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UK Acorn Finance v Markel

Posted on 15/07/2020 · Posted in Expert Witness, Financial Litigation, Lending, Property

The Claimant (‘AF’), an agricultural bridging finance lender, had instructed Colin Lilley Surveying Ltd (‘CLS’) to value 11 agricultural properties bought between 2010 and 2012. AF relied on the valuations to make loans. When it became clear that the properties had been negligently overvalued, AF made claims against CLS and obtained two default judgements against them with a combined value of over £13m. CLS had had professional indemnity insurance cover with the defendant company Markel since 2003 and notified Markel of these claims. After an investigation, Markel sought to avoid the policies (the relevant ones being 2013 and 2014) thereby denying any liability under them because they were void and of no effect. By now it was 2016 and CLS was in liquidation.

Using rights conferred by Third Party (Rights against Insurers) Act 1930, AF sought to recover the two judgement sums from Markel by stepping into the insolvent surveyor’s shoes and challenging Markel’s right to avoid the two insurance contracts. Markel argued that CLS were guilty of misrepresentation and non-disclosure. CLS had stated in the risk profile documents, which were generated by Markel prior to each policy renewal, that they had not undertaken commercial valuation work for sub-prime lenders, when in fact they had. The court found that as a matter of fact this was true and there had been a misrepresentation. The question was whether this was an innocent misrepresentation. In common with many other professional indemnity policies, these policies both had a UND (unintentional non-disclosure) clause. These clauses (sometimes also called innocent non-disclosure or avoidance waiver clauses) seek to limit the rights of an insurer to avoid a policy for non-disclosure or misrepresentation, and in this case the pertinent section of the clause read as follows :-

…‘in the event of non-disclosure or misrepresentation of information to us, we will waive our rights to avoid this provided that…you are able to establish to our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive’.

The onus of proof therefore appeared to be on CLS to show that they had made an innocent representation free from fraudulent conduct. The court was aware that the wording of this clause put the insurer in the position of ‘Judge and Jury’ in that CLS had to establish their position ‘to OUR [Markel’s] satisfaction’- Markel had everything to gain by deciding against them in what was effectively a subjective decision, and there appeared to be a clear conflict of interest. AF argued that it was for the Court to make findings of fact as to whether the representations were free from any fraudulent conduct or intent to deceive. The Court referred to many authorities and precedent, but relied principally on the Braganza duty, first emerging in the Supreme Court’s decision in Braganza v BP Shipping Ltd [2015] UKSC 17. This is a duty to act reasonably where a contract gives one party the power to make decisions which affect both parties to that contract (potentially creating a conflict of interest), and to ensure that the powers afforded by a contract are not abused. A court will be reluctant to interfere with the agreement reached between the parties, but will imply the Braganza duty into the contract requiring discretion to be exercised in a way that is not irrational, arbitrary, capricious and/or unreasonable. In other words, there must be a proper, rational decision- making process and an element of good faith.

The single biggest problem in communication is the illusion that it has taken place.”
George Bernard Shaw

In considering Markel’s decision-making process and on the evidence they produced to the court, the judge found that Markel failed to approach the issue of dishonesty in the way envisaged by the Braganza test which was to be considered an implied term. They had failed to take account of facts and material points that should have been considered. He noted that the individual claims handler at Markel was not trained in how to approach decision-making of this sort, nor was there any internal guidance for him to follow in the insurer’s claims handling manual to show how those issues ought to be approached. Further, it seemed that the claims handler had not approached this high value and complex case with an open mind or to consider that it was more probable that a misrepresentation was innocent rather than dishonest. Indeed it emerged under cross examination that the claim in question related to a sub-prime lender, making it even more unlikely that CLS was trying to hide any involvement with such lenders. Poor administration maybe, but evidence that there was no fraudulent intent.

The High court held that the policies could not be avoided by Markel and AF’s claim against them was upheld.

Link: UK Acorn Finance Ltd v Markel (UK) Ltd [2020] EWHC 922 (Comm) (21 April 2020)

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