Insurance Law Ucu Mukono - Cases

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INSURANCE LAW CASES
DEPARTMENT OF TRADE AND INDUSTRY V ST CHRISTOPHER MOTORISTS

ASSOCIATION LTD [1974] 1 ALL ER 395
TEMPLEMAN J. This is a summons by which the Department of Trade and Industry seek a
declaration that by undertaking to provide benefits for the members of the proprietary club known
as St Christopher Motorists Association in accordance with the rules of the association, the
defendant, St Christopher Motorists Association Ltd, is carrying on insurance business and is an
insurance company to which the Insurance Companies Act 1958 applies, and a declaration that by
accepting applicants as members of the association the defendant does effect contracts of insurance.
That raises the question of what is insurance? The department wish to find out whether the
defendant is carrying on insurance business because the department are contemplating exercising
powers under the Insurance Companies (Amendment) Act 1973 and earlier Acts, the object of
which is to ensure that when companies take premiums in return for specified obligations, those
companies keep in hand in some form or another sufficient moneys to be able to provide a margin
of solvency so that, in the public interest, the chances of insurance companies falling on hard times,
in a manner which has been painfully familiar in the past, will be eliminated or, at any rate,
reduced.
The court has no power to make a declaration by consent and is very reluctant to embark on
deciding any question without full argument. In the present case the defendant has very properly
taken the view that whatever the answer to this interesting problem the public interest is involved in
seeing that the defendant has a margin of solvency. The defendant has accordingly taken steps by
way of reinsurance to ensure compliance with the Acts and the defendant is not terribly interested in
what becomes then an academic question.
The Department of Trade and Industry, on the other hand, consider this an important matter on
which they would like to obtain a decision, and despite an invitation on my part to desist, followed
by some grumbling, counsel for the department cited to me Grant v Knaresborough Urban District
Council which, without hearing argument on the other side, I was disposed in the circumstances to
accept as compelling me to decide this application. The result is that I have heard argument from
the plaintiff and no argument from the defendant. From the point of view of the defendant that was
a perfectly proper attitude to take, and counsel for the department accepts that any decision I make
DISCLAIMER: The information contained herein is for educational purposes only. The authors shall not
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authority.
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now can only be on the particular facts of this particular case. But he has gone through the evidence
and gone through the statutes to satisfy me that he is entitled to the declaration which he seeks.
This summons having been brought by the department with a view to their exercising certain
statutory powers, one looks first of all to the statutes to see if they define insurance, and for reasons
which are understandable the result is a blank. There are various types of insurance business on
which the Acts concentrate, and no difficulty has ever arisen in practice, and therefore there has
been no all-embracing definition, and the probability is that it is undesirable that there should be,
because
Page 397 of [1974] 1 All ER 395
definitions tend sometimes to obscure and occasionally to exclude that which ought to be included.
I mention this to show that diligent search has been made in the statutes which are relevant, and the
result of that search has been fruitless.
So I must turn to consider what this defendant company does and to consider whether, in the light
of what it does and in the light of the authorities, it can be said that this defendant is carrying on an
insurance business. The defendant company was incorporated under the Companies Act 1948 and
its objects are, as set out in the department’s affidavit, first:
‘To protect advance and further the interests of and provide facilities for motorists and drivers or
users of all types of mechanically propelled transport in any manner whatsoever … ’
And secondly:
‘To establish, promote, maintain and conduct an association of motorists and owners or users of all
types of mechanically propelled transport to be called St. Christopher Motorists’ Association or any
other associations, clubs or societies and to afford to the members thereof all privileges and
advantages thereof.’
Pursuant to those objects the defendant company formed the association, the St Christopher
Motorists Association, which is a proprietary club owned and managed by the defendant company.
The relationship between the members of the association and the defendant is that the members of
the club look to the defendant to provide benefits which the club offers to each member. In other
words, there is a contractual relationship between an individual member of the association and the
defendant company. To find out what that contractual obligation is and to see what members are
authority.
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bound to do and what the defendant is bound to do for the members, one turns to the rules. Counsel
for the department, before coming to the rules, referred to an advertisement. This says:
‘St. Christopher Motorists Association protects you against being unable to drive your car. For as
little as £10 a year the St. Christopher Motorists Association will help keep you on the road, when
you can’t be behind the wheel. Whether disqualification or injury prevents you from driving,
SCMA will provide you with a driver and, if necessary a car and driver, for up to 40 hours a week,
for a maximum of 12 months.’
The general nature of the contract appears from that advertisement; the motorist is to pay an annual
sum and in return for that annual sum, if an event happens under which he cannot drive his own car,
either because he has had an accident or because the law forbids him to drive, then for certain
specified periods the association will provide him with a driver to drive the car in place of the
member and, if necessary, a car and driver.
Now, broadly speaking, the rules do no more than that. Of course, there are, in summary, 40 rules
and they contain various detailed restrictions on the rights of the member and there is a description
and elaboration of the circumstances in which benefits must be provided by the association and thus
by the defendant company.
The question arises whether the benefits to be provided are contractual or whether they are, in large
measure, discretionary. Rule 21 provides that the claim of a member shall be examined by a
committee and the committee shall assess the merits of each claim and decide whether or not the
claim is to be accepted. For example, a member may make a false declaration on his original
application for membership which would invalidate his claim, or a member may claim for a driver
as a result of an injury which was not sustained while driving his car. The decision of the committee
shall be final and they shall not be required to give any reason for their decision. Counsel for the
department submits, and I accept that, looking at the rules as a whole, that does not vest in the
committee an absolute discretion as to whether
Page 398 of [1974] 1 All ER 395
benefits are to be provided. It seems to me plain, from the other rules, which I need not go into in
detail, that if a member makes a perfectly truthful declaration on his application form, the material
parts of which require him to say whether he has had any earlier brush with the law, and answer
other questions designed to show whether, if I can use the phrase at this early stage, he is a good or
authority.
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bad insurable risk, providing he does that, and providing that the event which happens is one on
which the association is to provide benefits, then he is entitled to the services offered by the
association.
So far this looks very much like insurance. A member pays an annual sum which looks like a
premium; he pays it because he is frightened of some uncertain disaster which may fall on him and
which will have adverse consequences to him, and the defendant company engages to see that he is
indemnified or compensated if the awful event happens. But if the member qualifies for benefits he
does not get a sum of cash or money from the defendant company. He is entitled to what are called
the benefits of the chauffeur service and the chauffeur service takes this form. First of all I read
from r 17:
‘It shall be the responsibility of a member claiming Chauffeur Service to nominate a suitable person
to act as chauffeur. Subject to the Committee’s approval of the nominee and acceptance of the
member’s claim, the Company will enter into an agreement with the chauffeur under which his
services will be available to the member, or alternatively, at the Company’s option, offer to provide
to the member, at the Company’s expense, the services of a hired motor car and driver upon such
terms and for such period as the Company may think fit, and subject to the member entering into an
agreement with the Company in such form as the Company may from time to time prescribe.’
The member, having sustained the disaster of not being able to drive himself may nominate his own
chauffeur, and if he nominates the chauffeur the company employs the chauffeur and pays the
chauffeur. The agreement to be entered into by the member is not, as I understand it, anything more
than a provision which enables the company to obtain from the member some waiver of liability if
the chauffeur or if the car provided by the company turns out to be unfit. Then: ‘In the event of a
member being unable to find a suitable driver or hired car, the Company will provide one or the
other’.
There are certain limitations on the provision of a chauffeur or of a hired car and chauffeur. The
first is (r 18): ‘The maximum period for which the Chauffeur Service can be made available to any
member is 12 consecutive calendar months’. The second is (r 19):
‘The Company will only provide the services of a driver up to a maximum of 40 hours per week. If
a member wishes to employ a driver in excess of these hours, he must do so at his own expense.’
authority.
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Then there are various provisions whereby the member must provide evidence of the accident or of
a conviction and also various provisions whereby, if his conviction is something very serious—for
example, if, on taking the blood/urine test on which he is convicted he has more than double the
maximum alcohol allowable by law—then the committee will not normally offer the full chauffeur
service. But, as I have said, these are not discretionary in the sense of the company being able to
deprive a member of the chauffeur service if he is otherwise qualified and if he makes a proper
claim in a proper form. In return for that he is not paid anything but he is either provided with a
chauffeur paid by the company or he is provided with a hired car and chauffeur at the company’s
option, and I understand that option is usually exercised when the amount of running about which
the member ordinarily requires is very limited so that it would pay the company to provide a taxi
service rather than a full chauffeur service.
Page 399 of [1974] 1 All ER 395
In return for annual sums, if there happens an event which is uncertain at the date when the member
joins, then on that happening the member is entitled to services and those services are to
compensate him for the loss or disadvantage which has happened to him as a result of the
happening of the uncertain event. Prima facie that would appear to me to be coming very near what,
without any guidance, I would have thought was the essence of insurance.
Counsel for the department drew my attention to Chitty on Contractsa, in which the editor says:
‘A contract of insurance is one whereby one party (the insurer) undertakes for a consideration to
pay money to or for the benefit of the other party (the assured) upon the happening of an event
which is uncertain, either as to whether it has or will occur at all, or as to the time of its occurrence,
where the object of the assured is to provide against loss or to compensate for prejudice caused by
the event, or for his old age (where the event is the reaching of a certain age by the assured) or
(where the event is the death of the assured) for the benefit of others upon his death.’
That definition seems to cover the present case except for the requirement which is stated by the
editor to be necessary, namely, that the insurer must undertake to pay money to the assured.
Counsel for the department, as he was bound to do appearing without opposition, drew my attention
to the possible argument that in the present case it could be said that there is no policy of insurance
because the defendant company does not undertake to pay money to the member but only to
provide services whatever those services may cost. True, the company must pay money to the
authority.
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chauffeur in order to employ him but that is not what the editor means when he says that the insurer
must undertake to pay money to or for the benefit of the other party.
The authority cited by Chittyb for the assertion that a contract of insurance must provide for
payment of money to the insured is Rayner v Preston. That was a case where, in the then existing
state of the law, a purchaser of a house was not entitled to claim from the vendor a sum of money
paid to the vendor by an insurance company in respect of an insurance of the house against a fire
which took place after the contract but before completion. In that case it was never relevant to
consider whether every contract of insurance provided for payment of money to the insured, and
passages ((1881) 18 Ch D at 9) in the judgment of Brett LJ, on which the editor in Chittyc relies,
must, I think, be read in that context. There is a slightly similar statement in Halsbury’s Laws of
Englandd in which it is said:
‘Every insurance, whatever its nature, postulates that a sum of money will be paid by the insurers
on the happening of a specified event.’
For that proposition there is cited Prudential Insurance Co v Inland Revenue Comrs. In that case, in
consideration of weekly payments, the insurance company agreed to pay a certain sum on the
attainment by the insured at the age of 65 or in the event of his dying under that age a smaller sum
to be paid to his executors, and it was held that that was a policy of insurance on a contingency
depending on a life within the meaning of s 98 of the Stamp Act 1891. So again, as a matter of
decision, the case does not establish whether it was essential for money to be paid to the insured,
but Channell J considered the question of what is a policy of insurance. He said ([1904] 2 KB at
662, 663):
Page 400 of [1974] 1 All ER 395
‘The Attorney-General says that to constitute a contract of insurance it must be a provision against
something—against some loss or disadvantageous event. [Counsel for the appellants] says that may
be true as regards marine and fire policies which are indemnities against loss, but it is not true as
regards life policies, for a policy of life insurance is not a contract of indemnity. But the question is
whether that makes any real difference, and it seems to me that we must inquire a little further into
the nature of a contract of insurance. Where you insure a ship or a house you cannot insure that the
ship shall not be lost or the house burnt, but what you do insure is that a sum of money shall be paid
upon the happening of a certain event. That I think is the first requirement in a contract of
authority.
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insurance. It must be a contract whereby for some consideration, usually but not necessarily for
periodical payments called premiums, you secure to yourself some benefit, usually but not
necessarily the payment of a sum of money, upon the happening of some event. Then the next thing
that is necessary is that the event should be one which involves some amount of uncertainty. There
must be either uncertainty whether the event will ever happen or not, or if the event is one which
must happen at some time there must be uncertainty as to the time at which it will happen. The
remaining essential is that which was referred to by the Attorney-General when he said the
insurance must be against something. A contract which would otherwise be a mere wager may
become an insurance by reason of the assured having an interest in the subject-matter—that is to
say, the uncertain event which is necessary to make the contract amount to an insurance must be an
event which is prima facie adverse to the interest of the assured. The insurance is to provide for the
payment of a sum of money to meet a loss or detriment which will or may be suffered upon the
happening of the event. By statute it is necessary that at the time of the making of the contract there
should be an insurable interest in the assured. It is true that in the case of life insurance it is not
necessary that the interest should continue, and the interest is not the measure of the amount
recoverable as in the case of a fire or marine policy. Still, the necessity of there being an insurable
interest at the time of the making of the contract shows that it is essential to the idea of a contract of
insurance that the event upon which the money is to be paid shall prima facie be an adverse event.
Thus a contract depending upon the dropping of a life, such as a contract whereby two or more
people purchase a property as joint tenants with the object of the longest liver getting the benefit of
survivorship, would not be a contract of life insurance, although it would be a contract with
reference to a contingency depending upon a life or lives; it would not be a contract of insurance at
all. A contract of insurance, then, must be a contract for the payment of a sum of money, or for
some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become
due on the happening of an event, which event must have some amount of uncertainty about it, and
must be of a character more or less adverse to the interest of the person effecting the insurance.’
Applying that definition to the present case, we have a contract not for the payment of a sum of
money but for some corresponding benefit, the provision of a chauffeur or the provision of a hired
car and chauffeur to become due on the happening of an event. The event is a physical accident
which debars the member from driving himself or the interposition of the law which positively
authority.
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forbids him to drive himself. Then the event must have some amount of uncertainty about it. Well,
there is a great deal of uncertainty about it. The event must be of a character more or less adverse to
the interest of the person effecting the insurance. Well, that is fulfilled here because it is adverse to
the interests of the individual member that he should be immobilised either for physical reasons or
because of the requirements of the law.
That definition, including the learned judge’s careful pronouncement that there must either be the
payment of a sum or some corresponding benefit, seems to me to
Page 401 of [1974] 1 All ER 395
meet the present case and particularly so when, in substance, there seems to me to be no difference
between the defendant company paying a chauffeur on the one hand and on the other hand agreeing
to pay to the individual member a sum of money which would represent the cost to him of
providing himself with a chauffeur in the event of his being disabled from driving himself. I cannot
see any difference in logic between the two and therefore I see no reason why, in the present
particular case, the arrangement made by the defendant company should not amount to insurance.
It does not follow that the definition given by Channell J in a case based on the facts with which he
was concerned and applied by me to the case in which I am now concerned is an exhaustive
definition of insurance. There may well be some contracts of guarantee, some contracts of
maintenance which might at first sight appear to have some resemblance to the definition laid down
by Channell J and which, on analysis, are not found to be true contracts of insurance at all. I wish to
guard myself, particularly in view of the fact that, as I have said, counsel for the department has had
no vocal opposition except mine, against deciding anything other than that the rules and trade of the
defendant company in the present case amount to insurance. Counsel for the department himself
suggested some further limitation in that the event which must happen must not be an event within
the control of the insurer, but whether that, in fact, be so, I need not now decide. It is sufficient for
my purposes that the narrow distinction which might have been argued to differentiate the case of
the defendant from the normal type of insurance, that narrow distinction being the insistence that
the defendant company pays for a service instead of paying the member the amount which it will
cost him to provide a service, is not one which enables the defendant company to carry on business
outside the provisions of the Insurance Companies Acts. In the result, I am prepared to make a
declaration in the terms of cll 1 and 2 of the summons.
authority.
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Declaration accordingly.
MEDICAL DEFENSE UNION V. DEPARTMENT OF TRADE [1979] 2 ALL ER 421
SIR ROBERT MEGARRY V-C read the following judgment. This is an originating summons
under which the Medical Defence Union Ltd (‘the union’) seeks a declaration that it does not carry
on any class of insurance business in Great Britain within the meaning of the Insurance Companies
Act 1974. The defendant, the Department of Trade (‘the department’), asks in an affidavit filed on
its behalf that a declaration to the opposite effect should be made. Put shortly, the major issue in
resolving this question is whether the term ‘contract of insurance’ applies to a contract under which
a member of the union against whom some claim has been made can merely require the union to
consider whether to conduct the proceedings on his behalf,
Page 423 of [1979] 2 All ER 421
and whether to provide him with some indemnity, and has no right to require the union to assist him
in this way. In other words, the question is whether there is a contract of insurance where the
benefits are discretionary and not obligatory, and the member’s contractual right is no more than a
right to require the union to consider properly any request for assistance of this kind that he makes.
There is a subsidiary question whether as regards the conduct of proceedings (as distinct from the
grant of indemnity) the benefit is merely discretionary, or whether the member has a right to it.
Other questions also arose, but I do not need to mention them at this stage. The main question
requires some consideration of the nature of insurance and the meaning of the term ‘contract of
insurance’; and this may well be of some importance to bodies other than the union.
The union is a company limited by guarantee; and I shall have to consider some of the provisions of
the memorandum and articles. The union was formed in 1885, and today it has well over 80,000
members. Save for some 4,500 dentists, all are medical practitioners; and about 80% practise in the
United Kingdom. There are various classes of membership, and for the United Kingdom and
Ireland the rates of subscription vary from £10 for the newly qualified in their first year to £30 for
dentists and £70 for medical practitioners who are not newly qualified: the overseas rates are not
before me. The rates that I have mentioned, I should say, are those which will come into force on 1
January 1979. In broad terms, the work of the union may be divided into three categories: the
authority.
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conduct of legal proceedings on behalf of members; indemnifying members, wholly or in part,

against claims for damages and costs; and giving advice on a wide range of problems, including
employment, defamation, and professional and technical matters, and providing educational
guidance in medical and medico-legal problems by publications and films. In terms of the number
of members using these facilities, the overwhelming majority use those in the third category. In
terms of the cost to the union, the first two consume rather over half the union’s income. The union
is governed by a council consisting of 12 elected members and the officers.
With that broad indication of the union’s activities I can turn to the 1974 Act. The Insurance
Companies Act 1974 consolidates earlier Acts from 1958 to 1973. The Life Assurance Companies
Act 1870 first introduced a system of regulation which subsequent Acts extended to forms of
insurance other than life assurance. In very broad terms, the object of the legislation is to enable the
appropriate government department (today the Department of Trade) to take steps to ensure the
financial health of insurance companies, and to defeat those who would establish insurance
companies, collect the premiums, and then leave the companies with assets which are inadequate to
meet valid claims. Part I of the 1974 Act prohibits the establishing of insurance companies unless
authorised by the Secretary of State. This has no direct application to the case before me as it does
not apply to companies which were carrying on insurance business before 3 November 1966; and
the union, of course, has been carrying on business for far longer than that. What does apply, if the
union is an insurance company, is Part II of the Act, comprising ss 12 to 61. Part II establishes a
system of control of insurance companies, consisting partly of requirements which the company
must observe, and partly of powers of intervention exercisable by the Secretary of State, with
various other provisions as well. Section 57, I may say, gives the Secretary of State a discretionary
power to relax these provisions for particular companies. What is at issue is thus whether the union
is subject to this system of control or free from it.
The starting point is s 12(1) of the 1974 Act. This provides that, subject to the provisions of the
section, Part II of the Act ‘applies to all insurance companies … which carry on insurance business
within Great Britain’. By s 85(1), unless the context otherwise requires, ‘insurance company’ means
‘a person or body of persons (whether incorporated or not) carrying on insurance business’. The
term ‘insurance business’ simpliciter is not defined, but the subsection sets out, mainly referentially,
definitions of various specific forms of insurance business, such as ‘liability insurance business’,
authority.
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‘motor vehicle insurance business’, and so on. A common feature of these definitions is that they
are expressed in terms of ‘the business of effecting and carrying out contracts of insurance’ on, or
against
Page 424 of [1979] 2 All ER 421
the various subjects or risks of the various categories. The different categories or classes were
formerly the eight set out in s 1(1) of the 1974 Act: but the last six of these have now been replaced
by the 17 classes set out in Sch 1 to the Insurance Companies (Classes of General Business)
Regulations 1977a, made under s 2(2) of the European Communities Act 1972, and so in effect
varying the 1974 Act in this respect. However, as the 17 classes all define the nature of the business
in terms of ‘effecting and carrying out contracts of insurance’ in respect of the particular subject-
matter, the change in detail makes no change of substance: the basic question, that of the meaning
of ‘contracts of insurance’, remains unaltered.
The 1974 Act contains no definition of ‘contract of insurance’. True, s 85(1) provides that unless
the context otherwise requires ‘“contract of insurance”, except in sections 83 and 84, includes a
contract to pay an annuity on human life’; but this gives little assistance on the meaning of the term,
and neither counsel who appeared for the union, nor counsel who appeared for the department,
based any contention on it. It became common ground that the term fell to be construed, in its
context, according to the general law. It was also common ground that there was a contract between
each member of the union and the union, constituted by the union’s acceptance of each member’s
application for membership on the terms of the memorandum and articles of the union. I do not
think that what I have to decide is affected by certain differences in the language of the current
forms of application for membership from those previously in use. The central question emerged as
being whether each contract was a contract ‘of insurance’, and so the main issue comes down to the
meaning of the one word ‘insurance’ in the expression ‘contract of insurance’.
The leading authority, I think, is the judgment of Channell J in Prudential Insurance Co v Inland
Revenue Comrs, as read in the light of Gould v Curtis (Surveyor of Taxes). From these cases it
appears that a contract is a contract of insurance if three elements are present. There has been no
dispute about the second and third of these, and the first is also common ground, save as to one
point. It is round that point that the argument has centred. Before I turn to the terms of the three
elements, I should say that from Gould v Curtis (Surveyor of Taxes) ([1913] 3 KB 84 at 95, 6 Tax
authority.
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Cas 293 at 309–310), especially the judgment of Buckley LJ, and from West Wake Price & Co v
Ching ([1956] 3 All ER 821 at 826, [1957] 1 WLR 45 at 51), it appears that there are two categories
of insurance which may respectively be called indemnity insurance and contingency insurance.
Indemnity insurance provides an indemnity against loss, as in a fire policy or a marine policy on a
vessel. Within the limits of the policy the measure of the loss is the measure of the payment.
Contingency insurance provides no indemnity but instead a payment on a contingent event, as in a
life policy or a personal injury policy. The sum to be paid is not measured by the loss but is stated
in the policy. The contractual sum is paid if the life ends or the limb is lost, irrespective of the value
of the life or the limb.
With these two categories of insurance in mind, the three elements in a contract of insurance may
be expressed as follows: and in this I draw largely on what Channell J said in the Prudential case
([1904] 2 KB 658 at 663). First, the contract must provide that the assured will become entitled to
something on the occurrence of some event. This, of course, is the disputed element, and the dispute
is about what the ‘something’ is. For counsel for the department it is ‘some benefit’, whereas for
counsel for the union it is ‘money or money’s worth’. To this I shall have to return. Second, the
event must be one which involves some element of uncertainty. Counsel for the department would
add ‘outside the control of the insurer’. This may be right, but I do not have to decide the point, and
like Templeman J in Department of Trade and Industry v St Christopher Motorists Association Ltd
([1974] 1 All ER 395 at 401, [1974] 1 WLR 99 at 106) I leave it
Page 425 of [1979] 2 All ER 421
undecided. Third, the assured must have an insurable interest in the subject-matter of the contract.
On the three elements as a whole, I would also follow Templeman J in the St Christopher case
([1974] 1 All ER 395 at 401, [1974] 1 WLR 99 at 106), and say that I do not aspire to any
exhaustive or comprehensive definition, good for all purposes and in all contexts. I only say that for
the purposes of this case it seems to me that a contract which contains these three elements is likely
to be a contract of insurance, and a contract that lacks any of them is likely not to be a contract of
insurance. I may add that Templeman J instanced some contracts of guarantee or of maintenance
which might satisfy such a test and yet not be true contracts of insurance.
On the facts of this case it seems clear that all three elements are present, subject to the disputed
point on the first element. That point arises in this way. On the face of the memorandum and
authority.
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articles a member of the union has no right to require the union to conduct legal proceedings for
him, and no right to require the union to indemnify him against claims for damages. All that he has
is the right to have his request for the union’s help under these three heads properly considered by
the council or by one of its committees. In practice it is rare for such a request to be refused. Yet
although the prospects of such a request succeeding are great, all that the member has by way of
right is that his request should be properly considered, and, of course, if it is granted, that the union
should conduct the proceedings or indemnify him, or both. On that footing, counsel for the
department contends that although this right is not a right to money or money’s worth, it is of value,
and so is a benefit; and for the first of the three elements of insurance, all that is required is that on
the occurrence of some event the assured will become entitled to some benefit. Counsel for the
union, on the other hand, says that this is far too wide. The first element is satisfied if on the
occurrence of the event the assured becomes entitled to a benefit consisting of money or money’s
worth, but not if the only benefit is something else. As I have indicated, that is the central issue in
the case.
Before I consider this I must say something about the factual basis on which it rests. Counsel for the
department accepted that in respect of indemnities against claims the members had no more than a
right to have their request for an indemnity considered by the council or one of its committees; but
as regards proceedings he contended that members had a right to require them to be conducted by
the council or a committee, and that this was not merely discretionary. He based this contention
mainly on the contrasting wording of art 43 of the union’s articles, dealing with proceedings, and
art 44, dealing with indemnities, and particularly on the absence from art 43 of anything to match
the concluding limb of art 44(3).
In order to resolve this subsidiary point I think I had better read the whole of these two articles.
Article 43 provides as follows:
‘The Council or any Committee of the Council authorized by the Council for the purpose may
undertake the conduct of or assist in the conduct or defence of any matter or proceedings whether of
a strictly legal nature or otherwise concerning or affecting, whether directly or indirectly, the
professional character or interests of (i) any member; (ii) any former member; (iii) any deceased
member in category (a) or (b) of Article 8; provided that: (1) The Council or such Committee shall
be satisfied that the matter originated or the cause of proceedings arose during the period when the
authority.
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INSURANCE LAW CASES
person concerned was a member of the Union. (2) The person making the request shall abide
absolutely by every decision of the Council, or any such Committee, on the conduct or defence of
the matter or proceedings and shall not himself, without prior consent of the Council or any such
Committee, take any steps with reference to such matter or proceedings or to the determination
thereof. For the purpose of proviso (1) in the case of an application by a former member for
reinstatement on the Register, the matter shall be deemed to have originated immediately before the
date upon which his name was erased from the Register or upon which his registration in the
Register was suspended.’
Page 426 of [1979] 2 All ER 421
Article 8, I may say, relates to deceased persons who at their deaths were members or ex-members.
Article 44 is as follows:
‘(1) The Council or any Committee of the Council so authorized by the Council may, subject to the
like conditions as are specified in the provisos of the preceding Article, grant from the funds of the
Union to any member or any former member or the personal representatives of any former member
an indemnity wholly or in part with regard to any action, proceeding, claim or demand concerning
or affecting whether directly or indirectly the professional character or interests of such member or
former member or deceased person as the case may be and the indemnity may extend to all
incidental or consequential losses, damages, costs, charges and expenses exclusive of fines or
penalties. (2) The Council or any authorized Committee may determine any such indemnity at any
time by notice in writing to the member or the former member (or if the member or the former
member dies subsequent to the granting of the indemnity his personal representatives) or the
personal representatives of the former member concerned as the case may be without assigning any
reason. (3) Any such indemnity mentioned may be granted or determined either by a resolution of
the Council or any authorized Committee, and the grant of indemnity in every case shall be made
only upon such terms and conditions as the Council or any authorized Committee shall think proper
and it shall rest only in the absolute discretion of the Council or any authorized Committee in every
case to limit or restrict the grant of an indemnity or altogether to decline to grant the same or to
determine any indemnity so granted.’
Counsel for the department was, of course, forced to contend that the word ‘may’ at the outset of
art 43 in effect really meant ‘shall’, and was obligatory. The concluding words of art 44(3), making
authority.
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INSURANCE LAW CASES
explicit the absolute discretion of the council or committee to refuse or determine any indemnity, or
to limit or restrict it, prevented members from having any right to an indemnity; but there was
nothing to perform this function for art 43, and so the obligation imposed by the opening words of
art 43, which arose from treating the ‘may’ as in effect being ‘shall’, remained unqualified. That
was the contention.
I do not think this can be right. The draftsman of the articles clearly shows that he can use ‘shall’
when he means the imperative: thus the word ‘shall’ appears four times in the latter part of art 43
itself. He also uses ‘may’ repeatedly in circumstances which plainly show that it is merely
permissive: see, for example, arts 42, 45 and 46. Furthermore, counsel for the department had to
accept that the word ‘may’ was prima facie permissive and not imperative, and I can see nothing in
the nature of the subject-matter to which it applies to suggest that there is to be any obligation to
exercise the power which the word ‘may’ confers. Indeed, the width of the subject-matter suggests
the contrary: the wider the scope of the power, the more likely it is that its exercise is intended to be
discretionary. The power extends to ‘any matter or proceedings’, whether they are ‘of a strictly
legal nature or otherwise’, and whether they concern or affect ‘directly or indirectly’ the
professional character or interests of the member or former member concerned. I can see nothing
save the absence of words corresponding to those in art 44(3) which gives the slightest support to
counsel’s contention for the department; and that absence seems to me to be wholly insufficient.
Omit art 44(3) altogether, and the rest of the article appears to me to be plainly permissive. Thus if
the first ‘may’ in art 44(1) were to be treated as being in effect imperative, it would oblige the union
to grant an indemnity ‘wholly or in part’; and, as counsel for the union pointed out, an obligation to
grant at least a partial indemnity and not to refuse one altogether seems inherently improbable. To
say that a member may be fobbed off with (say) £1 but cannot be refused all help carries one back
to the old law of illusory appointments under powers, and being ‘cut off with a shilling’. In
addition, of course, the comment on the width of the scope of the power that I made in relation to
art 43 applies with equal force to art 44. Again, if the first ‘may’ in art 44(2) is treated as being in
effect ‘shall’, only to be
Page 427 of [1979] 2 All ER 421
made discretionary by force of art 44(3), the curious result is that the council or committee is bound
to determine any indemnity without assigning any reason. Both semantics and substance seem to
authority.
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INSURANCE LAW CASES
me to point overwhelmingly to the word ‘may’ in arts 43 and 44 being permissive and not
obligatory in import; and I so hold.
I therefore return to the main point on the footing that the rights of a member in relation both to
proceedings and to indemnities is merely a right to have his request fairly considered by the council
or one of its committees. Only if the request is granted is the member entitled to have the
proceedings conducted by the union and to have an indemnity, subject to the provisions of the
articles and not least art 44(3). For the purposes of this case I do not think that it matters whether
the right is a right to have the request heard and determined ‘fairly’ or ‘in good faith’. It is common
ground that it must not be dealt with by whim or caprice, and it is not contended that such a right is
valueless. As I have indicated, the short point is whether, in the first of the three elements of
insurance, it suffices that on the occurrence of the event the assured becomes entitled to ‘some
benefit’ or whether this does not suffice unless it amounts to ‘money or money’s worth’. The right
to have a request relating to proceedings or an indemnity properly considered by the union is
plainly a benefit, but equally plainly it is not money or money’s worth.
I have, of course, been referred to a number of reported decisions and textbooks. I may take the
matter by stages. In Chitty on Contractsb, a contract of insurance is defined in terms of it being an
undertaking by the insurer ‘to pay money’ to or for the benefit of the assured on the happening of
an uncertain event, and so on. The only authority cited for the words ‘to pay money’ is Rayner v
Preston. There, indeed, Brett LJ said (18 Ch D 1 at 9) that ‘the subject-matter of the contract of
insurance is money, and money only’. However, what Brett LJ was considering was the difference
between the subject-matter of a contract of insurance and the subject-matter of insurance: the
contract is about money, but what is insured may be a wide variety of things. I cannot think that
there was any intention to point a distinction between money and money’s worth. Furthermore,
although the Prudential case is cited on the same page on other aspects of the definition, it does not
seem to have been considered on this point; and that case is of much value. In it, Channell J states
([1904] 2 KB 658 at 663) the first of the three elements of a contract of insurance in terms of being
a contract whereby ‘you secure to yourself some benefit, usually but not necessarily the payment of
a sum of money’, on the happening of some event. That, of course, strongly suggested that the
definition in Chittyc is too narrow, as well as encouraging counsel for the department by using the
expression ‘some benefit’. However, Channell J in effect summarised the definition of a contract of
authority.
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INSURANCE LAW CASES
insurance in terms of it being a contract ‘for the payment of a sum of money, or for some
corresponding benefit such as the rebuilding of a house or the repairing of a ship … ' This, I think,
clearly indicates the type of benefit that was in the judge’s mind when earlier he had spoken of
‘benefit’ simpliciter: the benefit is one which sounds in money’s worth. In Gould v Curtis
(Surveyor of Taxes) the Court of Appeal discussed the Prudential case, and criticised the concept
there expressed of the event on which payment is to be made as being necessarily one which in
some way is adverse to the interests of the assured: if a sum is made payable to a man on attaining a
given age, or on living for a stated period of years, his feat of survival can hardly be called an event
that is adverse to his interests. Adversity, though commonly present, is not an essential of
insurance. But apart from that, the words of Channell J seem to have emerged unscathed.
Page 428 of [1979] 2 All ER 421
The St Christopher case concerned a proprietary club. If an event occurred which prevented a
member from driving a car, the club would provide him with a driver, or a car and driver, for stated
periods. The rules were construed as giving the member a contractual right to have a driver
provided when the necessary conditions were satisfied, and not as giving the member a mere right
to have his application fairly considered by the club committee, with a discretion in the committee
whether or not to grant the application. Templeman J discussed what was said in Chittyd (and the
passage in Halsbury’s Laws of Englande, which is also in terms of a sum of money), and Rayner v
Preston and the Prudential case as well. I do not think that Gould v Curtis (Surveyor of Taxes) can
have been cited, for the judge said ([1974] 1 All ER 395 at 400, cf [1974] 1 WLR 99 at 105): ‘The
event must be of a character more or less adverse to the interest of the person effecting the
insurance’, adding that this was fulfilled: but for present purposes this does not matter. The judge’s
conclusion was that the ‘careful pronouncement’ of Channell J ([1904] 2 KB 658 at 664) that ‘there
must either be the payment of a sum or some corresponding benefit’ met the case before him. He
could see no logical difference between the club paying the driver, and the club paying the member
a sum representing the cost to him of providing a driver. Such contracts were thus contracts of
insurance, and so fell within the 1974 Act.
This decision has been differently treated by different editors. In Chitty on Contractsf, the words ‘to
pay money’ were amplified into ‘to pay money or provide services’, citing the St Christopher case.
A warning footnote suggests that the decision may be open to question in that the extension of the
authority.
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INSURANCE LAW CASES
definition could embrace a number of contracts not previously regarded as being contracts of
insurance. A formulation in terms of the ‘provision of services’ does not seem to me to represent
the true ratio of the St Christopher case; and it appears to be at once both too wide and too narrow.
The decision was based on the absence of any logical distinction between the club paying the driver
and the club paying the member the cost to him of providing a driver: in each case the club met the
member’s claim by paying money that it otherwise would not have paid. If instead the service
provided had consisted of the club staff giving the member advice or assistance, I do not think that
this would fall within the ratio of the case, and I doubt whether it would have satisfied the
requirements of insurance. Yet although in this respect the phrase ‘provision of services’ may be
too wide, in another respect it seems to be too narrow. It would include the right to the services of
engineers to repair a television set when it became faulty, but not, it seems, a right to have the set
replaced if it became unserviceable. It is difficult to see any sound basis for such a distinction. I do
not think that this formulation should be relied on as it stands.
Halsbury’s Laws of Englandg adopts a different approach. It leaves standing the proposition stated
in the previous editionh, and adds the St Christopher case to the Prudential case as a supporting
authority. The proposition is that ‘a sum of money will be paid by the insurers on the happening of
a specified event’. This says nothing about the person to whom the money is paid: there is no ‘to or
for the benefit of the assured’. Attention is thus focused on the liability of the insurers to make a
payment rather than
Page 429 of [1979] 2 All ER 421
on the right of the assured to require something to be paid to him or for his benefit. This
formulation certainly seems to be better supported by the St Christopher case, but I feel
considerable doubt about confining it to the payment of a sum of money, thus narrowing what
Channell J said in the Prudential case. If one takes again a television set, and a contract by a
company that in return for an annual premium the company will replace the set when it becomes
unserviceable, the requirement would be satisfied if the company had to purchase a replacement set
every time an insured set became unserviceable, but it would not be satisfied if the company had
replacement sets in stock: for ‘will be paid … on the happening of a specified event’ cannot apply
to what has already been paid. The exclusion of the equivalent of money may lead to curious
results. Again, I would hesitate to rely on this formulation as it stands.
authority.
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I do not know whether a satisfactory definition of ‘a contract of insurance’ will ever be evolved.
Plainly it is a matter of considerable difficulty. It may be that it is a concept which it is better to
describe than to attempt to define; and, as I have said, I do not seek to lay down an exhaustive or
comprehensive definition. It is enough if I can find a principle which suffices for the decision of the
case before me. Plainly a provision for the payment of money is one of the usual elements in a
contract of insurance. The main difficulty lies in formulating what extension of this concept there
should be; for plainly there must be some.
If the extension is framed in terms of the equivalent of money, then this will be both limited in
extent and consonant with the central concept. If on the other hand the extension is framed in terms
of ‘some benefit’, then that seems to me to be far more than a mere extension: it is a reformulation
of the concept in wider terms. In other words, ‘money’s worth’ is merely an extension of ‘money’,
whereas ‘benefit’ is no mere extension of ‘money’ but a wider concept which engulfs money.
’Money’ would then be subsumed under ‘benefit’, with many other things. Obviously much is a
‘benefit’ which is not money or money’s worth, ranging from matters such as peace and quiet to the
pleasure of listening to the arguments of counsel in this case, and much else besides.
I am quite unable to see any justification for replacing ‘money’ or its equivalent by ‘benefit’ as a
constituent part of the definition of a contract of insurance. I can see nothing in the authorities
which gives any real support for so wide and extensive a generalisation, especially as the term
‘money or money’s worth’ seems to be adequate for all normal circumstances. It may be that in
view of the St Christopher case some further addition should be made so as to cover explicitly the
provision of services, but I shall defer the consideration of this until I turn to the services provided
by the union in this case.
In rejecting the term ‘benefit’ I may say that I think that one is in a different world from the world
of insurance when the only contractual right is a right to have a claim fairly considered. No doubt
one must not attach too much importance to the basic meaning of words; but terms such as ‘insure’
and ‘assure’, like ‘ensure’, seem to me to convey the sense of making something certain, and not
merely of giving a hope or expectation, no matter how well founded. When a person insures, I think
that he is contracting for the certainty of payment in specified events, and not merely for the
certainty of proper consideration being given to his claim that a discretion to make a payment in
those events should be exercised in his favour. The certainty must be direct, and not at one remove.
authority.
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I may add that I think that my views on this point are supported, at least to some extent, by some
observations in the judgment of Mocatta J in CVG Siderurgicia del Orinoco SA v London
Steamship Owners Mutual Insurance Association Ltd, of which a copy of the unrevised transcript
was put before me by counsel for the union.
Page 430 of [1979] 2 All ER 421
One may also speculate on the prospects of commercial success of an insurance company if its
policies of insurance gave no contractual right to any payment, but only the right to have any claims
properly considered by the directors.
There are other features in this case which are at least unusual in the case of normal contracts of
indemnity insurance. Once a member has joined the union his obligation is simply to pay the annual
subscription at the rate for the time being applicable to all who are in the same class of membership.
However many claims have been made against him, he may remain a member at the rate of
subscription common to all in his class of membership. By virtue of arts 11, 57 and 58, so long as
his name remains on the register of medical or dental practitioners and his registration has not been
suspended in consequence of disciplinary proceedings, he has only to pay his subscription, and with
one exception the union cannot determine his membership. That exception is where his conduct has
been detrimental to the honour and interests of the union or of the medical profession: somewhat
oddly, the dental profession is not mentioned. An anonymous instance of 1976 illustrates the
operation of the scheme in this respect. A member had had many claims made against him. He
received a warning, and then, when there was another claim, he was refused assistance. This may be
contrasted with the increased annual premiums and ultimately a refusal to renew the policy which
might be expected under any normal insurance policy, and also the insurer’s obligation to meet the
final claim if the policy was still in force when that claim was made.
Counsel for the union also pointed to the very wide ambit that would be given to the term ‘contract
of insurance’ if counsel’s submission for the department on ‘benefit’ is right. An important part of
the union’s work is giving advice and assistance to members on matters other than proceedings and
indemnity. Indeed, as I have mentioned, numerically, though not financially, this constitutes the
great bulk of the union’s help to its members. Advice is called for on a wide range of professional
work, on matters connected with contracts of employment, and on defamation. Such advice and
assistance is obviously of benefit to those who receive it, and equally obviously is not money; nor, I
authority.
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think, could it fairly be said to be money’s worth, at all events in the sense of being the equivalent
of money. The need for such advice will normally arise from some event involving an element of
uncertainty, and the member plainly has an insurable interest in the successful pursuit of his career.
If ‘benefit’ is the right expression, it is difficult to see why a contract to provide such advice and
assistance should not be a contract of insurance. Many professional and other bodies which give
their members the right to advice and assistance may thus be brought within the 1974 Act, or at
least be in danger of being treated as such. Like Monsieur Jourdain, who was astonished to find that
for 40 years he had been speaking prose without knowing it, such bodies might equally be
astonished to discover that for many years they have been insurance companies carrying on
insurance business without knowing it, or at least that they were in peril of being so regarded.
In view of the St Christopher case it may be that the term ‘money or money’s worth will not suffice
by itself. A possible addition would be ‘or the provision of services to be paid for by the insurer’.
The last seven words are intended to reflect the fact that in the St Christopher case the provision of
the services for each member was an additional cost for the club, incurred when the member made
his claim, and was not merely part of the general costs of running the club for the benefit of
members generally. As at present advised I would hesitate to omit these last seven words. If
members of a club or other body have the right to be given advice and assistance by the staff of that
body, so that the provision of this advice or assistance to any individual member adds nothing to the
expenses of the body, I doubt whether this could fairly be regarded as being insurance.
Looking at the case as a whole I have no hesitation in rejecting counsel’s contention for the
department that the union is an insurance company carrying on insurance business
Page 431 of [1979] 2 All ER 421
within the meaning of the 1974 Act. I do not have to decide whether ‘money or money’s worth’,
with or without an addition relating to providing services such as I have discussed, is the right
phrase to appear in the first of the three elements of a contract of insurance. I only say that I think
that something of that kind is probably on the right lines. What I do decide is that ‘benefit’ is far too
wide an expression, and I reject it. In particular, I reject the contention that the right to have an
application properly considered suffices for a contract of insurance. I also consider that the general
nature of the business carried on by the union is too far removed from the general nature of the
businesses carried on by those who are generally accepted as being insurers for the union’s business
authority.
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INSURANCE LAW CASES
to be fairly regarded as the effecting and carrying out of contracts of insurance. I accordingly hold
that the union is entitled to a declaration of the type claimed, though the precise wording is for
discussion.
That suffices to dispose of the case; but nevertheless there are three matters that I think I should
mention. First, it seems plain that the department has had second thoughts on certain matters. Thus
in 1968 the Board of Trade took the view that the union’s activities did not fall within the
provisions of the Acts which were replaced by the 1974 Act. That view, said Mr Lindley in his
affidavit on behalf of the Secretary of State, ‘has been reconsidered since 1968 in the light of
subsequent decisions of the courts’. What those decisions are I do not know: the St Christopher case
alone seems capable of being regarded in a way which might support a change of view. Again, Mr
Lindley’s affidavit states as one of the ‘essential indicia’ of a contract of insurance that the benefit
should be compensatory, in that it is referable to the interest which is adversely affected. However,
when counsel for the department came to make his submissions he repudiated any contention that
the benefit should be compensatory, and said that it need only be of value. This change was made, I
think, in view of certain comments that had been made during counsel’s opening speech for the
union. I do not, however, think that it matters that views on such points have changed before or
during the hearing. No question of estoppel or the like arises, and a contention on a point of law
may be equally sound or unsound whether it is the product of first thoughts, or second thoughts, or
no thoughts at all.
Second, I do not think that my decision is likely to open the door to colourable evasions of a
beneficial statute. I very much doubt whether commercial concerns will find it possible to establish
thriving businesses which are insurance businesses in substance and yet escape the 1974 Act. It
seems improbable in the extreme that many people would be content for their premiums to purchase
no right to any money or money’s worth in any event but merely a right to have their claims
considered by a body of directors or others with full discretionary power to pay nothing or merely
as much as they think fit. Where the body concerned, like the union in the present case, is run by
honourable members of an honourable profession it may well be that many members of that
profession will be content to rely on the discretion being always exercised in a proper way by the
governing body which they elect, with meritorious claims being admitted and the unmeritorious
authority.
Page | 23
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excluded; but this reliance does not convert a legitimate expectation of receiving discretionary
benefits in all proper cases into a contractual right to receive those benefits.
Third, I think that my decision makes it unnecessary to explore the concept which during the
hearing was referred to as a ‘mixed grill’. If a body carries on a business which in part falls within
the term ‘insurance business’ and in part is outside it, does the 1974 Act apply? Is it a question of
how much of the business is one and how much the other? Is the question to be determined by cost,
or by the number of persons concerned, or by some other means, and, if so, what? These are matters
of some difficulty. What is required is the business of effecting and carrying out contracts ‘of’
insurance and not merely contracts ‘for’ insurance. A contract which provides for insurance and
other things may well be a contract ‘for’ insurance; but is it a contract ‘of’ insurance?
Page 432 of [1979] 2 All ER 421
Prepositions may indeed be important in this field: see Gould v Curtis (Surveyor of Taxes).
However, I do not think that I need discuss this point, for several reasons. If none of the business is
insurance business, as I hold to be the case, the point does not arise. If I am wrong, and counsel’s
argument for the department of ‘benefit’ is right, then all, or nearly all, of the union’s activities
appear to be insurance business, and again the point does not arise. Further, my attention was drawn
to the Insurance Companies (Authorisation and Accounts: General Business) Regulations 1978i,
made under the European Communities Act 1972. From reg 5(1)(b) it appears that no authorisation
under the 1974 Act may be issued to a body having its head office in the United Kingdom unless,
inter alia, the applicant’s business activities ‘are limited to the carrying on of insurance business
(and operations directly arising therefrom) to the exclusion of all other commercial business’. Only
applicants whose business is pure insurance will thus be able to obtain an authorisation, and so the
puzzles of ‘mixed grills’ will not arise. I was told that elsewhere in the regulations this principle is
applied to bodies which have existing authorisations or do not need one: but I was not referred to
any precise provisions to this effect, and I do not propose to struggle through the referential opacity
of the regulations to find them. Assuming that the position is as I was told it was, I can see no
reason for considering the point further.
I therefore hold that this summons succeeds, and I shall consider the submissions of counsel on the
precise terms of the declaration to be made.
authority.
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Declaration that the Medical Defence Union is not an insurance company carrying on any class of
insurance business in Great Britain within the meaning of the Insurance Companies Act 1974.
SUFFISH INTERNATIONAL FOODS PROCESSORS UGANDA LTD AND ANOTHER V

