf of the Respondent/Defendant.

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J U D G M E N T

(As approved by the Court)

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©Crown Copyright

LORD JUSTICE SIMON BROWN: On 22nd October 1991 the appellant's flat was burgled and property worth some £31,000 was stolen. The bulk of the items stolen were valuables - jewellery, silverware and the like - and most of it belonged to his mother and father. The appellant had at the time a household contents policy with the respondent insurers, the total sum insured being £16,000 and the maximum recoverable for valuables (as defined in the policy) being one-third of that amount. Following the loss the appellant claimed under the policy. The respondents repudiated liability, alleging both misrepresentation and non-disclosure of material facts. It was their case that the appellant had represented that to the best of his knowledge and belief (i) the full cost of replacing all the contents of his flat as new was £16,000 whereas at the time of the burglary it was some £40,000, and (ii) that the total value of the valuables did not exceed one-third of £16,000 (£5,333) whereas by a very considerable margin it did - nearly £30,000 of the £40,000 total being represented by valuables. Further or alternatively, the respondents contended, the appellant was in breach of a duty to disclose as material facts (i) that the full cost of replacing the contents was substantially more than £16,000, and (ii) that the valuables were worth very substantially more than £5,333 (or, indeed, than one-third of the actual total value).

All those contentions succeeded below: on 2nd April 1996 Mr Recorder Hockman QC at the Central London County Court dismissed the appellant's claim. It had been agreed that, were his policy effective, the sum recoverable under it would be £7,815.38 exclusive of interest. The appellant now appeals to this court. The appeal raises questions of some importance, both for insurers and for those with home contents policies.

With that short introduction let me return in a little more detail to the facts. Cover under this policy began in January 1988. The appellant was at the time aged 18. Some 2½ years previously he had come to England from Cyprus to study. Whilst here he became the leasehold owner and occupier of a flat in north London. His parents, then still living in Cyprus, visited him from time to time.

On 7th January 1988 the appellant completed and signed a proposal form entitled ´Priority Application Form' which reads in part as follows:

"Yes I wish to insure the contents of my home and I understand that I will be covered on acceptance of my application and payment of my first premium.

Please send my personal policy documents to study at home without obligation for a full 15 days.

Please read carefully before completing this form.

The questions on this application form generally provide sufficient information for the insurers to assess the risk. However there may be some special feature concerning you or your family or your property, its location or use that is not covered by the questions but which might nevertheless affect their judgement. If you can think of anything which might influence the likelihood or severity of a loss, please give full details. If you are in any doubt whether a fact may affect their judgement, you should give details as failure to do so could invalidate the insurance ...

Home Contents ...

Sum to be insured £12,000 (including property of members of your family permanently residing with you. The figure must represent the full cost of replacing all your contents as new...)

Contents questions

4. Does the total value of precious metals or stones, jewellery, furs, curios, works of art, watches, exceed one third of the sum insured? ...

[To the latter question the Plaintiff answered "No".]

Declaration:

I/We declare that the statements and particulars given above and overleaf are to the best of my/our knowledge and belief, true and complete, that the sums insured under this Plan will be maintained on an up-to-date basis and that this proposal shall form the basis of the contract between me/us and the insurers."

That proposal was accepted by the respondents and a copy of their policy wording was sent to the appellant. The only parts I need read are these:

"Sum Insured

The amount shown in your current schedule or latest renewal invitation, being the maximum amount Insurers will normally pay in respect of a claim.

Contents

...

Valuables up to 33_% of Sum Insured ...

...

all owned by or the responsibility of you or members of your Household ... while contained within your Home."

[I need not set out the definition of Valuables.]

"Insurers will pay the cost of ... replacement as new following total loss ...

If at the time of any loss or damage the cost of replacing all the Contents as new is greater than the Sum Insured then any payment under the Home Contents section will be made after a deduction for any wear or depreciation."

The sum insured, initially £12,000, was index-linked. By the time for renewal in 1991 it had thereby increased to £12,800. No one suggests that in those initial years it failed to represent the full replacement value of the contents or that the valuables were worth more than one-third of it.

In 1990 the appellant's parents came to live permanently in England and took up residence at his flat, first his mother, then his father. They brought with them from Cyprus a considerable quantity of chattels which they kept in a wardrobe or suitcase in their double bedroom here. Mother told the appellant that she had brought both jewellery and silverware, much of which it was proposed to pass on to him when he got married. He saw some of the jewellery as and when his mother wore it; he showed, said mother, no interest in the silverware. He was but 21 at the time. Father had been a police divisional commander in Cyprus. He it was who suggested that the appellant should increase his contents insurance by some £3,000-£4,000 to take account of the value of these further chattels and that is precisely what the appellant did.

It would seem that towards the end of 1990 the appellant must have telephoned the respondents and told them to increase the sum insured to £16,000. The single document evidencing the January 1991 renewal is a Renewal Notice dated 6th December 1990 referring to the sum insured as £16,000 and reminding the appellant that his policy was renewable on 14th January 1991. The Notice contains a paragraph headed ´Important News' reading:

"It is important to remember that when you proposed for this insurance you gave information which enabled the insurer to assess the risk and arrive at the premium terms and conditions of your present insurance. You should advise us of any facts not already passed on to us, and of any circumstances which may have changed since the proposal was made, so that the insurer can reassess the risk if necessary. FAILURE TO DO SO MAY MEAN THAT THE POLICY MAY NOT OPERATE FULLY OR EVEN AT ALL".

As stated, the loss occurred on 22nd October 1991 and it was only then - when the appellant and others (in particular his sister) obtained from his mother a description of the items stolen, researched their appropriate retail prices, and thereby calculated their replacement cost - that the total value of the loss was established, fairly and in good faith as the judge below accepted, at £30,970 (the total value of the contents being found to be some £40,000).

