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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> O'Connor & Anor v. Bullimore Underwriting Agency (t/as Leisure Consortium At Lloyds) [2004] ScotCS 42 (24 February 2004)
URL: http://www.bailii.org/scot/cases/ScotCS/2004/42.html
Cite as: 2004 SCLR 346, [2004] ScotCS 42
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O'Connor & Anor v. Bullimore Underwriting Agency (t/as Leisure Consortium At Lloyds) [2004] ScotCS 42 (24 February 2004)
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OUTER HOUSE, COURT OF SESSION |
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OPINION OF LORD MACFADYEN in the cause FRANK O'CONNOR and ANOTHER Pursuers; against BULLIMORE UNDERWRITING AGENCY LIMITED, trading as THE LEISURE CONSORTIUM AT LLOYD'S Defenders:
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Pursuers: Moore, Solicitor Advocate; HBM Sayers, Glasgow
Defenders: Jones, Q.C., D Johnston; Simpson & Marwick, W.S.
24 February 2004
Introduction
[1] The pursuers are husband and wife. They formerly carried on business in partnership in premises at 5 Dalziel Street, Motherwell. The business had three separate aspects, namely (i) a lounge bar called "Memories", (ii) a nightclub or disco called "Faces" and (iii) a health club called "New Beginning". The premises were, from 3 November 2000, insured in respect of property risks, including fire, by the defenders. In the early hours of the morning of 26 February 2001 the premises were seriously damaged by fire. The pursuers made a claim under their policy with the defenders. The defenders, having carried out certain investigations, decided to declare the policy void. In this action the pursuers challenge the defenders' entitlement to make that decision. As the first conclusion stood at the commencement of the proof, the pursuers sought declarator:"that the Defenders are bound and obliged to indemnify the Pursuers in respect of the losses sustained by the Pursuers trading as Memories, Faces and the New Beginning Health Club as a result of a fire at the premises at 5 Dalziel Street, Motherwell, ML1 1PJ on 25 [sic] February, 2001 under and in terms of a Policy of Insurance taken out by the Pursuers with the Defenders being Policy No. 0NA8AA00014P."
Amendment
[2] The parties' pleadings evolved in the course of the proof, and it is convenient to note here when the various amendments were made. On 26 August 2002 the defenders tendered a minute of amendment (No. 24 of process). On 27 August 2002, the first day of the proof, that amendment was allowed, unanswered and unopposed. On 29 August 2002 the defenders tendered a further minute of amendment (No. 25 of process). Consideration of the motion to allow it to be received was continued until 30 August, and on that date it was granted. The pursuers were allowed twenty-eight days within which to answer the minute of amendment; a further period of fourteen days was allowed for adjustment of the minute of amendment and answers; and the case was put out By Order on 14 October 2002 for the purpose of considering the motion to amend. In the meantime, the proof proceeded on 3 and 4 September, and was then continued until 9 December and the five ensuing days. When the case called By Order on 14 October, I allowed the pleadings to be amended in terms of the minute of amendment and answers, both as adjusted (the adjusted versions being, respectively, Nos. 30 and 31 of process). In order to ensure that both parties had an adequate opportunity to lead evidence on the matters touched upon in the minute of amendment and answers, I allowed various witnesses to be recalled. [3] In the course of his submissions at the end of the proof, Mr Moore for the pursuers moved at the bar an amendment restricting the scope of the first conclusion. What was proposed was the insertion after the words "25 February 2001" of the following parenthesis:"(except in respect of losses arising as a result of the increased risk of damage to the premises on the west side of the fire break doors and shutters occasioned by breach of the fire break doors and shutters warranty)".
That amendment too was allowed.
The Issues
[4] As matters were focused by the end of the proof, the following issues required to be addressed:- whether the pursuers' admitted breach of the warranty that all fire-break doors and shutters would be kept closed, except during working hours, had the effect (as the defenders contended) of entitling them to repudiate in whole the pursuers' claim, or (as the pursuers contended) merely of restricting their claim in the way reflected in the amendment to the first conclusion mentioned in paragraph [3] above ("the warranty issue");
- whether the defenders were entitled to avoid the policy on the ground of material misrepresentation or non-disclosure on the part of the pursuers in respect of three matters, namely -
- their answer to a question in the proposal form relating to whether they had been the subject of any action in bankruptcy ("the bankruptcy issue");
- their failure to disclose the state of their financial affairs, in particular in relation to their bank ("the financial circumstances issue"); and
- certain statements made by the first pursuer to the defenders' surveyor in relation to the pursuers' practice in respect of the handling of cash ("the cash-handling issue"); and
- whether, in respect of the bankruptcy issue and the financial circumstances issue (but not the cash-handling issue), the pursuers were entitled to the benefit of General Condition 3 of the policy, which provides that the insurers will not avoid the contract on the ground of a misrepresentation or non-disclosure which was innocent and free of any fraudulent conduct or intent to deceive ("the innocence issue").
The warranty issue
(a) The contractual provisions
[5] Condition 3 of the Risk Protection Conditions in Section 1 of the policy (No. 6/2 of process) provides as follows:"fire break doors and shutters
It is hereby warranted that all fire break doors and shutters will be kept closed except during working hours and will be maintained in an efficient working order."
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"4. |
observance of terms |
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Observance of the terms of this Contract of Insurance relating to anything to be done or complied with by the Insured is a condition precedent to liability of the Underwriters. |
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5. |
warranties |
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Every warranty to which the Property Insured is or may be made subject shall from the time the Warranty attaches apply and continue to be in force during the Period of Contract of Insurance. Non-compliance with any warranty in so far as it increases the risk of Damage shall be a bar to any claim in respect of such Damage. |
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Provided that whenever this Contract of Insurance is renewed a claim in respect of Damage occurring during the renewal period shall not be barred by reason of a Warranty not having been complied with at any time during the previous Period of Contract of Insurance." |
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General Definition 12 defines "Damage" as meaning "accidental physical loss destruction or damage".
(b) The agreed facts
[7] The factual basis for the dispute as to the effect of those provisions is set out in paragraphs 7 to 10 of the Joint Minute (No. 38 of process). These paragraphs are in the following terms:"7. The sliding metal door and metal roller shutter on the second floor, the sliding metal door and two hinged metal doors on the first floor, the sliding metal door and two hinged metal doors on the ground floor and the metal sliding door and two metal hinged doors on the lower ground floor of the premises at 5 Dalziel Street, Motherwell were fire-break doors and fire-break shutters respectively;
8. That at the time the fire commenced within the premises the metal roller shutter on the second floor was closed, the sliding metal door on the second floor was open to the extent of approximately 10 cm, the two metal hinged doors on the first floor were open, the sliding metal door on the first floor was open, the sliding metal door on the ground floor was closed, the hinged metal doors on the ground floor were closed; the sliding metal door on the ground [sic] floor was open; the metal hinged doors on the lower ground floor were open;
9. That as a result of a fire-break door or shutter being open at the time the fire started, the risk of fire damage to content within and that part of the premises on the other side of the open fire-break door or shutter from the side on which the fire commenced was increased;
10. That the said doors and shutter were orientated approximately north/south within the premises and the fire began in the east section of the premises."
(c) The pursuers' submissions
[9] Mr Moore submitted that it did not follow from that acceptance that the defenders were entitled wholly to refuse to indemnify the pursuers for the loss which they suffered as a result of the fire. He submitted that the effect of the admitted breach of warranty was more limited. The policy defined the effect of non-compliance with a warranty in the second sentence of General Condition 5. The effect was that "in so far as it [increased] the risk of Damage", i.e. accidental physical loss destruction or damage, it operated as a bar to "any claim in respect of such Damage". That, Mr Moore submitted, could legitimately be paraphrased as saying to the insured: "You cannot claim in respect of any physical loss destruction or damage the risk of which was increased by virtue of non-compliance with a warranty". Construing General Condition 5 in that way, the effect of the admitted breach of warranty was adequately reflected in the circumstances of the present case by the qualification introduced into the first conclusion by the amendment mentioned in paragraph [3] above. It was conceded by the pursuers (paragraphs 9 and 10 of the Joint Minute) that the fire began to the east of the open fire-break doors, and that damage to the west of those doors was therefore damage the risk of which was in the event increased by the breach of warranty. It was therefore appropriate to exclude from the scope of the defenders' declared obligation to indemnify the pursuers any loss resulting from that increased risk. [10] In support of that contention Mr Moore advanced a number of arguments. First, he submitted that a provision of a policy of insurance should be construed in the light of the commercial object or function of the provision and its apparent relation to the policy as a whole (MacGillivray on Insurance Law, tenth edition, paragraph 11-8; M W Wilson (Lace) Ltd v Eagle Star Insurance Co Ltd 1993 SLT 938, per Lord McCluskey at 944). The purpose of General Condition 5 was to moderate the rule that breach of warranty discharges the insurer from liability from the date of the breach. It sought to do so by restricting the effect of breach of warranty, in circumstances in which there was a direct relationship between the breach and an increased risk of damage, to the barring of any claim in respect of damage the risk of which had been increased. In the present case, the breach of warranty gave rise to no increase in the risk of damage on the side of the fire-break doors on which the fire started. There was therefore no good reason for excluding the pursuers' claim for loss resulting from damage resulting on that side of the fire-break doors. The provision had its intended effect by barring the claim for loss resulting from damage on the opposite side of the fire-break doors from that on which the fire started: that was the damage the risk of which had been increased by the breach of warranty. [11] Next, Mr Moore submitted that if a provision was ambiguous, the more reasonable and fair interpretation should be preferred (MacGillivray, paragraph 11.9; Hooper v Accidental Death Insurance Co (1860) 5 H&N 546, per Pollock CB at 556-7, and Wightman J at 559; see also Braunstein v Accidental Death Insurance Co (1861) 1 B&S 782, per Wightman J at 795). To construe the policy as permitting the defenders to repudiate the whole claim in the event of a breach of warranty could lead to unfair results. For example, on the defenders' approach, a claim in respect of a fire which only affected the part of the property on one side of the fire-break doors would be barred if one of the fire-break doors was left open, even although none of the damage suffered was damage the risk of which had been increased because the fire-break door was open. A claim in respect of a fire which was successfully confined by closed fire-break doors would be barred if another fire-break door in a remote part of the building, unaffected by the fire, had been left open. The more reasonable construction was to bar only a claim for damage the risk of which was increased by the breach of warranty. Mr Moore was at pains to point out that he was not going so far as to suggest that, for the claim to be barred, there had to be a causal relationship between the breach of warranty (e.g. the open fire door) and the loss suffered; it was sufficient, he accepted, that the loss claimed resulted from damage the risk of which had been increased by the breach of warranty. Thus, for example, in the present case a claim for loss suffered as a result of damage to the part of the premises on the west side of the fire-doors was barred, whether the damage on the west side resulted from the fire reaching that part of the premises by passing through the open fire-break doors or by a wholly different route. The claim for west-side damage was barred because the risk of west-side damage was increased by the breach of warranty. [12] Mr Moore submitted that the meaning of the second sentence of General Condition 5 turned on the phrase "such Damage". The use of the word "such" was a reference back to the last previous use of the word "Damage" (Ex parte Barnes [1896] AC 146, per Lord Halsbury LC at 150). "Damage" was a defined term, so the word "such" was not required merely to make it clear that when used for the second time in the condition it had the same meaning as when first used. One possible construction of the phrase "such Damage" was that it meant "Damage of the sort just mentioned, namely Damage the risk of which has been increased by non-compliance with a warranty". Mr Moore, as I understood him, did not go so far as to submit that that was the only meaning that the phrase might bear. On the basis, however, that it was one possible construction, he went on to argue that it should be preferred in accordance with the contra proferentem rule. He accepted that that rule applied only where there was an ambiguity (McBryde on Contract, second edition, paragraph 8-37; Laidlaw v John M Monteith & Co 1979 SLT 78, per Lord Allanbridge at 81). He submitted that although there were two versions of the contra proferentem rule, one in which the proferens is the party who proposed the provision for inclusion in the contract and the other in which the preferens is the party who seeks to rely on the provision to diminish or exclude his basic obligation (Youell v Bland Welch & Co Ltd [1992] 2 Lloyd's LR 127, per Staughton LJ at 134; see also McBryde, paragraph 8-36), on either version the second sentence of General Condition 5 fell to be construed in dubio against the defenders (Kennedy v Smith 1975 SC 266, per Lord President Emslie at 277-8).(d) The defenders' submissions