EGYPT AIR CORPORATION [2003] 1 EA 330 (SCU)
Judgment
Oder JSC: This is an appeal against the decision of the Court of Appeal overturning the judgment
of the High Court which had allowed the Appellants’ suit against the Respondent.
The facts of the case are simple.
On or about 16 March 1996, the First Appellant entered into a contract with the Respondent to
airfreight a consignment of chilled fresh fish from Uganda to Brussels. On arrival at the destination,
the consignment was found to be unfit for entry into the European Economic Community, was
rejected and destroyed. The Second Appellant indemnified the First Appellant as its insured for the
loss in the sum of US$ 48 100 on an alleged insurance cover. The First Appellant instituted a suit
against the Respondent for the benefit of the Second Appellant under the doctrine of subrogation to
recover the sum of US$ 48 100 which the latter had paid to the former. The trial Judge found that
the goods were damaged either during the process of loading them into the plane or during the
flight and blamed the Respondent for causing the damage. Judgment was entered for the Second
Appellant. The Respondent was dissatisfied with the decision of the trial court, and appealed to the
Court of Appeal, which allowed the appeal, overturning the trial court’s judgment. Hence this
appeal.
Two grounds of appeal are set out in the memorandum of appeal but, in essence, they constitute
only one complaint, which is to the effect that the Court of Appeal erred in law and in fact by
holding that the First and Second Appellant failed to prove that here was a binding and operative
contract of insurance between them.
Before making his own conclusions in the lead judgment, with which the other members of the
Court of Appeal agreed, Berko JA re-evaluated the evidence in the case to the effect that the
Appellants’ plaint in the trial court pleaded in paragraph 6(b) thereof that the First Appellant took
out a valid insurance policy cover number 10/MR/OC/4499 with the insurers (the Second
authority.
Page | 25
INSURANCE LAW CASES
Appellant) to cover 10 000 kilograms of fresh chilled Nile Perch fillets, inclusive of airfreight
transportation, and handling. A copy of a marine certificate of insurance was attached to the plaint.
However, no such insurance policy/cover was produced in evidence. Instead, the Appellants put in
evidence as Exhibit P1 the marine certificate of insurance, which contained the following pertinent
information:
“We acknowledge receipt of your marine declaration number 181 dated … and have to advise you
that you are hereby covered, subject to the conditions and terms of the
Page 332 of [2003] 1 EA 330 (SCU)
company’s marine open policy/cover number 10/MR/OC/4499 under which your declaration is
made”.
After giving the descriptions of the goods and the airway bill number, its date and the sum insured
document concluded – “The condition of insurance briefly being as per open cover number
10/MR/OC/4499”.
The Learned Justice of Appeal then made his finding and concluded as follows:
“It is clear from the above that Exhibit P1 was not the insurance policy under which the goods were
insured. The actual policy was the open policy/cover number 10/MR/OC/4499.
As that document governed the rights of the parties, it would have contained the distinctive features
of the contract of insurance. These are the parties, the subject matter of insurance, the period of the
insurance, the date of commencement of the policy, the details of the peril which was insured
against and also a list of exemptions specifying the circumstances in which the insurers would not
be liable.
That document was not produced in court. I am not persuaded by the argument of Mr Shonubi,
counsel for the respondents, that the second respondent could not produce it in evidence because at
the time its existence was denied in the further amended written defence, they had closed their case.
Nothing prevented the respondents from adducing further evidence to rebut the denial, when in fact
counsel had reserved the right to do so at the time the amendment was being considered. The
respondent therefore failed to prove that there was a binding and operative contract of indemnity
between the first and second respondents. The Learned Judge erred in holding that there was such a
proof.
authority.
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It must be observed that the whole basis of the subrogation doctrine is founded on a binding and
operative contract of indemnity. It derives its life from the original contract of indemnity. In my
view the essence of the matter is that subrogation springs not from payment only but from actual
payment conjointly with the fact that it is made pursuant to the basic and original contract of
indemnity.
If then the right of subrogation rests upon payment under a contract of indemnity, how does the
matter stand when there is no such contract? If there is no contract of indemnity, then, if I may
borrow the words of McCardie J in John Edwards and Company v Motor Union Insurance
Company Limited [1922] 2 KB 249, ‘there is no juristic scope for the operation of the principle of
subrogation’. The essential basis of subrogation is wholly absent.
In the result, I would allow the appeal, set aside the judgment and orders of the Learned trial Judge
and substitute an order dismissing the action”.
Mr Alan Shonubi argued the Appellants grounds of appeal. He had also represented the Appellants
in the Court of Appeal where he filed written submissions. His arguments before us are similar to
those he put forward before the Court of Appeal in reply to the Respondent’s written submission in
support of the appeal in that court. In his submission before us, Mr Shonubi contended that it is not
only a policy of insurance that can prove existence of a contract of insurance. A relevant certificate
of insurance derived from a marine policy is sufficient to prove existence of a valid contract of
insurance. In the instant case, the learned counsel contended, the marine certificate of insurance
(Exhibit P1) was sufficient to show that there was a valid contract of insurance between the
Appellants. The evidence of Richard Byansi, (PW2) also proved that the Second Appellant issued
the First Appellant with insurance policy number 10/MR/OC/4499 and a marine certificate of
insurance (Exhibit P1). What the Appellants did is standard procedure under marine insurance. For
this preposition he relied on a publication by the Chartered Insurance Institute Marine
Page 333 of [2003] 1 EA 330 (SCU)
Insurance – The Legal and Documentary Frame Work (1999 ed). In his further submission the
learned counsel contended that in modern practice of export, the requirement for policy of insurance
can be dispensed with since a policy of insurance is not the only means by which a contract of
insurance can be proved. Generally there is no common agreement in the commercial world on the
definition of a policy. An insurance contract may exist without a policy. At common law the insurer
authority.
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INSURANCE LAW CASES
was allowed to sue the third party, because subrogation was regarded as implied, so a third party
could not say that there was no contract once the insured and the insurer had settled. Common law
regarded subrogation as an implied term of a contract of insurance; each certificate of marine
insurance being regarded as a separate contract. The learned counsel relied on several authorities for
his submission. These included Export/Import Procedures and Documentation (3ed) 1997, by
Johnson Thomas E at 126-133; The Law of Insurance (4ed) 1979, by Paul Colinvaux at 136; King v
Victoria Insurance Company [1896] AC 250 at 254; McLeod v Compagnie d’Assurance Generales
L’Helvetia [1952] 1 Lloyds 12.
In the instant case, the learned counsel further submitted that the Respondent having admitted
negligence and liability to the First Appellant, as indicated by Exhibit 4, it should not have denied
the claim made against it by the Appellants in the suit. The letter of subrogation, Exhibit P3 also
showed that the First and Second Appellants regarded the contract of insurance between them as
binding. Evidence of settlement, shown by Exhibit P6, also indicated that the two parties had
accepted the contract as binding between them. On the balance of probability, learned counsel
submitted, Exhibits P3 and P6 proved that there was a contract of insurance. The evidence of
Richard Byansi (PW1) also supported the existence of such a contract.
Finally, learned counsel submitted that in the circumstances of this case, and in view of the
settlement by the Second Appellant of the First Appellant’s claim under the relevant insurance
contract, the Respondent should not be allowed to benefit from its negligence. It was paid to carry
the goods, but the goods did not reach their destination. The learned counsel then criticized the
Court of Appeal for following the case of John Edwards and Company Motor Insurance Limited
[1922] 2 KB 249, which he said is not applicable to the instant case.
Mr Kasirye learned counsel for the Respondent opposed the appeal. In his submission he
emphasized the Appellants’ pleading in paragraph 6(b) of their plaint that an insurance policy
existed between them. The existence of such a policy was denied by the Respondent in its final
amended written statement of defence which averred that the Appellants would be put to strict proof
thereof. The denial was made necessary by the evidence of Richard Byansi (PW1) that the marine
certificate of insurance (Exhibit P1) dated 19 March 1996, was issued after the arrival of the fish
consignment. Learned counsel contended that after the Learned trial Judge had granted the
authority.
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INSURANCE LAW CASES
Respondent leave to amend its written statement of defence, the Appellants had the opportunity to
produce the insurance policy, but they chose not to do so.
Learned counsel contended that the marine certificate of insurance is not an insurance policy, and it
does not contain the features of an insurance policy.
In the instant case, Exhibit P1 does not bear these features. The most significant omission was when
the policy of insurance began and ended. The marine certificate of insurance (Exhibit P1) was dated
19 March 1996, after the consignment had arrived on 16 March 1996 according to the evidence of
Edison
Page 334 of [2003] 1 EA 330 (SCU)
Hammed (DW1). This means that Exhibit P1 was issued after the arrival and rejection of the
consignment in Brussels. The learned counsel contended that subrogation is not a blanket right at
common law, but it is in the contract of a particular insurance. It is different from a contract of
carriage, such as an airway bill. In the instant case, the Respondent’s case was that there was no
insurance relationship between the two Appellants. With regard to the Respondents’ admission of
responsibility for the damage, the learned counsel contended that it had no bearing on the
relationship between the First and Second Appellants as the insured and the insurer respectively.
In his counter argument, Mr Kasirye disagreed with Mr Shonubi’s contention that marine policy of
insurance does not have to be in writing and referred to MacGillivry and Parkington on Insurance
Law (8ed) at 267.
Mr Kasirye distinguished the authorities relied on by the Appellants’ learned counsel as not
applicable to the instant case because they were based on the English Marine Insurance Act of
1906. This was a statute of general application which ceased to apply to Uganda after the enactment
of the Judicature statute of 1996. The case of King v Victoria Insurance Company (supra) is also
distinguishable from the instant case in that in that case there was a contract of insurance between
the insurer and the insured, which had assigned its rights to the party who sued under the insurance
contract. The Privy Council, on the peculiar facts of that case rightly held that the third party who
was the author of the damage to the insured’s goods and was a stranger to the contract of insurance
was not entitled to refuse to indemnify the insurers. The decision in King v Victoria Insurance
Company (supra) notwithstanding, the Respondent’s learned counsel contended that under the
authority.
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INSURANCE LAW CASES
principle of subrogation, it is open to a third party, like the Respondent in the instant case, to rely on
a policy of indemnity in defence of a claim by the insured or insurer against him.
Regarding the case of John Edwards and Company v Motor Insurance Company (supra) Mr Kasirye
submitted that it is relevant to the instant case although it is not binding on this Court.
With regard to negligence on the part of the Respondent which the Learned trial Judge found
proved, Mr Kasirye argued that such finding cannot stand in the absence of a contract of insurance
between the First and the Second Appellants. As the record shows the First Appellant was only a
nominal plaintiff in the suit. It could have sued the Respondent on negligence, but it chose not to do
so. Consequently, the Second Appellant cannot rely on the negligence in the absence of a contract
of indemnity.
In support of his submission, the Respondent’s learned counsel relied on MacGillivry and
Parkington on Insurance Law (8ed); General Principles of Insurance Law (5ed) by ER Hardy
Ivammy (Butterworth’s); Halsbury’s Laws of England (4ed) Volume 25 (Butterworth’s); King v
Victoria Insurance Company [1896] AC 250 PC; Digby C Jess – The Insurance of Commercial
Risks Law and Practice; John Edwards and Company v Motor Union Insurance Company Limited
[1922] 2 KB 249.
In my view, the doctrine of subrogation is at the centre of this case. The Appellants’ court action is
founded on it; and the Respondent’s resistance of the suit was on the basis that the doctrine did not
apply because no contract of indemnity between Appellants was proved. As I have already
indicated, the Appellants and the Respondent have relied on many authorities in support of
Page 335 of [2003] 1 EA 330 (SCU)
their respective arguments. Some are decided cases and others are written opinions by learned
authors.
As I understand them, nearly all the authorities appear to agree on the essential elements of the
doctrine and its general application in the law of insurance. In summary these are that if a person
suffers a loss for which he can recover against a third party and that person has insured himself
against such a loss the insurer cannot avoid liability on the ground that the insured has a claim
against the third party.
Conversely, the third party cannot avoid liability on the ground that the insured has been or will be
fully compensated by his insurer. These principles are fundamental to the law of insurance.
authority.
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INSURANCE LAW CASES
Contracts would be largely defeated if the law were otherwise and the right of subrogation is
corollary to them. Subrogation is thus the right of an insurer who has paid for a loss to receive the
benefit of all the rights and remedies for the insured against the third parties which, if satisfied,
extinguish or diminish the ultimate loss sustained. The insurer who has paid for a loss, may thus
exercise the rights of the insured to recover from the third party, or if the insured has already
exercised that right, the insurer will be entitled to, repayment from him.
A contract of insurance by which an insurer agrees to pay a certain sum of money to the insured on
the happening of a certain event regardless of actual loss suffered by the insured has no basis for the
operation of the doctrine of subrogation.
From the foregoing it appears to be clear to me that in order for the doctrine to operate, it is
essential for a valid and operative contract of indemnity to exist between the insurer and the
insured. In the authorities I have referred to a contract of indemnity and a contract of insurance
appears to be used inter-chargeably. Payment of indemnity by the insurer to the insured alone is not
enough. There must be a valid and operative contract of insurance as the basis of payment by the
insurer upon a loss by the insured. The policy sets out the details of the event which is insured
against, and also a list of exceptions specifying the circumstances in which the insurers will not be
liable. In certain cases the event insured against has been brought about by the conduct of the
insured, he will not be entitled to recover under the policy.
To establish the existence of such a contract, it is not necessary that all its terms should have been
separately agreed. As the contract is usually in common form, there is, as a rule, no real negotiation
of terms, the agreement being, on the part of the insurers, to issue, and on the part of the insured to
take a policy in the ordinary form issued by the insurers. There must, however, be a clear agreement
as to the distinctive features off the particular contract of insurance. The parties, therefore, must be
ascertained; the assured must have agreed to the particular insurers. They must be ad idem as
regards the subject matter of the insurance. The period of insurance must be fixed and there must be
agreement as to the sum insured and the premium to be paid. It must also be clear that there was, in
fact, an offer to enter into the contract by one party followed by an acceptance of the offer by the
other and that a complete contract resulted.
Usually the acceptance of the offer will not take place at once, and before it does so, it is the
practice for a “cover note” to be issued.
authority.
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INSURANCE LAW CASES
Before acceptance, neither party is bound, and either may withdraw at its pleasure. After
acceptance, there is a contract from which neither party can
Page 336 of [2003] 1 EA 330 (SCU)
withdraw, binding the insured to pay the premium, and the insurer to accept the premium when
tendered, to issue a policy, and to pay any sum that may become payable under the terms of the
contract. The various steps in the negotiations leading to a contract of insurance are usually
recorded in certain formal documents, that is, the proposals, the cover note, and, finally, the policy.
The absence of any such document, however, during the preliminary steps does not necessarily lead
to the inference, that there is no contract of insurance between the parties.
In the instant case, the Appellant’s learned counsel also contended firstly, that because a certificate
of insurance derived from a marine policy is sufficient to prove the existence of a valid contract of
insurance; secondly, that because in modern practice of export the requirement of a contract of
insurance can be dispensed with; and thirdly, that because a policy of insurance is not the only
means by which a contract of insurance can be proved, therefore, in the instant case, it was not
necessary to prove by production in evidence the existence of a contract of insurance. With respect,
I am not persuaded by the learned counsel’s propositions. I think that the conclusion made by Berko
JA, in disallowing the Appellants’ suit cannot be faulted because no policy of indemnity was
proved. The following are my reasons.
Firstly, the Appellants founded their suit on the existence of a particular insurance policy made
between the two of them, namely, open policy/cover number 10/MR/OC/4499, which was pleaded
in paragraph 6(b) of their plaint. This was confirmed by the evidence of Richard Byansi (PW1), the
Second Appellant’s claims manager, to the effect that the Second Appellant issued the Respondent
with an insurance cover and the marine certificate of insurance (Exhibit P1), based on the insurance
cover.
Secondly, the Respondent, in his final written statement of defence totally denied the existence of
such an insurance contract and required the Appellants to strictly prove it. The Appellants were,
therefore, put on notice to prove that there was such an insurance contract. Even if the Respondent
did not deny the existence of such a contract the Appellants were under a duty to prove their case in
accordance with their pleadings in order to succeed. All that notwithstanding, the Appellants did not
authority.
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INSURANCE LAW CASES
prove that such a contract existed and, in my view stubbornly, refused to explain why they chose
not to do so.
Thirdly, the marine certificate of insurance (Exhibit P1) stipulated that the conditions on which the
consignment of fish was insured were as stated in the open insurance/cover number
10/MR/OC/4499. The document also warned the First Appellant: “Please read the important notice
on the reverse”.
The terms and conditions stated in the insurance/cover and on the reverse side of Exhibit P1 were
never produced in evidence. They are not known by anybody especially by the Respondent. As the
authorities to which I have referred indicate, the Respondent might have had certain defences
against the Second Appellant’s subrogation if he had seen the insurance contract, because such a
contract sets out in details the conditions terms of the event which is insured against and also a list
of exceptions specifying the circumstances in which the insurer may not be liable. Although the
third party, like the Respondent in this case, is a stranger to insurance contract, it nevertheless,
would be interested to know its details. Digby C Jess put it this way in The Insurance of
Commercial Risks Law and Practice at 346:
Page 337 of [2003] 1 EA 330 (SCU)
“The third party may also refer to the policy under which the insurers are exercising the subrogation
and rely, for example, on an express waiver of subrogation against themselves, or on the fact that
the insurance itself is illegal and therefore, unenforceable to give rise to any subrogation. This right
of the third party sued to refer to the policy does not extend, however, to argue the technical merit
of the insurer’s decision to make an indemnity under the terms of the policy provided the insurers
made the indemnity honestly”.
I agree with that statement of the law, but I would add that it applies provided that a valid and
operative contract of indemnity is the basis of the relationship between the insured and the insurer.
In the instant case it was a common ground that the marine insurance certificate (Exhibit 1) and the
contract of indemnity was issued after the fish consignment had already arrived and rejected at
Brussels. It is not known when the contract of indemnity was made. The Respondent would,
therefore, be interested to know whether the contract of insurance or indemnity was retrospective or
at least validly covered the period from the date the consignment was airfreight to when it arrived at
Brussels.
authority.
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INSURANCE LAW CASES
In the circumstances, my view is that it matters not that the Respondent apparently first admitted
liability which they subsequently retracted, or that the Appellants as between themselves acted on
the basis that there was a binding contract of insurance between them. The Respondent was still
entitled to know the details of the insurance policy/cover number 10/MR/OC/4499 stipulated in the
marine certificate of insurance (Exhibit P1). The Appellants having failed to prove it by producing
it in evidence, the Learned Justices of Appeal, in my view, rightly rejected the Appellants’ appeal
before them, and dismissed their suit.
The First Appellant had an option to recover its loss by a suit in negligence against the Respondent.
In the result, I would dismiss this appeal with costs to the Respondent here and in the courts below.
(Odoki CJ concurred in the judgment of Oder JSC).
Tsekooko JSC: I have had the benefit of reading in draft the judgment prepared by my Lord Oder
JSC, and I agree with his conclusions and with the orders which he has proposed.
The objections to the judgment of the Court of Appeal are in the form of two grounds of appeal. In
the first ground, the Appellants complain that the Justices of the Court of Appeal erred in law when
they held that the Appellants failed to prove that there was a binding and operative contract of
indemnity between the two Appellants. The second complaint is that the Justices of Appeal erred
when they allowed the Respondent to argue that there was no contract of insurance when the said
Respondent was not a party to the said insurance contract. In effect these two complaints refer to
different aspects of the same question of whether there was a contract according to and effective in
law.
The claim in the suit had its foundation in the doctrine of subrogation. Subrogation is the
substitution of one person for another, so that the same rights and duties, which attached to the
original person, attach to the substituted one. In matters of insurance, a person paying the premium
on a policy of insurance belonging to another may be subrogated to that other; and an insurer is
subrogated to the rights of the insured on paving the latter’s claim. This is the foundation upon
which the First Appellant based its claim. It claimed that it insured
Page 338 of [2003] 1 EA 330 (SCU)
its cargo of fish for US$ 48 100 with the Second Appellant who paid afterwards, the said money to
the First Appellant because the fish were condemned when they were delivered in Brussels.
authority.
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Because the First Appellant received indemnity, for loss of fish, from the Second Appellant, the
rights of the former were subrogated to the latter.
The suit was instituted by the Appellants against the Respondent. First the claim averred that the
Respondent was in breach of a contract between itself and the First Appellant. The claim was also
based on grounds that the Respondent was negligent or careless in handling, packing, piling and
loading the fish in the aircraft. Thirdly the Appellants relied on the doctrine of res ipsa loquitor.
As the Second Appellant had indemnified the First Appellant under an alleged policy of insurance,
therefore, the Second Appellant in effect took over the rights of the First Appellant so that the fruits
of the present litigation, if it ended in favour of Appellants, should go to the Second Appellant. The
Respondent in its defence denied liability and filed a counterclaim to the suit.
Issues were framed by plaintiffs’ counsel in his written submissions after evidence for both sides
had been adduced. So initially the hearing of the case was conducted without clear issues. Each side
went on fishing spree. Hence recalling of witnesses by both sides.
Be that as it may, at the trial, the Learned principal Judge relied on a marine certificate of insurance,
Exhibit P1, dated 19 March 1996, and held that the certificate is evidence of the contract of
insurance. The Court of Appeal, on the other hand, held that the said document alone was not
enough. That the actual physical policy of insurance should have been tendered in evidence by the
Appellants. That the policy would show the distinctive feature of the contract of insurance. These
features would be the parties, the subject matter of the insurance, the period of the insurance, the
date of the commencement of the policy, the details of the peril which was insured against and also
a list of exemptions specifying the circumstances in which the insurers would not be liable. Because
the document called the policy of insurance could not be produced in the trial court, or indeed up to
now, it is impossible to ascertain the distinctive features of the alleged policy of insurance. That
being the case, there was no binding and operative contract. Mr Alan Shonubi counsel for the
Appellants contended that in matters of marine insurance, it is the practice to rely on the marine
certificate of insurance and relied on The Legal and Documentary Frame Work [1991 ed] of the
Chartered Insurance Institute. This authority does not say that production of the policy of insurance
should not be made. Nor indeed, does the case of King v Victoria Insurance Company [1896] AC
250 which was also cited to us. In that case the policy of insurance was valid and that is a major
distinguishing feature.
authority.
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Both parties relied on a number of decided cases and also on opinions of learned writers on the
application of the doctrine of subrogation.
In the absence of the actual marine policy of insurance or any reasonable explanation showing why
the Appellant did not tender it in evidence, I cannot appreciate how the Court of Appeal can be
criticised for its decision that there was no binding and operative contract. This is especially so in
view of the evidence suggesting that the insurance cover may have been taken out after the fish
cargo was rejected on 16 March 1996 in Brussels.
Page 339 of [2003] 1 EA 330 (SCU)
I have looked at the various authorities including King v Victoria Insurance Company (supra) and
John Edwards and Company v Motor Union Insurance [1922] 2 KB 249 cited by Shonubi, learned
counsel for the Appellants. It is my considered view that none of the authorities he relied on
provides a solution to the major question in these proceedings which is the failure by his clients to
produce the relevant policy of insurance. In the absence of that policy, or credible explanation for
its absence, the Appellants’ case has no foundation. With respect I do not find soundness in
arguments based on ground two namely that because the Respondent was not a party to the contract
of insurance, therefore, it can not contest the validity of that contract. Of course, the Respondent
would be affected if we in the courts found that there was an enforceable contract between the two
Appellants. First of all, it was the Appellants who took the Respondent to court to enforce rights
under the doctrine of subrogation which rights to subrogation, of necessity, must be discerned from
the provisions of the policy that was never proved in court.
The validity of the rights to sue lies in the existence and the terms of the policy of insurance. The
policy was not produced. Its contents are unknown, as are the rights of the parties. Moreover, from
the evidence of Ehassan Hammad (DW1), it is clear that a consignor of valuable commodity can
ensure the commodity privately and if he does that, then the consignor must disclose the fact of the
insurance and also give the policy, presumably a copy thereof, to the carrier in this case the
Respondent. This was not done in this case. This lends credence to the view that there was no
policy of insurance. Moreover, Hammad’s evidence shows that previously the First Appellant used
to rely on the Respondent’s insurance to cover its cargo. Why did it take a private insurance this
time? And why didn’t the First Appellant reveal this to the Respondent? The Respondent must have
authority.
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INSURANCE LAW CASES
a say in the existence or non-existence of the policy of insurance. I think that both grounds of
appeal must fail.
I would, therefore, dismiss this appeal with costs here and in the courts below.
Karokora JSC: I have had the benefit of reading in draft the judgment prepared by my Learned
brother Oder JSC. I agree with him that the appeal must be dismissed with costs. However, I wish
to make a few comments on whether or not the Appellants proved that there was actually a binding
and operative insurance contract between themselves at the time the consignment left Entebbe for
Brussels.
In their pleadings the Second Appellant stated that they issued insurance open cover/policy number
10/MR/OC/4499 to cover the First Appellant’s 10 000 kilograms consignment of fresh chilled Nile
Perch fillets from Entebbe to Brussels. However, at the trial, no such insurance cover was tendered
in evidence. Instead, the Second Appellant put in evidence a marine certificate of insurance Exhibit
P1, which stated:
“We acknowledge receipt of your marine declaration number 181 … dated … and have to advise
that you are hereby covered subject to the conditions and terms of the company’s open policy/cover
number 10/MR/OC/4499 under which your declaration is made”.
After describing the type of goods, the airway bill number and the date of its issue, the sum assured,
the place of origin and the destination, the document concluded as follows:
“The condition of the insurance policy being as per open cover number 10/MR/OC/4499 subject
otherwise to all other terms/conditions of open policy/cover referred to above”.
Page 340 of [2003] 1 EA 330 (SCU)
After carefully analysing Exhibit P1, it is difficult, in my view, to fault the Court of Appeal’s
conclusion when it held inter alia:
“It is clear Exhibit P1 was not the insurance policy under which the goods were insured. The actual
policy was the open policy number 10/MR/OC/4499. As the document governed the rights of the
parties, it would have contained the distinctive features of the contract of insurance. These are the
parties, the subject matter of the insurance, the period of the insurance, the date of the
commencement of the policy, the details of the peril which was insured against and also a list of
exemptions specifying the circumstances in which the insurers would not be liable”.
authority.
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INSURANCE LAW CASES
In my view if the consignment of 10 000 kilograms of the fresh chilled Nile Perch fillets was
covered under insurance cover number 10/MR/OC/4499 it was incumbent on the Appellant to
prove, which they never did, that there was such a contract of indemnity especially after the
Respondent had denied responsibility for the loss of the cargo. I think that reliance upon the marine
certificate of insurance Exhibit P1 which was issued on 19 March 1996 after the consignment had
arrived in Brussels and after it was declared unfit for entry into European Economic Union would
not help the Appellant’s case, because that would clearly prove that the consignment left Entebbe
uninsured and that Exhibit P1 was purportedly issued after the Appellant had learnt of the loss of
the cargo. Clearly such certificate of insurance, Exhibit P1 would not be an insurance cover issued
against the risk when the risk had already occurred.
Therefore ground one must fail.
Finally I come to ground two, the thrust of which is that because the Respondent was not privy to
the contract of insurance between First and Second Appellants, it (Respondent) can not question its
existence. This objection is based on common law doctrine of privity of contract which states that
no one may be entitled to or bound by the terms of a contract to which he is not an original party.
See Prince v Easton [1833] 4 B and Ad 433 and Twedle v Atkinson [1861] 1 B and S 393. In my
view, although the objection is based on the correct statement of the law, in the instant case, as I
have stated while discussing the first ground, no contract of insurance existed between First and
Second Appellant at the time the consignment of the goods left Entebbe for Brussels. Consequently
in my view, the Respondent who was to be affected by the purported contract of insurance cover
number 10/MR/OC/4499 would be entitled to know the terms and conditions of that insurance
cover under which the subrogation was being sought to be exercised against it. In the circumstances
of this case, the Respondent would not correctly be called a third party to the contract, since the
contract of the insurance never existed. In the result, ground two must fail.
I would therefore dismiss the appeal with costs here and in the lower courts.
Kanyeihamba JSC: I have read in draft the judgment of my Learned brother Oder JSC, and I agree
with him that this appeal ought to be dismissed with costs. I will only add a few comments of my
own by way of emphasis. The facts and circumstances of this appeal have been ably set out and
described in the judgment of my Learned brother Oder JSC.
authority.
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In my view, once the Appellants have averred in their pleadings that they had entered into a
contract of insurance and described it, and in its defence, the Respondent denies the existence of
such a contract of it and expresses ignorance of its contents, it becomes incumbent upon the
Appellants to prove both the existence and contents of the alleged contract. Further the Appellants
are obliged to show the dates and periods in which the alleged insurance policy was
Page 341 of [2003] 1 EA 330 (SCU)
to operate, the parties to it, the cargo it covered and its terms and conditions of insurance.
Mr Alan Shonubi, learned counsel for the Appellants, submitted that in marine insurance matters, it
is not only a contract of insurance which can prove that parties and their cargo are insured but it
may be proved by other means such as the testimony of witnesses who may be knowledgeable
about the negotiations to insure and be insured between the parties and the general principles of
marine insurance and their consequences, in any given situation.
With respect, I disagree with this novel suggestion by learned counsel. Whereas, it may be surmised
that once it has been shown that there is a contract between the parties with clearly stated terms and
conditions, there may be implied trade or commercial consequences which need not be specifically
proved but can be discovered from proven customs and trade practices of the transaction, these
cannot be a substitute for the actual contract and its terms.
Unfortunately for the Appellants, no such contract or its terms were shown or proved in the courts
below. Nor has that feat been achieved in this Court. Moreover, the record of proceedings and the
submissions before this Court reveal that the alleged contract of insurance was effected, if at all,
after the cargo to be insured had been damaged and the damage reported. In other words, the
insurance policy, if any, would have been entered into and intended to cover a situation and events
which had passed. Such proposed insurance contract would not only be voidable but would be void.
It was also contended on behalf of the Appellants by their counsel, that in this particular case, the
evidence of Mr Richard Byansi, PW10, and the production in court of a marine certificate of
insurance, Exhibit P1, were sufficient to show that there was a valid contract of insurance between
the parties. In my opinion, this contention is untenable in this case. The mere testimony of a
witness, however credible and reliable it may be, that parties had previously negotiated for a
contract does not magically concretise those negotiations into a contract when the terms of the
contract are not known and when events which were contemplated to be covered by the anticipated
authority.
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INSURANCE LAW CASES
contract occur subsequently. Moreover, the fact that one is in possession of a marine certificate of
insurance and produces it in court is not proof that that certificate covered the goods affected or any
other goods for that matter. The terms and conditions for marine insurance of carriage of goods
differ from one type of cargo to another. One party may wish to transport corn or timber, steel,
animals, ice cream or some other goods, perishable or non-perishable. Each of these species of
goods will have its own terms and conditions of insurance and delivery agreed upon between the
parties and written down, differently. However, each of the parties may have and is entitled to have
a marine certificate of insurance couched in general terms.
The doctrine of subrogation can only apply if the facts confirm the principles of law of contract and
insurance I have endeavoured to explain. The Appellants’ pleadings and submissions on their behalf
fall far short of these requirements.
Therefore in agreement with my Learned brother Oder JSC, I would dismiss this appeal with costs
here and in the courts below.
JADAVJI SHAMJI PANDYA V THE ORIENTAL FIRE AND GENERAL INSURANCE