It follows from all this that whereas the sum insured was in fact increased in January 1991 by £3,200, the value of the contents had actually increased by some £27,000 - and the value of the valuables now greatly exceeded one-third of the total.

The claim on the policy was made on 10th November 1991. On 22nd June 1992 the respondents (or rather a panel of insurers of whom the respondents were the lead company) asserted an entitlement to avoid liability on grounds of misrepresentation and non-disclosure. On 8th December 1993 the particulars of claim were issued.

So much for the facts. I shall now consider each defence in turn.

The appellant has conceded throughout that at the time of the 1991 renewal he represented that to the best of his knowledge and belief (hereafter ´he believed that') the full cost of replacing all the contents of his flat as new (hereafter ´the full contents value') was £16,000. He does not, however, concede, although the judge below understood otherwise, that at the time of renewal, as opposed to the date of inception, he represented that the valuables did not account for more than one-third of that sum. Although at first I had some difficulty in understanding how these two matters could be distinguished, it now seems to me arguably possible, on this basis: whereas the statements in the original proposal form - "the [sum to be insured] must represent the full cost of replacing all your contents as new" and "the sums insured under this Plan will be maintained on an up-to-date basis" -

carry over and impliedly attach also to valuations on renewal (assuming the appellant's concession is rightly made), the assured, when answering at inception that the value of the valuables did not exceed one-third of the total, arguably was not then undertaking to keep them within that proportion - his promise to maintain "the sums insured ... on an up-to-date basis" (my emphasis) being insufficient for that purpose.

To my mind, however, this difficulty - if such it is - need not be resolved: the respondents' case on the facts is the same, neither stronger nor weaker, irrespective whether the appellant made both representations or only one. I shall accordingly concentrate primarily on the question of overall value.

What then was meant by the appellant's representation that, as at January 1991, he believed that the full contents value was £16,000? The judge below considered three possible meanings:

(i) That £16,000 was in fact the full value.

(ii) That the appellant honestly believed that £16,000 was the full value and had reasonable grounds for his belief.

(iii) That he honestly believed that £16,000 was the full value.

The judge understood Ms Kinsler for the respondents to be contending for both (i) and (ii) and found in her favour on both i.e. on (i), alternatively (if that went too far) on (ii). He rejected the appellant's argument in favour of (iii). Ms Kinsler told us that she never in fact put the case as high as (i) and certainly does not contend for that now. In the result the issue on appeal is between (ii) and (iii): when making a representation such as this, is the assured stating merely that he honestly believes the accuracy of his valuation or is he going further and impliedly stating too that he has reasonable grounds for that belief?

That issue was, I should note, critical because whereas the judge appears to have accepted that "looking at the matter from the plaintiff's own subjective point of view [he] was entitled to accept the figure which his father put forward" - i.e. he honestly believed that £16,000 was the full contents value - he concluded: "it is clear that the plaintiff did not have reasonable grounds for the representations that he made. Knowing as he did that his parents had introduced into the flat a quantity of jewellery and silverware, it would have been necessary for him to make substantially more enquiries than he did make before he could be said to have reasonable grounds for his belief. It is not necessary to specify what those enquiries might have involved."

In short, the judge below held that "commercial reality and common sense" required the appellant here as the representor to have objectively reasonable grounds for his belief; honesty alone was not enough.

In reaching this conclusion the judge relied upon two authorities in particular: Smith v Land and House Property Corporation (1884) 28 ChD 7, and Brown v Raphael [1958] Ch 636.

In Smith v Land and House Property Corporation the plaintiff put up a hotel for sale, stating in the particulars that it was "let to Mr Fleck (a most desirable tenant)". In the event, Mr Fleck proved not to be: before even the sale went through his company went into liquidation. Bowen LJ at page 15 said this:

"In considering whether there was a misrepresentation, I will first deal with the argument that the particulars only contain a statement of opinion about the tenant. It is material to observe that it is often fallaciously assumed that a statement of opinion cannot involve the statement of a fact. In a case where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of opinion. The statement of such opinion is in a sense a statement of a fact, about the condition of the man's own mind, but only of an irrelevant fact, for it is of no consequence what the opinion is. But if the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion. Now a landlord knows the relations between himself and his tenant, other persons either do not know them at all or do not know them equally well, and if the landlord says that he considers that the relations between himself and his tenant are satisfactory, he really avers that the facts peculiarly within his knowledge are such as to render that opinion reasonable. Now are the statements here statements which involve such a representation of material facts? They are statements on a subject as to which prima facie the vendors know everything and the purchasers nothing. The vendors state that the property is let to a most desirable tenant, what does that mean? I agree that it is not a guarantee that the tenant will go on paying his rent, but it is to my mind a guarantee of a different sort, and amounts at least to an assertion that nothing has occurred in the relations between the landlords and the tenant which can be considered to make the tenant an unsatisfactory one. That is an assertion of a specific fact."

In Brown v Raphael sale particulars prepared for the vendor of an absolute reversion in a trust fund on the death of an annuitant contained the statement that the annuitant was "believed to have no aggregable estate". That statement of belief was made honestly by the solicitors for the vendor but they had no reasonable grounds for so believing. The purchaser having relied on the representation sought rescission. Lord Evershed MR at page 644 said:

"I am therefore entirely of the same opinion as was the judge, that this is a case in which the representation was not merely confined to the fact that the vendor entertained the belief but also, inescapably, there goes with it the further representation that he, being competently advised, had reasonable grounds for supporting that belief."