[13] Mr Jones, who appeared for the defenders, submitted that the purpose of the warranty contained in Risk Protection Condition 3 was to minimise the risk of the spread of fire, in either direction, from one side of the fire-break doors to the other. At common law, breach of a warranty discharges the insurer from all liability under the policy as from the moment of breach (Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd, The "Good Luck" [1992] 1 AC 233, per Lord Goff of Chieveley at 263C). The purpose of General Condition 5 was to define, differently from the common law, the consequence of breach of warranty under this policy, but it did not explain the principle of law which allowed the insurer to refuse to meet the claim. General Condition 5 was properly to be seen as a qualification of General Condition 4 (in the same way as General Condition 3 is a qualification of General Condition 2 - see below). If the qualification contained in the proviso to General Condition 5 was to have any meaning, it required to be recognised that the parties were agreed that at common law breach of warranty discharged the insurers from liability from the date of breach. The effect of General Condition 5 was to give the insured the benefit of two qualifications to the terms of General Condition 4. Instead of all claims being defeated by breach of warranty, only some were. In terms of the proviso, breach remedied before renewal could not be relied upon as discharging liability for damage suffered after renewal. The other qualification - the one contained in the second sentence of General Condition 5 - could not be given the meaning contended for by the pursuers. At the time of the breach, when liability flew off, it was impossible to know where the fire might arise. It was therefore impossible to determine which risk was increased by reference to where the fire subsequently occurred. A "floating" exception, which came into existence when the warranty was breached, but did not attach to a particular category of loss until the fire subsequently occurred, was contrary to principle. Non-compliance with the warranty in Risk Protection Condition 3 increased the risk on both sides of the fire door. The risk which had been increased was the risk of fire spreading from one side of the fire-break doors to the other, in either direction. That was all that could be determined at the time when liability flew off because of the breach of warranty. The fact that, in the event, fire began on one side of the fire-break doors and spread to the other did not mean that the damage on the latter side was the only damage the risk of which had been increased by the breach of warranty. Whether the fire occurred on the east side or the west side of the open fire-break doors, the resultant damage was damage the risk of which had been increased by the breach of warranty. [14] Mr Jones submitted that the contra proferentem rule had no application to the construction of General Condition 5. He cited a number of observations on the nature and scope of the rule, including Ashville Investments Ltd v Elmer Contractors Ltd [1989] 1 QB 488, per May LJ at 494B, EE Caledonia Ltd v Orbit Valve Co Europe [1994] 1 WLR 221, per Hobhouse J at 227, Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd 1982 SC (HL) 14, per Lord Fraser of Tullybelton at 61, Adams v Richardson & Starling Ltd [1969] 1 WLR 1645, per Salmon LJ at 1653-4, and Scottish Special Housing Association v Wimpey Construction (UK) Ltd 1986 SC (HL) 57, per Lord Cameron at 64. His short point was that the contra proferentem rule has no application where the provision in question is conceived for the benefit of the party other than the one to be regarded as the proferens. Here, although the defenders could be regarded as the proferentes of the policy, General Condition 5 benefited the pursuers, by modifying the common law rule that breach of warranty discharges the insurer from liability, and substituting a rule more favourable to the insured barring only a claim for damage of a sort the risk of which had been increased by the non-compliance with the warranty. In construing that provision, the search was simply for the true intention of the parties.(e) Discussion
[15] Although the issue turns on the construction of General Condition 5, it is in my view appropriate to begin by considering the terms of the particular warranty the effect of breach of which is to be determined. Risk Protection Condition 3 warrants two things. The second is that fire-break doors and shutters will be maintained in efficient working order. It is not difficult to conceive of circumstances in which that part of the warranty might be broken in such a way as to give rise to continuing non-compliance, although it is also possible to conceive of a breach of that part of the warranty occurring and then being remedied. The first part of the warranty is, however, not one which requires a particular state of affairs to be maintained. On the contrary, assuming that in compliance with the other part of the Condition the fire-break doors are maintained in efficient working condition, it contemplates that the fire-break doors will be open during working hours, and accordingly that compliance with the warranty requires action at the end of each working day to close them. Any breach of the warranty thus lasts only from the end of one working day until the beginning of the next. That aspect of the particular warranty may in certain circumstances have a bearing, it seems to me, on the construction of General Condition 5 in its application to breach of Risk Protection Condition 3. Be that as it may, however, it is in my view clear that the purpose of Risk Protection Condition 3 is to reduce the risk of fire spreading through the premises. The function of a fire-break door is to prevent or at least inhibit the spread of fire from the part of the premises on one side of it to the part of the premises on the other side of it. It is to be noted too that a fire-break door between parts A and B of premises operates simultaneously to protect part A from fire commencing in part B and to protect part B from fire commencing in part A. The warranty is designed to ensure that fire-break doors and shutters are, outside working hours, so deployed as to enable them to fulfil that function. [16] When approaching the construction of General Condition 5, it is in my view appropriate, as Mr Jones submitted, to bear in mind the common law as to the effect of breach of warranty. The general rule is that it discharges the insurer from all liability under the policy as from the moment of breach (Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd, per Lord Goff of Chieveley at 263C). It seems to me that if the matter had been left to the common law, and in circumstances different from those of the present case, difficult questions might have arisen as to the effect on a claim if there had been breach of the warranty that fire-break doors would be kept closed outside working hours on an occasion or occasions in the past, but no breach of it on the date when the fire occurred. But that problem does not arise here because, whatever the extent of non-compliance with the warranty in the period before the fire began may have been, it is agreed that there was non-compliance on the date and at the time of the fire. In that situation the common law rule would in my view at least have discharged the defenders of all liability under the policy to meet the claim arising from the fire. [17] It is also appropriate, in my view, again as Mr Jones submitted, to see how General Condition 5 fits in with other provisions of the policy. It is in my view right to look at General Conditions 4 and 5 together. General Condition 4 makes observance of the terms of the policy relating to anything to be done or complied with by the insured a condition precedent to liability on the part of the insurers. General Condition 5 must, in my view, be read as expressing certain qualifications to General Condition 4. The second sentence of General Condition 5 in my opinion expresses the rule which the parties to the contract have agreed should apply, in substitution for the rule which the common law would imply and in qualification of the more generally expressed provision of General Condition 4, in the event of non-compliance with a warranty, where the non-compliance increases the risk of Damage (as defined in the policy). [18] In my view Mr Jones was correct in submitting that the contra proferentem rule has no application in the construction of General Condition 5. The defenders were no doubt the proferentes of the policy. It seems to me, however, that the contra proferentem rule ought not to be applied to the construction of a provision which, although put forward by one party to the contract, is conceived in favour of and operates to the benefit of the other party (Adams v Richardson & Starling Ltd, per Salmon LJ at 1653-4). When seen in the context of the common law rule as to the consequences of breach of warranty, General Condition 5 is properly to be regarded as a provision which, by moderating the rigour of that rule, confers a benefit upon the insured. Mr Jones was, however, in agreement with Mr Moore's other propositions, namely that General Condition 5 should be construed in the light of the commercial object and function of the provision and its relation to the policy as a whole, and that an interpretation which operated fairly and reasonably was to be preferred to one which did not. I have no difficulty in accepting that these considerations play a part in the construction process. [19] The second sentence of General Condition 5 is concerned with a particular category of case, namely where non-compliance with a warranty increases the risk of Damage. It provides that in such a case the non-compliance is to be a bar to any claim in respect of "such Damage". What then is meant by "such Damage"? A range of theoretical possibilities exists. One is that it means no more and no less than Damage, as defined in General Definition 12. If that were so, however, the word "such" would be redundant. The word "such" attached to an expression ordinarily operates as a reference back to the last previous use of the expression (Ex parte Barnes, per Lord Halsbury LC at 150). But since on both occasions when the word "Damage" is used, it is printed with an initial capital to denote, in the conventional manner, that it is a defined term in the policy, there is no need for the word "such" to be used to refer back to the first use of the word "Damage" if all that is meant is that when used for the second time, as when used for the first time, the word is used in its defined sense. In my view a construction which gives the word "such" some content is to be preferred to one which treats it as redundant. It seems to me that content can readily be given to the word "such" by treating it as importing into the second use of the word "Damage" (in addition to the contractual definition of the term) the indication that what is meant is Damage of the sort previously mentioned. It is not in my view difficult to see that as a reference to Damage the risk of which has been increased by non-compliance with a warranty. I would regard that as the natural meaning of the language used. I would regard it as consistent with the commercial object and function of the provision in the context of the policy as a whole. I would also regard it as being a fair and reasonable construction. It mitigates the rigour of the common law rule, without going so far as to require the insurers, if they are to be entitled to refuse a claim, to show that the damage was actually caused by the non-compliance with the warranty. Mr Moore was, in my opinion, right to accept that General Condition 5 does not, according to its terms, require a causal connection between the breach of warranty and the damage in respect of which a claim was barred. [20] How, then, is damage the risk of which has been increased by the pursuers' admitted breach of warranty to be identified? It seems to me to be at this stage of consideration of the issue that the real difference between the parties' positions emerges. The pursuers' position, reflected in the amendment to the first conclusion, is that, since the fire occurred on the east side of the open fire-break doors, the fact that fire-break doors were open did not increase the risk of damage on that side. On the other hand that fact did increase the risk of damage on the west side of the fire-break doors, because it made it possible for fire to pass through the open fire-break doors from east to west. Thus, General Condition 5 operates, in the events which happened, to bar any claim by the pursuers in respect of damage on the west side of the fire-break doors, but not so as to enable the defenders to repudiate the claim so far as it relates to losses consequent on damage on the east side of the fire-break doors. The defenders' position is that the breach of warranty, when it occurred, increased the risk of damage by fire on both sides of the fire-break doors. The purpose of the fire-break doors was to limit the risk of the spread of fire from one side of them to the other. They were designed to inhibit the spread of fire as much from west to east as from east to west. The fact that the fire-break doors were, in breach of Risk Protection Condition 3, left open after the end of working hours increased the risk of damage by fire on both sides of the doors. It left the west portion of the premises more at risk of suffering damage as a result of a fire commencing in the east portion, and at the same time it left the east portion more at risk of suffering damage as a result of a fire commencing in the west portion. The non-compliance with Risk Protection Condition 3 thus increased the risk of fire damage on both sides of the fire doors. In the event, the risk which was realised on the west side was one which had been increased by the breach of warranty, whereas the risk which was realised on the east side was one which was unaffected by the breach of warranty. That did not, however, alter the fact that the risk had been increased on both sides by the fire-break doors. In my opinion, the defenders' position is the correct one. Whether non-compliance with a warranty increased the risk of damage must, in my view, be judged when the non-compliance occurs. At that stage, before any fire has begun, it is in my view clear that the risk is increased on both sides. It is not, in my view, legitimate to assess whether there has been an increase in risk of damage in a particular part of the premises by reference to where the damage eventuated. To approach the matter in that way would be to confuse the risk of damage with the occurrence of damage. [21] I have therefore reached the conclusion that the pursuers' non-compliance with Risk Protection Condition 3 increased the risk of fire damage throughout the insured premises, and that on a sound construction of General Condition 5 they are therefore barred from making any claim in respect of Damage (as defined in General Definition 12) resulting from the fire on 26 February 2001.The bankruptcy issue
(a) The proposal form
[22] The proposal form (No. 6/1 of process) for the policy was signed on the pursuers' behalf by the second pursuer, Mrs Maureen O'Connor, on 13 November 2000. Section 6 of the proposal form was headed "the proposer(s) including all owners, partners or directors". Question 6(C) was in the following terms:"Has any of the Proposers ever been the subject of any action in bankruptcy or involuntary liquidation or had any convictions involving arson or dishonesty?"
That question was answered "NO".
(b) The agreed facts
[23] Paragraph 4 of the Joint Minute records the parties' agreement on the following matters:"That warrant to cite was granted in Petitions for Sequestration of both the First Named and the Second Named Pursuers on 21 May 1997, 26 November 1997, 18 August 1998, 17 March 1999, 21 April 1999, 5 October 1999, 26 May 2000 and 22 January 2001 and of the First Named Pursuer alone on 3 October 2000 as set out in No. 7/7 of process."