CO LTD [1957] 1 EA 21
Judgment
Briggs JA: read the following judgment of the court: This was an appeal from a judgment and
decree of the Supreme Court of Kenya dismissing with costs the appellant’s claim against the
respondents in respect of insurance of a motor car destroyed by accident. We dismissed the
appeal with costs and now give our reasons.
The appellant is a garage owner and trades in the name of “Kenya Garage”. The respondents are
underwriters. One Dhanji Jasmat on January 6, 1956, took from the appellant an Austin car, and
purported to enter into a hire purchase agreement in respect thereof on behalf of a company
called Dhanji Jasmat Ltd., which, he said, was incorporated in Uganda, and in which he claimed
to be largely interested. The appellant did not know Dhanji Jasmat but he was well-dressed and
authority.
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INSURANCE LAW CASES
looked respectable. He gave a cheque, which was subsequently dishonoured, for the amount
immediately payable on the car. He paid for the insurance on which this suit was brought. A
fortnight or so later he had an accident while driving the car and it was damaged beyond repair.
It was not disputed that, but for the matters mentioned hereinafter, the respondents would have
been liable for this loss.
The proposal form for the insurance is dated January 6, and was prepared by the appellant and
signed for Kenya Garage by his clerk. It gives, as “name of proposer”, “Dhanji Jasmat Ltd. and
Kenya Garage” with the address of the latter. Among the particulars the following are relevant:–
“3. Are you the sole and absolute owner of the cars? If not, give particulars of any
other interest. H.P. with Kenya Garage.
11. Do you, or any other person who to your knowledge will drive, suffer from
defective vision or hearing or from any other physical infirmity? No.”
The proposal form is warranted complete and accurate and is to be the basis of the
Page 23 of [1957] 1 EA 21 (CAM)
policy. On the same day the respondents issued a cover-note granting temporary cover “in terms
of the company’s usual form of Comprehensive Policy” and giving, as “name of policyholder”,
“Dhanji Jasmat Ltd. and Kenya Garage”. The relative policy was only issued on February 16,
some time after the accident. It is issued to Messrs. Dhanji Jasmat Ltd. alone, but embodies an
endorsement by way of special condition in the following terms:–
“It is hereby understood and agreed that Messrs. Kenya Garage (hereinafter referred to as the
owners) are the owners of the motor vehicle described in the schedule hereto and that the said
motor vehicle is the subject of a hire purchase agreement made between the owners of the one
part and the insured of the other part, and it is further understood and agreed that the said owners
authority.
Page | 41
INSURANCE LAW CASES
are interested in any monies which but for this endorsement would be payable to the insured
under this policy in respect of loss of or damage to the said motor vehicle (which loss or damage
is not made good, by repair, reinstatement or replacement) and such monies shall be paid to the
said owners as long as they are the owners of the vehicle and their receipt shall be a full and final
discharge to the company in respect of loss or damage.
“Save by this endorsement expressly agreed nothing herein shall modify or affect the rights or
liabilities of the insured or the company respectively or in connection with this policy or any
conditions or term thereof.
“Subject otherwise to the terms, exceptions and conditions of this Policy.”
There is not, and has never been, a company called Dhanji Jasmat Ltd. Dhanji Jasmat himself
was at all material times an undischarged bankrupt, having been adjudicated in Tanganyika. He
had lost one eye at the age of twenty and was wearing dark sunglasses when he saw the
appellant. The appellant was wholly unaware of these three material facts and had no reason to
suspect any of them, but it was common ground that the company, being non-existent, could not
recover on the policy and that, even if Dhanji Jasmat personally had been the assured, the policy
would have been voidable for misrepresentation and non-disclosure. The appellant contended in
the court below that Dhanji Jasmat’s conduct, even if actively fraudulent, could not avoid his
(the appellant’s) rights under the policy, that he must be treated as being separately insured and
that, since his own conduct had admittedly been entirely proper, he could recover the value of the
car. The learned trial judge rejected this submission, holding that the claim was made under the
policy and that the appellant could not be entitled to any monies unless, but for the endorsement
quoted, such monies would have been payable to the named assured. In this case nothing was so
payable.
Before us the appellant changed his line of attack. His counsel submitted, first, that on the form
of the pleadings the action need not be considered to be brought on the policy actually issued, but
could be treated as being brought on the contract of insurance contained in the proposal form and
cover-note alone. In strict accuracy this should have been the form of the action, for, although a
policy when issued ordinarily replaces the cover-note, where a loss takes place before issue of
authority.
Page | 42
INSURANCE LAW CASES
the policy the cover-note itself contains with the proposal form the relevant contract of
insurance. Whether in this case the pleadings could fairly be read as relying on that type of
contract, as opposed to the policy itself, might have been a question of some difficulty, but it was
not necessary to decide this point. We assumed in favour of the appellant that it was open to him
to argue the appeal on that basis.
The argument for the appellant proceeded as follows. Although, if the policy had been the
governing document, the learned judge’s decision would have been right, it was not the
governing document. The cover-note was the governing document. It stated that both Dhanji
Jasmat Ltd. and Kenya Garage were insured. Their interests in the subject-matter of the
insurance were not joint, but separate and complementary, and they must be taken to be insured
“for their respective rights and interests.” This would bring into play the rule laid down in
Samuel v. Dumas (1), [1924] A.C. 431, that where the interests of two persons insured under a
single contract of insurance are distinct and severable, the fraud, misrepresentations and non-
disclosure
Page 24 of [1957] 1 EA 21 (CAM)
of one assured do not affect the rights of the other, if he was not aware of them at the time of
making the contract. The appellant also relied on Salim bin Said v. South British Insurance Co.
(2), 14 K.L.R. 84, decision of the Supreme Court of Kenya. This argument was attractive and
might have been accepted, were it not for the provision in the cover-note that the insurance was
granted “in terms of the company’s usual form of Comprehensive Policy.” The evidence of the
appellant, which was given with commendable candour, showed clearly that he had on several
previous occasions insured cars under hire-purchase with the respondents, and that on each of
such occasions the policy had been issued in the name of the hirer alone with an endorsement in
his favour as owner in the form which we have quoted, and furthermore, that on the first of those
occasions he had objected to this, desiring to have a policy issued in the names of the hirer and
himself, but, on being informed that this was the respondents’ normal practice, had withdrawn
his objection and thereafter accepted willingly policies in this form. Lastly, the appellant
authority.
Page | 43
INSURANCE LAW CASES
admitted that he expected in this case to get a policy in the form in which it was subsequently
issued.
The appellant sought to overcome this difficulty by saying that the reference in the cover-note to
the usual form of policy could not have the effect suggested, because under the policy as issued
the appellant was not insured at all, whereas the cover-note said he was insured. The cover-note
being a printed form, the deliberately inserted name of the appellant as assured must override the
intention apparently expressed in the printed words. The “usual form”, if this were the usual
form, would be repugnant to the express provisions of the governing document. This argument
could of course be countered by showing that under the policy as issued the appellant was in fact
“insured”, though not in the sense or to the extent that he would have wished. We were of
opinion that on the true construction of the policy, and in particular the endorsement in question,
the appellant was directly insured under the policy, in the sense that his insurable interest was
admitted in the endorsement and it gave him an independent right of action against the
respondents if monies became payable for loss or damage. The appellant’s rights under the
policy were gravely restricted and dependent on a notional effective claim by “the insured”; but
we think that he had direct rights under the contract and was a party to it for this purpose. He was
therefore “insured” under it, though in a very precarious manner.
We were accordingly of opinion that a notional policy in the same terms as the actual policy was
imported into the contract contained in the proposal form and cover-note, and that the appellant
could not recover under them any more than under the policy itself. The appeal therefore failed.
We wish only to refer to one other matter. The appellant said in evidence that, when he objected
to this form of policy, he was assured by the respondents’ Mombasa manager that “this policy
has the same strength as one issued in two names” and that he “should not fear at all.” He was
also told that the endorsement entitled him to make an effective claim without joining the
insured. His evidence on this was not contradicted by the respondents; but it was not strictly
relevant to the issues in this case. The last piece of information was, we think, correct; but the
others were certainly incorrect and it is difficult to see how the manager, as an expert in
insurance, could have believed them to be correct. But this is not an action for deceit and in these
authority.
Page | 44
INSURANCE LAW CASES
proceedings we cannot assist the appellant. If however, what he said was correct, we are unable
to agree with the remark of the learned judge that the appellant and the respondents were equally
the victims of Dhanji Jasmat. We think the true moral aspect of this case would in that event be
quite different.
Appeal dismissed.
JUPITER GENERAL INSURANCE CO V KASANDA COTTON CO [1966] 1 EA 252

(CAK)
Judgment
Spry JA: This is an appeal from a judgment and preliminary decree of the High Court of
Uganda. The respondent company (to which I shall refer as “Kasanda Cotton”) claimed to have
been insured under a verbal contract by the appellant company (to which I shall refer as “Jupiter
General”) against loss of cash in transit. It alleged a loss, covered by the contract, of Shs.
64,273/79 and claimed the right to be indemnified against that loss. Jupiter General denied
liability: it admitted a contract of insurance but asserted that the contract was a written one,
certain terms of which excluded liability in the particular circumstances. There was also a
general denial that any loss had been sustained and the specific amount claimed was also
challenged.
One of the terms of the alleged written contract was that any dispute between the parties should
be referred to arbitration and accordingly when the suit came to trial a preliminary issue was
framed, whether the contract between the parties was an oral or a written one. After hearing
evidence and argument, which went considerably beyond the issue as framed, the learned Chief
Justice held that the Jupiter General
authority.
Page | 45
INSURANCE LAW CASES
“had accepted unconditionally to cover the plaintiff company’s cash-in-transit and did in fact
cover the said cash-in-transit unconditionally at the time. The contract of insurance was therefore
an oral one.”
Page 254 of [1966] 1 EA 252 (CAK)
A preliminary decree was extracted which merely provided that
“the said contract of insurance was an oral one.”
It is against that judgment and preliminary decree that the present appeal is brought.
The case for Jupiter General was that it had issued policies annually since the cotton buying
season 1958/59 to Kasanda Cotton covering cash in transit and had delivered them to the
company and that these policies contained common form conditions. From this it was claimed
that during the period with which we are concerned, that is to say the 1962/63 season, Kasanda
Cotton, while not in possession of a current policy, knew the conditions of the insurance or, in
the alternative, had agreed to accept the usual conditions. The only issue of fact was whether or
not a policy or policies had been delivered to Kasanda Cotton.
It may be remarked at this point that Jupiter General follow what seems a most peculiar practice
in relation to policies insuring cash in transit. Because the premium is based on the actual
amount of cash carried during the period of cover and therefore cannot be calculated until that
amount is known, no policy is issued until after the expiration of the period of cover.
It was not in dispute that, as a result of this practice, no policy relating to the 1962/3 season had
been delivered to Kasanda Cotton at the time of the alleged loss, but it was sought to be proved
that a policy relating to the 1961/2 season had been delivered on or about August 1, 1962. On
this question, there was a direct conflict of evidence. The learned Chief Justice found as fact that
the policy had not been delivered to Kasanda Cotton. It was one of the grounds of appeal that in
making this finding, the learned Chief Justice overlooked the evidence of an insurance assessor
who testified that when he called at the Kampala office of Kasanda Cotton, the accountant to the
company
authority.
Page | 46
INSURANCE LAW CASES
“asked me whether I would like to see the previous policy covering cash in transit.”
It was submitted by counsel for Jupiter General, that this remark raised an irresistible inference
that there was a policy in the possession of Kasanda Cotton. With respect, I cannot agree. The
accountant may well have believed or assumed that there was a policy but his enquiry can have
but little evidential weight in determining the question whether, as a matter of fact, there was a
policy in the company’s possession, particularly since the company’s insurance business appears
to have been handled by one of the directors. The only direct evidence on this question was that
of one Babulal Rambhai Dave, an employee of a company known as Oriental Agencies, Ltd. (to
which I shall refer as “Oriental Agencies”) which acted as agent for Jupiter General, who said
that he had handed the 1961/2 policy to Raojibhai Ranchhodbhai Patel, a director of Kasanda
Cotton. Raojibhai had earlier testified that no such document had ever been handed to him and
he had not been cross-examined on that statement. The learned Chief Justice preferred the
evidence of Raojibhai to that of Babulal and there is nothing in the record even to suggest that he
was wrong in so doing.
No serious attempt was made to prove delivery to Kasanda Cotton of any policy insuring cash in
transit for earlier years. Evidence was given by one Ambalal Maganlal Shah, a director of
Oriental Agencies, of what he described as the usual practice in relation to the insurance of cash
in transit, that after the amount of the premium had been ascertained, the information was sent to
the Bombay office of Jupiter General, where a policy was prepared. It was then sent to Oriental
Agencies in Kampala for signature. He went on:
Page 255 of [1966] 1 EA 252 (CAK)
“The usual practice with the Plaintiff Company was for us sometimes to send them the policies
by messengers or they were handed over the policies in our office. I do not remember actually to
whom the policy of the Plaintiff Company was given in any given year.”
Jupiter General was unable to produce any receipt for any of these policies, or any evidence of
posting, or any signature in a despatch book to substantiate this vague evidence. In my view, the
learned Chief Justice was, in these circumstances, fully justified in holding that it had not been
authority.
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INSURANCE LAW CASES
proved that any policy covering cash in transit had been delivered to Kasanda Cotton. I think,
too, that he was entitled to conclude that the contract of insurance for the 1962/63 season was an
oral one.
That would have been enough to dispose of the preliminary issue as framed but as I have said,
the evidence and the argument went beyond that issue and covered the further issue whether such
oral contract was subject to conditions or was an unconditional contract of indemnity. This was
an appropriate preliminary issue, because if the terms and conditions of Jupiter General’s usual
policies were imported into the oral contract, the arbitration clause, as one of those conditions,
would apply. The learned Chief Justice dealt with this issue, and decided that neither party was
“reasonably bound or entitled to conclude from the attitude of the other as known to it at the time
that written terms and conditions were intended by the other party to form part of the contract.”
He based this decision largely on the fact that Kasanda Cotton had each year received a copy of a
letter sent by Oriental Agencies to Jupiter General, informing the latter that the former had
covered Kasanda Cotton against loss of cash in transit, and on evidence by one of the directors of
Kasanda Cotton that he had enquired about a policy and been informed by a director of Oriental
Agencies that the letter was
“as good as a policy”.
This finding was challenged by counsel for the appellant on two main grounds. In the first place,
he submitted that if an oral contract had been concluded, it must have been on the basis that a
policy would in due course be issued on the usual terms and that those terms were therefore to be
regarded as embodied in the oral agreement; in the alternative, he argued that there was no
contract, either because Oriental Agencies lacked authority to enter into a contract or because
there was no consensus ad idem.
On the first of these grounds, counsel argued that it was inconceivable that an insurance
company should enter into a contract giving unconditional indemnity. He pointed out that this
had not been in contemplation even on the part of Kasanda Cotton, because the director of that
authority.
Page | 48
INSURANCE LAW CASES
company who normally dealt with such matters had said in evidence that when he arranged the
insurance, he expected to receive a policy containing the usual terms and conditions, a policy
similar to those issued to other companies taking out this kind of cover. The witness had said that
he did not know what those terms and conditions would be, but counsel argued that this was
immaterial, as there is no reason in law why a person should not agree to be bound by conditions
which have not been communicated to him and of the contents of which he is unaware. (In this
connection, he submitted that certain dicta in McCutcheon v. David MacBrayne Ltd. (1), are
unduly wide.)
Counsel for the respondent argued, on the other hand, that the underlying principle behind all the
English cases (it appears that there is no East African authority on the subject) is that if a person
is not aware of the terms of one or
Page 256 of [1966] 1 EA 252 (CAK)
more conditions, he is not bound by them. He argued that the learned Chief Justice had, in effect,
held that the letter a copy of which was sent by Oriental Agencies to Kasanda Cotton embodied
the conditions of the contract and that, even though the director of Kasanda Cotton may
originally have expected a policy containing conditions, the position was changed as soon as he
was told that the letter was “as good as a policy”. He submitted that the onus was on Jupiter
General to show that Kasanda Cotton knew the conditions of the policy and that, as they had
failed to do so, the learned Chief Justice was correct in holding that the contract must be
regarded as providing cover without conditions.
Counsel for the respondent relied largely on the English case of Re Coleman’s Depositories, Ltd.
and The Life and Health Assurance Association (2), a case which the learned Chief Justice had
said he found of assistance. That was a case where a policy of insurance against workmen’s
compensation risks containing a condition that “immediate” notice be given of any happening
giving rise to liability, was delivered to the insured after the occurrence of such a happening.
Vaughan Williams, L.J., said that
authority.
Page | 49
INSURANCE LAW CASES
“It could not have been in the contemplation of the parties that this condition as to immediate
notice should apply until the contents of the policy had been communicated to the employer.”
As there was no evidence that the insured knew, or had the opportunity of knowing, the
conditions of the policy, it was held that the condition as to immediate notice was not binding on
him prior to its communication to him.
There has been, I think, some confusion of thought and a tendency to treat as one what are really
two distinct questions: first, what was in fact the contract agreed between the parties and,
secondly, whether any term of that contract is for any reason unenforceable. I do not, with
respect, think that any of the cases cited to us has any bearing on the first of those questions, nor,
indeed, is it likely that any other case would be of assistance in deciding what is essentially a
matter of fact. On that question, there is evidence appearing on the record. As I have already
said, a director of Kasanda Cotton, who negotiated the insurance, said quite frankly that he
expected to receive a policy containing the conditions usual in respect of the particular risk. For
Jupiter General, evidence was called which indicates that this was a risk which the company was
accustomed to cover and for which it had a standard form of policy. It seems to me the
irresistible conclusion that there was a consensus ad idem for a contract of insurance on the usual
terms and conditions appropriate to the type of risk, which was, in due course, to be embodied in
the usual form of policy.
I do not think it can possibly be said that the terms of the contract were contained in the letter
from Oriental Agencies to Jupiter General, a copy of which was sent to Kasanda Cotton. As
counsel for the appellant pointed out, the letter does not even refer to the amount of the premium
or indicate the basis on which it was to be calculated.
Again, I do not think any significance is to be attached to the statement by a director of Oriental
Agencies that the letter was “as good as” a policy. I do not consider that anything more is to be
inferred from that remark than that Kasanda Cotton was in as good a position as if a policy had
been issued. If that is the correct interpretation, the remark supports the case for Jupiter General,
rather than that for Kasanda Cotton. I can see no justification for interpreting the remark as
authority.
Page | 50
INSURANCE LAW CASES
meaning that Kasanda Cotton was in an entirely different, and incidentally much more
favourable, position than it would have been had it received a policy.
Page 257 of [1966] 1 EA 252 (CAK)
I think, therefore, with respect, that the learned Chief Justice erred in holding that neither party
was “reasonably bound or entitled” to conclude that written terms were intended to form part of
the contract.
It is not, of course, for this court at this stage to deal with the question whether any particular
term or condition of the contract was binding on the parties in respect of the happening which
gave rise to this suit, but it is necessary to deal with counsel for the respondent’s submission that
none of the terms and conditions could have applied. This submission was based on the
Coleman’s Depositories case (2). That decision is not binding on us, because the contract of
insurance for the 1962/63 season was entered into before the coming into force on January 1,
1963, of the Contract Act, 1962, (No. 8 of 1962) and is therefore governed by the Indian
Contract Act, 1872, as formerly applied to Uganda, but it has persuasive value. In his judgment,
Vaughan Williams, L.J., after the passage I have quoted above, continued
“I hold that, on the face of the award there is no evidence that the employer knew or had the
opportunity of knowing, the conditions of the policy, and that the onus is on the association; and
in my opinion the risk undertaken by the association for the period prior to the delivery of the
policy did not impose upon the employer the obligation to give immediate notice of the accident
to Corrin on January 2, 1905, prior to the receipt by the employer of the policy or of information
of its containing such a condition or obligation. The only question in this case is the obligation of
this condition as to immediate notice . . .”
Counsel for the respondent stressed the use in this passage of the word “conditions” and argued,
if I understood him aright, that the use of the plural meant that none of the conditions were
applicable to the risk and therefore that there was cover without conditions. He submitted that the
position in the present case was the same.
authority.
Page | 51
INSURANCE LAW CASES
With respect, I cannot accept that contention. The last sentence of the passage I have quoted
seems to me to indicate clearly that the learned Lord Justice was expressly limiting his remarks
to the one condition with which he was concerned. This is equally clear from the judgment of
Buckley, L.J. In my view, no general principle is to be extracted from the Coleman’s
Depositories case (2), beyond the fact that a person will not be penalised for non-compliance
with a condition as to the giving of notice of which he is not actually or constructively aware. As
regards other conditions, such as conditions limiting the extent of the cover, I think very different
considerations may apply. Be that as it may, I know of no authority for saying, and in the
absence of authority I would not be prepared to hold, that where a person has contracted for
insurance on usual terms and conditions, he is not bound by any such terms and conditions, until
they have been made known to him.
It would, of course, not be proper for us to consider whether any particular term or condition of
the contract between the parties is or is not enforceable or is or is not usual in such contracts,
because these questions have not been argued or determined in the lower court. This includes the
question whether or not the alleged arbitration clause applies.
I can, I think, deal briefly with the remaining grounds of appeal. I would reject counsel for the
appellant’s submission that Oriental Agencies, as the agent of Jupiter General, lacked authority
to enter on behalf of its principal, into any contract of insurance except possibly one on standard
terms and conditions: the powers of an agent are in the first instance a matter of fact and there
was no evidence whatever to show the scope of and the limitations on the authority of Oriental
Agencies. In the absence of any evidence showing that
Page 258 of [1966] 1 EA 252 (CAK)
Oriental Agencies lacked express authority to make any particular kind of contract, no question
of implied authority arises. Oriental Agencies was, unquestionably, the agent of Jupiter General;
the former had for at least three years previously entered into similar contracts on behalf of the
latter and those contracts had been ratified by the principal. It would be impossible for Jupiter
General at this stage to deny the authority of its agent. Furthermore, this had not been pleaded,
and I am by no means convinced that it was proper to argue it on appeal.
authority.
Page | 52
INSURANCE LAW CASES
On the other hand, I would have been disposed to agree with counsel for the appellant’s
alternative argument, that there was no contract, for lack of consensus ad idem, if I were not
convinced, as I have already said, that there was consensus ad idem for a contract on the usual
terms and conditions. It would, in my view, be impossible, on the evidence, to hold that there had
been consensus ad idem for an unconditional contract of indemnity.
For the reasons I have given, I would allow this appeal and set aside the judgment and
preliminary decree of the High Court. I would substitute an order declaring, on the preliminary
issue, that there was an oral contract of insurance between the parties, on the terms and
conditions usual to contracts for insurance of cash in transit. I would remit the proceedings to the
High Court to proceed with the hearing on that basis. I would award Jupiter General the costs of
this appeal, with a certificate for two counsel. No order was made for costs in the High Court,
and the costs in that court to date should, in my opinion, be costs in the cause.
Sir Clement de Lestang VP: I have had the advantage of reading the judgment of Spry, J.A. with
which I agree. As Law, J.A., also agrees, there will be an order in the terms proposed.
Law JA: I also agree.
Appeal allowed. Proceedings remitted to the High Court to proceed with the hearing on that
basis.
ALLANSON NJUGI V BRITISH INDIA GENERAL INSURANCE CO LTD [1965] 1 EA