It is apparent that the Master of the Rolls was heavily influenced by the fact that the vendor had available to him the means of information and of enquiry as to the truth or otherwise of the situation. Romer LJ in his judgment at page 649 said:

"That being so, I should have thought that it was fairly obvious that the statement purporting to come, as it did come, from the vendor's solicitors, and expressing a belief vital in relation to this legal transaction, inevitably would suggest to the purchaser that the opinion was being expressed upon reasonable grounds; for it was a matter which everybody concerned, and especially a solicitor, must know would vitally affect the value of the reversion which the purchaser was proposing to buy, in that a matter which obviously affects the value of a reversion more than anything else is whether the value of it will be reduced because of the principle of aggregation when it falls in.

For my part, accordingly, even in the absence of authority, I should have thought, on the facts of this particular case, that it was abundantly clear that the judge was right when he said that the purchaser was entitled to expect that the opinion or belief was expressed upon reasonable grounds, and I should have come to that conclusion if there had been no authority on the matter at all."

Ms Kinsler on appeal seeks to rely in addition on three further authorities. First, Credit Lyonnais v ECGD [1996] 1 Lloyd's Rep 200. It is sufficient to quote just a single paragraph from Longmore J's long judgment in this complicated case, at page 216:

"Mr Hirst argued that to answer this question by saying that the management was respectable and trustworthy and had demonstrated that it was highly able and efficient was a misrepresentation. Mr Smith said that these matters were matters of opinion and would not found a claim for misrepresentation. In my view, even though the bank was being asked to express an opinion, any opinion given carries with it a representation that the maker of the statement has some genuine factual basis for the formation of that opinion, see Chitty on Contracts, 27th ed. par 6-004 to 6-006. In the present case, the bank had no factual basis from which it could truly have concluded that management of the three companies on which it was writing reports was respectable or trustworthy. The bank knew very little about Mr Chong and had seen no evidence which supported the transactions which he claimed to be making. Mr Herod was unable to say in his evidence what the respects were in which the management (by which he could only mean Mr Chong personally) was highly able and efficient. He had himself been asking for accounts for Sycamore but none had been forthcoming. As long ago as February, 1985 head office in Paris had been asking for a family tree and consolidated accounts. Nothing had been forthcoming. That was not indicative of high ability or efficiency. In my view the bank was giving a favourable answer to this question without having any foundation to support the answer. It follows that the answer to this question did amount to a misrepresentation."

Second, Ionides v Pacific Insurance Co. (1871) LR6 QB 674. The plaintiffs' clerk in the course of insuring a cargo of hides muddled up two vessels - one, the ´Socrates', a new Norwegian vessel, the other, the ´Socrate', an old French vessel. The defendant insurers' manager asked the clerk whether the hides were to be shipped on the ´Socrates' to which the clerk replied that he thought so. In fact, they were shipped on the ´Socrate' and were totally lost. Blackburn J, giving the judgment of the court on appeal said:

"It was argued that a representation, if only as to an expectation or belief, is substantially complied with if the assured really had honestly entertained that expectation on sufficient grounds, and that the representation that ´he thought' the ship was the Norwegian ship was literally true. We think this expression tantamount to an assertion that she was the Norwegian; but even were it otherwise, the letter of advice would, but for the carelessness of those who read it, have made them aware that the ship was that of which the captain was Jean Card, and therefore the plaintiffs had not reasonable grounds for believing that she was the Norwegian ship."

Third, Highlands Insurance Co v Continental Insurance Co [1987] 1 Lloyds' Rep. 109. This was a reinsurance case. The critical words on the slip, under the heading "Information", were: "Top location Holon with non-combustible construction and sprinklered". Steyn J first examined Highlands' primary case that those words amounted to a representation of fact and in the event concluded that they did. The passage relied upon by Ms Kinsler, however, is this:

"If (contrary to my conclusion) the ´Information' on the slip was no more than a representation that Continental believed that the top location Holon had been sprinklered, it also follows that there was no reasonable grounds for such belief. The basis of the belief was probably a misunderstanding on the part of Continental's underwriter. Accordingly, the implied representation that there were reasonable grounds for the belief was not true.

Under this heading one further argument was advanced on behalf of Continental. It was submitted that if (contrary to Continental's primary case) the provisions of the Marine Insurance Act 1906 applies to a non-marine insurance case, such as the present, then all the provisions of that statute apply. Section 20(5) reads as follows:

A representation as to a matter of expectation or belief is true if it be made in good faith.

The argument is that there is no scope for representations of the kind considered in Brown v Raphael [1958] Ch.D.636.

In my view this submission is not well-founded. Section 20(5) does not expressly lay down that an implied representation that there are reasonable grounds for a belief cannot give rise to a right of avoidance. Nor does it expressly exclude reliance on a representation that certain information had been supplied. In my judgment it would be contrary to accepted principles of statutory construction to give it such an extensive construction. If it were necessary to do so, I would hold that Highlands' alternative case, based on the hypothesis that there was no representation of existing fact, is established."

Relying principally on those five authorities, Ms Kinsler submits that Bowen LJ's dictum in Smith v Land and House Property Corporation - that "if the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion." - can be seen to apply equally in an insurance context as in the general law - see in particular Highlands. I understand her to submit, indeed, that it applies with particular force in an insurance context given that contracts of insurance are based upon the utmost good faith and that the insured will always know far more about the facts than the insurer. Given that inevitable inequality of knowledge, she argues, the defendant insurers here were entitled to assume that the appellant had reasonable grounds to support his valuation of the contents and that he was not merely relying, however honestly, on father's say-so.

Mr Bartlett submits that the approach adopted by the judge below and urged afresh by Ms Kinsler on appeal is fundamentally flawed. His starting point is section 20 of the Marine Insurance Act 1906 - one of a group of sections which it is now established apply equally to non-marine as to marine insurance -see PCW Syndicates v PCW Reinsurers [1996] 1 WLR 1136. The relevant subsections of section 20 are:

"(3) A representation may be either a representation as to a matter of fact, or as to a matter of expectation or belief.

(4) A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer.

(5) A representation as to a matter of expectation or belief is true if it be made in good faith."