(c) The evidence
[24] Although the second pursuer signed the proposal form, it was otherwise completed and dated by Alexander McArthur, the pursuers' insurance broker. According to the second pursuer, she was ill with asthma on the occasion when the proposal form was completed. Mr McArthur met her at the premises and filled in the form, partly on the basis of his own knowledge and partly on the basis of her answers to questions which he asked. The second pursuer said in examination in chief that Mr McArthur asked her the question formulated in section 6(C) of the proposal form. She said that the pursuers had never been declared bankrupt, but had been "on the bottom steps" of the court a few times. They had, however, always paid in time to avoid being made bankrupt. Mr McArthur had told her that all proposal forms referred to being "declared bankrupt". She responded that they had never been made bankrupt. The question was accordingly answered in the negative. She accepted that, if the question in section 6(C) meant, "Have you been the subject of proceedings that might have led to your bankruptcy?" the correct answer was in the affirmative, but maintained that she had thought it meant, "Have you ever been declared bankrupt". That was what Mr McArthur had said it meant. She had not intended to defraud, mislead or deceive the defenders. Under cross-examination, the second pursuer reiterated that Mr McArthur had read out question 6(C) to her. She had first answered the parts about arson and dishonesty. So far as bankruptcy was concerned, they had never been bankrupt, but had been "on the steps" a number of times. Mr McArthur had said that he thought the question was about whether they had been made bankrupt. He had not asked her if she had had any actions served on her. The position was that they had had "letters from the court". They had had a number of bankruptcy actions served on them. She had told Mr McArthur that. She had been honest about it. She had told the loss adjuster too. That appeared to be a reference to a statement (No. 7/10 of process) which was in inter alia the following terms:"20. ... We, in fact, were due to appear in court on 21 February 2000 [sic; the reference should in fact be to 2001] in an action for bankruptcy raised against us by HM Customs and Excise because of non-payment of VAT. ...
23. I accept that over the years our financial management has been very poor. We have had some 8 different bankruptcy applications filed against us by HM Customs & Excise but have always managed to get by, as we did again on this latest occasion."
"Have you or any principal in the business or any company in which you or such principal have or have had an interest ... ever been declared bankrupt, the subject of bankruptcy proceedings or of any voluntary or mandatory insolvency or winding up procedures?"
In his oral evidence Mr Vale said that it had not occurred to him that there was any difference between an "action for bankruptcy" and an "action in bankruptcy". If there had only been letters threatening proceedings for bankruptcy, that did not require an affirmative answer. When it was put to Mr Vale that if petitions had been served, so that action had been taken, to say (as Mr McArthur has said the second pursuer had said to him) that there had been letters threatening bankruptcy, but the matter had always been settled before the matter reached court, was factually incorrect, Mr Vale indicated that he found it difficult to answer the question in the terms in which it had been put to him. Under cross-examination, Mr Vale accepted that he had not seen the term "action in bankruptcy" used in a proposal form before. The form of wording adopted in the CU form was not the normal wording. It was the only example he had found of the phrase "subject of bankruptcy proceedings" or the like. Question 6(C), he said, was clear enough, although it was not the way he would have asked it.
(d) The pursuers' submissions
[30] Mr Moore began his submissions on this aspect of the case by quoting the following passage from the speech of Lord Shaw of Dunfermline in Condogianis v Guardian Insurance [1921] 2 AC 125 at 130:"In a contract of insurance it is a weighty fact that the questions are framed by the insurer, and that if an answer is obtained to such a question which is upon a fair construction is a true answer, it is not open to the insuring company to maintain that the question was put in a sense different from or more comprehensive than the proponent's answer covered. Where an ambiguity exists, the contract must stand if an answer has been made to the question on a fair and reasonable construction of that question. Otherwise the ambiguity would be a trap against which the insured would be protected by Courts of law."
He also cited the following passage from the judgment of MacKinnon J in Revell v London General Insurance Co (1935) 50 Ll. LR 114 at 116:
"... if there is an ambiguity in this question so that upon one view of the reasonable meaning which is conveyed to the reasonable reader of it the answer was not false, the company cannot say that on the other meaning of the words the answer was untrue so as to invalidate the policy".
Mr Moore argued that question 6(C) was ambiguous. In using the expression "action in bankruptcy" it used a phrase which had no defined meaning, and was not a term of art in Scots or English law. Witnesses experienced in the insurance industry (Ms Collier, Mr Davidson and Mr Vale) had never to their knowledge seen it used in a proposal form. The question was whether that phrase could reasonably be interpreted as referring only to a situation in which a court order constituting bankruptcy had been made.
[31] In considering the construction which a reasonable man might put upon a question, one factor to be taken into account was what a reasonable man would consider the purpose of the question to be (Revell, per MacKinnon J at 117). Mr Moore submitted that a reasonable person might conclude that the purpose of question 6(C) was to ascertain the solvency of the proposer. Given that bankruptcy proceedings can be raised in circumstances where a solvent party genuinely disputes the alleged debt, a reasonable man might conclude that the purpose of the question did not extend to finding out about bankruptcy proceedings which did not result in a declaration of bankruptcy. [32] Elaborating on the concept of the reasonable man in this context, Mr Moore referred to two dicta which he suggested were not easily reconciled. In Yorke v Yorkshire Insurance Co [1918] 1 KB 662 it was said, by McCardie J at 666, that the words of a question:"... must receive such an interpretation as would be placed upon them by ordinary men of normal intelligence and average knowledge of the world".
In Hales v Reliance Fire & Accident Insurance Corporation Ltd [1960] 2 Lloyd's Rep 391 at 396, McNair J said:
"... it is the duty of underwriters or insurance companies if they seek to rely upon a question in a proposal form, to state their question in clear and unambiguous terms, and I think that extends to this, they must state in such terms as can be understood by the persons who are likely to be required to answer them, which includes persons of humble rank and perhaps not of the highest intelligence".
On either view, Mr Moore submitted, it was unnecessary to undertake too deep a legal analysis of the meaning of the words. All that required to be determined was whether the answer was a truthful one, according to the construction which a reasonable man would put upon the question.
(e) The defenders' submissions
[33] Mr Jones submitted that in considering whether the pursuers had given a truthful answer to question 6(C) the question should be construed as it might be construed by a reasonable man. He accepted that the test was an objective one, but submitted that the reasonable man in question should be a reasonable person in the position in which the second pursuer was, and with the knowledge which she had, at the material time (Hooper v Royal London General Insurance Co Ltd 1993 SC 242, per Lord Justice Clerk Ross at 250B-C). The fact that Mr Davidson, or anyone else who had never been the subject of a court action, might regard the question as ambiguous or even meaningless had no bearing on how a reasonable person in the second pursuer's position would understand it. As an example of that approach Mr Jones referred to Stewart v Commercial Union Assurance Co plc 1993 SC 1. In the present case, by the time the second pursuer was called upon to answer question 6(C), the pursuers had, to her knowledge, been cited on seven occasions to answer petitions for sequestration. Question 6(C) was readily understandable by a person in that position. A reasonable person who had had petitions for sequestration served upon her would know that she had been involved in court actions at the instance of her creditors. She would know that she had been the subject of those actions. She would know that the creditors had been asking the court to make her bankrupt. It followed that a reasonable person in the position in which the second pursuer was at the time when she answered question 6(C) would understand that she had been "the subject of actions in bankruptcy", and that the question therefore fell to be answered in the affirmative. [34] Mr Jones also relied on an answer given by the second pursuer towards the end of cross-examination. She was asked if she had had a number of actions in bankruptcy served upon her. She replied that she had, that she had told Mr McArthur so, that she had been honest about it, and that she had told the loss adjuster too. In fact in the statement to the loss adjuster (No. 7/10 of process) at paragraph 20 she referred to an "action for bankruptcy". It could thus be seen (a) that she regarded the sequestration petitions as "actions in bankruptcy", and (b) that she drew no distinction between "actions for bankruptcy and "actions in bankruptcy".(f) Discussion
[35] In my opinion, in determining whether the pursuers gave a true answer to question 6(C), it is necessary to consider how that question would have been interpreted by a reasonable person in the position of, and having the knowledge possessed by, the second pursuer. On the face of the language of the question, it was seeking an answer to whether the proposers had "ever been the subject of any action in bankruptcy". The phrase "action in bankruptcy" is not a term of art in Scots or (so far as I am aware) English law. For a lawyer, understanding the purpose of the question, it would not, in my view, be difficult to reach the conclusion that it might be that what the insurer wanted to know was whether the proposers had been subjected to proceedings the purpose of which was to have them made bankrupt. I accept, however, that to a laymen the phrase "actions in bankruptcy" might well carry a connotation of steps taken once bankruptcy had already been constituted. Moreover, it is not clear whether the words "any action in" are intended to be read with "involuntary liquidation" as well as with "bankruptcy". If they are, the phrase "any action in .... involuntary liquidation" is even clumsier and more obscure than "any action in bankruptcy". If, on the other hand, "any action in" is not intended to be read with "involuntary liquidation", it becomes harder to construe "any action in bankruptcy" as referring to proceedings for bankruptcy. There is, too, the consideration that the latter part of the question relates to "any conviction involving arson or dishonesty", rather than any prosecution for those crimes. That part, at least, of the question is concerned with the result rather than the proceedings necessary to bring about the result. All of these considerations demonstrate, in my view, that question 6(C) is, at best for the defenders, expressed with a degree of ambiguity. [36] The evidence establishes, in my view, that the commonest form in which insurers ask a question about bankruptcy in proposal forms for insurance of the type in issue is to the effect: "Has the proposer ever been declared bankrupt". On the other hand, it is equally clear that if the defenders meant to ask a question aimed at discovering if there have been proceedings with a view to a declaration of bankruptcy, even where no such declaration has resulted, they were not alone in doing so. That is illustrated by the NIG form and the CU form. Both of these examples are, to my mind, somewhat clearer that question 6(C), since "bankruptcy proceedings" is clearer than "action in bankruptcy", not having the possible connotation of action taken after bankruptcy has been constituted. Moreover, both these examples refer not only to "bankruptcy proceedings" but also to the proposer being "declared bankrupt". They thus make it clear that the part of the question about bankruptcy proceedings is additional to the part about declaration of bankruptcy. The clarity derived from the conjunction of the two phrases is absent from question 6(C). It therefore seems to me that the ambiguity previously identified as inherent in question 6(C) remains, despite the existence of other examples of the use of a question about proceedings aimed at bringing about bankruptcy. [37] I do not consider that the evidence of witnesses involved in the insurance industry as to their understanding, or lack of understanding, of the phrase "actions in bankruptcy" could be regarded as conclusive, even if it all pointed one way. I found Mr Vale's ability to understand what question 6(C) was looking for more convincing than Mr Davidson's claimed inability to understand the phrase used in the question. In the end, however, the question is not, in my view, whether the language of question 6(C) was understandable to an insurance broker or underwriter, but whether it was understandable to a reasonable proposer of ordinary intelligence and business experience. [38] I do not think that it would be fair to the second pursuer to place much reliance on her tacit acceptance of language put to her in cross-examination, or on the language attributed to her in her statement to the loss adjuster. In paragraph 20 of the statement (No. 7/10 of process) the phrase used is "action for bankruptcy", and there seems to me to be no reason for confidence that those were the precise words used by the second pursuer. Again, I accept Mr Jones's submission that the question asked in cross-examination was couched in terms of "actions in bankruptcy", but my own note refers to "bankruptcy actions". That illustrates, in my view, the risk involved in placing too much weight on fine distinctions of language. [39] What I do find somewhat more persuasive is the submission that, with the knowledge she had of the pursuers' history of fending off bankruptcy at the last minute, the second pursuer must have been aware of what the question was seeking. I accept that the second pursuer asked for Mr McArthur's advice about what the question meant, and that he told her that such questions were usually concerned with whether the proposers had been declared bankrupt. Although under cross-examination Mr McArthur accepted, with the benefit of hindsight, that question 6(C) was not asking the usual question, I accept that at the time he thought that it was, and that his advice to the second pursuer to that effect was given in good faith. Had the second pursuer then been candid with Mr McArthur as to the pursuers' previous experience of bankruptcy proceedings, I would have had relatively little difficulty in accepting that she had in good faith been misled by Mr McArthur's advice into thinking that all that was sought was an indication of whether the pursuers had ever been made bankrupt, and that her answer was a tenable honest answer to an ambiguous question. The position is made more complex, however, by the fact that the second pursuer was not wholly candid in her discussions with Mr McArthur. Although she said that she told him that she had been "on the steps of the court" a few times, I prefer Mr McArthur's evidence that the most that she said the pursuers had received were "letters threatening bankruptcy", and that she had said that they always settled before court. That is not in my view a candid description of having been cited to answer bankruptcy petitions on seven occasions. It seems to me that the second pursuer was deliberately understating to Mr McArthur the gravity of the pursuers' history. The truth, as the second pursuer well knew, was that they had been cited to answer petitions for their bankruptcy on seven occasions in the preceding three years. She understated the position to Mr McArthur in terms of "letters threatening bankruptcy". Were it not that I accept that Mr McArthur advised the second pursuer that his understanding of the question was that it was concerned with declarations of bankruptcy, I would have been inclined to draw the inference that the second pursuer understood that the question demanded disclosure of the seven bankruptcy petitions, but concealed them from Mr McArthur by use of the anodyne expression "letters threatening bankruptcy", and thus gave Mr McArthur incomplete information which resulted in the giving of an answer to question 6(C) which concealed the true position and was false. In the result, however, in the light of the advice which Mr McArthur gave to the second pursuer, I do not feel able to draw that inference. [40] In my opinion, question 6(C) was ambiguous. One possible meaning of it was that it sought only the usual information about whether the proposers had ever been made bankrupt. If the defenders wanted more, they could have made that clear by adopting the form of question illustrated in the NIG and CU forms, but they did not do so. In face of the ambiguity, the second pursuer sought and was given professional advice as to the meaning of the question. Despite her lack of candour in explaining the pursuers' position to Mr McArthur, her answer to the question was true, if the question meant what she was advised that it meant. Adopting the approach illustrated in the dicta from Condogianis and Revell cited in paragraph [30] above, it follows, in my view that the second pursuer cannot be held to have given a false answer to question 6(C).The financial circumstances issue
(a) The proposal form
[41] Question 6(E) of the proposal form was in the following terms:"Are there any other facts not covered by the questions in this Proposal which you consider may be material to this insurance?"