58 (SCK)
Judgment
Farrell J: This suit arises out of an accident to a vehicle owned by the plaintiff and insured by
him with the defendant company. It is not disputed that the accident took place within the period
for which the policy was originally issued; but the defendants claim that the policy was validly
authority.
Page | 53
INSURANCE LAW CASES
cancelled before the accident took place. The plaintiff now claims under the policy a sum of Shs.
15,000/- in respect of damage to his vehicle and a declaration that the defendants are not entitled
to repudiate liability in respect of pending claims by third parties.
The facts are somewhat complex. The defendants operate in this country through East African
Underwriters Ltd., as their chief agents. In that organisation they have a representative who is
referred to in the correspondence as the branch manager of the defendant company. The chief
agents have a number of sub-agents, one of which was a firm called the United Marketing
Company, to which I shall refer as U.M.C. U.M.C. in turn had as agent one Nehra, trading under
the name of Phakey & Co. Nehra was thus a sub-sub-agent of the defendant company.
The plaintiff is an African who has for many years been engaged in a transport business, in
which he employed two or more vehicles, one of which was the
Page 60 of [1965] 1 EA 58 (SCK)
passenger omnibus, registration number KGM. 66, with which the suit is concerned. In October,
1962, he approached Nehra with a view to insuring this vehicle and signed a proposal form for a
policy with the defendant company for the period of 12 months from October 17, 1962, to
October 16, 1963. The premium was Shs. 2,285/75 of which Shs. 600/- was paid forthwith and
the balance was to be paid by three instalments, two of Shs. 600/- and one of Shs. 485/75. A
policy was issued five days later, on October 22, 1962. There is nothing unusual in the terms of
the policy, and it is only necessary to mention one condition, No. 7, which reads as follows:
“The company may cancel this policy by sending seven days’ notice by registered letter to the
Insured at his last known address and in such event will return to the Insured the premium paid
less the pro rata portion thereof for the period the policy has been in force or the policy may be
cancelled at any time by the Insured on seven day’s notice and (provided no claim has arisen
during the then current Period of Insurance) the Insured shall be entitled to a return of premium
less premium at the company’s short period rates for the period the policy has been in force.”
It is not clear on what date the instalments of premium were due, but two instalments each of
Shs. 600/- were paid by cheque, one on November 19, and the second on December 17, 1962.
authority.
Page | 54
INSURANCE LAW CASES
The final instalment then remained unpaid for some months. In the meantime Nehra did not hand
over the policy or certificate of insurance, but issued cover notes from time to time as they were
requested by the plaintiff.
On April 4, 1963, when the policy had been in force for nearly 6 months, Nehra sent a notice to
the plaintiff in the following terms:
“Dear Sir,
Motor Policy No. 720851/OC.
We very much regret to have to inform you that a sum of Shs. 486/75 being the premium due on
17.10.62 in respect of the above-named policy still remains unpaid despite previous reminders.
We are, therefore, compelled to notify you that if your cheque for the said amount is not received
within the course of the next seven days from the date hereof, the said policy will be cancelled.
Yours faithfully,
for Phakey & Co.”
This notice is on a printed form and was sent by registered post.
No payment was forthcoming within the specified time, and on April 16, 1963, Nehra returned
the policy and certificate of insurance to his immediate principals, U.M.C., with a request to
cancel the policy.
U.M.C. in turn passed this request with the certificate of insurance to the branch manager of the
defendant company on April 18.
On April 23, the plaintiff called on Nehra, and gave him a cheque to cover the balance of the
premium due on the policy. The cheque was post-dated to May 10, 1963, and in fact, owing to a
further request for time by the plaintiff, was not presented until May 17. On presentation the
cheque was duly paid.
authority.
Page | 55
INSURANCE LAW CASES
On receipt of this cheque Nehra immediately informed U.M.C., that if the policy had not been
already cancelled, it should not be cancelled. There appears to have been some delay in dealing
with the matter, but on May 6, U.M.C., wrote to the defendants’ branch manager, requesting him
to reinstate the policy and return the certificate of insurance. There is some reason to doubt
whether this letter was despatched on the date shown, as it appears not to have been received
until about May 18, when the policy had already been cancelled.
Page 61 of [1965] 1 EA 58 (SCK)
The cancellation was effected by an endorsement to the policy dated May 15, 1963, and
expressed to take effect from April 15, 1963.
In answer to the request for reinstatement of the policy, the branch manager replied to U.M.C.,
on May 18, informing them that the policy had already been cancelled and regretting that it could
not now be reinstated. Nevertheless, efforts were made by Nehra and U.M.C., to have the policy
reinstated, and according to Dave, a clerk employed by U.M.C., Durgesh the branch manager
agreed that it should be reinstated. This is denied by Durgesh, who in a letter to U.M.C., dated
June 26, suggested that a fresh proposal should be submitted. It seems clear, however, that Nehra
believed that the policy would be reinstated, and on June 6, 1963, he issued a cover note to the
plaintiff (Ex. 6) in which reference is made to the number of the policy. On July 16, a further
cover note was issued, this time by U.M.C., who sent a copy to the branch manager and informed
him that they were arranging to obtain the completed proposal form. The defendants through
their branch manager protested against the issue of this cover note before the proposal form had
been completed and threatened to cancel it if the proposal was not received within seven days.
On August 24, the plaintiff called on Nehra in response to repeated requests, and Nehra asked
him to sign a fresh proposal. The plaintiff says that he signed the form in blank, and Nehra does
not deny that he may have done so. The plaintiff also says that he was never informed of the
defendants’ refusal to reinstate the policy or of the reason why he was being asked to make a
fresh proposal. He thought that there might have been a mistake in the first proposal he had
completed. Nehra agrees that through a “mistake” he did not inform the plaintiff of the period for
which the new insurance was to be taken out, and explains that he was still fighting to have the
authority.
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INSURANCE LAW CASES
policy reinstated. I accept the evidence of the plaintiff as to his actual state of mind at the time
when he signed the fresh proposal form.
On August 30, 1963, before the defendants had received the fresh proposal, the accident
happened which gave rise to these proceedings. The plaintiff immediately submitted a claim
through Nehra, which was passed to U.M.C., and forwarded by them to the branch manager of
the defendant company who repudiated the claim.
To complete the narrative of facts, the agency of U.M.C., was terminated on August 31, 1963,
but notwithstanding this the managing director of U.M.C., in response to a telephoned request
issued a certificate on September 2, 1963, confirming that the vehicle was insured with the
defendant company from October 17, 1962, to October 16, 1963.
On these facts the plaintiff claims under the policy as originally issued. The defendant pleads that
the policy was cancelled with effect from April 16, 1963, and that the plaintiff having signed a
fresh proposal on August 24, 1963, is estopped from denying the cancellation of the original
policy. The plaintiff in his reply alleges in turn that the defendant is estopped from denying that
the policy continued in force by virtue of having issued cover notes and accepted the balance of
the premium after the date of the alleged cancellation. The first issue is whether the policy was
ever validly cancelled. If it was, the only issue remaining is whether the defendants are estopped
from relying on the cancellation by their subsequent conduct. If it was not validly cancelled, the
remaining issue is whether the plaintiff is estopped from denying its cancellation by having
signed a fresh proposal form.
It is, perhaps, worth pointing that, while it was the plaintiff’s delay in paying the last instalment
of his premium that led up to the purported cancellation of the policy, the defendants do not
claim to have cancelled the policy by reason
Page 62 of [1965] 1 EA 58 (SCK)
of non-payment of the premium. In this connection the following passage from Shawcross on
Motor Insurance (2nd Edn.) p. 472 is apposite:
authority.
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INSURANCE LAW CASES
“The mere non-payment of premium, unless amounting by the express provisions of the policy to
the breach of a condition precedent, does not affect the validity of the policy. Although the
policy as a rule expressly provides that pre-payment of premium is a condition of the insurers’
liability, or an event without which the policy is inoperative, yet if they issue a policy under seal
reciting payment of the premium, or if by their conduct they relieve the assured from the
necessity of compliance with such term, liability may, nevertheless, accrue to the insurers
without the premium having been paid. The premium must, save in these exceptional cases, be
paid to the insurers or their authorised agent and in the proper form.”
There is no condition in the policy itself requiring full payment of the premium as a condition
precedent. There is, however, on the proposal form, a note to the effect that “no insurance is in
force until the premium or a deposit has been paid”, and as the proposal is deemed to be
incorporated in the contract of insurance, this term becomes a condition of the policy. But the
defendants do not deny that the policy ever became operative, nor do they seek to rely on this
condition as a ground for cancellation. In any case the payment by the plaintiff of Shs. 600/- on
the date of the original proposal would presumably amount to a deposit.
In view of this, it is immaterial whether the final instalment of the premium was received before
or after the date of cancellation. In fact it appears to have been received the day after the
cancellation, as the receipt is dated May 16, 1963, and the endorsement of cancellation is dated
May 15, 1963; but nothing turns on this.
The defendants rely on condition 7 of the policy as giving them a right to cancel the policy at any
time without any reason being assigned. The condition has already been set out, and is in
common form. Where cancellation is by the insurers, Shawcross (loc. cit.) at p. 602 remarks:
“The mode of cancellation provided for is simple and needs little comment. Notice must be in
writing, sent by registered letter to the assured’s last known address, and must be given seven
days before the cancellation is to become effective.”
The only notice given to the plaintiff, which could in any way be construed as falling within the
terms of the condition was the letter of Nehra dated April 4, 1963, which has already been set
authority.
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INSURANCE LAW CASES
out. This was sent by registered post and purported to give seven days notice of cancellation, and
it is reasonable to suppose that it was intended by Nehra to be sent in compliance with the
condition. But it does not appear to me that this is in any way the sort of notice of cancellation
which was contemplated by the parties when they agreed to the condition. In the first place it is
in its terms conditional and in my view a notice of cancellation, like a notice to quit, must be
clear and unambiguous. Nor is it within the ordinary authority of an agent or sub-agent to cancel
a policy. If in purporting to cancel the policy Nehra was acting as agent for the defendant
company he was acting in excess of his authority, as he evidently realised when he later
requested the defendant company to cancel the policy. If the notice of April 4 was effective to
cancel the policy, such a request was unnecessary. Nor can it be said that the defendant company
ratified his unauthorised act, since they have purported to cancel the policy with effect from
April 16, 1963, whereas the notice if it was to be effective as a cancellation, must have taken
effect from April 11, 1963. The condition provides that the defendant company may cancel the
policy “by sending seven days’ notice”, and it must be strictly construed. I hold that the letter
dated April 4 was in no sense a cancellation by
Page 63 of [1965] 1 EA 58 (SCK)
notice in accordance with the condition, and must be construed as a warning rather than a notice
intended to have operative effect.
Faced by this difficulty, the defendants are driven to argue that in requesting cancellation of the
policy, Nehra was acting as agent for the plaintiff. This was the assumption of the branch
manager, Durgesh (D.W. 1), who said that if a request for cancellation came from an agent, the
defendants would assume it came from the insured. Where cancellation is requested by the
insured, seven days’ notice is equally stipulated by the condition, but in that case it is open to the
company to waive compliance with the requirement, and according to Durgesh this is frequently
done. But whatever Durgesh may have assumed, it appears to me far-fetched to suggest that
Nehra in requesting cancellation was in any sense acting as agent for the plaintiff. In the first
place, the plaintiff did not want the policy cancelled; he had asked not for it to be cancelled; and
if Nehra had written “I am authorised by the insured to ask for the cancellation of the policy” it
authority.
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INSURANCE LAW CASES
would have been manifestly untrue. In the second place, it is clear that Nehra was seeking to
protect his own interests. Under the system of accounting adopted by the defendants in relation
to their agents and sub-agents, it was the sub-agent (or sub-sub-agent) dealing directly with the
client who was accountable for any amount of premium not recovered. It was accordingly to the
interest of Nehra to secure full payment of the premium, or in default to procure cancellation of
the policy so that a refund of premium might be credited to him and he should not become liable
for payment of an amount which he had never received.
A parallel situation was considered by the English Court of Appeal in Ruby Steamship
Corporation v. Commercial Union Assurance Company (1). The facts of that case were complex,
involving the relations between American brokers, English brokers and an English insurance
company. It is sufficient to cite the following passage from the judgment of Scrutton, L.J.,
((1933) 46 Lloyd’s Rep. at p. 275):
“The defendants’ chief defence is that under the circumstances, by the law of New York (the
American brokers) had power to relieve themselves from further personal liability for premiums
which (the assured) would not pay, by cancelling the policy with the assent of the underwriters,
but without the consent of (the assured), who had not paid the premiums. This is a question of
New York law.”
The learned Lord Justice, then went on to decide, as a result of certain decisions of the American
courts and expert evidence on American law, that the American brokers were justified in
cancelling the policies. But it is clear from his judgment that, if English law had applied, the
decision on this point would have been different; and in an earlier passage (ibid at p. 272) he
referred to Xenos v. Wickham (2) in which it was held by Lord Cranworth that “it is no part of
the ordinary duty or power of a broker to cancel agreements once validly and completely entered
into”.
It must, of course, not be overlooked that both the cases cited were concerned with marine
insurance brokers, whose position vis-a-vis the assured is not in all respects the same as that of
an insurance agent. But as the broker is prima facie the agent of the assured, whereas the agent
is, except in special circumstances (e.g. when he fills up the proposal form for the insured), the
authority.
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INSURANCE LAW CASES
agent of the insurer, it might be expected that authority to cancel the policy would be more
readily implied in the case of the broker than of the agent. The cases establish that the broker has
no such implied authority, and it would appear a fortiori that neither has the agent.
For the reasons given I find that Nehra had no authority, express or implied to procure the
cancellation of the policy on behalf of the plaintiff, and that in
Page 64 of [1965] 1 EA 58 (SCK)
purporting to cancel it the defendant company did not comply with the condition by giving the
requisite notice. The cancellation was accordingly ineffective.
The next question for consideration is whether, notwithstanding that the cancellation was
ineffective, the plaintiff is, as the defendants allege, estopped from denying its cancellation. The
plea of estoppel is raised in para. 3 of the defence, which reads as follows:
“Well-knowing that the said policy was cancelled the plaintiff on 24.8.1963 signed a proposal
form in respect of his vehicle KOM. 66 requesting a comprehensive insurance from the
defendant in respect of the above vehicle for a period of twelve months from 16.7.1963. The
defendant did not agree to the said proposal and has not issued to the defendant a policy of
insurance in respect of the said vehicle as requested by the plaintiff in the said proposal form or
at all. At all material times the Certificate of Insurance as defined by s. 7 of the Insurance (Motor
Vehicle Third Party Risks) Act (Cap. 405) Laws of Kenya issued by the defendant to the plaintiff
in respect of the said policy has been to the knowledge of the plaintiff in possession of the
defendant due to the cancellation of the said policy. In the premises the defendant will urge that
the plaintiff is estopped from denying the cancellation of the said policy.”
It is by no means clear what exactly is meant by this plea of estoppel. It appears to be based on
two separate averments:
(1) that the plaintiff made a fresh proposal in July:
(2) that the certificate of insurance to be knowledge of the plaintiff remained in the
possession of the insurer “due to the cancellation of the said policy”.
authority.
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It is difficult to see how the second point could in any way amount to an estoppel, nor was it
pressed in argument before me, presumably because the evidence showed that the certificate of
insurance remained in the hands of the defendants’ agents throughout and long before any
question of cancellation arose, and that the plaintiff had not in any way acquiesced in its so
remaining.
In what sense is it alleged that the making of a fresh proposal by the plaintiff amounted to an
estoppel? The most concise (though not, perhaps, the most authoritative) statement of the
requirements of estoppel is found in Shawcross (loc. cit.) at p. 691:
“It (i.e. estoppel) arises where:
(1) The party against whom it is set up has by statement or conduct made a
representation as to a matter of fact with the actual or apparent intention that the party to whom it
is made shall act upon it;
(2) The party to whom the representation is made is induced to act, and does act upon
it;
(3) The party so induced and acting acts to his detriment.”
The pleading does not indicate what representation the plaintiff is alleged to have made by
completing a fresh proposal. If it was a representation that the policy had been cancelled, that
was a fact already asserted by the defendants without relying in any way on any representation
by the plaintiff. If it was a representation that the plaintiff accepted the cancellation as valid, the
defendants must go on to plead and prove that the defendants acted upon it to their detriment.
There is nothing in the pleading to this effect, nor is there any evidence that the defendants in
reliance on the supposed representation in any way altered their position for the worse. The
pleading, in fact, appears to emphasise that the defendants took no action at all on the second
proposal, except to reject it.
Page 65 of [1965] 1 EA 58 (SCK)
authority.
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Finally, two principles may be mentioned which would appear to deprive the alleged estoppel of
any effect. The first is stated in Halsbury’s Laws (3rd Edn.) Vol. 15 at p. 227:
“A representation will be deprived of any effect as an estoppel if the making of it has been
contributed to by some breach of duty on the part of the person seeking to take advantage of it.”
Here if the plaintiff by his conduct represented that he accepted the cancellation, he was induced
to make such representation solely by the defendants’ misconduct in requiring him to make a
fresh proposal on the erroneous basis that they had validly cancelled the policy.
The second principle is found in the ruling of Mackinnon, J., in Etchells, Congdon and Muir,
Ltd. v. Eagle Star and British Dominions Insurance Co., Ltd. (2), cited in Shawcross (loc. cit.) at
p. 695 (the full report is not available) that there can be no estoppel unless the party to be
estopped has acted with full knowledge of the facts. Here, the plaintiff is an illiterate African,
and I accept his evidence that he did not know why he was being asked to make a fresh proposal.
Nor had he ever been given an opportunity of seeing the policy, so as to make himself aware (if
he was capable of understanding them) of its terms and conditions.
I find that the alleged estoppel has not been pleaded with sufficient particularity to entitle the
defendants to rely on it, and that in any case no valid estoppel has been established by the
evidence.
No doubt conscious of the difficulties inherent in the plea of estoppel, counsel for the defendant
in his closing arguments based his case not so much on estoppel as on election. If the policy was
wrongly cancelled, so he argues, the plaintiff was put on an election either to accept the wrongful
cancellation or to treat the policy as continuing in force. By signing a proposal form only
explicable on the footing that the policy had come to an end, he unequivocally accepted the
cancellation as a fact.
It is very doubtful whether the defendants on the pleadings are entitled to rely on such an
election. Election is not the same as estoppel, and the pleadings are silent as to any election.
Whether that is so or not, I do not think the principle of election has any application to this case.
Election arises where a contract has been wrongfully repudiated, as is clear from the passage
authority.
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from Shawcross (loc. cit.) at p. 673 to which counsel referred. The reason why election is
necessary is that wrongful repudiation does not of itself put an end to the contract.
“The repudiation of a contract by one party or a breach by one party going to the root of the
contract does not of itself discharge the contract, but the other party has the option of treating the
contract as at an end, or of treating it as still in being.” (Shawcross, loc. cit. p. 692).
But in this case the defendants do not purport to have repudiated or to have been guilty of any
breach of the policy: they seek rather to rely on a condition of the policy which entitles them to
put an end to it at their own will. If they had complied with the condition, that alone would have
brought the contract to an end without the exercise of any option by the plaintiff. If they did not
comply with the condition their purported cancellation was of no effect. Admittedly, the plaintiff
might by his conduct have accepted an invalid cancellation in much the same way as he might
have accepted a wrongful repudiation. But that (if the other requirements were fulfilled) could
only have amounted to an estoppel: it could not amount to an election, since the issue whether
the policy continued in force or not after the purported cancellation was determined by the
failure or otherwise of the defendants to comply with the condition, and not by any subsequent
action on the part of the plaintiff.
Page 66 of [1965] 1 EA 58 (SCK)
In case I should be wrong on this point, I should in any case have thought that the principle laid
down by Mackinnon, J., in the case already cited, would apply with as much force to an election
as to an estoppel, as it would be inequitable to hold that a party had made an unequivocal
election without being fully aware of his rights. But as I have not been referred to or discovered
any authority on this point, I do not propose to say any more about it.
For the above reasons I find that the policy has not been validly cancelled and that nothing which
the plaintiff has subsequently done has estopped him or precluded him in any way from asserting
that it remained in force for the full period for which it was issued. In view of these findings it
becomes unnecessary to discuss the difficult question which would arise on a consideration of
the plaintiff’s plea of estoppel raised in his reply. There will be a declaration as prayed, and as
authority.
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the amount of the claim has not been seriously disputed judgment for the plaintiff for the sum of
Shs. 15,000/- with interest and costs.
Judgment for the plaintiff as prayed.
KENINDIA ASSURANCE COMPANY LTD V KAMITHI AND ANOTHER [2004] 2 EA 115
Judgment
RINGERA AJA: This is an appeal by Kenindia Assurance Company Limited (the appellant)
against the judgment of the High Court of Kenya whereby it was ordered to pay to Margaret Nduta
Kamithi and George Njenga Kamithi, suing as personal representatives of the estate of Stephen
Kamithi, (the respondents) the sum of KShs 4 million (four million) together with interest thereon
from the date of filing suit until payment in full. The said sum of KShs 4 million was the value of a
joint life assurance policy taken by the first respondent and her deceased husband Stephen Kamithi.
The brief facts of the matter as discernible from the record of appeal appear to be the following. By
a proposal form for a life assurance policy dated 7 December 1998, Stephen Kamithi (the
“deceased”) and Margaret Nduta Kamithi (the first respondent) jointly applied to the appellant for a
policy of life assurance. It was an express term of the proposal that all statements and answers given
by the deceased and the first respondent in the proposal were true, full and complete in every
particular and that they had not withheld any information. The deceased and the first respondent
further declared that the statements in the proposal and the declaration should be the basic of the
contract of assurance between them on the one hand and the appellant on the other hand. The
deceased and the first respondent agreed that if any untrue averment was contained in the proposal
or declaration the contract of assurance should be null and void and all monies which should have
been paid in respect of the contract should stand forfeited to the appellant. The deceased and the
first respondent signed the proposal and declaration.
In the proposal the deceased and the first respondent stated with regard to the deceased, inter alia,
that:
(a) the deceased did not have a usual medical attendant;
authority.
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(b) no member of the family of the deceased, living or dead suffered from any
hereditary disease (for example diabetes, stroke, mental disorder, heart disease, high blood
pressure);
(c) no illness, accident or medical condition had prevented the deceased from carrying
out his work and that the deceased had not remained absent from his work due to such condition in
the last five years;
(d) no other life assurance was then in force over the deceased’s life.
On the basis of the information provided, the premium was fixed at KShs 37 259. The policy term
was for 12 years. After completing that proposal form, the deceased and the first respondent were
on the same day referred by the appellant to Dr JN Muiru for a medical examination. They were
examined on 9 December 1998. They were also examined by a Dr Chege and X-rays were taken.
The examinations revealed that the deceased had a heart condition. As a result of that revelation the
premium was increased to KShs 44 925.
On the strength of the proposal and declaration and the subsequent medical examination, the
appellant on 19 January 1999 issued a joint life insurance policy number 948694 on the lives of the
deceased and the first respondent, effective from 7 December 1998 for an assured sum of KShs 4
million on the terms and conditions set out in the policy. The class of assurance was said to be a 12
year dynamic advantage plan with profits. The policy specification schedule also provided that the
monthly premium would be KShs 44 925 payable by banker’s
Page 119 of [2004] 2 EA 115 (CAK)
order until the stipulated date of last payment or previous death of the life assured. The stipulated
date of last payment was 27 November 2010. It was an express term of the policy that the proposal
from and declaration were the basis of the insurance. Clause 4 of the conditions and privileges of
the policy provided, inter alia that in case it should thereafter appear that any untrue or incorrect
statement was contained in the proposal and declaration, or in any of the statements referred to
therein, or that any material information had been withheld, then and in every such case the policy
shall be void, and all claims to any benefits in virtue thereof shall cease and determine, and all
moneys that had been paid in consequence thereof shall belong to the company. Concerned with the
increased premium, the deceased and the first respondent visited the appellant’s offices. They were
advised by a Mr Njau and as a result of the advice received, they requested and were allowed to
authority.
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alter the plan and term of the policy form dynamic advantage, 12 years to multiple advantage, 15
years, and the monthly premium was reduced from KShs 44 925 to KShs 42 884. The dates of last
payment and maturity were also changed to 7 November 2013 with effect from 7 March 1999. That
endorsement to the policy was made on 10 March 1999.
The deceased passed away on 11 April 1999. His death was notified to the appellant via a letter
dated 1 May 1999 under the hand of the first respondent. In the letter the first respondent also put
up a claim in her capacity as a beneficiary as well as an insured. A death certificate was attached.
On 18 June 1999, the first respondent was interviewed by, and recorded a statement with, the
appellant’s investigator. In the statement, she disclosed that the deceased had a private doctor, a Dr
Gikonyo, who in 1996 had referred the deceased to South Africa for medical treatment. During the
sojourn of two weeks, the deceased was given a heart by-pass-operation. She also disclosed that in
1995 he had been admitted to Nairobi Hospital with pneumonia for which he was treated and
discharged. She further disclosed that the deceased had two other life policies with Alico whose
numbers were 4146073 and 3577837 which policies had already been settled.
On 9 August 1999, the appellant wrote to the first respondent to the effect that following its
investigations into the genuineness of the claim, it had been found that there was gross non
disclosure of material facts on the proposal from signed and dated 7 December 1998 and, in the
circumstances, the claim stood repudiated. It would also appear that despite the death of the
deceased, premiums continued to be paid on the policy by banker’s order until the first respondent
instructed their bank to stop. On 5 November 1999, the appellant refunded to the first respondent a
sum of KShs 257 442 being the amount erroneously received after the death of the assured. No
refund of the premiums paid up to the time of the demise of the deceased was paid. After the
appellant declined to settle the claim by the first respondent the first respondent and her son, the
second respondent, who had jointly obtained a grant of letters of administration to the estate of the
deceased, filed a suit in the High Court for recovery of the sum assured.
After hearing the evidence adduced by the respondents (the appellant elected not to call any
evidence) and the submissions made by the respective parties’ advocates, Mbaluto J, in a reserved
judgment, found there was the clearest evidence of non-disclosure of material facts by the deceased
in that the answers to the questions in the proposal from on whether the deceased had a usual
medical
authority.
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INSURANCE LAW CASES
Page 120 of [2004] 2 EA 115 (CAK)