Mr Bartlett relies in particular upon sub-section (5) notwithstanding what Steyn J said about it in the passage cited above from Highlands. He accepts, as inevitably he must, that the appellant had to have some basis for his statement of belief in this valuation; he could not simply make a blind guess: one cannot believe to be true that which one has not the least idea about. But, he submits, and this is the heart of the argument, the basis of belief does not have to be an objectively reasonable one. What the appellant's father told him here was a sufficient basis for his representation: he was under a duty of honesty, not a duty of care.

In my judgment these submissions are well-founded. This case seems to me very different from those relied upon by the respondents.

The representation in Smith v Land and House Property , as Bowen LJ expressly stated, "amounts at least to an assertion that nothing has occurred in the relations between the landlords and the tenant which can be considered to make the tenant an unsatisfactory one. That is an assertion of a specific fact." In the event it was held to be an untrue assertion of fact.

Similarly, the representation of opinion in Credit Lyonnais can be seen on analysis to have been not merely without foundation but actually contrary to the representor's experience. As stated in Chitty on Contracts in one of the paragraphs relied upon by Longmore J:

"... in certain circumstances a statement of opinion or of intention may be regarded as a statement of fact, and therefore as a ground for avoiding a contract if the statement is false. Thus, if it can be proved that the person who expressed the opinion did not hold it, or could not, as a reasonable man having his knowledge of the facts, honestly have held it, the statement may be regarded as a statement of fact."

Brown v Raphael seems to me to fall into a different category. The representation there, purporting as it did to come from the vendor's solicitors, would inevitably carry with it the implication that there were reasonable grounds to support the belief, not least given that the true situation could readily have been discovered. The case is in no way inconsistent with the appellant's submissions here. After all, Bowen LJ's dictum is only that "a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion" (my emphasis); he did not say that that is invariably so. And of course Brown v Raphael was not an insurance case so that section 20(5) was not in play.

Ionides - a case decided before Smith v Land and House Property but which, Ms Kinsler submits, assumes the principle therein stated to be correct - is, I think, to be explained rather on the basis that the representor there was held not entitled to rely on a belief which ignored the letter of advice in his possession. The passage relied upon is in any event obiter.

What then of Highlands, the case at the very forefront of Ms Kinsler's submissions? This passage too is, of course, obiter, Steyn J having already decided that the words amounted to a representation of fact. More to the point, however, is it correct? Can one in an insurance context, consistently with section 20(5) of the 1906 Act, find in a representation of belief an implied representation that there are reasonable grounds for that belief? In my judgment not.

I accept, of course, that, as in Smith v Land and House Property , what may at first blush appear to be a representation merely of expectation or belief can on analysis be seen in certain cases to be an assertion of a specific fact. In that event the case is governed by sub-sections (3) and (4) rather than (5) of section 20. And I accept too, as already indicated, that there must be some basis for a representation of belief before it can be said to be made in good faith. But if what Steyn J was saying - which is not altogether easy to discern - was that all who propose insurance must have reasonable grounds for their ( ex hypothesi honest) representations of belief, as was found to be required of the particular vendor in Brown v Raphael , I would respectfully disagree. In my judgment the requirement is rather, as section 20 (5) states, solely one of honesty.

There are practical and policy considerations too. What, would amount to reasonable grounds for belief in this sort of situation? What must a householder seeking contents insurance do? Must he obtain professional valuations of all his goods and chattels? The judge below held that "it would have been necessary for him to make substantially more enquiries than he did make before he could be said to have reasonable grounds for his belief. It is not necessary to specify what those enquiries might have involved." The problem with not specifying them, however, is that householders are left entirely uncertain of the obligations put upon them and at risk of having insurers seek to avoid liability under the policies. There would be endless scope for dispute. In my judgment, if insurers wish to place upon their assured an obligation to carry out specific enquiries or otherwise take steps to provide objective justification for their valuations, they must spell out these requirements in the proposal form.

I would hold, therefore, that the sole obligation upon the appellant when he represented to the respondents on renewal that he believed the full contents value to be £16,000 was that of honesty. That obligation the judge apparently found him to have satisfied. Certainly, given that the appellant was at the time aged 21, given that the figure for the increase in cover was put forward by his father, and given that father was a retired senior police officer, inevitably better able than the appellant himself to put a valuation on the additional contents, there would seem to me every reason to accept the appellant's honesty.

In these circumstances it is unnecessary to consider whether, as Mr Bartlett submits in the alternative, the appellant had in fact reasonable grounds for his belief, reasonable that is from an objective standpoint. Suffice it to say that I found little merit in Ms Kinsler's argument that the appellant should at the very least have insisted on examining all the additional valuables for himself and have formed his own view upon their worth. That seems to me wholly unrealistic.

The appellant formally admitted for the purpose of these proceedings below that:

"1. The following were material facts:

(a) The full cost of replacing all the contents of the plaintiff's premises as new (´the sum insured');

(b) whether the total value of ... ´valuables' exceeded one-third of the sum insured.

2. Those facts induced the defendant to enter into the contract on the terms agreed."

During argument before us, however, it became apparent that what is really being said here is that the appellant was bound to disclose:

(i) that the full cost of replacing the contents was substantially more than £16,000, and

(ii) that the valuables were worth very considerably more than £5,333 (or, indeed, very substantially more than one-third of the actual total value of the contents).

The judge below considered a number of authorities on non-disclosure and various passages from Spencer Bower on Actionable Non-Disclosure 2nd ed.(1990) and concluded:

"Mr Bartlett submits strongly that the onus on the defendants is to establish what he calls ´Nelsonian blindness' on the part of the plaintiff, that is a wilful shutting of the eyes to the truth. I am inclined to think that this puts the test rather too favourably to the plaintiff, but I am prepared to assume that that is the test which I ought to apply.