That question was answered in the negative.
[42] The proposal form gives guidance as to what is meant by material facts. At the beginning of the form there is a passage in the following terms:"Please answer all the following questions in full and to the best of your ability. Incorrect answers or failure to disclose all the material facts may render the Insurance invalid. Material facts are those which would influence acceptance or assessment of the Insurance risk. If you are in doubt on any question please disclose them [sic] or seek assistance by calling Marsh and Company immediately."
(b) The evidence
[43] The financial circumstances which the defenders maintain should have been disclosed in answer to question 6(E) are primarily those relating to the pursuers' relationship with their bankers. The position, as disclosed in evidence may be summarised thus. As at 7 July 2000 the pursuers were indebted to their bankers, the Bank of Scotland ("the Bank") in respect of a term loan and an overdraft facility. On that date the Bank sent to the pursuers by recorded delivery post two formal letters (both contained in No. 7/8 of process). One letter related to the term loan, and stated:"... we have to advise you that as the instalments are now in arrears in terms of your agreement with us, the whole debt has become repayable. Therefore we now write to formally demand immediate repayment thereof."
The sums said to be due was £250,523.22, with interest continuing to accrue until settlement. The other letter related to the overdraft, and demanded immediate repayment of £4732.12, with interest continuing to accrue until settlement. The second pursuer responded by an undated letter (also in No. 7/8 of process) in which she referred to the fact that the pursuers' youngest daughter had been in hospital, and offered various explanations for the state of the accounts. She stated, "... I know we are going to try to sell the place soon". Mr Smith of the Bank replied by letter dated 18 July 2000 in which he made inter alia the following observations:
"The problem is, because you have not been paying into the [overdraft] account the Bank has not been able to take [from it] the payments for the term loan. The overdraft has run up because the monthly premium to keep the building insured has been debited but again you have not been paying in to meet this cost. ...
Ultimately the solution to the dilemma is the sale of the building. If you intend to sell the building in the short term it must be in your best interests to have control of the sale. To regain control you must make an effort to pay in and at least keep the term loan payments up to date. ..."
By letter dated 24 October 2000 (again in No. 7/8 of process) Mr Smith wrote again to the pursuers, expressing disappointment that they had not responded to his telephone calls to discuss their borrowing and that no progress had been made towards agreeing an acceptable way forward. He stated:
"I have advised my Head Office of this and with regret must advise you that the Bank will take steps to enforce the security over the premises."
(c) The pursuers' submissions
[47] In his submissions on this issue, Mr Moore did not follow the second pursuer's approach of contending that the pursuers' financial circumstances were not material. On the contrary, he accepted that the fact that a proposer was in financial difficulties would be regarded as material by a prudent insurer (e.g. James v CGU Insurance plc [2002] Lloyd's Rep IR 206, paragraphs 85-86), and that the pursuers' financial circumstances as disclosed in evidence were such as to be properly regarded as material. Financial difficulties, it was accepted, clearly affected the moral hazard. Instead, Mr Moore relied on two propositions to save the pursuers from the charge of non-disclosure. They were (1) that the defenders had in the circumstances waived their entitlement to disclosure of the pursuers' financial difficulties, and (2) that by the wording of question 6(E) the defenders had made it necessary to judge the truth of the answer in some degree subjectively. [48] In relation to the first of these points, Mr Moore cited Joel v Law Union and Crown Insurance Co [1908] 2 KB 863, per Vaughn Williams LJ at 878:"I think also that the insurance office may, by the requisitions for information of a specific sort which it makes of the proposer, relieve him partially from the obligation to disclose by an election to make inquiries as to certain facts material to the risk to be insured against itself."
He also cited Schoolman v Hall [1951] 1 Lloyd's Rep 139, per Asquith LJ at 143:
"It is unquestionably plain that questions in a proposal form may be so framed as necessarily to imply that the underwriter only wants information on certain subject matters, or that within a particular subject matter their desire for information is restricted within the narrow limits indicated by the terms of the questions, and, in such a case, they may pro tanto dispense the proposer from what otherwise at common law would have been a duty to disclose anything material."
The fact that the answers to express questions are made the basis of the contract merely prevents argument as to the materiality of the answers, and does not per se relieve the proposer of the general obligation to disclose anything material (Schoolman, per Cohen LJ at 142). However, in Hair v The Prudential Assurance Co Ltd [1983] 2 Lloyd's Rep 667 at 673 Woolf J approved the following passage from MacGillivray:
"It is more likely, however, that questions asked will limit the duty of disclosure, in that, if questions are asked on particular subjects and the answers to them are warranted, it may be inferred that the insurer has waived his right to information either on the same matters but outside the scope of the questions or on kindred matters to the subject matter of the questions. ... Whether or not such waiver is present depends on a true construction of the proposal form, the test being : Would a reasonable man reading a proposal form be justified in thinking that the insurer had restricted his right to receive all material information and consented to the omission of the particular information in issue?"
Later on the same page, Woolf J said:
"I am bound to say, that, if it was intended that an assured should answer matters even though he was not being questioned about them, ... I would have expected something to be said which clearly indicated to a proposer that, although they had not been asked any specific questions about the matter, if there was something which was relevant to the risk which they knew of, but which was not covered by the questions, they should still deal with it, and leave a space for them to do so."
(d) The defenders' submissions
[51] Mr Jones submitted that the state of the pursuers' affairs in relation to the Bank was plainly a material fact which ought to have been disclosed to the defenders, in answer to question 6(E) as well as at common law. The relevance of financial difficulties encountered by the proposer to moral hazard as part of the risk to be assessed by the insurer was explained in evidence by Mrs Collier. The concept of moral hazard was explained by Mance J in Insurance Corporation of the Channel Islands v The Royal Hotel Ltd [1998] Lloyd's Rep IR 151 at 156:"It is important to realise what is embraced by 'risk'. It is not simply the peril or possibility of loss or damage occurring within the scope of the policy. It embraces other matters which would, if known, be likely to influence a prudent underwriter's decision. It includes what is known as 'moral hazard', which may merely increase the likelihood of it being made to appear (falsely) that loss of damage has occurred falling within the scope of the policy".
"Thus, if an insurer asks "How many accidents have you had in the last three years?" it may well be implied that he does not want to know of accidents before that time, though these would still be material. If he were to ask whether any of the proposer's brothers or sisters had died on [sic] consumption or been inflicted [sic] with insanity, it might well be inferred that the insurer had waived similar information concerning more remote relatives, so that he could not avoid the policy for non-disclosure of an aunt's death of consumption or an uncle's insanity."
Mr Jones submitted that in the present case the defenders made it plain that the disclosure of material facts should not be limited by reference to the questions asked. What question 6(E) required was the disclosure of material facts "not covered by the questions". The wording was precisely what Woolf J desiderated in Hair (in the passage last quoted in paragraph [48] above).
[53] A reasonable proposer seeking insurance of the sort in question, and knowing what the second pursuer knew about the pursuers' financial circumstances, would realise, Mr Jones submitted, that they were material in the sense explained at the beginning of the proposal form (see paragraph [42] above). That much the pursuers accepted. Such a proposer would have understood that question 6(E) was specifically directed at such material facts if they were "not covered by the questions" in the proposal form. A reasonable proposer would not think that question 6(C) about bankruptcy "covered" the fact that the proposers' bank was proposing to enforce its security over the subjects, following default in the servicing of loans exceeding £250,000 and failure to make satisfactory proposals to address the matter. Question 6(E) therefore required candid disclosure of the state of affairs that prevailed between the pursuers and the Bank at the time of the proposal.(e) Discussion
[54] In my opinion it is clear that, as Mr Moore accepted, the facts relating to the pursuers' difficulties with the Bank were material to the assessment of the risk by the defenders. In principle, facts are material if they are likely to influence a prudent underwriter in determining whether and, if so, on what terms to accept the risk. The risk includes moral hazard, and it is quite clear why financial difficulties experienced by the proposers affect the moral hazard. They increase the risk of a fraudulent claim being made. No doubt it is a matter of degree whether a particular set of circumstances is of sufficient significance to be material in that way. I have no difficulty, however, in regarding the circumstances of the pursuers, as described in paragraph [43] above, as falling clearly into the category of facts which were material and required to be disclosed. The second pursuer's optimistic attitude, as expressed in evidence, was quite unrealistic. The truth was that the pursuers' were in serious financial difficulty. [55] Notwithstanding the materiality of a fact, a proposer may be excused from disclosing it if, by the questions asked in the proposal form, the insurer demonstrates that he waives his entitlement to disclosure of the particular fact or of facts of that class (Joel v Law Union and Crown Insurance Co, per Vaughn Williams LJ at 878; Schoolman v Hall, per Asquith LJ at 143). The mere fact that express questions are asked and made the basis of the contract does not per se amount to waiver of the disclosure of all other material facts (Schoolman v Hill, per Cohen LJ at 142). It is, in each case, a matter of construction of the proposal form in question (see the passage from MacGillivray approved by Woolf J in Hair and quoted in paragraph [48] above). Relatively clear examples may be seen elsewhere in the passage from MacGillivray approved by Woolf J in Hair (paragraph [52] above). Question 6(E) makes it expressly clear that it is concerned with "other facts not covered by the questions". The proposer is invited to consider whether there are such facts which are material. He is reminded, at the beginning of the proposal form, what materiality means. He is advised that, if he is in doubt, he should disclose the facts about which he is in doubt, or else seek assistance from the brokers who issued the proposal form. That appears to me to be an effective attempt on the part of the defenders to do what Woolf J desiderated in Hair (see the last quotation in paragraph [48]above). I do not consider that it is sound to argue that question 6(C) about bankruptcy can properly be regarded as "covering" the issue of financial soundness, and waiving the right to disclosure of other material facts bearing on the proposer's financial standing. The pursuers' relationship with the Bank and their financial difficulties generally are clearly a different matter from the narrow question of bankruptcy, and I do not consider that any reasonable proposer could think that, because the insurers asked question 6(C), they did not want to know about the other matters. [56] I do not consider that it is of any assistance to the pursuers that question 6(E) asks for facts "which you may consider material". Materiality is ordinarily to be judged by reference to whether the fact would influence the prudent underwriter. There is, in my view, some force in Mr Moore's submission that for the purpose of question 6(E), materiality becomes a matter to be judged from the point of view of the proposer. The language of the question must, of course, be read in the context of the rest of the proposal form, and that reminds the proposer of what is meant by materiality. It may be, therefore, that the question which arises, if a failure to give a true answer to question 6(E) is alleged, comes to be whether the fact which was not disclosed is one which a reasonable proposer would think would not influence a prudent underwriter. I do not consider, and Mr Moore did not ultimately argue, that the test could be wholly subjective. If the matter, notwithstanding the words "which you may consider material", remains one to be tested by reference to the views of a prudent underwriter, it is in my view clear that the pursuers' financial difficulties should have been disclosed. On the other hand, if those words have the effect of making the views of a reasonable proposer the proper test, the result in my opinion remains the same. As I have already said, the second pursuer's expressed optimism about the pursuers' financial position was in my view quite unrealistic. Any reasonable proposer would have realised that such financial difficulties would be material to a prudent underwriter, or would at least have discovered that that was so by consulting Marsh & Co as the proposal form instructed. [57] In summary, therefore, I am of opinion that the pursuers' financial difficulties were plainly material. Any reasonable proposer would have realised that that was so. Those facts were not "covered" by the other questions in the proposal form. Question 6(E) was not framed in such a way as to waive disclosure of those material facts. The negative answer to question 6(E) therefore amounted to non-disclosure of a material fact by the pursuers to the defenders.The cash-handling issue
(a) The relevant policy provisions
[58] The policy (No. 6/2 of process) begins with the following statement:"The Proposal (whether verbal or written) is the basis of and forms part of this Contract of Insurance".