attendant, whether he had other policies in force, whether he had any hereditary disease, and
whether he had been prevented from carrying out his work by illness, accident or medical condition
had all been untrue or incorrect. In that regard, the Learned Judge found that that the first
respondent had in her evidence admitted that the deceased used to be treated by Dr Gikonyo who
had been his doctor since 1990, that he had a heart disease and was off duty for three weeks when
he went to South Africa for a heart operation, and that at the time of completing the proposal form,
the deceased had other life policies with Alico Kenya Limited and Mercantile Life and General
Assurance Company Limited. The Learned Judge further found that by reason of non-disclosure of
material facts the appellant was entitled to repudiate the policy at the time it became aware of the
true position regarding the information it had received from the deceased and the first respondent.
The Judge further found that in the circumstances of this case the appellant had, however, lost its
right to repudiate the policy as it did not do so within a reasonable time of becoming aware of the
non-disclosures and untruths but on the contrary continued to accept premiums from the first
respondent. As regards continued acceptance of premiums after the demise of the deceased, the
Learned Judge reasoned as follows:
“The deceased died on 11 April 1999 and the death was reported to the defendants on 1 May 1999.
From that date up to 5 November 1999, the defendant continued to accept the monthly premium of
KShs 42 884 on the joint policy without raising any query on the matter. In his submissions, Mr
Fraser for the defendant said that the premiums were accepted because they were being paid
through a banker’s order which the first plaintiff had failed to stop upon the death of the deceased.
However, I am unable to see what would have obliged the first plaintiff to stop payments of the
premiums prior to the receipt of communication from the defendant of its intention to repudiate the
policy and particularly when the defendant was all the while, accepting the payments without
complaint. In any case, the defendant having tendered no evidence whatsoever in this matter
regarding that or indeed any other issue, there is nothing to support what Mr Fraser says”.
As regards failure to repudiate the policy within a reasonable time after being aware of material
non-disclosures, the Learned Judge reasoned as follows:
“The defendant had a right to repudiate the policy upon the discovery of non disclosure of material
facts by the deceased. Accordingly, although the evidence is not very clear when the defendant first
authority.
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became aware of the matter, at the very latest it knew by 18 June 1999 that the answer to the
question regarding other life policies was untrue and that it had the right to repudiate the policy. In
my opinion therefore, the defendant lost the right to avoid the policy by accepting further premiums
on the policy from that moment”.
In reaching those conclusions, the Learned Judge relied heavily on the following passage in the
Law of Insurance by Raoul Colinvaux (5 ed) 1984 paragraph 5-02:
“The duty to disclose it not an implied term of the contract itself. Unlike fraud or a breach of
condition, non-disclosure never by itself gives to a claim for damages. Avoidance of the whole
contract is the only remedy. Once the aggrieved party (i) knows all the facts, and (ii) has had a
reasonable time in which to make up his mind, he must make his election once and for all. He need
not exercise it, however, until he knows all the facts; being put on inquiry is not sufficient. Thus
where, although the assured has suppressed or misrepresented a fact he discloses it to the insurance
office before they pay a claim, they cannot after payment recover back the money. Similarly where
the insurers receive notice that the risks insured against have
Page 121 of [2004] 2 EA 115 (CAK)
been misrepresented, concealed or incompletely disclosed and accept further premiums on the same
policy, they lose their right to avoid it”.
In those premises, the Learned Judge held for the plaintiffs and awarded them the sum of KShs 4
million with interest thereon from the date of filing suit until payment in full.
In the course of his judgment, the Learned Judge also dealt at length on the evidential status of two
documents marked as “MFIA” and “MFIB” which had been introduced on record on the basis that
they were referred to in the appellant’s notice to the respondents to admit documents but which
were not formally produced by the appellant at the trial. The Judge found the said documents were
not evidence in the case. As decision in this appeal does not turn on the Judge’s finding with regard
to whether or not the said documents were evidence in the trial, no more will be said of them and
the ground(s) of appeal pertinent thereto will not be considered.
From the above judgment, the appellant has preferred this appeal on the grounds that:
(i) the Judge erred in holding that the appellant was only entitled to repudiate the policy
at the moment in time the appellant becomes aware of the true position;
authority.
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(ii) the Judge erred in holding that the appellant did not repudiate within a reasonable
time and thereby lost the right to repudiate;
(iii) the Judge erred in holding that the appellant lost the right to repudiate or avoid the
policy on 18 June 1999;
(iv) the continuing cover under the policy came to an end on the death of the first of the
deceased or the first respondent, (sic). Therefore no premiums were payable after the death of the
deceased. In the circumstance the receipt of premiums paid by banker’s order after the death could
not amount to a waiver or an estoppel on the right to repudiate;
(v) the Judge erred in holding that payments made by banker’s order in the appellant’s
account could constitute a waiver or estoppel;
(vi) the Judge erred in holding that there was no evidence that the premiums were paid
by the first respondent by banker’s order and continued until the first respondent stopped the
banker’s order; and
(vii) the Judge erred in holding that the respondents were entitled to judgment in the sum
of KShs 4 000 000 with interest thereon from the date of filing suit until payment in full.
For their part, the respondents availed themselves of the procedural latitude conferred by rule 91 of
the Court’s Rules and filed a notice of grounds for affirming the decision of the superior court on
grounds other than those relied upon by the said court. Those grounds were:
(i) that the appellant having prior to the issuance of the subject policy subjected the
deceased to a medical examination by its own nominated doctors and having accepted loaded
premiums thereto for five months before the subjects death is therefore precluded by estoppel
and/or waiver from repudiating the claim/policy; and
(ii) adverse inference ought to be drawn against the appellant for its failure to call
material witnesses namely the said doctors and its underwriters to support its averments.
Mr Fraser, who represented the appellant in this appeal, as he did in the superior court, argued that
in law the appellant was not obliged to repudiate the policy upon discovering the non-disclosures or
misrepresentations by the assured and,
Page 122 of [2004] 2 EA 115 (CAK)
authority.
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INSURANCE LAW CASES
accordingly, it was under no obligation to do so within a reasonable time. The assured had a choice
to make. In that regard, he referred to Colinvaux’s Law of Insurance (supra), paragraph 5-02 where
it is stated:
“Where the assured conceals something he knows to be material such concealment is fraud. But in
any case the effect of mere non-disclosure on an insurance contract is to some extent the same as
with the effect of fraud. The party aggrieved, when the matter comes to his knowledge, may choose
either to carry on with the contract or not. It is voidable at the election of the aggrieved party, as
opposed to that class of contract which is void by operation of law”.
In further support of his submissions, counsel cited the English Court of Appeal decision in Allen v
Robles [1969] I WLR 1193, at page 1196 letters E-H where the Court cited with approval the
following passage from Clough v London and Nothwestern Railway Company [1871] LR 7 Exch
26 at 34:
“We agree with what seems to be the opinion of all the Judges below, that if it can be shown that
the (insurers) have at any time after knowledge of the fraud, either by express or by unequivocal
acts, affirmed the contract, their election has been determined forever. But we differ from them in
this, that we think the party defrauded may keep the question open as long as he does nothing to
affirm the contract”.
The English Court of Appeal then proceeded to express the view that if the insurer discovered that
there was a claim and that the insured was in breach of a condition, they were in a position to elect
either by refusing to indemnify; or to accept a liability or indemnity; or it was open for them to
delay their decision. In the later regard, the Court stated that mere lapse of time would not lose them
their right to decide to refuse to indemnify; the lapse of time would only operate against them if
thereby there was prejudice to the insured or if in some way rights of third parties had intervened or
if the delay in itself was of such a length as to be evidence that they had in truth decided to accept
liability.
Counsel also relied on Mac Gillivray on Insurance Law (9 ed) 1997 paragraph 17-27 where it is
posited:
“If the assured has failed in his duty of making full disclosure, the insurer may, on discovering the
full facts, elect to avoid the contract of insurance, and he may do so either before or after the loss
has occurred. The contract cannot therefore be said to be automatically avoided by non-disclosure;
authority.
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INSURANCE LAW CASES
it remains in force until avoided by the insurer ... unless there has been wilful or fraudulent
concealment on the part of the assured, the premiums paid are returnable”.
As regards the effect of the retention of premiums paid before the death of Mr Kamithi and the
receipt of further premiums after his death and even after discovery of the non-disclosure and
misrepresentations, Mr Fraser argued with regard to the former that they were not refundable as the
insurance was at risk on the life of Mrs Kamithi and both the proposal form and the policy itself
made it clear that in the event of non-disclosure or misrepresentation of material facts the premiums
paid would be forfeited to the insurer. With respect to receipt of premiums after death and discovery
of non-disclosure, he argued that the evidence from Mrs Kamithi showed that payments thereof was
by banker’s cheque and they continued until she stopped the payments. He contended that such
payments were in any event inconsequential as the life of the policy came to an end with the death
of one of the assured and, accordingly, no premiums were payable thereafter and the insurer could
not be estopped from repudiating the policy on the basis that it had accepted premiums which were
not payable.
Page 123 of [2004] 2 EA 115 (CAK)
He argued that it was only in the case of an ongoing policy where acceptance of premiums after
knowledge of facts giving rise to right to repudiate could possibly stop the insurer from repudiating.
Counsel also invoked Spencer Bower and Turner’s The Law Relating to Estoppel by
Representation (3 ed) 1977 on pertinent principles concerning estoppel and waiver. At paragraph
310, the law is stated as follows.
“The doctrine of election as applicable in the law of estoppel may be summarised as follows: where
A, dealing with B, is confronted with two alternative and mutually exclusive courses of action in
relation to such dealings, between which he may make his election, and A so conducts himself as
reasonable to induce B to believe that he is intending definitely to adopt the one course, and
definitely to reject or relinquish the other, and B in such belief alters his position to his detriment, A
is precluded, as against B, from afterwards resorting to the course which he has thus deliberately
declared his intention of rejecting”.
Mr Muturi Kigano, too, argued for the respondent in this Court, as he did in the superior court. His
principal contention was that although the deceased might have lied in the proposal form, the
appellant immediately become aware of the fact that the deceased had a heart condition and that he
authority.
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had a usual medical attendant in the name of Dr Gikonyo as a result of the medical examination and
inquiry carried out by Dr Muiru on the instructions of the appellant and, consequently, when the
appellant accepted the premiums and subsequently loaded them to KShs 44 000 and later to KShs
42 884 it waived its rights to subsequently repudiate the policy on the basis of the statements in the
proposal form. In counsel’s view, a new contract of insurance constituted by the proposal as varied
by the subsequent medical examination and the acceptance of premiums was created. Counsel
emphasised that the appellant accepted premiums for four months before the death of Mr Kimithi
and that those premiums were not returned. Counsel relied on the following passages from
Halsbury’s Laws of England (4 ed) Volume 25:
Paragraph 440
“If what is relied on as a waiver is conduct after a breach has occurred, the conduct must be such as
to indicate an intention to treat the contract as still subsisting. There can be no waiver unless the
insurers have full knowledge of the material circumstances”.
Paragraph 422
“The dividing line between estoppel and waiver is so fine as to be in many cases almost
indistinguishable. In theory a waiver of a contractual right is something contractual involving
agreement express or implied, between the parties; estoppel, however, is merely a rule of evidence
or law by which a party is precluded from asserting the existence of a fact, including a right.
Therefore, conduct by the insurers making performance of a condition either impossible or
unnecessary can be set up as a waiver if there is the requisite assent to or consideration for it.
Alternatively, the same conduct can be relied on as an estoppel if it has induced the assured to
believe that the condition need not be performed or that accrued rights are not going to be enforced,
and to act accordingly. However, if it follows a breach of a condition, the conduct must be such as
to lead the assured to the belief that the contract is being treated by the insurers as valid
notwithstanding the breach, as where they accept a renewal premium or do or demand something
without any justification except the policy. There must, however be a reliance on the part of the
assured on the representation as to the continued validity of the policy imparted by the insurer’s
conduct and a consequential alteration in his position. Unless the assured is misled, there is no
estoppel”.
Page 124 of [2004] 2 EA 115 (CAK)
authority.
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Counsel submitted on the basis of the foregoing that in this case, the insurer was aware of all
material circumstances when it issued the policy after receiving the medical report and that the
insured was induced to believe the policy was in force. He invoked the passage previously cited
from Colinvaux’s Law of Insurance (supra) that where the insurer receives notice that the risks
insured against have been misrepresented concealed or incompletely disclosed and accept further
premiums on the same policy, they lose their right to avoid it. Counsel also relied on the following
passage from Chitty on Contracts (27 ed) Volume II at page 904:
“Non-disclosure or misrepresentation makes the contract voidable, not void, so that the aggrieved
party has an election whether or not to avoid the contract. Once the aggrieved party knows all the
facts, he should inform the other party within a reasonable time if he elects to avoid the contract, for
otherwise his subsequent conduct may be taken to be either an affirmation of the contract, or as
leading the other party to suppose that the contract is being affirmed and causing him to act
accordingly. Thus where the aggrieved party does some act which is inconsistent with an intention
to avoid the contract, such as paying a claim, or accepting further premiums after knowledge of a
non-disclosure or misrepresentation, the right to avoid the contract will be lost. However, the right
will not be lost unless the aggrieved party does know all the facts; being put on inquiry is not
sufficient. Once the aggrieved party has made his election, it is irrevocable”.
Reference was also made to the decision of the East Africa Court of Appeal in South British
Insurance Company Ltd v Samiullah [1967] EA 659, where it was held that when an insurer came
to know that an insured had concealed a material fact when obtaining a policy, he was entitled from
that moment or within a reasonable time thereafter to repudiate and should have repudiated the
policy. And in Ayrey v British Legal and United Provident Assurance Co [1918] 1 KB 136, it was
held that the acceptance of premiums by the agent of the insurer with full knowledge that there had
been a non-disclosure of material facts was a waiver by the company of the breach of the clause in
the proposal form entitling it to avoid the policy for such non-disclosure.
In concluding his arguments, Mr Kigano submitted that on the facts the insurer waived its right to
repudiate the policy, compensated itself for the higher risk by loading the policy, and led the
assured to believe that a valid policy of insurance had been entered into. All that, in his view, lent
substance to ground (1) of the notice of grounds for affirming the superior court’s decision. Counsel
further submitted that even if grounds for repudiating the policy existed, it was incumbent on the
authority.
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appellant to prove them through its own witnesses and as it had failed to call any evidence, the
Court inferred that such evidence would have been adverse to the appellant. All in all, he asked for
the dismissal of the appeal with costs here and below.
In a brief reply, Mr Fraser pointed out that according to the evidence of the first respondent, the
loading of the policy was due to the discovery that the deceased had previously had a heart
operation. In response to the point that the appellant knew of the non-disclosure of material facts
when it accepted the premiums, counsel argued that the appellant did not know of the other lies
until after the death of the deceased. Such lies included the fact that he had been hospitalised for
pneumonia, that he had a usual medical attendant, and that he had other life insurances. In his view,
if one was caught on one lie, it did not follow that all the other lies had been forgiven. He
emphasised that the repudiation of the policy was on things other than the deceased’s medical
condition
Page 125 of [2004] 2 EA 115 (CAK)
relating to the heart. As regards the facts that Mr Maingi PW2, (who filled in all the answers in the
proposal form) knew that the deceased had Dr Gikonyo for his regular doctor and that he had other
life policies with Alico, Mr Fraser submitted that according to the evidence of Mr Maingi himself
he was Mr Kamithi’s insurance agent and referred to Mr Kamithi as his client and, accordingly, his
knowledge could not be imputed to the company and even the Learned Judge below had not made
such an imputation.
Having considered the grounds of appeal, the grounds for affirming the decision of the superior
court, and the arguments canvassed by the advocates for the parties, the following view commends
itself to me. Grounds (1), (2) and (3) of appeal raise the issue of the effect of non-disclosure or
concealment of material facts on the contract of insurance and the time frame, if any, within which
the insurer may exercise its right to repudiate or avoid the policy by reason of non-disclosure or
misrepresentation or concealment of material facts. On the authority of the passage here before
cited from Chitty on Contracts, Mac Gillivray on Insurance Law and Colinvaux’s Law of Insurance
it is evident that the position in law is that non-disclosure or concealment or misrepresentation of
material facts does not have the effect of automatically avoiding a contract of insurance. It’s effect
is to make the contract voidable at the instance of the insurer. As regards when the option should be
exercised, the textbooks and judicial authorities apparently express different views. In Colinvaux it
authority.
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is stated that once the insurer knows all the facts (as opposed to merely being put on inquiry) and
had had a reasonable time in which to make up his mind, he must make his election once and for
all. In Chitty it is said that once the insurer knows all the facts he should inform the assured within a
reasonable time if he elects to avoid the contract. From those two works, the impression one gets it
not that it is incumbent on the insurer who has known the full facts to elect to avoid the contract at
once or within a reasonable time thereafter but that he is entitled to a reasonable time in which to
make up his mind either way and he should communicate such decision to the assured. Be that as it
may, in South British Insurance Company Ltd v Samiullah (supra) Law JA with whom the other
member of the East African Court of Appeal concurred, took the view that from the moment the
insurer became aware of the facts entitling it to repudiate within a reasonable time thereafter, it
could and should have repudiated the policy. The editor of the law report in holding (ii) puts the
matter somewhat differently by positing, “from that moment, or a reasonable time thereafter, the
appellant should have repudiated the policy.” I think the editor’s note is a misrepresentation of the
view of the Judge. In my opinion, the ratio of the case is that the insurer was entitled on discovery
of non-disclosure or concealment to repudiate the contract at once or within a reasonable time
thereafter. The decision does not purport to deprive the insurer of his right to elect to avoid or
affirm the policy. In Allen v Robles and another (supra), the English Court of Appeal decided that
an insurer who had discovered non-disclosure, or misrepresentation of material facts had three
choices. It could elect either (i) to refuse to indemnify, or (ii) to accept liability to indemnify, or (iii)
to elect to delay the decision. The Court said that if the option of delay was adopted, the mere lapse
of time would not lose them their right to decide to indemnify; lapse of time would only operate
against them if thereby there was prejudice or if in some way rights of third parties had intervened
or if the delay in itself was of such a length as to be evidence that
Page 126 of [2004] 2 EA 115 (CAK)
they had in truth decided to accept liability. In my judgment what the authorities established is this;
if and when the insurer becomes possessed of all the facts entitling him to avoid or repudiate the
policy for the reason of non disclosure, concealment or misrepresentation of material facts, he is
entitled to elect to avoid or affirm the contract at once or to have a reasonable time to weigh his
potions. If the opts to delay his election, the delay per se will not have the effect of vitiating his
right to avoid or repudiate the contract. Delay would only be prejudicial to his rights if it has
authority.
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prejudiced the assured, or the rights of third parties had intervened as a result thereof, or it was of
such a length as to be evidence that the insurer had in truth decided to accept liability.
How do those principles apply in the circumstances of this case? In my judgment, Mbaluto J was in
error to find and hold that the appellant having, at least on 18 June 1999, known that the deceased
had concealed information about the existence of other life policies and that the insurer was,
accordingly, entitled to repudiate the policy, it should have done so from that moment or within a
reasonable time thereafter failing which he lost his right to repudiate. As seen above, the insurer
was entitled to a reasonable time to weigh his options and delay in doing so did not and could not,
without more, lose him his right to repudiate. And in this case, there was no more to the delay as it
was not contended and it had not been shown that the insured was prejudiced thereby or that the
rights of third parties had intervened, and, as will shortly be clear, the delay could not in the
circumstances of this case have amounted to an affirmation of the contract. In the premises grounds
(1), (2) and (3) of the appeal succeed.
As regards the effect of continued receipt of premiums after 18 June 1999, I think it is best to deal
with ground 6 of the appeal first. It will be recalled that the purport of that ground was that the
Judge was in error in holding that there was no evidence that the premiums were paid by the first
respondent and continued to be paid until the first respondent stopped them. Now from the proposal
form itself and the policy both of which were exhibited, it was clear that monthly premiums were to
be paid by way of banker’s order. And Mrs Kamithi, the first respondent, testified that such was the
mode of payment and the payments continued until she put a stop to them. In those circumstances,
the Judge was plainly in error in his finding that there was no evidence that the premiums were paid
by banker’s order and continued until stopped by the first respondent. In that connection, it should
be stated that credible and admissible evidence once adduced in a trial is not appropriated to any
party and may be relied upon by any party to the proceedings. The next matter for consideration is
the effect, if any, of the acceptance of those premiums from 18 June 1999 until November 1999
when a refund thereof was made to the first respondent. Mr Fraser’s submissions that those
payments could not constitute a waiver of the insurer’s right to repudiate the policy or operate as an
estoppel against the assertion of such a right are, in my view, irresistible. It is clear from the policy
specification schedule that the policy in question was a joint life policy and he obligation to pay
premiums ceased on maturity date or death of the assured whichever came first. Accordingly the
authority.
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obligation to pay premiums in the circumstances here ceased on 11 April 1999 when the deceased
(one of the joint insured) died. In those circumstances the continuing cover under the policy come
to an end and the premiums paid thereafter were inconsequential to the rights and obligations under
the policy. Where there is no obligation to pay the premium, it can never be the case that payment
thereof operates as a
Page 127 of [2004] 2 EA 115 (CAK)
waiver or an estoppel on the right to repudiate a policy obtained through non-disclosure,
concealment or misrepresentation of material facts. A waiver and estoppel could only operate on a
continuing policy. Those considerations eluded the Learned Judge and they do distinguish this case
from the authorities which affirm that acceptance of premium after knowledge of the material facts
entitling an insurer to repudiate operate to deny him the right to subsequently repudiate the contract.
In the result, I am of the opinion that grounds (4), (5) and (6) of the appeal succeed. That only
leaves for consideration the respondent’s grounds for affirming the decision on grounds other than
those relied upon by the Learned Judge.
It bears repetition that the superior court found that the appellant was entitled to repudiate the policy
on grounds of non-disclosure of material facts concerning whether the assured had a usual medical
attendant, whether he had other life policies in force, whether he had been prevented from carrying
out his work by illness, accident or medical condition, and whether he had any hereditary disease.
There was no cross appeal from those findings. There being no such cross appeal, the respondents’
second ground of affirming the decision is a vain one as the evidence which ought to have been
called could only relate to non-disclosure of material facts. That ground must therefore be
peremptorily rejected. The other ground for affirming the decision was that the appellant having
caused the deceased to be examined by its own doctor and having known as a result of such
examination that the deceased had a heart condition, and having loaded the premium as a result of
that revelation, the appellant was precluded by waiver and/or estoppel from repudiating the policy.
Having weighed the rival arguments, I have taken the view that if it had been the case that the
insured had attempted to repudiate the policy on the basis of information relating to the deceased’s
heart condition, it would have been precluded from doing so by both waiver and estoppel: Waiver
in that in the circumstances of this case, the appellant could have been said to have agreed to
continue the policy notwithstanding the deceased’s non-disclosure and misrepresentation of his
authority.
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heart condition in consideration of payment of enhanced premiums; and estoppel in that by not
repudiating the policy and by accepting premiums after knowing the truth about his heart condition,
the insurer had represented to the deceased that the policy would continue to be a valid one and the
deceased had altered his position to his detriment by paying the enhanced premium. However,
insurer here did not seek to avoid the policy only on grounds of the deceased’s heart condition. The
policy was also sought to be and was avoided on the grounds that the had not disclosed that he had
a usual medical attendant, he had previously been hospitalised for pneumonia, and he had other
policies of life assurance. In my view these other non-disclosures could not be said to have been
waived nor could the insurer be said to be estopped from relying thereon to repudiate the policy by
virtue of the fact that it had accepted an enhanced premium in consideration of the deceased’s
known heart condition. As counsel for the appellant said colourfully, forgiveness of one lie did not
connote forgiveness of all the other lies. In the premises, this ground of affirming the decision is
also rejected.
In the upshot, I would allow this appeal, set aside the judgment and decree of the superior court and
substitute therefore an order dismissing the plaintiffs’ suit in the High Court with costs. I would
award the costs of the appeal to the appellant.
Page 128 of [2004] 2 EA 115 (CAK)
Tunoi and Omolo JJA concurred in the judgment of Ringera AJA.
UNITED MILLS AGENCIES LTD V R E HARVEY, BRAY & CO [1952] 1 ALL ER 225
Action for damages for negligence.
The insured, the plaintiffs in the action, on 30 March 1951, instructed the defendants, who were
insurance brokers, to effect an open marine insurance of the insured’s goods, obtaining immediate
cover. On 2 April the brokers reported the rates quoted to the insured and on their acceptance by the
insured informed them that the cover was placed. On 4 April the brokers dispatched the cover note
to the insured. It did not contain any clause relating to attachment of risk while goods were at
packers, such clause not being a usual one, though also not an unusual one, in an open cover. On the
authority.
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night of 4 and 5 April goods of the insured of the value of £8,000 were destroyed by a fire at a
warehouse at Gomersal, ner Leeds, of the packers, LEP Transport, who were holding them on
behalf of the insured. The insured alleged that the brokers were negligent in failing to effect an
insurance of the goods while at packers when so instructed, or, alternatively, in failing to advise the
insured that the insurance did not cover goods in the hands of packers at insured’s risk after having
had clear notice that the insured had goods in that situation. They also submitted that the brokers
were negligent in that they delayed in sending them a copy of the cover note for some days after the
insurance had been placed, thereby depriving the insured of the opportunity of examining it and
seeing whether it complied with their requirements. The insurers said that, if the cover note had
been sent in due time, they would have had the opportunity of ascertaining that it did not cover the
goods in the circumstances which existed. The insurance brokers denied negligence.
21 December 1951. The following judgment was delivered.
McNair J found that the insurance brokers had no knowledge that the goods in the hands of
packers were uninsured and that they were not negligent in not insuring them in the hands of
packers or in not informing the insured that they had not so insured them. The insured contended
that it was the duty of the brokers to cause the insured to be notified promptly of all the terms as
soon as they had arranged the insurance and that there had been a failure on the part of the brokers
to do so. Evidence had been called from an independent broker—and substantially agreed to by the
defendant brokers’ witness—that it was the practice of, at any rate, those two offices of insurance
brokers (and he His Lordship) had no doubt the practice of brokers as a whole) that when cover had
been placed the clients were notified as soon as possible. That seemed to be good business and
prudent office management, but on the evidence he (His Lordship) was completely unable to hold
that it was part of the duty owed by the broker to the client so to notify him, in the sense that a
failure to do so would involve him in legal liability. No case was cited in which any broker had ever
been held liable or had ever paid any client money in respect of such a failure. It seemed to him
(His Lordship) to put an intolerable and unreasonable burden on a broker to say that as a matter of
law, apart from prudent practice, he was bound to forward the cover note as soon as possible.
Page 226 of [1952] 1 All ER 225
It was, no doubt, prudent to do so, both to allay the client’s anxiety and possibly to enable
the client to check the terms of insurance, but that was very different from saying it was part of the
authority.
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broker’s duty. He (His Lordship) doubted whether, even if the cover had been in the insured’s
hands on 3 April action appropriate to the circumstances would have been taken, but he did not
found his judgment on that point because he was left in very considerable doubt on it. The insured
failed on whichever of the three alternative ways they put their case, and there must be judgment for
the brokers with costs.
Solicitors: Coward, Chance & Co (for the insured); Ince, Roscoe, Wilson & Griggs (for the
brokers).
PAN ATLANTIC INSURANCE CO LTD AND ANOTHER V PINE TOP INSURANCE

CO LTD [1994] 3 ALL ER 581
Appeal
Pan Atlantic Insurance Co Ltd and Republic Insurance Co (both suing on their own behalf and
on behalf of all members of the Pan Atlantic Group Reinsurance Syndicate and/or the Pan
Atlantic Reinsurance Group) appealed with leave of the Appeal Committee granted on 19 July
1993 from the judgment of the Court of Appeal (Sir Donald Nicholls V-C, Farquharson and
Steyn LJJ) ([1993] 1 Lloyd’s Rep 496) delivered on 3 March 1993 dismissing the appellants’
appeal from the decision of Waller J ([1992] 1 Lloyd’s Rep 101) delivered on 25 March 1991
dismissing the appellants’ action against the respondents, Pine Top Insurance Co Ltd, claiming
payment or damages for non-payment of losses under a casualty account excess of loss
reinsurance contract entered into between the parties, a declaration that they were entitled to
have letters of credit opened in respect of outstanding losses and a declaration that the
respondents were liable to indemnify them under the reinsurance contract. The facts are set out in
the opinions of Lord Mustill and Lord Lloyd of Berwick.
Michael Beloff QC, Steven Berry and Sarah Moore (instructed by Ince & Co) for the
appellants.
Page 585 of [1994] 3 All ER 581
authority.
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Adrian Hamilton QC, Timothy Saloman QC and Simon Picken (instructed by Alsop
Wilkinson) for the respondents.
25 July 1994. The following opinions were delivered.
Their Lordships took time for consideration.
LORD TEMPLEMAN. My Lords, I have read the speech to be delivered by my noble

and learned friend Lord Lloyd of Berwick and I agree with his reasons and his conclusions.
Prior to the judgments of the Court of Appeal in Container Transport International Inc v
Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476 (the CTI
case) the duty of disclosure imposed by the common law and statute seems to have been well
defined in principle, albeit that the application of principle to individual facts produces familiar
conflicts of expert evidence which the court must resolve. When insurance is under negotiation,
the underwriter must decide whether to accept the proffered risk and if so on what terms. In
particular, the underwriter must decide the amount of the premium which he considers an
appropriate consideration for the risk accepted. If a material fact is undisclosed by the insured,
the insurer may avoid the insurance contract. An undisclosed fact is material if disclosure would
have affected the acceptance of the risk or the rate of premium. Materiality must be judged by
the reactions of a prudent insurer, otherwise the actual underwriter could, after the risk has
matured, convince himself and the court that he would have rejected the risk or increased the
premium if full disclosure had been made in the course of the negotiations. It must be assumed
that, failing disclosure, the prudent insurer would have been willing to accept the risk at the
premium actually negotiated. The question then is whether full disclosure would have caused the
prudent insurer to resile from the negotiations or increase the premium.
The authorities cited in the speech of Lord Lloyd and the citations of other authorities by
counsel establish the common law rule which was embodied in s 18(2) of the Marine Insurance
Act 1906 in these terms:
‘Every circumstance is material which would influence the judgment of a prudent insurer
in fixing the premium, or determining whether he will take the risk.’
authority.
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In my opinion ‘the judgment of a prudent insurer’ cannot be said to be ‘influenced’ by a