In my judgment there was here a wilful shutting of the plaintiff's eyes to the reality of the situation. He had been informed, as I find, that a quantity of jewellery and silverware had been introduced into the flat by his parents. In my judgment he closed his eyes as to the true nature and value of these items and this amounts to actionable non-disclosure.

On any view, moreover, the plaintiff was possessed of knowledge of certain facts, namely the presence of jewellery and silverware, which should have led him to make further enquiries, and such enquiries would in my view naturally and inevitably have led him to the conclusion that material facts had not been disclosed.

Accordingly I am driven to the conclusion that the defendants are entitled to avoid the policy also on the ground of non-disclosure."

That part of the judgment is to my mind open to criticism on a number of points. Let me start with the law.

It seems to me that the governing principle is that to be found in section 18 (1) of the 1906 Act:

"Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract."

It is clearly established that an assured such as this appellant, effecting insurance cover as a private individual and not "in the ordinary course of business", must disclose only material facts known to him; he is not to have ascribed to him any form of deemed or constructive knowledge. As was said by Saville LJ in Group Josi Re v Wallbrook Insurance Co [1996] 1 WLR 1152 at 1169:

"The distinction is expressly drawn between knowledge and deemed knowledge. The latter type of knowledge is then carefully circumscribed. To suggest that there is to be found in the section another and unexpressed type of deemed knowledge which is not so circumscribed seems to me simply to contradict the words used, and to destroy the very distinction that has been expressly drawn. To my mind ´every material circumstance which is known to the assured' means precisely what it says, and does not include circumstances that are not known to the assured."

And that, indeed, as I understand it, had earlier been the position at common law. In Blackburn Low & Co v Thomas Vigors (1887) 12 App Cas 531 Lord Macnaghten said at page 543:

"... it would, in my opinion, be a dangerous extension of the doctrine of constructive notice to hold that persons who are themselves absolutely innocent of any concealment or misrepresentation, and who have not wilfully shut their eyes or closed their ears to any means of information, are to be affected with the knowledge of matters which other persons may be morally though not legally bound to communicate to them."

And as was said by Fletcher Moulton LJ in Joel v Law Union and Crown Insurance Company [1908] 2 KB 863 at 884:

"The duty is a duty to disclose, and you cannot disclose what you do not know. The obligation to disclose, therefore, necessarily depends on the knowledge you possess."

In short, I have not the least doubt that the sole obligation on an assured in the position of this appellant is one of honesty. Honesty, of course, requires, as Lord Mcnaghten said in Blackburn Low , that the assured does not wilfully shut his eyes to the truth. But that, sometimes called Nelsonian blindness - the deliberate putting of the telescope to the blind eye - is equivalent to knowledge, a very different thing from imputing knowledge of a fact to someone who is in truth ignorant of it.

The test, accordingly, for non-disclosure was in my judgment precisely the same as that for misrepresentation, that of honesty. And by the same token that the appellant was under no obligation to make further enquiries to establish reasonable grounds for his belief in the accuracy of his valuations, so too he was not required to enquire further into the facts so as to discharge his obligation to disclose all material facts known to him. Indeed the appellant's case on non-disclosure seems to me a fortiori to his case on misrepresentation. The Association of British Insurers' Statement of General Insurance Practice states with regard to proposal forms:

"(d) Those matters which insurers have found generally to be material will be the subject of clear questions in proposal forms."

Where, as here, material facts duly are dealt with by specific questions in the proposal form and no sustainable case of misrepresentation arises, it would be remarkable indeed if the policy could then be avoided on grounds of non-disclosure.

What, then, of the judge's conclusions of fact on this part of the case? I have, I confess, great difficulty in understanding how the judge concluded that "there was here a wilful shutting of the plaintiff's eyes to the reality of the situation." That, as stated, is tantamount to a finding of dishonesty and yet that seems to me not merely unjustifiable on the facts but positively inconsistent with what I understand the judge to have found on the issue of misrepresentation.

As to the alternative basis on which the judge appears to have found the ground of non-disclosure made good, namely that the appellant's knowledge of the presence of jewellery and silverware "should have led him to make further enquiries", that seems to me to have been based in part on a passage from Spencer Bower and in part on the line of authority concerned with an assured's medical condition when proposing life insurance. At page 56 of Spencer Bower it is said that there is a species of presumptive knowledge in this form:

"... from the proved actual knowledge by a party of a fact the law infers, without proof, a knowledge by that party of any further fact to which the actual knowledge of the first fact would naturally have led, or which such inquiries as were reasonable under the circumstances would have elicited ..."

With regard to the medical cases, let a single citation suffice, from the judgment of the Lord President in Life Association of Scotland v Foster (1873) 11 Macph 351 - applied by Roskill J in Godfrey v Britannic Assurance Company Limited [1963] 2 Lloyd's Rep 515 at 530:

"Hence, without any fraudulent intent, and even in bona fide , the insured may fail in the duty of disclosure. His duty is carefully and diligently to review all the facts known to himself bearing on the risk proposed to the insurers, and to state every circumstance which any reasonable man might suppose could in any way influence the insurers in considering and deciding whether they will enter into the contract."

There appears to be no support - certainly in insurance law - for Spencer Bower's proposition which seems to me altogether too widely stated. And as for the medical cases it is important to recognise that, in these, issues of fact and materiality tend to shade into each other, and whereas, of course, to avoid liability the insurer must show that the assured knew of the facts, he does not have to establish knowledge of materiality. In short, the appellant's knowledge in the present case merely of the presence of jewellery and silverware in the flat to my mind gave rise to no duty of disclosure beyond that subsumed in an honest estimate of the required increase in cover under the policy.