"Proposal" is a defined term: General Definition 1 provides that it means "any proposal and declaration and any supplementary information supplied to the Underwriter by or on behalf of the Insured".
(b) The scope of the issue
[59] The letter (No. 6/4 of process) of 18 April 2001 from the defenders' solicitors, Simpson & Marwick WS, by which the pursuers were informed that the defenders were avoiding the policy did not expressly mention the cash-handling issue, but it contained the following statement:"Underwriters remain concerned about other issues and we hereby reserve the right to specify other grounds for repudiation of the Policy and claim."
The cash-handling issue was introduced into the defenders' pleadings by the amendment process begun on 29 August 2002 and concluded on 14 October 2002 (see paragraph [2] above). Reliance was placed on certain statements allegedly made by the first pursuer to the defenders' risk surveyor, John Driscoll, when he visited the premises on 24 November 2000, about the way in which cash was handled in the pursuers' business. In particular, the alleged statements founded on were (i) that the cash kept in the safe on the premises was normally limited to ₤5000, (ii) that if there were larger amounts, they were put in the bank night safe, and (iii) that when cash was to be banked, the first pursuer and his sons took it by car, and the journey was monitored by the police on closed circuit television (CCTV), as was the arrival at the back door of the bank. The defenders position was that those statements were, by being made to Mr Driscoll, "supplied to the Underwriters", and were therefore, by virtue of the definition of "Proposal" quoted in paragraph [58] above, part of the proposal. They contended that the statements were untrue. No issue as to the materiality of the misrepresentation arose, they contended, because the Proposal was declared to be the basis of the contract of insurance and was thereby rendered material. The pursuers' position was that no untrue statement about cash-handling was made to Mr Driscoll, and that, in any event, any misrepresentation on that subject was immaterial.
[60] In these circumstances it is necessary to consider (i) what was said by the first pursuer to Mr Driscoll about cash-handling; (ii) what the true position was about cash-handling in the pursuers' business; (iii) whether, therefore, there was a misrepresentation on the subject of cash-handling; (iv) if there was such a misrepresentation, whether it is necessary for the defenders to establish that it was material; and (v) if so, whether it was indeed material.
(c) The evidence about the statements to Mr Driscoll
[61] Mr Driscoll surveyed the premises on 24 November 2000. His Report (No. 7/3 of process) contains a passage headed "Safes & Cash Handling", which is in the following terms:"The only safe is an old 12 corner bent model. There is no name and a positive identification can not be given, however it is relatively heavy duty; a limit of ₤5000 seems reasonable.
Cash in the safe overnight is normally limited to ₤5000, if there are larger amounts, such [as] at Christmas, it is taken to the bank night safe by the Assured. Normal banking is undertaken when cash reaches ₤5000, the Assured drives to the bank with his two sons, and they call the Police before leaving. The Police apparently watch the car for the whole journey on their CCTV system, and the Bank give access via their back door, which is also monitored using CCTV.
The approach is slightly unconventional, but the Assured takes sensible precautions, and the situation is regarded as acceptable."
It is evident that Mr Driscoll in his report referred to the first pursuer as "the Assured". The reference to "a limit of ₤5000" relates to the fact that under section 3(f) of the policy the sum assured in respect of money "in Safes at Insured's premises" is set at ₤5000.
[62] In evidence in chief Mr Driscoll confirmed that he had seen the safe to which he referred (although under cross-examination he said that he did not recall where it was). He identified the first pursuer as the source of the information set out in the second paragraph of the passage in his Report quoted in paragraph [61] above. Under cross-examination, he denied that he had been told that there was a second safe in the residential part of the premises. When it was put to him that the first pursuer did not drive, he said that the phrase "the Assured drives to the bank with his two sons" was not intended to convey that the first pursuer was the driver. He said that the passage about cash-handling was "not something I would concoct from thin air". He said he had no recollection of a conversation with Francis O'Connor, junior, or of being told that one of the pursuers' sons was a professional boxer. He denied being told that cash was kept overnight in a safe in the living accommodation. He denied being told that the cash was taken to the bank by the pursuers' daughter escorted by one of their sons. [63] The defenders also led the evidence of Annette McCallum of Cunningham Lindsay, Loss Adjusters, who had carried out a survey of the premises on behalf of previous insurers, Albion Insurance Co Ltd, earlier in 2000. She visited the premises on 10 July, when the appointment was cut short when the first pursuer was called away because his daughter was ill, then returned to complete the survey on 30 August 2000. In the letter covering her survey report (No. 7/12 of process) she reported:"A safe is utilised by the Insured for on-site storage of cash. ... Bearing in mind the amount of cash which can be on the premises at any one time (maximum ₤10,000) you may wish further inquiries to be undertaken [in regard to the cash rating of the safe]".
In evidence she explained that she saw the safe. Although she could not say precisely where it was (on the survey form she recorded merely "first floor", but explained under cross examination that she may have lost track of where in the premises she was at the stage when she saw the safe), it was not in the flat, since she was never there. She had no recollection of being told of a second safe in the flat; if she had been told about it she would have recorded that fact. She identified the first pursuer as the source of the information that the maximum cash kept in the safe overnight was ₤10,000, but it may merely reflect the maximum permitted under the Albion policy. The other potentially significant passage in Ms McCallum's letter was in the following terms:
"During our meeting Mr O'Connor advised that when cash takings are paid into the bank the person banking them is always accompanied from the risk address to the bank by a police officer. This appears to be an initiative introduced recently by the local police."
In evidence she said that she had never come across such an arrangement before. She believed she was told something about CCTV cameras. She had no recollection of being told that the police escort was never used. She expressed certainty that what she had written accurately reflected what she was told. She had no recollection of discussing cash handling arrangements with the pursuer's daughters.
[64] The first pursuer first gave evidence on 28 August 2002, before either Mr Driscoll or Ms McCallum had given evidence, and before the cash-handling issue was focused in the defenders' pleadings. Nevertheless he was cross-examined on that date about the second paragraph of the passage in Mr Driscoll's report quoted in paragraph [61] above. He said that he did not think he had told him that the cash in the safe was normally limited to ₤5000 overnight. He maintained that he did not say to Mr Driscoll that they took any excess cash to the night safe. He could not remember telling Mr Driscoll about the method of transferring cash to the bank. He said that he did not tell Mr Driscoll anything about the CCTV system. He did not tell him about gaining access to the bank by the back door. His position more generally was that, although Mr Driscoll asked to see the safe, he did not ask anything about the handling of cash. [65] The first pursuer was recalled on 9 December 2002 to deal with the evidence which Ms McCallum was expected to give. He said that he remembered meeting her only once, on the occasion when he had to cut the meeting short to go to hospital to see his daughter. He did not remember her coming back. His account was that Ms McCallum asked about banking arrangements, but that he told her to ask his daughter Kathleen about that. He said that Kathleen and Michelle (Mrs Shedden) spoke to Ms McCallum about the banking arrangements. He said that he did not tell Ms McCallum that the cash was escorted to the bank by the police. He did tell her about the CCTV cameras, and that if a police car was available it would follow. He maintained, however, that he told her that they never used that system. [66] The second pursuer, when she was recalled on 9 December 2002, said that she had been made aware in December 1999 by the local licensing sergeant of Strathclyde Police of an arrangement by which a licensee could telephone the police and arrange for the transfer of cash to the bank to be monitored on CCTV. She also understood that for a very large amount, if a car was available, an escort would be provided. The pursuers had never made use of either of these arrangements. [67] Francis O'Connor, junior, also gave evidence on 9 December 2002. He said he was present on the occasion of Mr Driscoll's visit. He was there when Mr Driscoll asked about the safe and the banking arrangements. He maintained that Mr Driscoll was told about both safes, the one in the flat as well as the one in the cellar. He said that Mr Driscoll was not told that excess takings were put in the bank night safe. The family called the safe in the flat the "night safe". No figures were mentioned about how much was kept in the safe. Under cross-examination he said that he himself told Mr Driscoll that the takings were put in the upstairs safe each night. In relation to banking arrangements, Francis junior said that he told Mr Driscoll that he took the cash to the bank with his sister every Friday. He did not say that the first pursuer took the money to the bank. He told Mr Driscoll about the availability of the CCTV surveillance system, but also told him that they had never used it. Francis junior said that he remembered the visit of Ms McCallum, but had no recollection of any conversation with her about safes or banking arrangements. [68] The pursuers' married daughter, Michelle (Mrs Shedden), did not give evidence bearing directly on what was said to Mr Driscoll. She did, however, claim to have been present during Ms McCallum's visit. Her father had told Ms McCallum about the CCTV surveillance arrangement, but because he "tended to drag things out" she intervened and completed the account. She maintained that she had told Ms McCallum that they never used the arrangement. She said that the first pursuer had also mentioned the possibility of a police escort for a very large amount, but that it was not said that that was something the pursuers used. [69] The facilities made available by the police were explained by Sergeant McCann of the Licensing Department of Strathclyde Police. He was not the licensing sergeant in Motherwell, being in charge of the Coatbridge office of the Licensing Department, but he was aware of the arrangements. He said that there were CCTV cameras which covered the pursuer's premises in Dalziel Street, and also the Bank of Scotland branch in Motherwell. The police in Motherwell make a facility available to licensed traders in terms of which the licensee may make a request to the police control room for the CCTV operator to supervise the transfer of cash from the licensed premises to the bank. That was introduced (as the first pursuer had said) just before the millennium (i.e. the beginning of 2000). His understanding was that the pursuers did not take advantage of it. There was no arrangement for providing a police escort for licensees while they transferred cash to the bank; or at least he was not aware of any such arrangement. He would be reluctant to do anything of that sort because of the demand on resources.(d) The evidence about the actual cash-handling arrangements
[70] The evidence about the way in which the pursuers actually handled the cash takings of the business can be dealt with more briefly, because there was little real dispute about what happened. It is clear from the evidence of the second pursuer that no banking of cash in the conventional sense was carried out. As she put it, the business was conducted on a cash basis. Cash takings were used to meet wages, the partners' drawings, and other expenditure. The "banking" that various witnesses spoke to being carried out each Friday was not the deposit of the week's takings in the pursuers' account at the bank, but the payment of accounts (principally the brewer's account) by the deposit of cash directly into the creditor's bank account. It also seems clear that the pursuers did not control the amount of cash held on the premises overnight. That cash was not kept in the safe in the business part of the premises, but, on such (according to the second pursuer, rare) occasions as it was put in a safe at all, in the other safe upstairs in the residential part of the premises. There was no practice of depositing any excess of cash over ₤5000 in the bank's night safe. The first pursuer took no part in the so-called "banking" that was carried out each Friday. That was undertaken by the pursuers' daughter, Kathleen, escorted normally by Francis junior, but occasionally by Michael. The CCTV monitoring arrangement made available by the police at the end of 1999 or beginning of 2000 was not used by the pursuers. Nor, if the police (contrary to Sergeant McCann's understanding) on occasions provided an escort for particularly large consignments of cash, did the pursuers ever make use of that service.(e) Was there misrepresentation of the cash-handling arrangements?