circumstance which, if disclosed, would not have affected acceptance of the risk or the amount
of the premium. On behalf of the underwriters, Mr Hamilton QC submitted that a circumstance
was material if a prudent insurer would have ‘wanted to know’ or would have ‘taken into
account’ that circumstance even though it would have made no difference to his acceptance of
the risk or the amount of premium. If this is the result of the judgments of the Court of Appeal in
the CTI case then I must disapprove of that case. If accepted, this submission would give carte
blanche to the avoidance of insurance contracts on vague grounds of non-disclosure supported by
vague evidence even though disclosure would not have made any difference. If an expert says,
‘If I had known I would not have accepted the risk or I would have demanded a higher
premium’, his evidence can be
Page 586 of [1994] 3 All ER 581
evaluated against other insurances accepted by him and against other insurances accepted
by other insurers. But if the expert says, ‘I would have wanted to know but the knowledge would
not have made any difference’ then there are no objective or rational grounds upon which this
statement of belief can be tested. The law is already sufficiently tender to insurers who seek to
avoid contracts for innocent non-disclosure and it is not unfair to require insurers to show that
they have suffered as a result of non-disclosure. Of course they suffer if the risk matures but that
is the risk accepted by every insurer.
In the present case the insured failed to disclose that the claims received in respect of the
1981 insurance amounted to $US468,168 and not $US235,768. No juggling with figures can
obscure the clear indication, found by the judge, that the true 1981 figures were more alarming
than the disclosed figures and would have caused the prudent insurer in 1982 to reject the risk or
increase the premium; the insurer is therefore entitled to avoid the policy.
I would dismiss this appeal.
authority.
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LORD GOFF OF CHIEVELEY. My Lords, I have had the opportunity of reading in draft
the speeches prepared by my noble and learned friends, Lord Mustill and Lord Lloyd of
Berwick. Like them, I too would dismiss the appeal.
Underlying the appeal before your Lordships’ House have been two questions of
principle, of great importance to the law of insurance. The first relates to the test of materiality in
cases of non-disclosure, which in the law of marine insurance is to be found in s 18(2) of the
Marine Insurance Act 1906. There it is provided that:
‘Every circumstance is material which would influence the judgment of a prudent insurer
in fixing the premium, or determining whether he will take the risk.’
Here the question for your Lordships is whether, as the appellants (Pan Atlantic) have
contended, it must be shown that full and accurate disclosure would have led the prudent insurer
either to reject the risk or at least to have accepted it on more onerous terms. This has been called
the ‘decisive influence test’. The second question is whether, for an insurer to be entitled to avoid
a policy for misrepresentation or non-disclosure, it is enough that the misrepresentation or non-
disclosure was material, or whether in addition it must, as Pan Atlantic have contended, have
induced the making of the policy on the relevant terms. This has been called the ‘actual
inducement test’.
I turn first to the second of these questions. Like both of my noble and learned friends, I
have come to the conclusion that, on this question, Mr Beloff QC’s submission on behalf of Pan
Atlantic should be accepted; in other words, I accept that the actual inducement test accurately
represents the law. I do so for the reasons given by my noble and learned friend Lord Mustill.
Like him, and for the reasons he gives, I conclude that there is to be implied in the 1906 Act a
requirement that a material misrepresentation will only entitle the insurer to avoid the policy if it
induced the making of the contract; and that a similar conclusion must be reached in the case of a
material non-disclosure. This conclusion is, as I understand it, consistent with the opinion
expressed by my noble and learned friend Lord Lloyd that Parliament, by enacting the law
Page 587 of [1994] 3 All ER 581
authority.
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as it did in s 20 of the 1906 Act, must have intended to codify the common law on
materiality, without touching the common law on inducement.
I turn next to the first question, which is whether the decisive influence test is the
appropriate test for deciding whether a fact which has not been disclosed is a material fact. Here
there is a difference of opinion between my two noble and learned friends, Lord Lloyd accepting
the decisive influence test and Lord Mustill rejecting it.
On this point, I respectfully prefer the reasoning of Lord Mustill. I do so for the following
reasons.
First it seems to me, as it does to Lord Mustill, that the words in s 18(2) ‘would influence
the judgment of a prudent insurer in … determining whether he will take the risk’ denote no
more than an effect on the mind of the insurer in weighing up the risk. The subsection does not
require that the circumstance in question should have a decisive influence on the judgment of the
insurer; and I, for my part, can see no basis for reading this requirement into the subsection.
Second, in agreement with my noble and learned friend, and with both Parker and
Stephenson LJJ in Container Transport International Inc v Oceanus Mutual Underwriting
Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476 at 511–512, 526–527 (the CTI case), it
seems to me that the decisive influence test faces insuperable practical difficulties, because it
ignores the fact that it is the duty of the assured to disclose every material circumstance which is
known to him, with the result that the question of materiality has to be considered by the assured
before he enters into the contract. At that time, it is not unreasonable to expect that an assured
who is aware of, and understands, his duty of disclosure should be able to identify those
circumstances, within his knowledge, which would have an impact on the mind of the insurer
when considering whether to accept the risk and, if so, on what terms he should do so; but it
appears to me to be unrealistic to expect him to be able to identify a particular circumstance
which would have a decisive effect. Likewise it seems to me, in agreement with Parker LJ, that
an inquiry after the event as to whether the judgment of a prudent insurer would have been
decisively influenced by the relevant circumstance, if disclosed, would in many cases be
authority.
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impracticable, because this must in the nature of things depend upon the reactions of the
particular underwriter.
For these reasons in particular, and for the other reasons given by my noble and learned
friend Lord Mustill, I would reject the decisive influence test. I do not propose myself to review
the authorities, or to examine the learned writings, on this subject. This is because I find myself
to be in complete agreement with the analysis of my noble and learned friend. In particular I am,
like him, convinced that the origin of the test of influence on the judgment is to be found in the
writings of learned authors on the subject, which show no indication of the decisive influence
test for which Pan Atlantic now contend—indeed the indications are to the contrary. In the end,
as it seems to me, your Lordships are at liberty to give to the definition of materiality in s 18(2),
and indeed to that in s 20(2), an interpretation which accords with the natural and ordinary
meaning of the words used, the underlying obligation of good faith and the practicalities of the
situation—all of which are, in my opinion, inconsistent with the decisive influence test.
Page 588 of [1994] 3 All ER 581
I wish to add that there is, to my mind, danger in considering the two questions now
before your Lordships in watertight compartments because, as I see it, the conclusion that actual
inducement by the actual underwriter is necessary before he can avoid the contract for non-
disclosure has an impact upon the question of materiality. If actual inducement is not required,
materiality becomes all important, because it is the sole requirement for entitling the insurer to
avoid the contract on the ground of non-disclosure. It was, I believe, because it was thought, in
the CTI case and subsequently, that actual inducement was not required, that critics of the
decision in that case promoted the idea that the test of materiality should be hardened into the
decisive influence test, by introducing into the concept of materiality something in the nature of
inducement, though attributing it not to the actual underwriter but to the hypothetical prudent
insurer. But once it is recognised that actual inducement of the actual underwriter is required, the
pressure to take any such step disappears, and the idea of introducing any such requirement into
the concept of materiality can be perceived to be not merely unnecessary, but inappropriate. The
authority.
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result is that, as I have said, the definition of materiality in s 18(2) of the Act can be given its
natural and ordinary meaning which, for the reasons I have given, is also the sensible meaning.
In the result, I wish to express my agreement with the conclusions expressed in the last
two paragraphs of Part IV, and to two short propositions set out at the end of Part V, of my noble
and learned friend’s speech; but, for the reasons given by him, I would dismiss the appeal.
LORD MUSTILL. The two short questions upon which this appeal depends should, after
more than 200 years of history, be capable of a ready answer. The controversy which they have
aroused shows that they are not. Although the issues arise under a policy of non-marine
insurance it is convenient to state them by reference to the Marine Insurance Act 1906 since it
has been accepted in argument, and is indeed laid down in several authorities, that in relevant
respects the common law relating to the two types of insurance is the same, and that the Act
embodies a partial codification of the common law.
The relevant sections of the 1906 Act read:
‘17. A contract of marine insurance is a contract based upon the utmost good faith, and, if
the utmost good faith be not observed by either party, the contract may be avoided by the other
party.
18.—(1) Subject to the provisions of this section, the assured must disclose to the insurer,
before the contract is concluded, every material circumstance which is known to the assured, and
the assured is deemed to know every circumstance which, in the ordinary course of business,
ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the
contract.
(2) Every circumstance is material which would influence the judgment of a prudent
insurer in fixing the premium, or determining whether he will take the risk …
20.—(1) Every material representation made by the assured or his agent to the insurer
during the negotiations for the contract, and before the contract is concluded, must be true. If it
be untrue the insurer may avoid the contract.
authority.
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Page 589 of [1994] 3 All ER 581
(2) A representation is material which would influence the judgment of a prudent insurer
in fixing the premium, or determining whether he will take the risk …
91.—(2) The rules of the common law including the law merchant, save in so far as they
are inconsistent with the express provisions of this Act, shall continue to apply to contracts of
marine insurance.’
I. The history in outline
The questions arise in this way. Between 1977 and 1982 Pan Atlantic Insurance Co Ltd
(Pan Atlantic) wrote a quantity of direct American liability insurance. Much of this was long-tail
business, in which a long period of time may elapse before claims mature. More recent
experience has shown that such business can involve the insurer in disastrous losses. The present
case is no exception. The disputes arise under a contract of reinsurance relative to the policy year
1982 made between Pan Atlantic and Pine Top Insurance Co Ltd (Pine Top). In relation to the
years 1977 to 1979 Pan Atlantic’s casualty account had been reinsured with other insurers for
excess of loss above a certain figure. Pine Top became the reinsurer in respect of this cover for
the 1980 policy year and later renewed for two subsequent years. Disputes subsequently arose in
relation to all three years. Judgment was given in favour of Pan Atlantic in an action brought
under the first two treaties. An appeal by Pine Top was dismissed and the position as regards
1980 and 1981 is no longer in suit. The present appeal is concerned only with the claim under the
treaty for the year 1982.
The broking history of this treaty was summarised by Steyn LJ, in one of the judgments
now under appeal, as follows ([1993] 1 Lloyd’s Rep 496 at 499–500):
‘The broker who acted on behalf of Pan Atlantic was Mr. Robinson of Butcher, Robinson
& Staples Ltd. The underwriter was Mr. O’Keefe. On Dec. 22 or 23, 1981 Mr. O’Keefe gave a
quotation. On Jan. 13, 1982 Mr. O’Keefe signed the slip on behalf of Pine Top. Pine Top took a
line of 50 per cent. on the slip. Guildhall Insurance Co. Ltd. signed for the remaining 50 per cent.
Guildhall never sought to avoid their liability under the 1982 treaty and therefore drops out of the
authority.
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picture. The structure of the renewal for 1982 must be briefly explained. For the 1981 year the
rate of premium was 10 per cent. When it came to the renewal for 1982 Pan Atlantic wanted the
rate reduced to 7 per cent. That could only be done by introducing an aggregate deductible of
U.S.$225,000. That was the way in which the slip was then written and signed. The main
features of the slip were as follows. First, it covered the liability of the reinsured under: “… all
policies and/or contracts and/or binders of insurance and for reinsurance … allocated to their so-
called Casualty Account …” Secondly, the treaty was to pay U.S.$75,000 excess of U.S.$25,000
each and every loss on an ultimate net loss basis. Thirdly, it provided for an aggregate deductible
of U.S.$225,000. Fourthly, the rate of premium was 7 per cent. The slip is, of course, in
commercial terms the primary evidence of the bargain struck between the broker and
underwriter. In the usual way treaty wording was prepared by clerical staff long after the contract
was made. It was agreed on Oct. 29, 1992 … Article XV reads as follows … “It is hereby
declared and agreed that any inadvertent delays, omissions or errors made in connection with this
Page 590 of [1994] 3 All ER 581
Reinsurance shall not be held to relieve either of the parties hereto from any liability
which would have attached to them hereunder if such delay, omission or error had not been
made, provided rectification be made upon discovery, and it is further agreed that in all things
coming within the scope of this Reinsurance the Reinsurer shall share to the extent of their
interest the fortunes of the Reinsured.” … The basis of Pine Top’s purported avoidance of the
reinsurance contract for 1982 was the presentation made by Mr. Robinson to Mr. O’Keefe. The
undisputed evidence was that Mr. Robinson was an experienced and respected broker. Mr.
O’Keefe was an underwriter with some four years’ experience. They knew one another. They
had negotiated the 1981 contract. Mr. Robinson and Mr. O’Keefe met on Dec. 22 or 23, 1981
and again on Jan. 13, 1982 when Mr. O’Keefe signed the slip. The discussions covered the
reduced premium and the introduction of the aggregate deductible. There was some discussion of
the loss record, and on Jan. 13 1982 Mr. Robinson said to Mr. O’Keefe that he had done “a quick
update” and there was little movement in the figures. Mr. Robinson had available for Mr.
O’Keefe’s inspection two documents, respectively called the short record and the long record.
The short record contained only the record for the years 1980 and 1981. The long record
authority.
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contained the record for the 1977 to 1979 period when Pine Top was not on risk as well as the
record for the 1980 and 1981 years when Pine Top was reinsurer. The record for the 1977 to
1979 period was so bad that it was eventually common ground at the trial that no prudent
underwriter would have signed the slip for 1982 on the terms which Mr. O’Keefe accepted. A
major issue at the trial was whether there was a fair presentation in respect of the loss record for
the 1977/1978 and 1979 underwriting years. The judge found that, although to Mr. O’Keefe’s
knowledge, both the short record and the long record were available for inspection, Mr.
Robinson presented the risk in a way which diverted Mr. O’Keefe’s attention from examining
the loss records for the underwriting years 1977/1978 and 1979. The loss record for 1980 and
1981 was undoubtedly disclosed. But the disclosed record was incomplete. [The minor
inaccuracy as regards 1980 need not be explored.] There was, however … a more important
inaccuracy in respect of the loss record for 1981. As against the disclosed losses of U.S.$235,768
for the underwriting year 1981 it is common ground that the true losses for 1981 were U.S.
$468,168. It was common ground that Pan Atlantic had information about these additional losses
available before the slip was signed on Jan. 13, 1982, and that the additional losses were not
disclosed.’
Within a few years it became plain that the treaty thus broked was incurring disastrous
losses. As with the two earlier years Pine Top repudiated liability. Pan Atlantic commenced
proceedings, and by its defence Pine Top sought to avoid the treaty on the ground of non-
disclosure of the 1977 to 1979 loss record and related misrepresentations. In January 1991, less
than four weeks before the start of the trial, Pine Top amended to add a defence that the 1980 to
1981 loss record as disclosed was incomplete and that this constituted a further material
misrepresentation or non-disclosure.
At the conclusion of the trial Waller J ([1992] 1 Lloyd’s Rep 101) gave judgment in
favour of Pine Top. He rejected the ground of defence originally relied on, holding that a prudent
underwriter would have wanted to check the
Page 591 of [1994] 3 All ER 581
authority.
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record for 1977 to 1979 because with long-tail insurance, where the claims record is slow
to develop, the history for the older years is a much more reliable guide than the results for
recent years; but that the broker had a summary of the 1977–1979 years available, which itself
was perfectly fair, and which the underwriter, if he was doing his job, knowing it was the most
material information, decided not to examine. The judge did however uphold the defence based
on the understatement of the losses for the year 1981. The Court of Appeal (Sir Donald Nicholls
V-C, Steyn and Farquharson LJJ) ([1993] 1 Lloyd’s Rep 496) dismissed an appeal by Pan
Atlantic, expressing regret at being compelled to take this course.
II. The questions of law
On these facts two questions of law arise for decision.
1. Where ss 18(2) and 20(2) of the 1906 Act relate the test of materiality to a
circumstance ‘which would influence the judgment of a prudent underwriter in fixing the
premium, or determining whether he will take the risk,’ must it be shown that full and accurate
disclosure would have led the prudent underwriter to a different decision on accepting or rating
the risk; or is a lesser standard of impact on the mind of the prudent underwriter sufficient; and,
if so, what is that lesser standard?
2. Is the establishment of a material misrepresentation or non-disclosure sufficient to

enable the underwriter to avoid the policy; or is it also necessary that the misrepresentation or
non-disclosure has induced the making of the policy, either at all or on the terms on which it was
made? If the latter, where lies the burden of proof?
A further question was raised in argument concerning the effect of art XV of the treaty.
This has no bearing on the fundamental issues just stated, and I will leave it aside for the time
being.
Before summarising the views expressed on these issues in the courts below I must
describe the previous decision of the Court of Appeal in Container Transport International Inc v
Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476 (hereafter
‘the CTI case’). Unlike the present, this was a case of marine insurance and therefore directly
authority.
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governed by the 1906 Act. The facts are of no present concern; once again, the dispute arose in
relation to allegations that the previous claims record and insurance history had not been
properly disclosed during the broking of a reinsurance treaty. At the trial the judge (Lloyd J)
expressed his opinion on the law as follows ([1982] 2 Lloyd’s Rep 178 at 187–188):
‘In general I would say that underwriters ought only to succeed on a defence of non-
disclosure if they can satisfy the Court by evidence or otherwise that a prudent insurer, if he had
known the fact in question, would have declined the risk altogether or charged a higher premium.
It seems to me that this should be the general rule, if only because the defence under s. 18 is
capable of working such great hardship on the assured. Take a case where the fact is known to
the assured, but not the materiality of the fact. Suppose that the prudent insurer, if he had known
the fact, would have accepted the risk, but charged a small additional premium; suppose further
that there is a substantial claim under the policy. In other jurisdictions, the assured could enforce
the claim, by tendering the additional premium. But not so in England. The fairness
Page 592 of [1994] 3 All ER 581
of the English rule is not at once obvious and hardly seems to reflect the duty of utmost
good faith under s. 17 which, be it noted, is owed both ways. Why, if the insurer would have
accepted the risk in any event, albeit at an increased premium, should he be able to avoid the
claim altogether? Since the English law is so favourable to the underwriter in this respect, the
least that should normally be expected of the underwriter is to show that a prudent insurer would
have charged an increased rate. But the language of s. 18 goes wider than that. It is the judgment
of the prudent insurer which has to be influenced, not the rate; and I can imagine cases where the
prudent insurer could say: “… Yes, this would have affected my judgment; but I would
nevertheless have charged the same rate because of counter-balancing factors.” Such cases,
though rare, would, I think, come within the definition of materiality; but even in such cases the
defendant must prove that the judgment of the prudent insurer would in fact have been affected,
not that it might have been affected. It can never be enough for the prudent insurer to say “Yes, I
would have liked to know this or that fact, so that I could have made up my mind what to do
about it.’’’ (Lloyd J’s emphasis.)
authority.
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In the Court of Appeal three extensive judgments were delivered. It is impossible to

compress these in a manner which does them justice and I will therefore do no more than quote
some of the most important passages. First, Kerr LJ ([1984] 1 Lloyd’s Rep 476 at 491-492):
‘The Judge in effect equates “judgment” with “final decision”, as though the wording of
these provisions had been “would induce a prudent underwriter to fix a different premium or to
decline the risk”. Thus, he said [at 187]: “... In general I would say that underwriter ought only to
succeed on a defence of non-disclosure if they can satisfy the court by evidence or otherwise that
a prudent insurer, if he had known the fact in question, would have declined the risk altogether or
charged a higher premium.“ And [at 188] he said: “... some ‘difference of action‘ is required in
order to establish materiality. The mind of the reasonable insurer must have been influenced so
as to induce him to refuse the risk or alter the premium“ [Lloyd J’s emphasis]. Finally in this
context, he said [at 189]: “... normally, at any rate, insurers must show that the result would have
been affected. Moral hazard cases, to which I shall have to refer later, may be an exception.“
This interpretation differs crucially from what I have always understood to be the law and from
the interpretation which Mr. Everett [an expert witness] adopted in much of his evidence. Mr.
Everett interpreted s. 18(2) in the sense that “judgment” referred to the assessment or evaluation
of the risk. Apart from other passages in his evidence, this appears from the following extract at
the beginning. He had made a written report stating his views on all the allegations of non-
disclosure, which was treated as part of his evidence. He was then referred to s. 18(2), and there
was the following exchange between him and Counsel: “[Q] In what sense do you use the word
material in your report? [A] In that sense. In the sense that the facts must have an influence on
the underwriting judgment.“ In my view this is the correct approach …’
Page 593 of [1994] 3 All ER 581
A little later, Kerr LJ said this (at 492):
‘The word “influenced” means that the disclosure is one which would have had an impact
on the formation of his opinion and on his decision-making process in relation to the matters
covered by s. 18(2) … evidence to support the materiality of the undisclosed circumstance, from
this point of view, is therefore often given by an independent expert witness whose evidence has
authority.
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to be assessed by the Court long after the event. He, or the actual insurer, or both, may then be
asked: “What would have been your reaction if you had known of this undisclosed fact?” Both
would in my view give relevant evidence on materiality if they replied: “I would then have
regarded the risk in a different light. I would have taken this circumstance into account. As a first
step I might have asked some questions before making up my mind about the risk. What my final
decision would have been, I cannot now say for certain. I might have declined the risk altogether,
or increased the premium, or altered the terms in some other way”. And it would make no
difference if the witness went on: “I might even have taken a chance, or given credit for the
frankness of the disclosure, by writing the risk as I did. But I should obviously have been told
about this fact before being asked to make up my mind”.’
Finally, after detailed consideration of various reported cases Kerr LJ expressed his
opinion thus (at 496–497):
‘It follows that when ss. 17 to 20 of the Act are read together, one way of formulating the
test as to the duty of disclosure and representation to cases such as the present, in the context of
Mr. Fleetwood’s presentation first to Mr. Bragg and then to Mr. Lee, is simply to ask oneself:
“Having regard to all the circumstances known or deemed to be known to the insured and to his
broker, and ignoring those which are expressly excepted from the duty of disclosure, was the
presentation in summary form to the underwriter a fair and substantially accurate presentation of
the risk proposed for insurance, so that a prudent insurer could form a proper judgment—either
on the presentation alone or by asking questions if he was sufficiently put on enquiry and wanted
to know further details—whether or not to accept the proposal, and, if so, on what terms?” This
is not an onerous duty for brokers to discharge in practice.’
These passages all relate to the first of the questions posed for consideration in the
present appeal. As to the second question, in a previous decision at first instance, Berger v
Pollock [1973] 2 Lloyd’s Rep 442 at 463, Kerr J had stated the principles in a way which
suggested that the insurer could avoid the policy only if he had in fact been influenced by the
misrepresentation or non-disclosure. In the CTI case [1984] 1 Lloyd’s Rep 476 at 495, after more
extensive citation of the authorities, particularly Zurich General Accident and Liability Insurance
authority.
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Co Ltd v Morrison [1942] 1 All ER 529, [1942] 2 KB 53, Kerr LJ concluded that he had been
wrong in Berger v Pollock, and that it was not necessary to prove that the mind of the actual
insurer had been affected.
The next judgment, that of Parker LJ, began with the second question and concluded
([1984] 1 Lloyd’s Rep 476 at 510) after a review of the authorities, including in particular
Marene Knitting Mills Pty Ltd v Greater Pacific General
Page 594 of [1994] 3 All ER 581
Insurance Ltd [1976] 2 Lloyd’s Rep 631, and an examination of the wording of the 1906
Act, that there was no requirement that the particular insurer should have been induced to take
the risk or charge a lower premium than he would otherwise have done. On the first question
Parker LJ said (at 510–511):
‘A circumstance which increases the risk would, as it seems to me, clearly influence the
judgment of a prudent insurer. It would be one amongst perhaps many factors exerting an
influence, be it great or small, upon his judgment towards declining the risk, or charging a higher
rather than a lower premium, or inserting some protective condition in the policy. In the same
way a circumstance which diminishes the risk would be one amongst perhaps many factors
exerting an influence the other way, albeit disclosure of circumstances which diminish the risk is
excused under s. 18(3)(a). The decision whether to take the risk and if so at what premium, must
in each case be a matter of the prudent insurer exercising his judgment upon some factors
influencing that judgment one way and some factors influencing it another. Whether the
influence of a circumstance which increases the risk would or would not be great enough to
cause a prudent insurer to decline the risk or move from one level of premium to another must
inevitably vary as between prudent insurers. Whether it would or not, if it is a circumstance
“bearing” on the risk (Parsons on Marine Insurance and General Average (1868) vol I, p 495) or
having a “tendency” towards declining the risk or raising the premium (Phillips on Marine
Insurance and Average (5th edn, 1867) vol I, ss 531, 571, 676), it appears to me that it would
influence the judgment of the prudent insurer in fixing the premium or in determining whether to
take the risk. Indeed no other construction appears to me to accord with either commonsense or
authority.
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practical reality. The test submitted on behalf of the respondents [the plaintiffs] would involve
the Court in the task, perhaps years after the event, of endeavouring to ascertain what a prudent
underwriter would have done, first in the light of the circumstances actually disclosed by the
assured, and secondly, on the hypothesis that, in addition to those circumstances, the undisclosed
circumstance had been disclosed. Such a task is on its face impractical. Five experienced and
prudent underwriters might be called. At stage 1, one might say he would not have taken the risk
even on the facts disclosed; the other four might all have taken the risk but at different premiums.
At stage 2 the four remaining might all say “we regard the fact as significantly increasing the
risk” but one might say “not, but by the narrowest margin, sufficiently to demand a change in
premium, but it would call for a change in the policy wording”, one “sufficiently to put up the
premium”, and the last, “sufficiently to decline the risk”. Furthermore the one who would not
have taken the risk in the first place might say that he would, had the additional fact been
disclosed, have regarded it as an additional reason for declining the risk. In such circumstances
what is the Court to do? It cannot, as it seems to me, choose one prudent underwriter rather than
another. The very choice of a prudent underwriter as the yardstick in my view indicates that the
test intended was one which could sensibly be answered in relation to prudent underwriters in
general. It is possible to say that prudent underwriters in general would consider a particular
circumstance as bearing on the risk and exercising an influence on their
Page 595 of [1994] 3 All ER 581
judgment towards declining the risk or loading the premium. It is not possible to say,
save in extreme cases, that prudent underwriters in general would have acted differently, because
there is no absolute standard by which they would have acted in the first place or as to the
precise weight they would give to the undisclosed circumstance.’ (Parker LJ’s emphasis.)
The third member of the court, Stephenson LJ, concluded as follows after a
comprehensive analysis of the authorities (at 526–527):
‘What is naturally meant by a circumstance “which would influence the judgment of a

prudent insurer in fixing the premium, or determining whether he will take the risk?” [There] is a
danger in dissecting a phrase into its component parts, taking it word by word, and asking what
authority.
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each word means. Does “would” mean “probably would” or “possibly might”? Does “influence”
mean “alter”? Does “judgment” mean “judging”, the formation of opinion, or “judgment”, the
final decision? The Judge may have been asked to decide between “would” and “might”; we are
asked to decide between the decision-making process of judging and the decision itself. If I did
only that, I would feel more strongly the force of what I take to be the Judge’s opinion that a
circumstance taken into account by a prudent insurer in the process of considering the risk
offered and the premium and the terms required, but disregarded in the conclusion to accept the
risk at a particular premium and on particular terms, is not a circumstance which could properly
be said to influence the judgment of an insurer, prudent or imprudent. But two considerations
prevent me from adopting his construction of the words. The first, stressed by my brethren, is the
practical difficulty, if not impossibility, of deciding what factors would affect the result of a
hypothetical prudent insurer’s consideration of a risk, whether to accept it and on what terms;
whereas there is no great difficulty in answering the question whether any particular factor would
be one which he would want to know and take into consideration in determining whether to
accept a risk and on what terms, without having to decide whether he would ultimately disregard
it altogether or give it much or little weight. The second consideration is the overriding duty of
utmost good faith imposed by s. 17. That duty seems to require full disclosure and full disclosure
seems to require disclosure of everything material to the prudent underwriter’s estimate of the
character and degree of the risk; and how can that be limited to what can affirmatively be found
to be a circumstance which would in fact alter a hypothetical insurer’s decision? Provided that
there is some information which a prudent insurer would obviously want to know, or which a
credible expert swears he would want to know, in considering an offer of a risk, that is a material
circumstance which the greatest good faith and the rule against concealment require the assured
or his agent to disclose, subject to the qualifications which the knowledge and conduct of the
insurer or his agent may put upon the assured’s duty.’
And later (at 529):
‘I conclude from the language of the sub-sections in their context and from the authorities
that everything is material to which a prudent
authority.
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Page 596 of [1994] 3 All ER 581
insurer, if he were in the proposed insurer’s place would wish to direct his mind in the
course of considering the proposed insurance with a view to deciding whether to take it up and
on what terms, including premium. His mind would, I think, be influenced in the process of
judging whether to do so, either temporarily where he can say that he would ultimately have
reached the same decision without it, or permanently where it would have led him to reach a
different decision. The difficulties of discriminating between those considered facts which
influence and those which do not is well illustrated J.E.B. Fasteners Ltd v Marks, Bloom & Co
[1983] 1 All ER 583, and I do not think that these sub-sections require an insured to do so. He is
only to be trusted by the proposed insurer if he discloses everything a prudent insurer would
want to consider before fixing the premium or determining to take the risk.’
Turning to the present case both the trial judge and the Court of Appeal were bound by
the CTI case and therefore had no reason to explore the principles at length. Waller J directed
himself that the law laid down in the CTI case was as follows ([1992] 1 Lloyd’s Rep 101 at 103):
‘… any circumstance is material, i.e. is one which would influence the judgment of a
prudent insurer in fixing the premium or determining whether he will take the risk, if it is a
circumstance which: … would have had an impact on the formation of his opinion and on his
decision making process. That is to say “judgment” was equal to “formation of opinion” rather
than the “final decision”. The case also made clear that the test in relation to non-disclosure or
misrepresentation was influence on the judgment of a “prudent insurer” and that thus the right to
avoid did not depend on whether the particular insurer was influenced as a fact in relation to
determining the premium he charged or in his decision whether or not to take the risk.’
In the Court of Appeal we find the court striving, through the medium of the principal
judgment delivered by Steyn LJ, to find a workable understanding of the ratio of the CTI case
which was consistent not only with the rejection of decisive influence as the test for materiality
but also with the rejection of any requirement of influence on the actions of the individual
underwriter. It may well be that but for this second constraint the court might have felt more free
authority.
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in its ruling on materiality. At all events this is which Steyn LJ proposed ([1993] 1 Lloyd’s Rep
496 at 505–506):
‘Having rejected the “decisive influence” construction, it seems to me that there were at
least two feasible alternative solutions to be considered in C.T.I. v. Oceanus. The first solution
was that a fact is material if a prudent insurer would have wished to be aware of it in reaching his
decision. The second solution involves taking account of the fact that avoidance for non-
disclosure is the remedy provided by law because the risk presented is different from the true
risk. But for the non-disclosure the prudent underwriter would have appreciated that it was a
different and increased risk. Approaching the matter in this way it is possible to say that the test
is whether a prudent underwriter, if he had known the undisclosed facts, would have regarded the
risk as increased beyond what was disclosed on the actual presentation … In my view we are
free to
Page 597 of [1994] 3 All ER 581
choose between the two solutions. As between the two alternative solutions, I
unhesitatingly choose the second solution. In other words, I would rule that, as the law now
stands, the question is whether the prudent insurer would view the undisclosed material as
probably tending to increase the risk. That does not mean that it is necessary to prove that the
underwriter would have taken a different decision about the acceptance of the risk. After all,
there may be many commercial reasons for still writing the risk on the same terms. But if the
concept of “influence” is interpreted in accordance with the second solution, it seems to me that
it is easier to fit the C.T.I. v. Oceanus decision within the framework of our insurance law and it
results in a somewhat fairer and more balanced principle of materiality as between insured and
insurer. And the difficulties which this decision has caused in practice will be considerably
ameliorated.’
In a brief concurring judgment, with whose sentiments Steyn LJ agreed, Sir Donald
Nicholls V-C expressed his unease at the consequence to which inadvertent non-disclosure had
led in this case, for the result was that the reinsurer had avoided all liability for his own bad
bargain and, moreover, had done so even though full disclosure would have resulted, not in his
authority.
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declining to take the risk, but only in an increased premium. Justice and fairness would suggest
that when the inadvertent non-disclosure came to light what was required was an adjustment in
the premium or, perhaps, in the amount of cover. But those were not options available under
English law. The remedy was all or nothing. In the opinion of the Vice-Chancellor the present
case was an unhappy example of a case where, in the absence of a discretion, the law did not
produce a satisfactory result. Farquharson LJ agreed with both judgments.
III. Criticisms of the CTI case
In substance this is an appeal against the decision in the CTI case. In his judgment Steyn
LJ said quite bluntly that CTI had proved to be a remarkably unpopular decision not only in the
legal profession but also in the insurance markets (see [1993] 1 Lloyd’s Rep 496 at 505).
Whether this generalisation about the markets is correct I cannot judge, but the books and articles
produced in argument all adopt a critical stance. Nevertheless, although the unanimous
disapprobation of the CTI case is striking, equally striking is the lack of unanimity about what
exactly was wrong with it. Space does not permit a full discussion of the diverse criticisms. The
following appear to be the principal complaints.
(1) The law is too harsh, for it deprives the assured of a recovery for a genuine loss by
perils insured against even if the misrepresentation or non-disclosure had no bearing on the risk
which brought about the loss. There is practical force in this objection, but it is not consistent
with general principle, for the vice of misrepresentation and non-disclosure is not that after the
event the underwriter has suffered from having taken on a parcel of risks one of which led to a
loss, but that a breach of the duty of good faith has led the underwriter to approach the proposal
on a false basis. This distinction need not be explored here, for it has long been established that
the absence of a connection between the misrepresentation or non-disclosure and the peril which
caused the loss is no ground for depriving the underwriter of the right
Page 598 of [1994] 3 All ER 581
authority.
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to avoid (for an early decision see Seaman v Fonereau (1743) 2 Stra 1183, 93 ER 1115);
and this is nowadays an inevitable consequence of ss 18 and 20 of the 1906 Act. The Court of
Appeal in the CTI case could not have ruled otherwise even if invited to do so, which it was not.
(2) The law is too harsh, for it deprives the assured of the whole of his recovery even if
full and accurate disclosure would have done no more than cause the actual underwriter, or the
hypothetical prudent underwriter, to insist on one rate of premium rather than another. The
inflexibility of an ‘all-or-nothing’ rule has been present to the minds of all the courts which have
heard these two cases, as the judgments of Kerr LJ and Sir Donald Nicholls V-C clearly
demonstrate. It has been fully ventilated before your Lordships, and I acknowledge the
attractions of a solution which involves an element of ‘proportionality’. Whether such a solution
would be practicable outside the field of consumer insurance is debatable: as witness the adverse
conclusion of the Law Commission of England and Wales in Insurance Law: Non-Disclosure
and Breach of Warranty (1980) (Law Com No 104). It need not, however, be debated here. As
early as 1808 it was stated in Marshall A Treatise on the Law of Insurance (2nd edn) vol I, p
463: ‘Nor can the insured, by tendering any increase of premium, require the insurer to confirm
the contract’; and there has never subsequently been any suggestion that an intermediate solution
of this kind was the common law. Moreover, the words of the 1906 Act are plainly inconsistent
with any such rule. It may be that the question of a statutory change is due for reconsideration in
the light of the last 20 years’ experience, but this is not an area in which the courts have any
freedom of choice.
(3) The law fails to take account of whether a reasonable person seeking insurance would
appreciate that a particular circumstance was material and ought to be disclosed. Again, there is
force in this submission, at least as regards those consumer cases where there is an imbalance of
expertise and experience between the proposer and the insurer. The position is however quite
different in a case like the present where the considerations which weighed heavily with Kirby P
in Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR
514 are wholly absent. The assured here was an insurance company acting through an
experienced broker. The performance of the latter in the episode of the long record shows that
these were no shorn lambs who needed the winds of the common law rule to be tempered. The
authority.
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broker knew very well what he was doing, and took care about how he did it. But this is beside
the point. The House has not been, and could not be, invited to introduce a wholly new doctrine,
hinging upon what was, or could have been, or should have been, in the mind of the proposer. In
the field of marine insurance this would require a fundamental amendment of the 1906 Act, and
in commercial insurance as a whole such a wholesale change to a central and long-established
first principle of insurance law could not have been made by the Court of Appeal in the CTI case
any more than it can now be made by this House.
(4) The doctrine of the CTI case demands more of the assured than is feasible in modern
trading conditions. This is the kind of criticism which it is hard for a court, and particularly for
an appellate court, to assess. I would, however, make the following brief comments upon it.
First, I believe that a substantial part of the criticisms, to the effect that the broker in order to
play
Page 599 of [1994] 3 All ER 581
safe will be forced to disclose hundreds of documents which are of no real interest to the
insurer and which impede that speedy placing of risks which is such a positive feature of the
London market, are based on an interpretation of Kerr LJ’s pronouncements in the CTI case
which is wider than the Lord Justice intended. Secondly, although the physical bulk of placing
material is likely in modern times to have been swollen by photocopies, electronically
transmitted documents and computer print-outs there will, I believe, be many cases where the
core of material of which good faith demands the disclosure is relatively small and easy to
identify. The present case is a good example. Finally, some of the critics come close to saying
that the central obligation of good faith and its embodiment in the 1906 Act are out of date in
modern conditions. This was not an option open to the court in the CTI case, or to any other
court. Undoubtedly, commercial law must be responsive to changes in commercial practices if it
is not to founder, and established principles must be applied sensitively in new situations. Thus,
once the court has reached a conclusion on the true content of the obligations created by the Act,
in the light of any relevant previous decisions, it must translate them into practice by reference to
conditions prevailing, not in 1906, but at the time when the risk was written. But it was not for
authority.
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the Court of Appeal, any more than for this House, to alter the meaning of the statute. Only
Parliament can do that.
(5) The effect of the CTI case has been to deter overseas interests from placing risks in
the London market. Again, it is not possible to judge the factual accuracy of this complaint. The
comment is however obvious that if overseas interests take business elsewhere because English
law insists that they and their brokers make fair presentations in good faith this may be business
which the London market can well do without; and there is no need to emphasise at the present
time the dangers of judging the success of an insurance market by volume alone. Moreover,
whilst I accept that if that good quality business is being driven away there is reason to look
carefully at whether the rules are being properly applied, if the rules established by Act of
Parliament are having a deleterious economic effect it is for Parliament, not the courts, to change
them.
Thus far, I have summarised and briefly discussed various of the criticisms to show that,
although they have not been overlooked, they do not point towards a solution of the problems
now before the House. The literature does however also develop in considerable detail a number
of other groups of criticism which are directly in point.
(6) The Court of Appeal in the CTI case set the standard of materiality too low. The law
ought to be that a circumstance is material only if its disclosure would decisively have influenced
the mind of the prudent underwriter: if it would have made all the difference to whether he wrote
the risk, and if so at what premium. Alternatively, even if a circumstance can be material without
being decisive, the law ought to require a greater potential effect on the mind of the hypothetical
underwriter than was acknowledged in the CTI case.
(7) The decision in the CTI case that a defence of misrepresentation or non-disclosure can
succeed even if the actual underwriter’s mind was unaffected is contrary to commonsense and
justice. Moreover, the rule is not correct in principle, since (i) the juristic basis of the
underwriter’s ability to disclaim the policy is that the misrepresentation or non-disclosure vitiates
the consent necessary for a binding contract, and consent cannot be vitiated if the
authority.
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Page 600 of [1994] 3 All ER 581
underwriter would have made the same contract even if the circumstance in question had
been properly disclosed; and (ii) to dispense with the requirement for inducement of the contract
is inconsistent with the general law on misrepresentation.
(8) If the actual underwriter would not have been influenced by the information it cannot
have been material, and hence the assured was under no duty to disclose it.
(9) The court in the CTI case failed to appreciate the importance of Ionides v Pender
(1874) LR 9 QB 531 and associated cases.
All of these criticisms were developed in the argument for the plaintiffs on the present
appeal, to which I now turn.
IV. Materiality
This part of the case depends on the words ‘which would influence the judgment of a
prudent insurer in fixing the premium, or determining whether he will take the risk’ (ss 18(2) and
20(2) of the 1906 Act).
The main thrust of the argument for Pan Atlantic is that this expression calls for the
disclosure only of such circumstances as would, if disclosed to the hypothetical prudent
underwriter, have caused him to decline the risk or charge an increased premium. I am unable to
accept this argument.
In the first place I cannot find the suggested meaning in the words of the Act. This is a
short point of interpretation, and does not yield to long discussion. For my part I entirely accept
that part of the argument for Pan Atlantic which fastens on the word ‘would’ and contrasts it
with words such as ‘might.’ I agree that this word looks to a consequence which, within the area
of uncertainty created by the civil standard of proof, is definite rather than speculative. But this is
only part of the inquiry. The next step is to decide what kind of effect the disclosure would have.
This is defined by the expression ‘influence the judgment of the prudent underwriter’. The
legislature might here have said ‘decisively influence’; or conclusively influence; or ‘determine
authority.
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the decision’; or all sorts of similar expressions, in which case Pan Atlantic’s argument would be
right. But the legislature has not done this, and has instead left the word ‘influence’ unadorned. It
therefore bears its ordinary meaning, which is not, as it seems to me, the one for which Pan
Atlantic contends. ‘Influence the judgment’ is not the same as ‘change the mind’. Furthermore, if
the argument is pursued via a purely verbal analysis, it should be observed that the expression
used is ‘influence the judgment of a prudent insurer or [the underwriter] in ... determining
whether he will take the risk’. To my mind, this expression clearly denotes an effect on the
thought processes of the insurer in weighing up the risk, quite different from words which might
have been used but were not, such as ‘influencing the insurer to take the risk’.
My Lords, this conclusion accords with what I regard as the practicalities. Looking at the
matter through the eyes of a court, called upon to rule after the event on whether an undisclosed
circumstance was material, the proposition that ‘influence’ means ‘decisively influence’ takes as
its point of reference a hypothetical underwriter personifying the generality of those who know
their job and perform it carefully, without exceptional timidity or boldness; it assumes that this
underwriter has had before him all the material which was before the actual underwriter; it also
assumes that after weighing up the
Page 601 of [1994] 3 All ER 581
conflicting factors which enter into a decision of this kind the hypothetical underwriter
has decided that the balance comes down in favour of writing the risk on the terms on which it
was actually written; and then on these assumptions requires a firm conclusion on whether or not
the undisclosed facts would (not might) have tipped the balance the other way and caused him to
reach a different decision. Even looking at the matter after the event, this exercise presents great
difficulties, for the reasons given by Parker LJ in the CTI case [1984] 1 Lloyd’s Rep 476 at 510–
511 in the passage quoted above. But the point is that it is not the court after the event, but the
prospective assured and his broker before the event, at whom the test is aimed; it is they who
have to decide, before the underwriter has agreed to write the risk, what material they must
disclose. I am bound to say that in all but the most obvious cases the ‘decisive influence’ test
faces them with an almost impossible task. How can they tell whether the proper disclosure
authority.
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would turn the scale? By contrast, if all that they have to consider is whether the materials are
such that a prudent underwriter would take them into account, the test is perfectly workable.
Furthermore, the argument for Pan Atlantic demands an assumption that the prudent
underwriter would have written the risk at the premium actually agreed on the basis of the
disclosure which was actually made. Yet this assumption is impossible if the actual underwriter,
through laziness, incompetence or a simple error of judgment has made a bargain which no
prudent underwriter would have made, full disclosure or no full disclosure. This absurdity does
not arise if the duty of disclosure embraces all materials which would enter into the making of
the hypothetical decision, since this does not require the bargain actually made to be taken as the
starting point.
There is also a logical difficulty, not addressed in argument. When an underwriter seeks
to avoid a policy for non-disclosure and the dispute comes to court, the arguments will naturally
focus on the particular item of information which has been withheld; and, if the argument for Pan
Atlantic is right, on the question whether if it had been disclosed it would have made all the
difference to the hypothetical underwriter. It is natural that in an inquiry thus conducted ex post
facto little regard will be paid to the other items of information which should have been disclosed
and were actually disclosed. As already noticed however this forensic exercise misses the point
of the duty to act in good faith, which calls for a decision in the real commercial world about
everything which ought to be disclosed. If there are (say) six items of information bearing on the
risk, it will in many cases be easy to say that all of them ought to be disclosed. Yet if the
narrower interpretation advanced by Pan Atlantic is right, it would be necessary for the assured
and the broker to decide in advance whether any of them would in itself be enough to turn the
scale, and the answer might logically be that none of them were. This answer would be absurd.
Accordingly, treating the matter simply as one of statutory interpretation I would feel
little hesitation in rejecting the test of decisive influence. Since however the opposing view has
been persuasively advanced, the study must be widened to see what light is shed by decisions
and writings before and after 1906.
authority.
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I will begin with an argument which, if correct, leads directly to a solution, without the
need for close scrutiny of the language used in judgments delivered before 1906. In its simplest
form the argument is as follows. During
Page 602 of [1994] 3 All ER 581
the early development of the law the courts were concerned to assess the impact of the
non-disclosure on the mind of the actual underwriter, and to ask: If the circumstance in question
had been disclosed to the actual underwriter would his decision have been different? Later, when
in cases such as Ionides v Pender (1874) LR 9 QB 531 it was recognised that the test should
relate to the reaction of the hypothetical prudent underwriter rather than the actual underwriter,
there was no reason why the required degree of impact on the underwriter’s mind should have
been changed; and it was not changed. The question is still whether, on balance of probabilities,
it is shown that a prudent underwriter in the position of the actual underwriter would have acted
differently if the circumstance had been disclosed.
Whilst this argument has the attraction of simplicity, I believe it to be unsound, for more
than one reason. In the first place it founds upon an equation between materiality and actual
effect which was absent even from the earlier law. This is most clearly seen in regard to
misrepresentations. I must return later to the relationship between misrepresentation in marine
insurance law and misrepresentation in the general law of contract, but the texts and the relevant
cases leave no room for doubt that whereas if the representation inducing a contract was either
fraudulent or a ‘warranty’ of the contract its falsehood would invariably give a right to avoid an
innocent misrepresentation inducing the contract would give the underwriter a right to avoid only
if it was material. Proof of actual effect was not necessarily proof of materiality.
The long-standing controversy about whether the converse proposition might also be true
—whether a material misrepresentation or non-disclosure would vitiate the policy even if it had
no effect on the mind of the actual underwriter—also speaks against the argument now being
considered. Duer The Law and Practice of Marine Insurance (1846) vol II, pp 680 ff and Parsons
on Marine Insurance and General Average (1868) vol I, pp 367–369 believed that it would,
whilst Joseph Arnould and Willard Phillips tended to the opposite view: see Arnould on Marine
authority.
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Insurance and Average (2nd edn, 1857) p 541 and Phillips on Marine Insurance and Average
(5th edn, 1867) vol I, p 156. I must consider this question at a later stage, but for the present it is
not the merits of the controversy which matter but its existence; for it would have been
meaningless if a decisive influence on the actual underwriter was equivalent to materiality.
Another pointer to the distinction between materiality and effect is found in the list of
exceptions contained in s 18(3) of the 1906 Act. These exceptions were established by Lord
Mansfield in Carter v Boehm (1766) 3 Burr 1905, 97 ER 1162 and were therefore well
established by the time of Ionides v Pender. It is convenient to state them in the form in which
they now appear in s 18(3) of the Act:
‘In the absence of inquiry the following circumstances need not be disclosed, namely (a)
Any circumstance which diminishes the risk; (b) Any circumstance which is known or presumed
to be known to the insurer. The insurer is presumed to know matters of common notoriety or
knowledge, and matter which an insurer in the ordinary course of his business, as such, ought to
know; (c) Any circumstance as to which
Page 603 of [1994] 3 All ER 581
information is waived by the insurer; (d) Any circumstance which it is superfluous to