By way of footnote I wish to add this. The issue of non-disclosure has throughout been dealt with, as stated, upon the appellant's concession as to materiality. Certain aspects of this concession have, however, made me uneasy. In the first place I note these paragraphs in MacGillivray and Parkington on Insurance Law 8th ed at page 777:

"1730. Under-insurance. Under a non-marine policy of insurance the insured can recover the whole amount of his loss up to the limit of the sum insured. He may, therefore, obtain insurance at a small premium by understating the value of the subject-matter insured, but nevertheless make recovery in a sum up to the amount insured, where there is a partial loss he may even be able to recover the full amount of his loss and suffer no penalty for being under-insured.

1731. It has therefore become the almost invariable practice for insurers to declare that the policy is ´subject to average' or ´subject to the under-mentioned condition of average' which means that, if the sum insured does not represent the value of the property insured at the time of the loss or damage, the insured is to be his own insurer for the requisite proportion of the insurance and must therefore bear a part of the loss accordingly. In Careers Ltd. v Cunard Steamship Co. where the plaintiff company warehoused goods with the defendant company at a fixed rental to include insurance against loss or damage by fire, Bailhache J held that the so-called pro-rata condition of average was so common in fire insurances on merchandise that it must be implied as a term of the warehouse agreement. The average clause now occurs in almost all policies, except those relating to private dwelling-houses and household goods, and to buildings (and their contents) used wholly or mainly for religious worship."

Ordinarily, therefore, it appears, under-insurance, so far from being regarded as material non-disclosure justifying the avoidance of the policy, results instead in averaging, or indeed in full recovery without penalty. Why then should the position be so very different in the present case, not least given that the policy itself expressly envisages at least some degree of under-insurance:

"If at the time of any loss or damage the cost of replacing all the contents as new is greater than the capital sum insured then any payment under the Home Contents section will be made after a deduction for any wear or depreciation."

And that leads me to the second point. Just how substantial must be the extent of under-insurance (or the excess beyond one-third in the proportion of valuables to the total) before it is said, assuming always that the assured had knowledge of these facts, that the policy can be avoided on grounds of non-disclosure?

None of these questions were addressed before us, nor indeed, having regard to my conclusions on the central issues, did they need to be. I raise them, however, because in other circumstances it seems to me that they are likely to have considerable importance and accordingly should not be lost sight of.

For the reasons given earlier, however, I would allow this appeal and enter judgment for the appellant against the respondents in the sum of £7,815.38 together with interest.

LORD JUSTICE PETER GIBSON: This case raises issues of significance to all who have household insurance policies as well as to all insurers under such policies. If the Recorder's decision is correct, such a policy is liable to be avoided at the option of the insurers if the insured, in giving the insurers (whether in the proposal form or on renewal) a value for what is to be insured, gives too low a value, even though the insured in giving that value was purporting to do so to the best of his knowledge and belief and was acting honestly and - subjectively - reasonably. So surprising a result prompts a close scrutiny of the facts and the applicable law.

I gratefully adopt Simon Brown L.J.'s account of the facts. I would highlight the salient factual features as being as follows:

(1) The declaration in the Priority Application Form related to all the statements and particulars given in the form, including the sum to be insured in respect of Home Contents. That sum, the insured was told, must represent the full cost of replacing all the contents as new. Also included was the statement in answer to the question whether the real value of the valuables exceeded _rd of the sum assured. But the declaration only required those statements and particulars to be true and complete to the best of the insured's knowledge and belief.

(2) The insured by that declaration also (a) promised that the sums insured under the plan would be maintained on an up to date basis and (b) declared that the proposal should form the basis of the contract between the insured and the insurers. But the Priority Application Form did not indicate what were the consequences of promise (a) not being honoured nor the significance of declaration (b).

(3) The Plaintiff completed the Priority Application Form, stated £12,000 to be the sum to be insured for those contents and answered "No" to the question whether the real value of the valuables exceeded _rd of the sum insured.

(4) The policy wording sent to and received by the Plaintiff contains no reference whatever to the Priority Application Form despite declaration (b) in para.(2) above.

(5) Under "How to make a Claim" the insured is told by the policy wording:

"First, check the Policy to make sure that the incident you are claiming for is covered. The Policy will also set out whether there are any instances for which the Insurers will not pay the claim or any portion of it."

(6) The policy wording contains 16 pages headed on one side "Your Policy will pay for" and on the other "Your Policy will not pay for". In respect of home contents the insured is told that the policy will pay for:

"1. Events insured

Up to the Sum Insured for loss or damage to the contents of your Home caused by ....

g) Theft ...."

The insured is told that the policy would not pay for loss or damage to the home contents in two specified circumstances. They do not include underinsurance of the contents.

(7) The only consequence of underinsurance expressed in the policy wording in respect of home contents is that a deduction for any wear or depreciation may be made. A similar consequence is expressed in respect of underinsurance of the buildings.

(8) Although according to Mr. Facer, one of the Defendant's experts, the Defendant assumed that the risk was misrepresented at the policy's inception in 1988, it is not now suggested by the Defendant that the Plaintiff made any misrepresentation or failed to disclose any material fact before the renewal of the policy in 1991.

(9) The renewal notice contained the warning that failure to advise the insured of facts not already passed on to them or of any circumstances which may have changed since the proposal was made might mean that the policy might not operate fully or at all.

(10) The increase in the sum insured by £3,200 to £16,000 on renewal was to cover the chattels brought into the Plaintiff's flat by his mother and father, that increase being within the range suggested to the Plaintiff, a 21 year old student, by his father, a retired senior Cypriot police officer, to take account of those chattels. The Plaintiff was aware that his mother had brought jewellery and silverware into the flat, but had not inspected what had been brought.

(11) £3,200 constituted a serious underestimate of those chattels, the true replacement value when ascertained after the burglary in which they were stolen being nearly £31,000, and as the bulk of the items were valuables, well over one third of the value of the home contents was attributable to valuables.