[71] As Mr Moore submitted, the contention that the pursuers misrepresented their cash-handling arrangements depends on the evidence of Mr Driscoll. It is therefore important to examine his evidence carefully. Mr Moore submitted that he was wholly unreliable, and also suggested that his integrity was open to question. Various submissions were made in support of these propositions, many of which related to aspects of the case which are no longer in issue. I accept that Mr Driscoll probably made a number of mistakes of detail in his survey of the property. Equally, I regard some of the grounds on which his reliability was challenged as trivial and of no real weight. On balance, having considered the various points made against Mr Driscoll's credibility and reliability, I am not persuaded that the attack on his integrity has been made out. Nor do I think that it would be right to take an over-all view of his reliability. Rather, it seems to me that it is necessary to consider the conflict of evidence between Mr Driscoll and the members of the O'Connor family on the various aspects of cash-handling point by point. [72] The first aspect of the matter that requires to be considered is whether there was misrepresentation of the use made of the safe on the premises. I accept that Mr Driscoll was shown only one safe, the one in the business part of the premises. He was not shown, or told about, the safe in the residential part of the premises. There would not appear to be any rational explanation for his not recording the second safe if he had been told about it. I derive support for the conclusion that he was not told about it from the fact that Ms McCallum too was shown the same safe as Mr Driscoll was shown (I do not attach any significance to the differences in their descriptions of it), but had no recollection of being told of another safe in the residential part of the premises. I do not accept the evidence of Francis O'Connor, junior, to the effect that Mr Driscoll was told about both safes. Mr Driscoll had no recollection of speaking to Francis junior, and the first defender, when he first gave evidence, made no reference to Francis junior having been involved in the discussion. I also accept Mr Driscoll's evidence, which accords with the report he prepared shortly after carrying out the survey, that he was given to understand that cash up to £5000 was kept in the safe he was shown. The truth of the matter appears to be that the cash kept in the premises overnight, which would not necessarily be restricted to £5000, was not normally put in a safe at all. The use of the upstairs safe was infrequent. That was the position adopted by the second pursuer, and I have no reason to doubt her on that matter. I also accept Mr Driscoll's evidence that he was given to understand that, if there was cash in excess of £5000, it was put in the bank's night safe. The references made by Francis junior and Michelle to the upstairs safe being known in the family as the "night safe" seemed to me, on the one hand, to provide a possible explanation for a misunderstanding of a reference to that safe as a reference to the bank's night safe. On balance, however, I view that evidence with some suspicion. It seems to me to be quite probable that it was devised in the interval between the two parts of the proof precisely in order to attempt to provide such an explanation of the passage in Mr Driscoll's report referring to the bank night safe. Certainly the first pursuer, when Mr Driscoll's report was put to him when he first gave evidence on 28 August 2002, and he was asked about the reference to the night safe, made no mention of such a family usage of the expression. Even if it were accepted that the reference to the night safe had been intended as a reference to the safe in the flat, that was not a true account of what was routinely done with the cash held overnight. As the second pursuer herself made clear, such cash was not normally put in the safe in the flat. [73] The conclusion which I reach on this aspect of the matter is that Mr Driscoll was told by the first pursuer that the money kept in the premises overnight was kept in the downstairs safe, and that any excess over £5000 was put in the bank's night safe. The truth, on the other hand, was that no control was exercised over the amount of cash held in the premises overnight; that such cash was ordinarily kept unsecured, although on relatively rare occasions it was put in the upstairs safe which was not drawn to Mr Driscoll's intention; and that no use was made of the bank's night safe. [74] The second aspect of the matter that requires to be considered is the arrangement for transporting cash to the bank. Mr Driscoll understood that to be undertaken "when cash reached £5000". That is consistent with his understanding that £5000 was the limit of cash kept in the premises. That in turn was consistent with the fact that was the sum insured in respect of cash kept "in Safe at Insured's premises" in section 5 of the proposal form completed by the second pursuer some eleven days earlier. Mr Driscoll further understood that "the Assured [the first pursuer] drives to the bank with his two sons". I can conceive of no reason why Mr Driscoll should make that up. The fact that the first pursuer cannot drive is in my view quite immaterial. The phrase used by Mr Driscoll does not, to my mind, necessarily imply that the first pursuer was the driver; it merely indicates that all three went by car. It is plain, however, that it was not true. I accept the body of evidence to the effect that the journey to the bank was normally undertaken by Kathleen escorted by Francis junior or (rarely) Michael. Finally, and most significantly, Mr Driscoll understood that the drive to the bank was undertaken after a call to the police and under CCTV surveillance. It is plain that there was indeed in operation from about the beginning of 2000 an arrangement whereby the police would, on request, undertake such surveillance. It is equally plain that Mr Driscoll was told about it. I find it quite incredible, however, that the various members of the O'Connor family who claimed to have spoken to Mr Driscoll on the subject all claimed to have explained the system to him, then told him that they made no use of it. There could have been no point in their doing that. Mr Driscoll found the arrangement an unusual one, and it seems to me that he would have been even more struck by it, and would have remembered, if the O'Connors had first gone to great pains to explain the system to him, and had then made it clear that they did not use it. It seems to me to be quite clear that the point of telling Mr Driscoll about the CCTV surveillance system was to create an impression that the pursuers did make use of it, and thus took proper precautions to safeguard the transfer of cash to the bank. I reject the evidence that Mr Driscoll was told that the system was not used. I accept that Ms McCallum was given the impression that the trip to the bank was actually given a police escort. I would have been inclined to think that she might have been given an account of the trip being monitored by the police by CCTV and misunderstood what she was being told as an account of an actual police escort, were it not for the fact that both the first and the second pursuers suggested that for large sums an actual escort could be obtained. The fact that the first pursuer said that he told Ms McCallum that they never used the escort system replicates the improbability which I have noted in relation to what Mr Driscoll was told. [75] On this aspect of the matter, my conclusions are that the pursuers never in fact used the CCTV monitoring system; that they nevertheless told Mr Driscoll that they did; and that their evidence that they also told him that they never used the system is not true.
(f) Materiality - the pursuers' submissions
[76] Mr Moore did not, as I understood him, dispute that what was said to Mr Driscoll was "supplementary information supplied to the Underwriter by ... the Insured", and was therefore part of the Proposal in terms of General Definition 1. He recognised that the policy provided that "[the] Proposal (whether verbal or written) is the basis of ... [the] Contract of Insurance". He further recognised that the ordinary rule in such circumstances is that inaccurate information given in the proposal will entitle the insurers to repudiate liability, irrespective of whether the information in question would otherwise be regarded as material (Standard Life Assurance Co v Weems (1884) 11 R (HL) 48, per Lord Blackburn at 51). Nevertheless, he submitted that the terms of the contract in the present case were such that the defenders were not entitled to repudiate in respect of inaccuracy that was not material. [77] Mr Moore referred first to the introductory passage at the beginning of the proposal form (No. 6/1 of process) which stated:"Incorrect answers or failure to disclose all the material facts may render the Insurance invalid".
He pointed out that there was no reference to immaterial facts. He then relied upon part of the declaration on page 8 of the proposal form. In my view it is important to see the part relied on in context, so I shall quote more extensively from the declaration, highlighting in bold the part relied on by Mr Moore:
"To the best of ... our knowledge and belief the information provided in connection with this Proposal Form, whether in ... our hand or not, is true and ... we understand that non-disclosure or misrepresentation of a material fact will entitle Insurers to void the insurance.
... We understand that the signing of this Proposal Form does not bind ... us to complete the insurance but agree that should a contract be concluded, this Proposal Form and the statements made therein form the basis of the contract."
Again, in the part relied upon, there was no reference to immaterial facts. Turning to the policy (No. 6/2 of process) Mr Moore drew attention to General Condition 2, which provides:
"This Contract of Insurance shall be voidable in the event of misrepresentation misdescription or non-disclosure in any material particular."
These provisions, Mr Moore submitted, suggested that the contract could be repudiated for an inaccurate statement only if the mis-stated fact was material. He referred to MacGillivray on Insurance Law, Ninth edition, paragraph 16-34:
"... if the insurers are limited by contractual terms to avoiding the policy only in cases of material omissions or misrepresentation then in order to repudiate liability under the policy they must show that the misstatement concerned material facts"
(The equivalent passage in the same paragraph of the tenth edition is somewhat differently expressed.) Mr Moore recognised that General Condition 2 did not expressly state that there could be no repudiation for immaterial misstatement, and that it might therefore be argued that the effect of the "basis of the contract" provision was not overridden. Nevertheless he submitted that it was necessary to look at the contract as a whole (Hamlyn v Crown Accidental Insurance Co [1893] 1 QB 750, per Lopes LJ at 753-4), and that in the light of the passages quoted from the proposal form as well as General Condition 2 the proper conclusion was that the defenders could repudiate for misrepresentation only if it related to a material fact.
[78] Mr Moore submitted that any misrepresentation about the handling of cash was not material to the risk of fire. He recalled that Mrs Collier had said that money left lying around in the flat was not material to the fire risk (although I have her noted as modifying that answer later in her evidence). Mr Davidson, too, said that the amount of cash kept in the premises overnight was not material to the fire risk. Mr Moore submitted that Mr Vale (No. 7/16 of process, paragraph 47) appeared to support the same view, but while he took the view that the fact that more cash had been kept in the premises than the policy allowed should not be held against the insured making a claim in respect of fire, he was at pains to disagree with Mr Davidson's view that the breach of the cash limit was not material to the fire risk. Mrs Collier did not found on the cash-handling situation when she originally decided to repudiate the claim. Mr Moore submitted that her explanation for changing her position on that matter did not bear scrutiny. The fact that she did not originally found on the cash-handling situation as ground for repudiation supported the conclusion that she and the defenders would not have regarded that issue as material to the fire risk.(g) Materiality - the defenders' submissions
[79] Mr Jones submitted that no inference that the misrepresentation about the cash-handling arrangements was immaterial could be drawn from Mrs Collier's evidence. Although at the time when she originally avoided the policy she was aware from the second pursuer's statements that more cash had been in the premises at the time of the fire than was permitted under the policy, she took the view that that should not be regarded as invalidating the fire claim. If a money claim had been made, she would have regarded it as invalidating that. She thought, however, that it would be petty to rely on that ground to avoid the policy entirely. She had not understood the second pursuer's references to the business being conducted on a cash basis as meaning that money was never banked in the pursuers' account. She changed her mind when she found that the second pursuer had lied to Mr Driscoll about the arrangements for transfer of cash to the bank. The information provided to Mr Driscoll had appeared to indicate proposers who recognised the hazards of cash transfer and had taken some action in that connection. When it became evident that the information about cash transfer arrangements was not true, the deception appeared to be material to the assessment of risk. [80] In any event, Mr Jones submitted, the cash-handling misrepresentation did not have to be shown to be material. It was material by virtue of its being part of the proposal, and the proposal being the basis of the policy.(h) Materiality - discussion
[81] In my opinion, on a sound construction of the policy, it is not necessary for the defenders to prove the materiality of the cash-handling misrepresentation. The representations were, by virtue of being supplementary information supplied through Mr Driscoll to the defenders, part of the proposal. The proposal is declared to be the basis of the policy. It follows, in my opinion, that, unless the contract provides otherwise, the defenders are entitled to treat the cash-handling misrepresentations as ground for avoiding the policy, whether they would otherwise have been held to be material to the assessment of risk or not. Mr Moore's argument, so far as based on the terms of the proposal and of the policy, concentrated on various indications that misrepresentation of a material fact would entitle the defenders to avoid the policy. He suggested that the corollary was that misrepresentation of a non-material fact would not entitle them to do so. Thus, proof of the materiality of the misrepresentation founded on was necessary. In my view that analysis overlooks the effect of the provision that the proposal is the basis of the contract. The correct approach is, in my view, explained in the passage from the speech of Lord Blackburn in Standard Life Assurance Co v Weems to which Mr Moore referred:"It is competent for the contracting parties, if both agree to it, and sufficiently express their intention to agree, to make the actual existence of anything a condition precedent to the inception of the contract; and, if they do so, the non-existence of that thing is a good defence. And it is not of any importance whether the existence of that thing was or was not material; the parties would not have made it part of the contract if they had not thought it material, and they have a right to determine for themselves what they shall deem material. ... But I think, when we look at the terms of this contract, and see that it is expressly said in the policy as well as in the declaration itself that the declaration shall be the basis of the policy, that it is hardly possible to avoid the conclusion that the truth of the particulars is warranted."