disclose by reason of any express or implied warranty.’
The significance of these exceptions is that they were not written back by Lord Mansfield
into his definition of materiality, but were aimed at the duty of disclosure and the consequences
of failing to perform it. This is what one would expect. The materiality or otherwise of a
circumstance should be a constant; and the subjective characteristics, actions and knowledge of
the individual underwriter should be relevant only to the fairness of holding him to the bargain if
something objectively material is not disclosed.
The next objection to the argument is that it first posits a former state of the law where
the effect on the decision of the actual underwriter was the only test, the concepts of the
hypothetical underwriter and the influence upon his judgment being unknown; and goes on to
assert that the innovation of Ionides v Pender (1874) LR 9 QB 531 was to substitute these
authority.
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concepts as the decisive test. The first stage of this argument is, I believe, historically unsound,
as will appear from the early works of reference quoted hereafter. Leaving this altogether aside, I
cannot find any support for the second stage in Ionides v Pender itself. The facts of the case were
simple. Commissions and other ancillary interests in goods were insured by the plaintiffs under a
marine voyage policy at greatly excessive values. The vessel sank in circumstances which gave
rise to suspicion. At the trial the jury was unable to reach a conclusion on whether the ship was
cast away and whether the over-valuations were fraudulent, but did find that it was material to
the underwriter to know of the over-valuation and that the fact of it was concealed. On these
facts the sole issue was whether the non-disclosure was material. This was the culmination of a
long-standing controversy about the nature of the ‘risk’ to which the duty of disclosure was
related. Was the duty of disclosure confined, as Duer vol II, pp 388–391 had argued, to those
facts which affected the intrinsic nature of the risks—ie those which affected the probability that
the subject matter would be lost or damaged by a peril insured against? Or were Phillips and
Arnould right to say that ‘risk’ should be given a wider meaning so that the duty extended to
anything which would probably influence the insurer’s ultimate decision, including what later
came to be called the ‘moral hazard’? The Court of Queen’s Bench decided in favour of the latter
view. This was certainly very important, but the decision was concerned with the kind of risk
which was the subject of the duty to disclose, and not with either the standard imposed by the
duty or the identity of the person by reference to whom the extent of the duty was to be
ascertained; and there is nothing in either the texts or the decisions cited in argument which bore
on these questions at all. The nearest that can be found in the entire report is the following
passage from the judgment of the court, delivered by Blackburn J ((1874) LR 9 QB 531 at 539):
‘We agree that it would be too much to put on the assured the duty of disclosing
everything which might influence the mind of an underwriter. Business could hardly be carried
on if this was required. But the rule laid down in [Parsons on Marine Insurance and General
Average vol I, p 495], that all should be disclosed which would affect the judgment of a rational
underwriter governing himself by the principles and calculations on which underwriters do in
practice act, seems to us a sound one.’
Page 604 of [1994] 3 All ER 581
authority.
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As I read this passage its purpose was the following. The law postulated by Duer was
comparatively simple to apply. One simply looked at the intrinsic nature of the perils insured
against and inquired whether they were enhanced by the non-disclosure. This was a question
which was capable of reasonably objective ascertainment. The problem with the wider test,
preferred by Parsons and in the event by the court itself, was that if the duty of disclosure was
widened to include all the additional matters which might influence what an underwriter might
think or do the duty would be at the same time impractically wide and impossible of
ascertainment. The court therefore answered Duer’s objection by emphasising that it was matters
which might influence the mind not of ‘an underwriter’ (Blackburn J’s words) but of a
hypothetical reasonable underwriter, whose standards of materiality would be at once bounded
and possible to fix. This qualification was an essential part of the court’s decision on the
controversy which was the only issue before it, but I cannot find anything to suggest that the
court thereby intended to set the whole law of disclosure off in an entirely new direction. Nor
indeed does it appear that this is how the case was viewed after the event, for in Arnould on
Marine Insurance (5th edn, 1877), published only three years later with the high authority of Mr
David Maclachlan, the very few references to Ionides v Pender (1874) LR 9 QB 531 give no hint
that in the respects material to the present appeal anything at all remarkable had been decided.
For these reasons I would reject Ionides v Pender as the key to the problem, and must
look elsewhere to see whether there is anything to suggest that the interpretation which I have
proposed is wrong. Since the controversy relates to the interpretation of an Act designed to
reflect the existing common law inquiry will naturally begin with the decisions of the courts
before 1906. With one crucial exception, nothing would be gained by rehearsal of the score of
authorities through which the House was taken with great care during argument, for although it is
possible to find expressions in the various judgments which support one or another of the
conflicting interpretations, examination shows that in none of them did it make any difference
which formula was used. Either the case was not about the extent of the duty at all, or the
outcome would have been the same however the test was described. Accordingly, without
intending disrespect to the diligent arguments or to the judgments in the CTI case, where
importance was attached to a number of the older authorities, I shall not occupy space by
authority.
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analysing them, and will pass immediately to Carter v Boehm (1776) 3 Burr 1905, 97 ER 1162
which not only contained the first and most extended exposition of the doctrine but was also the
starting point for the opinions of the notable scholars in England and the United States whose
treatment of the subject has had such a powerful influence on the development of the law. Lord
Mansfield said ((1776) 3 Burr 1905 at 1909–1911, 97 ER 1162 at 1165):
‘First. Insurance is a contract upon speculation. The special facts, upon which the
contingent chance is to be computed, lie most commonly in the knowledge of the insured only:
the under-writer trusts to his representation, and proceeds upon confidence that he does not keep
back any circumstance in his knowledge, to mislead the under-writer into a belief that the
circumstance does not exist, and to induce him to estimate the risque, as if it did not exist. The
keeping back such circumstance is a fraud, and therefore the policy is void. Although the
suppression should
Page 605 of [1994] 3 All ER 581
happen through mistake, without any fraudulent intention; yet still the underwriter is
deceived, and the policy is void; because the risque run is really different from the risque
understood and intended to be run, at the time of the agreement. The policy would equally be
void, against the under-writer, if he concealed; as, if he insured a ship on her voyage, which he
privately knew to be arrived: and an action would lie to recover the premium. The governing
principle is applicable to all contracts and dealings. Good faith forbids either party by concealing
what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his
believing the contrary. But either party may be innocently silent, as to grounds open to both, to
exercise their judgment upon. Aliud est celare; aliud, tacere; neque enim id est celare quicquid
reticeas; sed cum quod tu scias, id ignorare emolumenti tui causa velis eos, quorum intersit id
scire. This definition of concealment, restrained to the efficient motives and precise subject of
any contract, will generally hold to make it void, in favour of the party misled by his ignorance
of the thing concealed … Men argue differently, from natural phenomena, and political
appearances: they have different capacities, different degrees of knowledge, and different
intelligence. But the means of information and judging are open to both: each professes to act
authority.
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from his own skill and sagacity; and therefore neither needs to communicate to the other. The
reason of the rule which obliges parties to disclose, is to prevent fraud, and to encourage good
faith. It is adapted to such facts as vary the nature of the contract; which one privately knows,
and the other is ignorant of, and has no reason to suspect. The question therefore must always be
“whether there was, under all the circumstances at the time the policy was underwritten, a fair
representation; or a concealment; fraudulent, if designed; or, though not designed, varying
materially the object of the policy, and changing the risqué understood to be run’’.’
Whilst it is true that this decision has been criticised on the facts, and that the wide
general contractual duty of good faith which Lord Mansfield propounded has long since ceased
to hold sway, the courts have never been deflected from the high standard of duty prescribed in
his judgment. The assured is not to keep anything back which goes to the computation of the
‘contingent chance’, for otherwise there is no ‘fair representation’, and the underwriter is led to
approach the ‘risk understood to be run’ on a false basis. Such is the principle on which
insurance law has been developed and insurance contracts made for more than 200 years and I
would do nothing to dilute it now. I can see no room within it for a more lenient test expressed
solely by reference to the decisive effect which the circumstance would have on the mind of the
prudent underwriter.
It may however fairly be objected that it is not sufficient to take Lord Mansfield’s
statement and apply it to the facts of the individual case, for directly in the case of marine
insurance, and indirectly in the present instance, the court must give effect to the words of the
Act; and Lord Mansfield’s formulation did not use the word ‘influence’ or refer to the prudent
underwriter. How did these features enter the law?
As regards the test of influence on the mind I feel little doubt that the origins lay in the
writers of the texts. These were a far more potent source of general principle than the scattered
decisions of the courts; Chalmers’ Digest of the Law
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authority.
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Relating to Marine Insurance (1st edn, 1901, 2nd edn, 1903) shows that, as one would
expect, the draftsman of the 1906 Act had them fully in mind; and so of course did Blackburn J
when he expressed the test in slightly different terms in Ionides v Pender (1874) LR 9 QB 531 at
539. (It may be noted that the word ‘influence’ does not appear in Ionides v Pender). As early as
1823 ( and possibly earlier: prior editions are not to hand) we find in Marshall on Insurance (3rd
edn) vol I, p 465:
‘Every fact and circumstance, which can possibly influence the mind of a prudent and
intelligent insurer, in determining whether he will underwrite the policy at all, or at what
premium he will underwrite it, is material.’
We see the word ‘influence’ employed by Parsons on Marine Insurance and General
Average vol I, p 409–410:
‘the question as to the materiality of a representation is not whether the fact stated
actually did, or possibly could, affect the risk but whether it would naturally tend to influence the
insurer, in his estimate of the risk.’ (See also p 449.)
A very similar formulation appears in Phillips on Insurance vol I, p 274: ‘tending to

influence [the underwriter’s] estimate of the character and degree of the risk to be insured
against.’ The word also appears repeatedly in Arnould on Marine Insurance (2nd edn, 1857) pp
565–568. In Arnould (6th edn, 1887) p 518, edited by Mr Maclachlan, we find a reference to
‘facts “tending to induce the underwriter more readily to assume the risk by diminishing the
estimate he would otherwise have formed of it’’’ followed by the statement that ‘Facts, the
statement of which may reasonably be presumed likely to have such an influence on the
judgment of the prudent underwriter are called “material facts” …' In Duer vol II, p 382 we find
that the materiality of facts is expressed in terms of ‘their probable influence on the estimated
value of the risks’.
These references to the influence of the misrepresented or undisclosed fact on the mind of
the underwriter are significant, not so much because they demonstrate what could safely have
been assumed, namely that ss 18 and 20 of the Act reflected a well-established understanding of
authority.
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the law, but because the same authors who were content to speak of influence also expressed the
test in ways which bear closely upon the present issue. Thus, as shown by the passages quoted
(and there are others which I need not set out), they employed the qualifying words ‘tending to,’
which to my mind are quite inconsistent with a hard-edged criterion expressed in terms of a
decisive influence on the working of the underwriter’s mind. Elsewhere in these works the
authors used expressions other than ‘influence the mind’ to explain the principle, plainly without
any notion that they were saying something essentially different, and again the terminology
cannot be reconciled with the narrower view of the duty to disclose. According to Parsons pp
172 and 174, the material fact must be such that it would ‘naturally and reasonably enter into the
estimate of the risk, or the reasons for or against entering into the contract of insurance’; and the
whole object of the rules as to representation, misrepresentation and concealment is ‘to enable
the underwriters to judge accurately of the risk they undertake’. So also Duer speaks of
regulating the underwriter’s estimate of the premium and facts which a prudent and
Page 607 of [1994] 3 All ER 581
experienced underwriter would deem it proper to consider; Arnould (6th edn, pp 514 and
518) also refers to the underwriter’s estimate of the risk.
My Lords, these and similar passages do not conclusively establish that the test of
decisive effect is unsound, for the discussions in the books are long, and shorts turns of phrase
cannot safely be plucked out of context. Nevertheless, I can see nothing in them to suggest that
before 1906 materiality was understood as extending only to such circumstances as would
definitely have changed the underwriter’s mind; and they furnish substantial support for the view
that the duty of disclosure extended to all matters which would have been taken into account by
the underwriter when assessing the risk (ie the ‘speculation’) which he was consenting to
assume. This is in my opinion what the Act was intending to convey, and what it actually says.
Before coming to the cases decided after 1906 I should mention Rivaz v Gerussi Bros &
Co (1880) 6 QBD 222, which was relied on to suggest that a test expressed in terms of the
underwriter’s assessment of the risk is contrary to authority. I disagree. As clearly appears from
the argument for the defendants (6 QBD 222 at 225-226) the case was concerned with the same
authority.
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controversy between the views of Duer and Parsons on whether the duty of disclosure extended
beyond matters directly affecting the probability of a loss by perils insured against, as had
previously been resolved in favour of the wider view in Ionides v Pender (1874) LR 9 QB 531.
That the word ‘risk’ must be understood in the wider sense is now beyond dispute, but this has
no bearing on the principle which I derive from the authoritative texts, and indeed from both the
letter and the spirit of Carter v Boehm (1776) 3 Burr 1905, 97 ER 1162, that it is the relevance to
the underwriter’s intellectual process when assessing the risk which determines the scope of
disclosure.
I pause for a moment to consider the other conspicuous feature of the earlier law, namely
the presence in the equation of the hypothetical prudent underwriter. Just when and how this
feature was added cannot be deduced from the materials now available, but it is at least as old as
1823 (see Marshall on Insurance, 3rd edn, vol I, p 465), and may well be much older. It is a fair
assumption that at least one reason must have been that the principles stated by Lord Mansfield
required fair dealing, and it would have been unfair to the assured to require disclosure of
matters which a reasonable underwriter would not have taken into account. It is possible that
another reason was that until the Evidence Act 1851 (14 & 15 Vict c 99) a party to a suit could
not give evidence on his own behalf, so that the actual underwriter could not testify on either
materiality or causation, and any decision on the latter would have to proceed by assuming that
the underwriter was reasonable and asking what effect the information would have had on a
reasonable underwriter in his situation. It is unnecessary to pursue this aspect further, and I
mention it only to show that the argument based on Ionides v Pender cannot be sound, since it
posits a change in the law which (if it was a change at all) had occurred several decades before.
Returning to the standard of materiality, I pass to the decisions after 1906, of which by
far the most important is Mutual Life Insurance Co of New York v Ontario Metal Products Co
Ltd [1925] AC 344. A life assured had answered questions in a proposal form in a manner which
was not strictly accurate. The policy was governed by the Ontario Insurance Act 1914, ss 156(3)
and (4) of which provided:
Page 608 of [1994] 3 All ER 581
authority.
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‘(3) The proposals or application of the assured shall not as against him be deemed a part
of or considered with the contract of insurance except in so far as the court may determine that it
contains a material misrepresentation by which the insurer was induced to enter into the contract.
(4) No contract shall be avoided by reason of the inaccuracy of any such statement [ie in
an application for a policy] unless it is material to the contract …’
The insurers sought to avoid the policy in reliance on the misstatements in the proposal
form. The trial judge found that the misrepresentations were not material. The Judicial
Committee of the Privy Council upheld this decision. I must quote from the opinion of the
Board, at a little length ([1925] AC 344 at 350–352):
‘The main difference of judicial opinion centres round the question what is the test of
materiality? Mignault J. thought that the test is not what the insurers would have done but for the
misrepresentation or concealment, but “what any reasonable man would have considered
material to tell them when the questions were put to the insured.” Their Lordships are unable to
assent to this definition. It is the insurers who propound the questions stated in the application
form, and the materiality or otherwise of a misrepresentation or concealment must be considered
in relation to their acceptance of the risk. On the other hand, it was argued that the test of
materiality is to be determined by reference to the questions; that the Insurance Company had by
putting the question shown that it was important for them to know whether the proposer had been
in the hands of a medical man within five years of his application, and, if so, to have had the
opportunity of interviewing such medical man before accepting the risk. The question was
therefore, they contended, a material one, and the failure to answer it truthfully avoids the
contract. Now if this were the true test to be applied there would be no appreciable difference
between a policy of insurance subject to s. 156 of the Ontario Insurance Act, and one in the form
hitherto usual in the United Kingdom. All of the questions may be presumed to be of importance
to the insurer who causes them to be put, and any inaccuracy, however unimportant in the
answers, would, in this view, avoid the policy. Suppose, for example, that the insured had
consulted a doctor for a headache or a cold on a single occasion and had concealed or forgotten
the fact, could such a concealment be regarded as material to the contract? Faced with a
authority.
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difficulty of this kind, the appellants’ [the defendant company’s] counsel frankly conceded that
materiality must always be a question of degree, and therefore to be determined by the Court,
and suggested that the test was whether, if the fact concealed had been disclosed, the insurers
would have acted differently, either by declining the risk at the proposed premium or at least by
delaying consideration of its acceptance until they had consulted Dr. Fierheller. If the former
proposition were established in the sense that a reasonable insurer would have so acted,
materiality would, their Lordships think, be established, but not in the latter if the difference of
action would have been delay and delay alone. In their view, it is a question of fact in each case
whether, if the matters concealed or
Page 609 of [1994] 3 All ER 581
misrepresented had been truly disclosed, they would, on a fair consideration of the
evidence, have influenced a reasonable insurer to decline the risk or to have stipulated for a
higher premium. Applying this test, the evidence which has impressed their Lordships most is
that of Dr. McCullough—a witness adduced by the appellants and who, as their medical
examiner in Toronto, was the person by whom they would naturally be guided in accepting or
declining the risk. Now Dr. McCullough states that if Dr. Fierheller’s name had been mentioned,
he would have noted it in the answer to question 18, but he also emphatically states that if he had
known at the time all that Dr. Fierheller deposed to in evidence, he would still have sent up the
case with a recommendation for acceptance. In other words, having, as the result of his own
examination, passed Mr. Schuch as a healthy man, his opinion would not have been altered by
his prior medical history as now ascertained in great detail. Dealing with the evidence as a whole
the learned trial judge came to the conclusion that “if the facts as stated in the evidence of Dr.
Fierheller with relation to the condition of Schuch and his treatment had been known to the
defendant company, it was not at all probable that they would have refused the premium and the
issue of the policy, nor do I think they would even have required the examination which the
officials now think they would have required.” In this finding their Lordships substantially
concur, although they would have expressed the finding somewhat differently and would have
preferred to say that had the facts concealed been disclosed, they would not have influenced a
reasonable insurer so as to induce him to refuse the risk or alter the premium. Their Lordships,
authority.
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therefore, concur in the conclusion of the trial judge that the non-disclosure or misstatement was
not material to the contract and therefore, under the law of Ontario, is not a ground for avoiding
it.’
As I read it, in this passage their Lordships were stating the following propositions. (1)
Materiality was not to be judged by reference to the opinion of a reasonable assured. This had
been the common law for very many years. (2) The fact that the insurers had inserted a question
in the proposal form was not ipso facto a demonstration of its materiality. (3) The fact that if the
information had been correctly stated it would have caused the insurers to delay in reaching a
decision was not in itself enough to make it material. (4) The test was whether the information
would have influenced a reasonable insurer to decline the risk or to have stipulated for a higher
premium.
Now I must say at once that this decision cannot in my opinion be put aside simply
because it arose in the context of a statute which required proof of actual inducement. The
discussion in the passage quoted was concerned with materiality, not causation. Here, I must
differ from the Court of Appeal in the CTI case and to this extent from Samuels J in Mayne
Nickless Ltd v Pegler [1974] 1 NSWLR 228, although the general tenor in the latter case is
broadly in accord with my own opinion. This being said, however, I do not consider that the
Mutual Life Insurance case establishes Pan Atlantic’s argument. The dispute centred on the first
three propositions which I have summarised. Once the insurers’ contentions on these were
rejected the outcome of the case was inevitable, and the Board had no occasion, when stating the
general law on materiality, to examine the quite narrow distinction which this House is now
considering, and which had no relevance to the decision of the appeal before
Page 610 of [1994] 3 All ER 581
the Board. I would make the same comment about other expressions of the test for
materiality in cases decided since 1906. None of the disputes from which they sprang made it
necessary for the court to distinguish between the various interpretations of the test so minutely
examined in the arguments before the House.
authority.
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In these circumstances I consider that the House is free to interpret ss 18(2) and 20(2) in
the way proposed, and to give them a reading which reflects not only the words actually used but
also the insistence on fair dealing and equal bargaining which has imbued this branch of the law
from the beginning. In reaching this conclusion I have concentrated on the Act, notwithstanding
that it does not apply directly to the present dispute, because the principles have been largely
developed in relation to marine insurance. It is, however, accepted that the laws applying to the
two types of policy is in the relevant respects the same, and once it is established that ss 17 to 20
of the Act correctly embody the common law of marine insurance, as in my opinion it is, the
problems now facing your Lordships may be addressed simply by applying the words of the Act.
When at a later stage examining the facts of the present dispute I will go straight to the language
of ss 18(1) and 20(2).
V. Inducement
I turn to the second question which concerns the need, or otherwise, for a causal
connection between the misrepresentation or non-disclosure and the making of the contract of
insurance. According to ss 17, 18(1) and 20(1) if good faith is not observed, proper disclosure is
not made or material facts are misrepresented, the other party, or in the case of ss 18 and 20 the
insurer, ‘may avoid the contract’. There is no mention of a connection between the wrongful
dealing and the writing of the risk. But for this feature I doubt whether it would nowadays occur
to anyone that it would be possible for the underwriter to escape liability even if the matter
complained of had no effect on his processes of thought. Take the case of misrepresentation. In
the general law it is beyond doubt that even a fraudulent misrepresentation must be shown to
have induced the contract before the promisor has a right to avoid, although the task of proof
may be made more easy by a presumption of inducement. The case of innocent
misrepresentation should surely be a fortiori, and yet it is urged that so long as the representation
is material no inducement need be shown. True, the inequalities of knowledge between assured
and underwriter have led to the creation of a special duty to make accurate disclosure of
sufficient facts to restore the balance and remedy the injustice of holding the underwriter to a
speculation which he had been unable fairly to assess; but this consideration cannot in logic or
justice require courts to go further and declare the contract to be vitiated when the underwriter,
authority.
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having paid no attention to the matters not properly stated and disclosed, has suffered no
injustice thereby. How then does it happen that the 1906 Act seems to contemplate that once a
material misrepresentation or non-disclosure is established the underwriter has an invariable
right to avoid?
One possibility, suggested by Mr D St L Kelly (1988) 1 Ins LJ 30 at 34, developing an

interesting thesis centred on Ionides v Pender (1874) LR 9 QB 531, is that the omission of an
express requirement for inducement was due to an oversight by the draftsman. With respect, this
is a proposition which I could not accept unless forced to do so by want of any other explanation.
Sir
Page 611 of [1994] 3 All ER 581
Mackenzie Chalmers was a most learned and careful scholar. Throughout the prolonged
struggle to get successive Marine Insurance Bills through Parliament the drafts had been closely
scrutinised and revised by persons of great knowledge and experience: see the foreword to
Chalmers’ Digest of the Law of Marine Insurance (1st edn). It would be most surprising if an
elementary proposition of marine insurance law had simply slipped through the net, and the fact
that it did not is borne out by the fact that the concluding sentences of ss 18(1) and 20(1) did not
appear in the 1894 version of the Bill. Attention must have been directly focused on the
connection between misrepresentation and non-disclosure on the one hand and the right to avoid
on the other and it seems impossible that a need for inducement, if such was the common law at
the time, could simply have been forgotten.
In these circumstances there appear to be three reasons why the Act may have taken the
form which it did. First, the common law did not require inducement and was correctly
reproduced by the Act. Second, the common law did require inducement but the promoters of the
Act wished the law to be changed and Parliament did change it. Third, the common law did
require inducement and the Act, properly understood, is to the same effect. To make a choice we
must look behind the Act to the developing history of marine insurance law. For this, once again,
particular regard must be paid to the scholarly writings. The older cases have practically nothing
useful to say on the matter, very possibly because what Duer, Vol II, p 682 called ‘the known
authority.
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prudence of underwriters’ would make it comparatively rare for an underwriter to ignore a