The Defendant's case as pleaded was primarily based on misrepresentation and non-disclosure of material facts. It was said that by the application form in January 1988 the Plaintiff had made a representation to the Defendant that (among other things) the total value of the valuables did not exceed _rd of the full cost of replacement of the contents and that the sums insured would be maintained on an up to date basis. It was further said that he made a further representation before the renewal on 14 January 1991 that the full cost of replacement of the contents as new was £16,000. It was claimed that those representations were false on the renewal date in that the true cost of replacing all the contents was substantially in excess of £16,000 and the value of the valuables exceeded _rd of the full cost of replacement. It was also said that there was a corresponding failure to disclose material facts known to the Plaintiff. The Defendant also pleaded breach of warranty, but this was not pursued at the trial nor was any claim for misrepresentation or non-disclosure other than at the time of renewal in January 1991.

The Recorder held that, notwithstanding the form of the declaration in the proposal form, the representations relied on by the Defendant must be interpreted as representations of fact. Ms. Kinsler did not seek to defend this part of the judgment and to my mind it is clear that the Recorder was wrong so to hold. If authority is needed for the proposition that a representation expressed to be true to the best of the insured's knowledge and belief is not a representation that is true in fact, it can be found in Macdonald v Law Union Insurance Co. (1874) L.R. 9 Q.B. 328, where a distinction is drawn between an unqualified representation and one qualified in the way in which the Plaintiff's declaration was qualified.

The Recorder never addressed the question whether the statements made by the Plaintiff were true to the best of the Plaintiff's knowledge and belief. Instead he considered whether the Plaintiff had impliedly misrepresented that he had reasonable grounds for his belief. The Recorder dismissed the submission of Mr. Bartlett for the Plaintiff that there was no representation by the Plaintiff that he had reasonable grounds for his belief as "inconsistent with commercial reality and common sense". For the reasons given by Simon Brown L.J. all the cases relied on by the Recorder and Ms. Kinsler are distinguishable. It is in my opinion important to keep in mind in considering these cases by whom and in what circumstances the representation in question was made. For example in Brown v Raphael [1958] Ch. 636 the statement of belief came from reputable solicitors in respect of a matter (the aggregable estate of the annuitant) which they would be expected to know and on which they had advised the vendor. Again in Highlands Insurance Co. v Continental Insurance Co. [1987] 1 Lloyds Rep. 109 the relevant representation was made by a professional underwriter. With such cases can be contrasted a case such as the present where the statement is made by a layman with no relevant skills. Like Simon Brown L.J. I regard s.20(5) Marine Insurance Act 1906 as providing the conclusive answer to this point. On its face it applies to all representations as to matters of expectation or belief. It is with considerable diffidence and unease that I differ from Steyn J.'s view, albeit expressed obiter, in the Highlands case on this point in a field in which he has such great expertise. But the statutory test, consistent with the common law which s.20 enacted (see, for example, Anderson v Pacific Fire and Marine Insurance Co. (1872) L.R. 7 C.P.65 at p.69), is one of good faith which is necessarily subjective and I find it impossible to see how consistently with s.20(5) an objective test of reasonableness can be imported by way of an implied representation. Once statute deems an honest representation as to a matter of belief to be true, I cannot see that there is scope for enquiry as to whether there were objectively reasonable grounds for that belief. Of course the absence of reasonable grounds for belief may point to the absence of good faith for that belief. But in a case such as the present where the bad faith of the Plaintiff is not alleged, I can see no basis for the implication of a representation of reasonable grounds for belief.

I would add that even if I am wrong on this point and the Plaintiff must be taken to have impliedly represented that he had reasonable grounds for his belief, I would hold that the representation was accurate. In my judgment a 21 year old student could reasonably adopt the valuation estimate of his parents who owned the chattels the subject of the estimate, particularly when his father was a senior policeman. Indeed Ms. Kinsler conceded that it was subjectively reasonable for the Plaintiff to have acted as he did. When asked what more the Plaintiff should have done in order to have objectively reasonable grounds for believing in what he said to the insurers, she suggested that the Plaintiff should have insisted on seeing for himself what were his parents' chattels and formed his own view of their value. I cannot see that realistically that would have caused the Plaintiff to override his father's suggestion. The parents themselves seem to have been surprised to find out the true value of what they owned - a common enough experience -and the Plaintiff was not a valuer. Ms. Kinsler did not go so far as to say that the Plaintiff should have obtained a professional valuation.

I come next to the question of non-disclosure. The issue before the Recorder turned on the extent of knowledge which must be established in order to give rise to actionable non-disclosure. The Recorder found assistance from Spencer Bower on Actionable Non-Disclosure 2nd ed. (1990) pp. 56 and 75, dealing with presumptive knowledge (commonly called constructive knowledge). But the author was not considering what knowledge was necessary for the purposes of non-disclosure in an insurance contract. The Recorder found that the Plaintiff wilfully shut his eyes to the reality of the situation. If there was such Nelsonian blindness on the Plaintiff's part, then that would be equivalent to actual knowledge and would not be constructive knowledge. But that would be tantamount to dishonesty on the part of the Plaintiff in failing to disclose what he would have seen, if only he had chosen to open his eyes. The Recorder does not go so far and the evidence of the Plaintiff was that he genuinely considered what he said to the insurers to be true. The Recorder simply says that the Plaintiff failed to make enquiries. Ms. Kinsler does not suggest that this was a finding of wilful and reckless failure to make enquiries. It is a finding of constructive knowledge. But here again the answer lies in the 1906 Act. As s.18(1) has been interpreted, in my view correctly, there is no need for a private individual to disclose what he does not actually know. Constructive knowledge is not relevant ( Group Josi Re v Walbrook Insurance Co. [1996] 1 W.L.R. 1152 at pp. 1168-9). Accordingly, in my judgment the Recorder erred in relation to non-disclosure also: there was no failure to disclose material circumstances known to the Plaintiff.