It seems to me therefore that, where the parties to a contract of insurance agree that the information included in and incorporated into the proposal is the basis of the contract, they are agreeing that that information is to be deemed to be material. It therefore ceases to matter whether the information would otherwise be regarded as material. It is treated as material because the parties have agreed that it should be so treated. It therefore seems to me that references in other parts of the contract to the insurers' right to avoid the contract on the ground of material misstatement must be construed as covering both misstatements which can be shown to be material, and also misstatements which fall to be treated as material because the parties have agreed that they should be so treated. It follows, in my opinion, that it is unnecessary for the defenders to show that the cash-handling misstatements were material. They fall to be regarded as material because they form part of the proposal, and the proposal is the basis of the contract.
[82] On that view of the matter it is unnecessary to consider the question of materiality any further. I would only add two observations. First, I do not consider that, if the materiality of the cash-handling misrepresentation had been for the defenders to establish, it could have been said to be immaterial in the context of a fire claim merely because it only bore on a money claim. That involves treating the policy as if it were several separate policies. Mrs Collier was entitled to take the view that it would not be fair to rely on the excess amount of cash in the premises to repudiate the fire claim when there was no cash claim made, but that does not bear directly on the materiality of the cash-handling misrepresentation in the context of the policy as a whole. Secondly, I do not accept that Mrs Collier's change of position did not bear scrutiny. On the contrary, I accept her evidence that the significance of the second pursuer's statements about the business being conducted on a cash basis did not bring home to her that no real banking was carried out. I accept that it was only when it became clear that the first pursuer had misled Mr Driscoll, not only about the extent to which cash was kept in the premises, but also about the adoption of safety precautions in connection with the transfer of cash to the bank, that the cash-handling misrepresentation emerged as a ground which might properly be relied upon to avoid the policy. In my view, had it been necessary to consider the materiality of the cash handling misrepresentation, without reference to the fact that it was made material by the fact that it formed part of the proposal which was the basis of the contract, I would have concluded that it was material to the assessment of the over-all risk under the policy.The innocence issue
(a) The contractual provisions
[83] As already noted in paragraph [77] above, General Condition 2 of the policy is in the following terms:"2. contract voidable
This Contract of Insurance shall be voidable in the event of misrepresentation misdescription or non-disclosure in any material particular."
That provision is, however, qualified by General Condition 3, which provides:
"3. innocent misrepresentation
The Underwriters will not exercise their right to void this Contract of Insurance where there has been misrepresentation misdescription or non-disclosure provided that the Insured shall establish to the Underwriter's satisfaction that such misrepresentation misdescription or non-disclosure was innocent and free of any fraudulent conduct or intent to deceive."
(b) The scope of the issue
[84] The pursuers sought to rely on General Condition 3 in relation to the bankruptcy issue and the financial circumstances issue. I have held, however, that the pursuers' answer to question 6(C) did not amount to a misrepresentation, and consequently the innocence issue does not require to be considered in the context of the bankruptcy issue. Moreover, Mr Moore specifically disavowed any intention of founding on General Condition 3 in relation to the cash-handling issue. He accepted that if it was held that a misrepresentation was made about the cash-handling arrangements, no innocent explanation of that was tendered. The only context in which the innocence issue remains live is thus in relation to the financial circumstances issue.(c) The pursuers' submissions
[85] Mr Moore submitted that the defenders' power under General Condition 3 to determine whether the pursuers had established to their satisfaction that the non-disclosure of the pursuers' financial difficulties was innocent was subject to an obligation to act reasonably in addressing that issue. He cited a number of examples of a discretionary power reserved to one party to a contract being held to be qualified by an obligation to act reasonably. He cited Gordon District Council v Wimpey Homes Holdings Ltd 1989 SLT 141, per Lord Clyde at 142-3 (a contract for the sale of land which was conditional on planning permission being obtained to the satisfaction of the purchaser); Rockcliffe Estates plc v Co-operative Wholesale Society Ltd 1994 SLT 592 (a sale of a portfolio of heritable properties where the purchasers had power to withdraw properties from the bargain); and Taylor Woodrow Property Co Ltd v Strathclyde Regional Council 15 December 1995, Lord Penrose, unreported (a repairing obligation in a commercial lease, which had to be carried out to the satisfaction of the landlord). Reference was also made to a number of insurance cases, although their circumstances were more or less remote from those of the present case (Macdonald v Refuge Assurance Co Ltd (1890) 17 R 955 (a life policy requiring "satisfactory evidence of the accident"); Ballantyne v Employers' Insurance Co (1893) 21 R 305 (a life policy requiring "such ... information and evidence as the directors may require"); Napier v UNUM Ltd [1996] 2 Lloyd's Rep 550 (a permanent health policy requiring "proof satisfactory to [the insurers]"); Braunstein v Accidental Death Insurance Co (1861) 1 B&S 782 (a life policy requiring "proof satisfactory [to the insurers] together with such further evidence or information as [they] should think necessary"); and Manby v Gresham (1861) 29 Beav 439 (in which the insurer's judgment was tested by reference to bona fides rather than reasonableness). [86] In testing whether the insurers had acted reasonably, Mr Moore submitted, it was inappropriate to borrow from administrative law the concept of Wednesbury unreasonableness (Gordon District Council, per Lord Clyde at 143; Taylor Woodrow, per Lord Penrose). The question was simply whether they had acted reasonably. [87] On the basis that in judging whether the defence of innocence had been made out the defenders required to act reasonably, Mr Moore relied on the evidence of both Mr Vale and Mr Davidson to support the proposition that an underwriter acting reasonably would give the insured reasonable notice of any intention to avoid the policy under General Condition 2, and of the ground on which they proposed to do so; would allow them a reasonable opportunity to proffer any defence that they might wish to make under General Condition 3; and would consider that defence before avoiding the policy. He referred also to Edwards v Aberayron Mutual Ship Insurance Society [1876] 1 QB 563, per Amphlett B at 579-80. [88] Mr Moore's submission was that the defenders had not in this case done what was required of a reasonable insurer in operating General Conditions 2 and 3. Mrs Collier's evidence disclosed a defective approach on her part. She did not directly give notice to the pursuers of the grounds on which avoidance of the policy was being considered. She relied on communication through Knowles Loss Adjusters. She proceeded on the basis of Mr McArthur's letter of 28 March 2001 (No. 6/15 of process), although all he said in response to Knowles's query about the pursuers' financial position was that it was commonplace for businesses to have overdrafts or commercial mortgages. She had, through Knowles (see the third paragraph of their letter of 4 April 2002, No. 6/44 of process), sought to focus the financial circumstances issue for Mr McArthur. Despite that, she had instructed Simpson & Marwick to issue the repudiation letter of 18 April 2002 (No. 6/4 of process) without waiting for a response from Mr McArthur. When his response came on 25 April 2002 (No. 6/33 of process), Marsh & Co did not pass it to her. It was therefore not taken into consideration. In these circumstances, Mr Moore submitted, the pursuers were deprived of a fair opportunity to put forward a General Condition 3 defence to the proposed avoidance of the policy on the ground of the non-disclosure of their financial circumstances, and Mrs Collier's decision on the defenders' behalf was unreasonable. [89] On the basis of that submission, Mr Moore then went on to consider the effect of the fact that the defenders had acted in that way. His primary submission was that, since the defenders had by their actings prevented the pursuers from maintaining that the non-disclosure of their financial circumstances was innocent, the non-disclosure should be deemed to be innocent. He based that submission on McKay v Dick & Stevenson (1881) 8 R (HL) 37. In that case one party contracted to supply to the other "a steam navvy of novel construction" on condition that it achieved a stipulated rate of excavation in stipulated circumstances. The purchaser did not make available the "opened up face" that was necessary to enable the trial to be carried out. In these circumstances the supplier was held to be entitled to the price, because the failure to carry out the stipulated trial was caused by the purchaser's failure to provide the "opened up face". [90] If the court was not prepared to treat the pursuers as having made out the innocence defence because the defenders had unreasonably deprived them of the opportunity of doing so, Mr Moore's alternative submission was that it became a matter for the court to decide for itself whether the innocence of the pursuers' non-disclosure had been made out. In support of that proposition reference was made to McArthur v Mercantile Mutual Life Insurance Co Ltd [2001] QCA 317, per McPherson JA at paragraphs [15] and [23], and Napier v UNUM Ltd [1996] 2 Lloyd's Rep 550, per Tuckey J at 554, as well as to Karl Construction Ltd v Pallisade Properties plc 2002 SLT 312 at paragraph [24] (a case concerned with whether the court could intervene in place of a failed certification mechanism in a construction contract), and to the cases of Macdonald, Ballantyne and Braunstein mentioned in paragraph [85] above and Trew v The Railway Passengers Assurance Co (1860) 5 H & N 211 and (1861) 6 H & N 839. [91] If the stage was reached of the court deciding for itself whether the General Condition 3 defence of innocence had been made out, a question arose as to the meaning of innocence. The full phrase is "innocent and free of any fraudulent conduct or intent to deceive". Mr Moore referred to Switzerland Insurance (Australia) Ltd v Gooch [1996] NZLR 525, in which the same phrase was under construction, and in which it was decided that the concept of equitable fraud had no relevance to the construction of the clause. He suggested that "innocent" had to be given its ordinary and natural meaning (Glasgow Training Group (Motor Trade) Ltd v Lombard Continental plc 1989 SLT 357, per Lord Clyde at 380; M W Wilson (Lace) Ltd v Eagle Star Insurance Co Ltd 1993 SLT 938, per Lord McCluskey at 944). If there was ambiguity, it should be construed contra proferentem, the defenders being the proferentes (Cornish v The Accident Insurance Co (1889) 23 QBD 453, per Lindley LJ at 456. In construing "innocent" in General Condition 3, no account should be taken of the legal categorisation of misrepresentations into innocent, negligent and fraudulent misrepresentations. Nor should account be taken of the state of mind of the pursuers' agent. What mattered was the second pursuer's innocence. Even if she acted on negligent advice, she was innocent if she did not intend to defraud or deceive.(d) The defenders' submissions
[92] The defenders did not take issue with the propositions (1) that, before it was determined whether a General Condition 3 defence of innocence had been made out in relation to a particular misrepresentation or non-disclosure, it was necessary for the insured to be made aware that the insurer was considering avoiding the policy on the basis of that misrepresentation or non-disclosure, and (2) that the insured required to be afforded an opportunity of putting forward the defence and the material relied upon in support of it. It was submitted, however, that express written notice to the insured was not necessary. It was sufficient if the insured (or their agent) were made aware of the grounds for avoidance which the insurers were considering. [93] The defenders' position was that Mr McArthur, the pursuers' agent, was made aware of the grounds on which the defenders were considering avoiding the policy. He was told by Colin Leslie of Knowles Loss Adjusters that there was a problem over the pursuers' financial circumstances. In his letter of 28 March 2001 (No. 6/15 of process) to Mr Smith of Knowles, he indicated in the second paragraph that he understood that the question, whether the defenders would have accepted the business if they had been aware of the pursuers' financial position, was under consideration. He dealt with the point, albeit superficially by pointing out that many businesses have overdrafts or commercial mortgages. In Knowles's fax of 4 April 2001 (No. 6/44 of process) Mr McArthur's attention was drawn to the fact that they had been provided with information that on 24 October 2000 the Bank wrote to the pursuers indicating that they would take steps to enforce their security. In his statement dated 6 April 2001 (No. 6/29 of process) he said only that "[with] regard to [the pursuers'] financial situation I was not aware of any major financial difficulties". He also mentioned "a problem" with VAT returns. By the date of Simpson & Marwick's letter (No. 6/4 of process) avoiding the policy, namely 18 April 2001, that was all the material that was before the defenders. They were entitled on that material to take the view that the pursuers, through their agent, had been aware of the contemplated repudiation for non-disclosure of the pursuers' financial difficulties, and that nothing had been put forward in response that bore out the defence of innocence. The defenders were unaware that Mr McArthur had not told the pursuers that there was a problem in connection with the non-disclosure of their financial difficulties. [94] Mr Jones further submitted that, once the pursuers had been given a reasonable opportunity to make representations to satisfy the defenders that the non-disclosure was innocent, and had failed to do so, the defenders were entitled to bring the matter to an end by declaring the policy avoided. The letter from Mr McArthur dated 25 April 2001 (No. 6/33 of process) thus came too late to affect the matter. [95] Addressing the eventuality of its being held that the defenders had failed to give the pursuers a reasonable opportunity to put forward the defence of innocence, Mr Jones submitted that the result of that failure was different from that contended for by the pursuers. Mr Jones submitted that Mr Moore's reliance on Mackay v Dick & Stevenson was misguided. He submitted that the proper scope of that case was confined to potestative conditions. If it were applied in cases such as the present, it would mean that any failure on the part of the defenders would lead to the condition being