For these as well as the reasons given by Simon Brown L.J. and in acceptance of Mr. Bartlett's helpful submissions I too would allow this appeal.

SIR IAIN GLIDEWELL: I have read in draft the judgments of Simon Brown LJ and Peter Gibson LJ. I gratefully adopt Simon Brown LJ's recital of the facts and his analysis of the issues in this appeal.

The essential words of the declaration signed by the appellant on the proposal form in January 1988 were:

"I declare that the statements and particulars given above and overleaf are to the best of my knowledge and belief, true and complete, that the sums insured under this Plan will be maintained on an up-to-date basis ... "

The respondents do not suggest that when initially the appellant estimated the full replacement value of the contents of his flat at £12,000, of which not more than one-third was the value of "valuables" as defined in the policy, his declaration was untrue. The appellant concedes that when in late 1990 he instructed the respondents to increase the sum insured to £16,000 on renewal in January 1991, he was impliedly repeating his declaration that this was, to the best of his knowledge and belief, the full cost of replacing the contents at that later date. Put simply, the issue is, what do the words "I declare ... to the best of my knowledge and belief" mean?

The respondents, as was made clear by their counsel, Ms Kinsler, do not now contend (if they ever did) that the appellant was declaring as a fact that £16,000 was the true value. Ms Kinsler does, however, submit that the declaration meant that the appellant honestly believed that £16,000 was the full value, and had reasonable grounds for that belief.

I agree with Simon Brown LJ that, in the declaration, "knowledge" means actual knowledge, subject only to the qualification that an insured cannot be heard to say that he does not know a fact when he has wilfully and deliberately shut his eyes to evidence of that fact. See the passage from the speech of Lord Macnaghten in Blackburn Low & Co v Thomas Vigors (1887) 12 App Cas 531 quoted by Simon Brown LJ.

It is, of course, a cardinal principle to be followed when construing a document that words in the document must be given their natural meaning, provided that meaning is clear. In my judgment the natural meaning of the words "to the best of my knowledge and belief ..." can be rephrased as "based upon the relevant facts within my knowledge, I honestly believe ..." However, this precise construction was not advanced in argument by either counsel, and I do not think it right to base my judgment in this case on it.

I turn therefore to consider the submission made to us by Ms Kinsler that the appellant's declaration made "to the best of my knowledge and belief ..." included an implied representation that he had reasonable grounds for that belief. Simon Brown LJ has set out and quoted from the relevant authorities. I content myself with repeating single sentences from the first two authorities on which Ms Kinsler relies. In Smith v Land and House Property Corporation (1884) 28 Ch D 7, Bowen LJ said at page 15:

"But if the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion".

In Brown v Raphael [1958] Ch 636 Lord Evershed MR said at page 644:

" ... this is a case in which the representation was not merely confined to the fact that the vendor entertained the belief but also, inescapably, there goes with it the further representation that he, being competently advised, had reasonable grounds for supporting that belief."

This, however, inevitably raises the old question, by whose standards is what constitutes ´reasonable grounds for the belief' to be judged? In other words, is it to be decided subjectively or objectively? The learned editors of Chitty on Contracts 27th edition say at paragraph 6-004:

"... in certain circumstances a statement of opinion or of intention may be regarded as a statement of fact, and therefore as a ground for avoiding a contract if the statement is false. Thus, if it can be proved that the person who expressed the opinion did not hold it, or could not, as a reasonable man having his knowledge of the facts, honestly have held it, the statement may be regarded as a statement of fact."

The editors then refer to Smith v Land and House Property Corporation and Brown v Raphael as authorities for that proposition. In my view they have summarised accurately the effect of those authorities, an effect which applies equally to a statement of belief as it does to a statement of opinion.

So I would apply to this case the test: "Could the appellant, as a reasonable man knowing the facts he knew, honestly have believed that the replacement value of the property in his flat in December 1990 was £16,000?" The relevant facts which the appellant knew were that his mother had brought with her to his flat some possessions which included silver and jewellery; that he had seen some of the jewellery but not the silver; that he was aware that it was necessary to increase the total value of the property insured under the policy; that he therefore asked his father, a retired senior police officer, by what sum he should increase the cover; and that the father suggested an increase of £3,000 to £4,000, which opinion the appellant accepted and adopted.

In my judgment, knowing those facts, the appellant as a reasonable man could honestly have believed that this was a proper increase, and thus that the £16,000 was a proper figure for the total value of the property.

Mr Bartlett, for the appellant, based an argument on s.20 (5) of the Marine Insurance Act 1906, and the question whether that section deals comprehensively with the affect to be given to representations made during the negotiation of an insurance policy. In the passage quoted by Simon Brown LJ from the judgment of Steyn J in Highlands Insurance Co v Continental Insurance Co [1987] 1 Lloyds' Rep. 109, that learned judge expressed the view that it does not (if I understand him correctly). He said, in effect, that in his view, if a representor had no reasonable grounds for the belief he had declared that he held, the insurer might have a right to avoid the policy. Since I have decided that, in the present case, the appellant did have reasonable grounds for his belief, it is unnecessary for me to reach any conclusion on this argument. I content myself by saying that I would wish to hear further argument on this subject before concluding that Steyn J's dictum was wrong.

On the issue of non-disclosure, I entirely agree with the judgment of Simon Brown LJ.

It follows that, for reasons somewhat different from those contained in my Lords' judgments, I too would allow this appeal and enter judgment as they propose.

ORDER: Appeal allowed; judgment entered for the appellant in the sum of £7,815.38, plus interest agreed in the sum of £3,594.72; appellant to have costs here and below; legal aid taxation of appellant's costs; leave to appeal refused.