deemed to be satisfied, irrespective of whether the non-disclosure was innocent or a blatant fraud. There was no reason to imply into the policy an obligation on the part of the insurers to act reasonably in determining whether the innocence defence had been made out. The policy was a contract uberrimae fidei, and it was unnecessary to add an implied obligation to act reasonably. If the defenders failed to act in good faith in dealing with the question whether the innocence defence had been made out, the result was that they were in material breach of contract. In that situation, the pursuers had the usual option to seek enforcement of the condition (by having the court order the defenders to give the pursuers an opportunity to make their case of innocence), or to treat the contract as at an end, and claim damages. That analysis avoided placing the court in the position of usurping the role of the defenders as decision-makers under General Condition 3. [96] If it was not established that the defenders had failed to give the pursuers a reasonable opportunity to put forward the defence of innocence, and if it then remained for the court to decide whether the pursuers had acted in good faith (or reasonably) in making the substantive decision that the innocence defence had not been made out, there was, Mr Jones submitted, no basis for a finding in favour of the pursuers on that point. There was no evidence from which bad faith on Mrs Collier's part could be inferred. If the test was reasonableness, it ought to be approached in the Wednesbury way, by asking whether the defenders' decision had been one which no reasonable insurer in the position of the defenders could have taken. Otherwise the court would be substituting its decision on the innocence issue for that of the insurers, on whom the contract had conferred the decision-making power. There was no evidential basis for a finding that the defenders had failed the Wednesbury test of reasonableness in making the substantive decision under General Condition 3. [97] Mr Jones further submitted that if it was for the court to determine whether the defenders acted reasonably in deciding that the innocence defence had not been made out, it was necessary to consider whether General Condition 3 focused attention exclusively on the actings of the insured themselves, or whether the insured were to be regarded as responsible for the actings of their agent. He drew attention to the fact that the provision required, not that the insured establish that they had acted innocently and without fraudulent conduct or intent to deceive, but rather in the abstract that they prove that the non-disclosure was innocent and free from any fraudulent conduct or intent to deceive. To make a case of innocence, therefore, the insured had to show not only that they were innocent, but also that their agent was innocent (MacGillivray on Insurance Law, paragraphs 18-8 to 18-10; Kranz v Allan (1921) 9 Ll L R 410). Negligent or fraudulent conduct on the part of the agent would allow the insured a right of relief which would secure that the loss ultimately lay where it belonged. [98] If the defenders had acted unreasonably in not affording the pursuers a proper opportunity to make out the innocence defence, and if in that situation the court was entitled to reach its own conclusion as to whether the non-disclosure of the pursuers' financial difficulties was innocent and free of any fraudulent conduct or intent to deceive, it was necessary, Mr Jones submitted, to determine whether negligent conduct was innocent within the meaning of General Condition 3. In the context of misrepresentation, "innocent" was a word with a well-recognised legal meaning. Throughout the policy, there were many expressions used which had a legal meaning, e.g. "warranty", "the basis of", "condition precedent". "Innocent" was another such expression. The law classified misrepresentations as innocent, negligent or fraudulent. Innocent thus meant neither negligent nor fraudulent. If the pursuers were right in their submission that innocent was a synonym for non-fraudulent, then General Condition 3 was tautologous. It would mean, moreover, that the condition excused negligence and recklessness. That was inconsistent with the proposer's duty to exercise due diligence (McPhee v Royal Insurance Co Ltd 1979 SC 304, per Lord President Emslie at 323; MacGillivray, paragraph 16-8). The legal meaning of "innocent" was in any event not materially different from its ordinary meaning, which connoted an absence of blame. A negligent or reckless wrong answer was blameworthy, and therefore not innocent. The question of whether negligence excluded innocence was not argued in Switzerland Insurance (Australia) Ltd v Gooch. [99] The non-disclosure of the pursuers' financial difficulties had arisen through negligence on the part of Mr McArthur. He knew that financial difficulties experienced by the proposers would be regarded as material by the insurer. He accepted that he did not know about the detail of the pursuers' financial affairs, and could not have known about them without asking the second pursuer questions which he did not ask. He accepted that, if he had been taking proper care, he should have asked such questions of the pursuers before answering question 6(E) in the negative. In these circumstances, Mr Jones submitted, the non-disclosure of the pursuers' financial difficulties could not be said to be innocent within the meaning of General Condition 3.(e) Discussion
[100] I have no hesitation in holding that it was incumbent on the defenders, before avoiding the contract on the ground of the pursuers' non-disclosure of their financial difficulties, to afford the pursuers an opportunity to put forward a contention that the non-disclosure had been innocent. That seems to me to follow from the fact that General Condition 3 operates as an exception to General Condition 2, taken with the fact the contract of insurance is a contract uberrimae fidei. I do not consider that the defenders could, in good faith, avoid the contract under General Condition 2 without giving an opportunity to the pursuers, if so advised, to put forward a case that the non-disclosure was innocent and that the defenders were therefore bound by General Condition 3 not to treat it as ground for avoidance. I do not consider, therefore, that it is necessary for this purpose to imply into the contract an obligation on the part of the defenders to act reasonably in their handling of the claim. I should, however, add that, were it not for the well-established obligation on the part of the insurers to act in good faith, I would have been inclined, on the basis of the authorities cited by Mr Moore (see paragraph [85] above), to have inferred an obligation to act reasonably in order to secure that a fair opportunity was given to the pursuers to advance a defence of innocence. It is, in my view, clear that if the relationship between General Condition 2 and General Condition 3 is to operate fairly, the pursuers must be given such an opportunity. [101] The next question for consideration is: what, in particular, does that obligation require of the defenders? It would, I think, be desirable that the insurer should give express notice to the insured that consideration is being given to avoidance of the policy on the ground of the misrepresentation, misdescription or non-disclosure in question. In my view, however, it is sufficient if it is in fact made clear, by one means or another, to the insured, or to the agent acting for them in relation to the claim, that such avoidance is under consideration, and the ground on which it is being considered. I do not consider that any formality of notice is required, although such formality would serve to eliminate issues as to the sufficiency of the intimation. It is, I think, necessary that the ground on which avoidance is being considered should be sufficiently identified. I do not consider that the insurer need expressly draw the insured's attention to General Condition 3. The onus of invoking that provision, if so advised, in my view plainly rests on the insured. Once intimation has been given that a particular ground of avoidance is under consideration, the insurer must, in my view allow a reasonable time for response on the insured's part. How much time is reasonable will, in my view, be a matter of circumstance and degree, and may be affected by the terms of any communication between the insured and the insurers. [102] In my opinion, the defenders in the present case did adequately convey to the pursuers, through their agent, Mr McArthur, that they were considering avoidance of the policy on the ground of the pursuers' non-disclosure of their financial difficulties. The evidence does not disclose particularly clearly how that was achieved, but the terms of Mr McArthur's letter of 28 March 2001 (No. 6/15 of process) make it clear that it was achieved. I draw that conclusion from the second paragraph of the letter, which begins:"I understand that you [Knowles Loss Adjusters] are taking a statement from the Underwriters as to whether they would have accepted the business if they had been aware of the [pursuers'] financial position."
The substance of his response, however, went scarcely any distance towards putting forward a defence of innocence. Mr McArthur's attention was further focused by Knowles's fax of 4 April 2001, with its reference to the Bank's letter of 24 October 2000, but his statement of 6 April merely records that he was "not aware of any major financial difficulties". Nothing further emerged before the letter intimating avoidance was written on 18 April. In these circumstances, I consider that the fact that avoidance for non-disclosure of the pursuers' financial difficulties was under consideration was adequately drawn to the attention of Mr McArthur, who was acting on the pursuers' behalf in connection with the claim. It is, in my view, of no moment that it has turned out that Mr McArthur did not take the matter up with the pursuers, and made no case under General Condition 3 on their behalf. In the light of the responses which Mr McArthur did make, and in the absence of any indication from him that more time was required to put forward a case of innocence, I am of opinion that by the time Simpson & Marwick's letter avoiding the policy was issued, the defenders were entitled to consider that the pursuers had been allowed a reasonable time to put forward, or at least indicate that they were going to put forward, a case of innocent non-disclosure. The defenders were therefore in my view entitled to proceed to a decision on the avoidance of the policy on the ground of the pursuers' non-disclosure of the financial difficulties at the time that they did. The pursuers were not in my view deprived of a fair opportunity to make a case of innocent non-disclosure by the way the matter was handled by and on behalf of the defenders. I say nothing as to what redress, if any, the pursuers may have against Mr McArthur in respect of his handling of the matter.
[103] In these circumstances, the issue as to the consequences of a finding that the defenders acted unreasonably in that regard does not arise. If I had had to address that matter, I would have rejected the primary submissions of both parties. I do not consider that the pursuers were right in arguing, by analogy with Mackay v Dick and Stevenson, that if the pursuers were deprived of a fair opportunity of invoking General Condition 3 the consequence would be that the non-disclosure would fall to be deemed to have been innocent. Equally, I do not consider that Mr Jones was right in his submission that failure to afford a fair opportunity to advance a case under General Condition 3 would fall to be treated as a material breach of contract, for which the pursuers' remedies would be, in their option, judicial enforcement of the obligation or a claim for damages. In my opinion, the pursuers' remedy in such circumstances would have been to seek from the court a determination of whether the defence of innocence had been made out (McArthur v Mercantile Mutual Life Insurance Co Ltd; Napier v UNUM Ltd). In that context, that would be a decision for the court to make in light of the whole relevant evidence. In the circumstances, however, that issue does not arise. [104] In my opinion, however, the fact that I have held that the defenders were entitled to act procedurally in the way that they did, in handling the question of avoidance on the ground of the non-disclosure of the pursuers' financial difficulties, does not mean that the pursuers are bound at this stage to accept that decision. The scope for challenging it in this litigation is, however, in my view limited. The contract confers the decision-making power in respect of that issue on the defenders. For me to approach the question of whether the General Condition 3 defence of innocence was made out as one for me to decide on the material before me would be to substitute my decision for that of the contractually appointed decision-maker. That would, in my view, be wrong in principle. Rather, the pursuers, if they wished to challenge the defenders' decision, would require to show that it was one which no reasonable insurer placed in the like circumstances would have made. I put the matter in that way, which echoes the Wednesbury formulation used in administrative law, because there is not necessarily in such circumstances one single course that can be regarded as reasonable. If the insurers' decision was reasonable in the circumstances, the insured cannot in my view succeed merely by showing that a different decision might also be regarded as reasonable. [105] In dealing with a challenge of that sort, it is necessary to address the questions (1) what is meant by "innocent" in General Condition 3, and (2) whether regard must be had to the actings of the pursuers' agent as well as those of the pursuers. In my opinion, innocent is not simply the antithesis of fraudulent. If it were, General Condition 3 would be tautologous. In the context of misrepresentation, the tripartite categorisation into innocent, negligent and fraudulent is familiar, and I see no reason to suppose that that categorisation was not in the mind of the drafter of the policy. Moreover, it seems to me to be improbable that the intention of the insurers was to excuse negligent misrepresentation or non-disclosure. So far as the second question is concerned, I am of opinion that negligence on the part of the proposer's agent would exclude the defence of innocence. To hold otherwise would leave the insurer bearing loss occasioned by the negligence of the proposer's agent. The better course, in my view, is to allow the agent's negligence to be regarded as excluding innocence, and to leave it to the proposer to work out his remedy against the negligent agent. [106] In my view, if proper care had been taken by the second pursuer to explore what was meant by question 6(E), and if proper care had been taken by Mr McArthur to consider that question and to make the necessary inquiries of the pursuers to enable it to be answered properly, the pursuers' financial relationship with the Bank would have been disclosed. I am therefore of opinion that it cannot be said that a reasonable insurer could not, in the whole circumstances as they now appear, have reached the decision that the contention that the non-disclosure was innocent had not been made out.
Result
[107] For the reasons which I have set out, I shall repel the pursuers' pleas-in-law, sustain the defenders' second, third, fourth and fifth pleas-in-law, and assoilzie the defenders from the first conclusion of the summons (as amended). I shall reserve all questions of expenses.