material consideration. I should add that until the modern change in the climate of business it
would have been even more unusual for insurers to risk having it said in public proceedings that
they were at the same time careless enough to ignore something which a prudent underwriter
would have taken into account and anxious enough to avoid paying a claim to rely on a breach of
duty which had done them no harm.
A fact which at once captures attention is the existence, almost from the outset, of a
controversy about the need for inducement. I have already given references to the conflicting
views of the nineteenth century scholars. To modern eyes the controversy is puzzling. The
doctrine that a contract of marine insurance is uberrimae fidei had been firmly established for
decades. How could there still be any doubt as to a point which, although rarely arising in
practice, was of fundamental theoretical importance, the more so given that it is nowadays a
truism that an innocent misrepresentation will lead to rescission?
My Lords, I believe that the key to the problem is provided by MacGillivray and
Parkington on Insurance Law (8th edn, 1988) para 577, where it is pointed out that at common
law an innocent misrepresentation did not affect the validity of the contract or afford a defence to
an action upon it, unless there was a total failure of consideration. This proposition was asserted
as late as 1867 in the judgment of the Court of Queen’s Bench delivered by Blackburn J in Lord
Kennedy v Panama, New Zealand and Australia Royal Mail Co (Ltd) (1867) LR 2 QB 580.
Thus, in the field of life insurance, which was governed by the common law, the law on
misrepresentation took a shape which was quite unrecognisable from what it is today: see, for
example, the difficult case of Anderson v Fitzgerald (1853) 4 HL Cas 484, 10 ER 551. It was not
until, after the Judicature Acts, the equitable doctrines governing rescission for
Page 612 of [1994] 3 All ER 581
misrepresentation had infiltrated the general law of contract that a route to the protection
of the underwriter in non-marine cases became apparent.
authority.
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It was against this background that the doctrine of good faith in relation to marine
insurance was enunciated and developed. Originally, Lord Mansfield had proceeded in Carter v
Boehm (1766) 3 Burr 1905, 97 ER 1162 on the basis of a general doctrine of good faith
applicable to all contracts, and this doctrine was propounded by Park J in his influential early
work on insurance, A System of the Law of Marine Insurances, (1st edn, 1786). This general
principle did not prevail, but marine insurance continued to be treated as an exceptional case in
which non-disclosure and misrepresentation would ordinarily vitiate the contract even though
they would not have had that effect at common law. What was never clearly spelt out was how
this result was achieved. Various theories were advanced: that the policy failed for want of
agreement on the subject matter; that non-disclosure was constructive fraud; and that contracts of
marine insurance were subject to an implied condition precedent that there had been full and
accurate disclosure. (See eg Arnould (2nd edn) p 548; Phillips on Insurance (5th edn) vol I, p
278–279; Parsons on Marine Insurance and General Average, vol I, p 402ff; Kent’s
Commentaries on American Law (14th edn, 1896) vol III, p 282; and Duer vol II, p 380ff).
This uncertainty led to differences of opinion on more than one topic. Conspicuous
examples were the questions whether the contract was rendered void ab initio or merely
voidable, and the mechanism whereby the validity of the contract was compromised. To a great
extent the source of the power to avoid has been made academic by the creation of the statutory
power under the Act, but the controversy has still not been resolved: see, for example, the line of
cases beginning with Blackburn, Low & Co v Vigors (1886) 17 QBD 553, (1887) 12 App Cas
531 at 539 and continuing through William Pickersgill & Sons Ltd v London Provincial Marine
and General Insurance Co Ltd [1912] 3 KB 614, [1911–13] All ER Rep 861 and Merchants’ and
Manufacturers’ Insurance Co Ltd v Hunt [1941] 1 All ER 123 at 128, 136, [1941] 1 KB 295 at
312, 318 to Mackender v Feldia AG [1966] 3 All ER 847, [1967] 2 QB 590, March Cabaret
Club & Casino Ltd v London Assurance [1975] 1 Lloyd’s Rep 169 and Banque Financière de la
Cité SA v Westgate Insurance Co Ltd [1989] 2 All ER 952, [1990] 1 QB 665. A valuable recent
study of the authorities is contained in Clarke The Law of Insurance Contracts (2nd edn, 1994),
para 23-1A. Since the reasons why misrepresenta-tion or non-disclosure vitiated the contract
must have had at least some bearing on the need for proof of inducement, if the present task had
authority.
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been to reconstruct the common law as it stood in 1873 just before the decision in Ionides v
Pender (1874) LR 9 QB 531, some taxing problems would have required solution. Particular
scrutiny would have been required of the observations of Turner LJ in Traill v Baring (1864) 4
De GJ & SM 318 at 330, 46 ER 941 at 946. But there is no need for this, since the problem is to
ascertain the law which formed the basis of the partial codification contained in Chalmers’
Digest and reproduced with some modifications in the Act. This law had by 1906 become a
fusion of the common law and equity. What one would expect to find, as regards
misrepresentation, is that the newly available equitable remedy should be applied in the field of
insurance, in the same way as in the law of contract at large. In my opinion this is just what one
does find. It will be recalled that the predecessors in the Digest of what were to become ss 18(1)
and 20(1) of the Act did not contain any explicit reference to the
Page 613 of [1994] 3 All ER 581
avoidance of the policy. What the Digest did contain, however, was art 91(2), in the
following terms:
‘The rules of the common law, including the law merchant, save in so far as they are
inconsistent with the express provisions of this Digest, and in particular the rules relating to the
effect of fraud, illegality, misrepresentation, and mistake, apply to contracts of marine
insurance.’ (Lord Mustill’s emphasis.)
This passage is supported by a note ‘as to fraud and misrepresentation, see Leake on
Contracts, (3rd edn, 1892), pp 241, 230 …' The passage in Leake thus called up stipulates, as
regards fraud, that the party is entitled to avoid by showing that he was induced to agree by the
fraud of the other party. Furthermore, in his note to art 17 of the Digest p 22 where Chalmers
wrote that ‘the ordinary rules of law as to voidable contract apply to insurance’.
Subsequently, when Parliament passed the Act, the addition of the new sentences in paras
18(1) and 20(1) was accompanied by the omission of the words in art 91(2) which I have
emphasised, but the remainder of art 91(2) was unchanged. Precisely why these alterations were
made is now a matter of speculation, but at all events I see no room to doubt that in the minds of
authority.
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those who prepared the statute the ordinary rules of law were to apply. The note to art 17
survived into Chalmers’ work when it mutated into a commentary on the new Act, and there is
no trace in the commentary of any suggestion that Parliament had deliberately changed the law.
At this stage I pause to note that the footnote 4 to art 17 of the Digest called up Arnould
(6th edn) pp 513–514, where it was stated that the contract is vitiated (or ‘void,’ as Arnould put
it) wherever misrepresentation or concealment ‘has entered into the making of it’. This is a hint,
although probably no more, that the editor was contemplating a need for actual inducement.
Similarly, when one turns to the contemporary texts, to see whether any change in the
relevant law was perceived after the Act, a comparison may first be made between Arnould (7th
edn, 1901) and (8th edn, 1909) respectively, where the editors deal with misrepresentations of
material facts. In the former, we find (at p 641):
‘Even where the representation is of material facts, yet, if it satisfactorily appears that it
did not influence the judgment of the underwriter, its falsity will be held not to avoid the policy.’
For this proposition the editors cited Flinn v Headlam,(1829) 9 B & C 693 and appended
the following note:
‘Phillips ((5th edn) vol I, s 681, pp 371–372) is of opinion that the assured cannot be
allowed to prove that a material misrepresentation did not influence the underwriter. The editors
submit that the rule stated by Arnould is correct, although the evidence in Flynn v. Headlam may
not have justified its application. In equity it is clear that even a fraudulent misrepresentation
gives no right to rescind a contract, when it has not influenced the party to whom it was made.’
In the next edition the same passages appeared, but with the following addition to the
note ((9th edn, 1914) pp 694–695):
Page 614 of [1994] 3 All ER 581
‘The Marine Insurance Act, however, if the language used in sect. 20, sub-sect 1, is
construed literally, supports’ Phillips’ view. Such a construction involves an anomalous state of
authority.
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the law. For it is clear that, apart from marine insurance, even a fraudulent misrepresentation
gives no right to rescind a contract, when it has not influenced the party to whom it was made.’
Turning to the title ‘Marine Insurance’ in Halsbury’s Laws (1st edn) para 789, a text
carrying the very high authority of Mr Arthur Cohen KC, we find that the author first states as a
general proposition (at p 404):
‘A contract of marine insurance, like any other contract, is voidable on the ground of
fraud, and any fraudulent misrepresentation made in order to induce the underwriter to enter into
the contract entitles him to avoid the policy, unless it is proved, either that he knew the true state
of facts at the time of contracting, or that he did not rely on the misrepresentation.’
Later, in a footnote to a passage dealing with the innocent misrepresentation of a material

fact, the author says (at para 809):
‘(p) It is submitted that it is rightly argued in Arnould on Marine Insurance, (8th edn,
1909) vol I s. 536, that as a fraudulent misrepresentation will not avoid the contract (see p. 404,
ante) if it did not influence the mind of the contracting party, this must a fortiori be true of an
innocent misrepresentation.’
No reference is made to the point on the literal construction of s 20(1) which had
concerned the editors of the sixth edition of Arnould.
Next, I turn to a series of decisions after the passing of the Act. The first is Cantiere
Meccanico Brindisino v Janson [1912] 2 KB 112. This raised questions of misdescription and
non-disclosure. In his judgment on appeal [1912] 3 KB 452 at 460 Vaughan Williams LJ relates
that the trial judge had pointed out that:
‘it is sufficient to avoid the contract if the statement was in fact made, and it was untrue,
and that it is not necessary, that the underwriter should have relied on it
Yet the report of the judgment of Scrutton J in the Law Reports ([1912] 2 KB 112) omits
any discussion of representation, and as reported in the Law Times the judge said only ((1912)
106 LT 678 at 680): ‘The defendants have not satisfied me that the alleged misrepresentation
authority.
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was made …' It therefore appears that whatever exactly may have been said at the trial, it was
obiter.
The next case was Visscherij Maatschappij Nieuwe Onderneming v Scottish

Metropolitan Assurance Co (1922) 10 Ll L Rep 579. A vessel sank in suspicious circumstances
whilst greatly over-insured. The trial judge found that the vessel had been cast away and also
held that the over-valuation was a material fact which the owners had wrongfully failed to
disclose. The Court of Appeal upheld his decision on the first issue, but doubted the conclusion
on non-disclosure given the sparseness of the evidence. As Scrutton LJ observed, ((1922) 10 Ll
L Rep 579 at 584):
‘The underwriters have not taken the course, which in my view should always be
pursued, of coming into the box and saying what they knew and what it was material that they
did not know.’
Page 615 of [1994] 3 All ER 581
Whilst anything said by Scrutton LJ, particularly on a commercial matter, must always
command the greatest respect, I do not find that these dicta take the matter very much further
forward. Nor am I able to derive help from Mutual Life Insurance Co of New York v Ontario
Metal Products Co Ltd [1925] AC 344, since this turned on an express provision in the Ontario
Insurance Act 1914 to the effect that:
‘The proposals or application of the assured shall not as against him be deemed a part of
or considered with the contract of insurance except in so far as the court may determine that it
contains a material misrepresentation by which the insurer was induced to enter into the
contract.’ (Section 156(3).)
Next, there is Zurich General Accident and Liability Insurance Co Ltd v Morrison [1942]
1 All ER 529, [1942] 2 KB 53. This arose under the Road Traffic Act 1934 which enabled third
parties to recover from insurers the amount of any judgment obtained in respect of a liability
covered by a policy. The scheme of the 1906 Act was that the insurer’s right to avoid was
preserved as against the third party if, in an action commenced within a given time, the insurers
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procured a declaration that the policy had been ‘obtained’ by the non-disclosure of a material
fact or by a representation of fact which was false in some material particular. The circumstances
of the case were that the insured had obtained a motor vehicle policy with the plaintiffs after
completing a proposal form in which he stated that he had driven regularly and continuously
during the past 12 months and had driven cars for three years. An accident caused the death of
the third party’s husband. The insurers brought an action against the third party amongst others
claiming to avoid the policy, relying on an allegation that the facts represented in the proposal
were untrue and that the insured had failed to disclose that the driver had failed a driving test.
The action failed. For present purposes three passages from the judgments of the Court of Appeal
are material ([1942] 1 All ER 529 at 537, [1942] 2 KB 53 at 58, per Lord Greene MR):
‘The evidence entirely fails to convince me that the insurers, had they known of the
failure to pass the test, would have declined to issue a policy on precisely the same terms as
those on which they did issue the policy in question.’
Another passage conveys the same idea ([1942] 1 All ER 529 at 539, [1942] 2 KB 53 at
59 per Mackinnon LJ):
‘Under the general law of insurance an insurer can avoid a policy if he proves that there
has been misrepresentation or concealment of a material fact by the assured. What is material is
that which would influence the mind of a prudent insurer in deciding whether to accept the risk
or fix the premium. If this be proved, it is not necessary further to prove that the mind of the
actual insurer was so affected. In other words, the insured could not rebut the claim to avoid the
policy because of a material representation by a plea that the particular insurer concerned was so
stupid, ignorant, or reckless that he could not exercise the judgment of a prudent insurer and was
in fact unaffected by anything the assured had represented or concealed. Under the provisions of
this Act of 1934, however, I think this general rule of insurance law is modified.
Page 616 of [1994] 3 All ER 581
Section 10 of that Act requires the insurer to establish that the policy was “obtained” by
non-disclosure or misrepresentation. In such a case as this, therefore, I think the plaintiffs must
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establish two propositions: (i) that the matter relied on was “material” in the sense that the mind
of a prudent insurer would be affected by it, and (ii) that in fact their underwriter’s mind was so
affected, and the policy was thereby obtained
Per Goddard LJ after holding that the fact not disclosed was immaterial ([1942] 1 All ER
529 at 542, [1942] 2 KB 53 at 60):
‘I am convinced … that, had the fact been disclosed, the assured would have got exactly
the same policy as was issued in this case and, consequently, that it was not obtained by non-
disclosure of a material fact.’
No authority was cited for the observations of MacKinnon LJ on what the position would
have been in the absence of the express statutory requirement that the policy had been obtained
by the non-disclosure, and the passage is plainly obiter.
Finally, there is Marene Knitting Mills Pty Ltd v Greater Pacific General Insurance Ltd
[1976] 2 Lloyd’s Rep 631. This was concerned solely with the question whether the fact that the
predecessor in business of the assured had suffered a series of fires was a material consideration
which should have been disclosed. In the course of an opinion delivered by Lord Fraser of
Tullybelton, upholding the decision that this fact was material, the Judicial Committee of the
Privy Council took note that the trial judge had directed himself by reference to a passage from
the judgment of Samuels J in Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 at 239:
‘Accordingly, I do not think that it is generally open to examine what the insurer would
in fact have done had he had the information not disclosed. The question is whether that
information would have been relevant to the exercise of the insurer’s option to accept or reject
the insurance proposed. It seems to me that the test of materiality is this: a fact is material if it
would have reasonably affected the mind of a prudent insurer in determining whether he will
accept the insurance, and if so, at what premium and on what conditions.’
In my opinion this citation is no assistance here, for Lord Fraser immediately went on to
say that so far as materiality was concerned it was unnecessary to pursue a possible difference
from the test applied in Mutual Life Insurance Co of New York v Ontario Metal Products Co Ltd
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[1925] AC 344, since the earlier fires were obviously material whichever test was applied; and as
regards the full sentence of the passage quoted there was no occasion to consider whether it was
correct, since materiality and not causation was the sole suspect of the appeal.
My Lords, in my judgment little or nothing can be gleaned from twentieth century cases
to indicate a solution to the problem of causation. Before stating my own opinion on this
problem there are two more points to be made.
First, one suggested explanation for the absence from s 20 of any requirement that the
misrepresentation shall have induced the contract is that any such requirement had been swept
away 30 years before in Ionides v Pender (1874) LR 9 QB 531. Consistently with the views
already expressed I am
Page 617 of [1994] 3 All ER 581
unable to accept this, and I should add that even if the effect of Ionides v Pender had been
to make the influence on the hypothetical underwriter the benchmark of materiality I am unable
to see why this should not have left behind such requirements of actual causation as had
previously formed part of the common law. However, as I have said, although Ionides v Pender
was an important case it did not in my opinion have the effect contended for.
Secondly, it has been suggested that the absence from the 1906 Act of any reference to
causation stems from a disciplinary element in the law of marine insurance. The concept is that
persons seeking insurance and their brokers cannot be relied upon to perform their duties
spontaneously; that the criterion of whether or not the misrepresentation or non-disclosure
induced the contract would make it too easy for the assured to say that the breach of duty made
no difference; and that accordingly the law prescribes voidability as an automatic consequence of
a breach by way of sanction for the enforcement of full and accurate disclosure. For my part,
although I think it possible to detect traces of this doctrine in the earlier writings I can see
nothing to support it in later sources; and I would unhesitatingly reject any suggestion that it
should now be made part of the law. The existing rules, coupled with a presumption of
inducement, are already stern enough, and to enable an underwriter to escape liability when he
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has suffered no harm would be positively unjust, and contrary to the spirit of mutual good faith
recognised by s 17, the more so since non-disclosure will in a substantial proportion of cases be
the result of an innocent mistake.
For these reasons I conclude that there is to be implied in the 1906 Act a qualification
that a material misrepresentation will not entitle the underwriter to avoid the policy unless the
misrepresentation induced the making of the contract, using ‘induced’ in the sense in which it is
used in the general law of contract. This proposition is concerned only with material
misrepresenta-tions. On the view which I have formed of the present facts the effect of an
immaterial misrepresentation does not arise and I say nothing about it.
There remain two problems of real substance. The first is whether the conclusion just
expressed can be transferred to the case of wrongful non-disclosure. It must be accepted at once
that the route via s 91(2) of the Act and the general common law which leads to a solution for
misrepresentation is not available here, since there was and is no general common law of non-
disclosure. Nor does the complex interaction between fraud and materiality, which makes the old
insurance law on misrepresentation so hard to decipher, exist in respect of non-disclosure.
Nevertheless if one looks at the problem in the round, and asks whether it is a tolerable result
that the Act accommodates in s 20(1) a requirement that the misrepresentation shall have induced
the contract, and yet no such requirement can be accommodated in s 18(1), the answer must
surely be that it is not the more so since in practice the line between misrepresentation and non-
disclosure is often imperceptible. If the Act, which did not set out to be a complete codification
of existing law, will yield to qualification in one case surely it must in common sense do so in
the other. If this requires the making of new law, so be it. There is no subversion here of
established precedent. It is only in recent years that the problem has been squarely faced. Facing
it now, I believe that to do justice a need for inducement can and should be implied into the Act.
In forming this conclusion I have taken into account the contrary opinions expressed in
Page 618 of [1994] 3 All ER 581
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Spencer Bower Actionable Non-Disclosure (2nd edn, 1990) para 3.09, p 36. Whilst
attaching great weight to any proposition from this source, I believe that both principle and
justice require the conclusion which I have expressed.
Accordingly, I consider that the instinct of Kerr J in Berger v Pollock [1973] 2 Lloyd’s
Rep 442 was right, and that the adoption of the contrary view by the Court of Appeal in the CTI
case [1984] 1 Lloyd’s Rep 476 should not now be upheld.
Finally, there is the question whether this conclusion holds good for non-marine
insurance. The problems raised by the wording of ss 18(1) and 20(1) do not here arise. The
general considerations are however the same, and I feel no doubt that they should lead to the
same conclusion.
Before embarking on this long analysis I suggested that the questions in issue were short.
I propose the following short answers. (1) A circumstance may be material even though a full
and accurate disclosure of it would not in itself have had a decisive effect on the prudent
underwriter’s decision whether to accept the risk and if so at what premium. But, (2) if the
misrepresentation or non-disclosure of a material fact did not in fact induce the making of the
contract (in the sense in which that expression is used in the general law of misrepresentation)
the underwriter is not entitled to rely on it as a ground for avoiding the contract.
These propositions do not go as far as several critics of the CTI case would wish, but they
maintain the integrity of the principle that insurance requires the utmost good faith, whilst
avoiding the consequences, to my mind unacceptable, of upholding Pine Top’s arguments in full.
VI. The facts
Although the underlying facts are of great importance to the parties they have no general
significance and have already been investigated in both the courts below. Although they were
explored in much detail, I may take them quite shortly.
As regards the first presentation by the broker, if I correctly understand the findings of
the trial judge, the broker had in his possession the long record; he knew that it contained
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materials which showed a bad claims experience; he let the underwriter know that he had it with
him; he hoped that the underwriter would not ask to see it, and conducted himself in such a way
as to reduce the likelihood that in fact the underwriter would do so; in the event the underwriter
did not ask to see it, with the result that he accepted the risk in ignorance of facts which the
broker himself, who had taken the trouble to divert attention from them, must himself have
thought were significant. Notwithstanding that the trial judge held that there was no material
non-disclosure, and that the Court of Appeal saw no reason to interfere, I would have wished to
look very closely at this course of events, if the appeal had turned on this question alone; for the
conduct of the broker scarcely seems redolent of the utmost good faith required by s 17, or of the
fair representation on which Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905 at 1909–
1911, 97 ER 1162 at 1164–1165 insisted. The point is however of no practical importance, since
quite apart from the question of causation it seems to me that an argument of waiver would be
unanswerable. I am therefore content, in company with the Court of Appeal, to leave the decision
of the trial judge undisturbed.
Page 619 of [1994] 3 All ER 581
As to the second presentation by the broker I have had the opportunity to read in draft the
speech to be delivered by my noble and learned friend Lord Lloyd of Berwick. Although the test
of materiality which he applies is not the same as the one which I myself would prefer I so
entirely concur in his opinion that the misrepresentation was material and in his reasons for
arriving at that conclusion that it would be pointless to cover the same ground again. I will add
one brief rider. Differing from the CTI case and hence from the principle which the Court of
Appeal was bound to apply in the present case I have concluded that it is an answer to a defence
of misrepresentation and non-disclosure that the act or omission complained of had no effect on
the decision of the actual underwriter. As a matter of common sense however even where the
underwriter is shown to have been careless in other respects the assured will have an uphill task
in persuading the court that the withholding or misstatement of circumstances satisfying the test
of materiality has made no difference. There is ample material both in the general law and in the
specialist works on insurance to suggest that there is a presumption in favour of a causative
effect. It is not necessary for present purposes to give the proposition this formal label, or to
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explore it in detail. For present purposes it is sufficient to say, in company with my noble and
learned friend, that on the facts of this particular case the position as regards causation is so clear
that the appeal can be decided in favour of the indemnitors without the need for remittal to the
trial judge.
VII. Inadvertent omissions
Pan Atlantic maintains that the non-disclosures relied upon by Pine Top were inadvertent
and therefore excused by the opening words of art XV. Notwithstanding the energetic argument
of Mr Beloff QC I am quite satisfied that art XV is inapt for this purpose. The matter is
thoroughly discussed by Steyn LJ who has said all that is necessary on the matter.
VIII. Conclusion
For these reasons, although I differ in certain important respects from the view of the law
which the Court of Appeal was constrained to apply I would dismiss the appeal. In conclusion I
wish to acknowledge the painstaking research which founded the arguments addressed on
appeal, and in particular the deployment of modern academic and other writings. Throughout its
long history the law of marine insurance has owed as much to commentators as to the courts, and
although the views of these writers are not fully reflected here, I have taken them carefully into
account.
LORD SLYNN OF HADLEY. My Lords, I have had the advantage of reading in draft
the speech of my noble and learned friend, Lord Mustill. I agree with him that the ‘decisive
influence’ test is to be rejected and that a circumstance may be material for the purposes of an
insurance contract (whether marine or non-marine) even though had it been fully and accurately
disclosed it would not have had a decisive effect on the prudent underwriter’s decision whether
to accept the risk and if so at what premium, but that an underwriter who is not induced by the
misrepresentation or non-disclosure of a material fact to make the contract cannot rely on the
misrepresentation or non-disclosure to avoid the contract.
Page 620 of [1994] 3 All ER 581
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I also agree that no sufficient reason has been shown for interfering with the trial judge’s
findings of fact. I, too, would dismiss the appeal.
LORD LLOYD OF BERWICK. My Lords, in these proceedings Pan Atlantic Insurance

Co Ltd (Pan Atlantic) and others claim payment under a contract of reinsurance dated 29
October 1982. The reinsurers are Pine Top Insurance Co Ltd (Pine Top), now in liquidation. The
defence is non-disclosure and misrepresentation. This appeal provides your Lordships with the
opportunity to consider the correctness of the decision of the Court of Appeal in Container
Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1
Lloyd’s Rep 476 (the CTI case).
Pan Atlantic’s business included the insurance of liability risks, mostly in the United
States. The business was classic long-tail business; that is to say, claims took a long time to be
advised, and still longer to be settled. The history starts with the years 1977 to 1979, during
which, as will be seen, very serious losses were incurred by Pan Atlantic. But Pine Top were not
affected by these losses, since they were not then party to the reinsurance. They came on risk for
the first time in 1980. The underwriter who accepted the risk on behalf of Pine Top for that year
was Mr Oliver. For the following year, 1981, the risk was accepted by Mr Neil O’Keefe. The
contract was renewed for 1982, with Pine Top taking 50% of the risk. There were two meetings
between Mr O’Keefe and Mr Robinson, of Messrs Butcher, Robinson & Staples Ltd, the brokers,
during which terms were negotiated. The first of these meetings was on 22 or 23 December
1981, and the second on 13 January 1982, when Mr O’Keefe signed the slip. I will return to
those meetings when I come to consider the facts in greater detail.
For a considerable time after the inception of the 1982 contract, Pine Top continued to
pay reinsurance claims covering the three years for which they were on risk, namely, 1980, 1981
and 1982. Then in 1985 they ceased paying altogether. Pan Atlantic recovered judgment under
RSC Ord 14 in respect of sums due for 1980 and 1981. In March 1987 they commenced these
proceedings in respect of the 1982 year. The defence was served in May 1987. The only non-
disclosure or misrepresentation alleged at that stage related to the 1977 to 1979 years, in which,
as I have said, very serious losses were incurred. The experts were agreed that these early years
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gave the best indication of how the business was likely to develop. By contrast, the later years
were described by the judge as having very little relevance.
Pine Top’s case was that Mr O’Keefe was never shown the figures for 1977 to 1979. If he
had been, there would have been a copy of the record on his file. Pan Atlantic’s case was that Mr
Robinson took the figures with him to both meetings with Mr O’Keefe, and that they were
available on the table for his inspection. Waller J ([1992] 1 Lloyd’s Rep 101 at 106) accepted Mr
Robinson’s evidence. He found that there was a ‘perfectly fair presentation’ of the years in
question. His finding was upheld in the Court of Appeal ([1993] 1 Lloyd’s Rep 496). I will say at
once that, despite Mr Hamilton QC’s arguments to the contrary, I can see no basis on which the
House could possibly disturb that finding.
A few weeks before the case came on for trial, Pine Top amended their defence to add
certain further allegations of non-disclosure and misrepresentation in relation to 1980 and 1981.
So far as 1980 is concerned, it
Page 621 of [1994] 3 All ER 581
was common ground that Pan Atlantic had failed to disclose a claim of $US25,000. But
as it was also common ground that that non-disclosure was ‘trivial’ in the context of disclosed
claims of $US406,277, your Lordships are not directly concerned with the 1980 year. The
dispute thus centres on 1981. Pine Top’s case is that there were two additional claims in respect
of that year which had already been advised, but which were not disclosed to Mr O’Keefe. The
figure disclosed was $US235,768. It should have been $US468,168. Pan Atlantic concede, and
have conceded ever since the service of the amended defence, that there was inadvertent non-
disclosure in respect of these two claims. It is not suggested that the non-disclosure was
deliberate. The issue is whether the admitted non-disclosure entitles Pine Top to avoid the
contract. Waller J, applying the test laid down by the Court of Appeal in the CTI case, as he was
obliged to do, held that the non-disclosure was material. The Court of Appeal, applying a
different test, reached the same conclusion. The question which now arises for the first time in
your Lordships’ House is what is the correct test to apply for avoidance by an insurer of a
contract of insurance or reinsurance on the ground of non-disclosure.
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Mr Beloff QC for Pan Atlantic submits that the insurer must show (1) that a prudent
insurer, if he had known of the undisclosed fact, would either have declined the risk altogether or
charged an increased premium, and (2) that the actual insurer would himself have declined the
risk or charged an increased premium. Mr Hamilton for Pine Top submits that it is sufficient that
the fact is one which a prudent insurer would have ‘wanted to know’ or would have ‘taken into
account,’ even though it would have made no difference to him in the result. According to Mr
Hamilton, the impact on the actual insurer is irrelevant.
Waller J adopted Mr Hamilton’s test even though, as he himself said, he felt some unease
in doing so. Why, he asked, should the failure to disclose the two additional claims in the 1981
year entitle Pine Top to avoid all liability ‘when their underwriter appears simply not to have
been concerned to look at or take account of the most material part of the record in considering
this risk,’ that is to say, the figures for 1977 to 1979? (See [1992] 1 Lloyd’s Rep 101 at 114.) The
Court of Appeal rejected Mr Hamilton’s test, but did not adopt Mr Beloff’s. The leading
judgment was given by Steyn LJ. The test which he proposed was whether a prudent underwriter
would regard the undisclosed fact as tending to increase the risk. If so the insurer might avoid,
whether or not he would have declined the risk or charged an increased premium. Farquharson
LJ agreed. Sir Donald Nicholls V-C also agreed, but like the judge felt uneasy at the outcome. In
his view, justice and fairness required that in a case of inadvertent non-disclosure, such as the
present, it ought to be possible for the court to adjust the premium, or perhaps restrict the cover.
But this, as he pointed out, is not an option available under English law. In the absence of some
express provision in the contract, English courts are bound to adopt an all-or-nothing approach.
There have been various proposals for reform, which have so far come to nothing. In the
meantime, Sir Donald Nicholls V-C, regarded the present case as ‘an unhappy example of a case
where … the law manifestly does not produce a satisfactory result’ (see [1993] 1 Lloyd’s Rep
496 at 508).
Page 622 of [1994] 3 All ER 581
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Pan Atlantic now appeal from the decision of the Court of Appeal. Pine Top seek to
support the decision on the alternative ground, decided against them below, that there was non-
disclosure of the 1977 to 1979 record.
I will start by considering the two halves of Mr Beloff’s argument. But first it is
convenient to mention certain preliminary matters, by way of clearing the ground. These were
largely non-contentious. The CTI case [1984] 1 Lloyd’s Rep 476 was a case of marine insurance.
In the present case your Lordships are concerned with non-marine insurance. It is not suggested
that there is any relevant difference between the two. The law of marine insurance is of course
codified by the Marine Insurance Act 1906. Section 18(1) and (2) provide:
‘(1) Subject to the provisions of this section, the assured must disclose to the insurer,
before the contract is concluded, every material circumstance which is known to the assured, and
the assured is deemed to know every circumstance which, in the ordinary course of business,
ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the
contract.
(2) Every circumstance is material which would influence the judgment of a prudent
insurer in fixing the premium, or determining whether he will take the risk.’
The 1906 Act did not change the law. It restated the common law as to non-disclosure or
‘concealment’ as it had first been laid down by Lord Mansfield in Carter v Boehm (1766) 3 Burr
1905, 97 ER 1162 (itself a case of non-marine insurance) and as it was developed in a number of
marine and non-marine cases throughout the nineteenth century. It would have been possible for
non-marine insurance to have diverged since the passing of the 1906 Act. But it was not
suggested that this had happened.
Secondly, the duty to disclose every material circumstance known to the assured before a
contract of insurance is concluded (s 18 of the 1906 Act) is closely linked with the duty to ensure
that every material representation is true (s 20). Both are illustrations or consequences of the
rule, set out in s 17, that a contract of insurance is a contract of utmost good faith. In practice,
non-disclosure and misrepresentation are often joined as defences in the same pleading. They
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were joined in the CTI case and so they are here. Often, as here, the alleged misrepresentation
adds nothing. It is but the converse of the non-disclosure (‘impliedly represented that [the
proffered] information … gave a true and fair picture’). It would be unsatisfactory to reach a
different conclusion on the same facts depending on which way the case is put.
Thirdly, whereas the right to avoid for non-disclosure is peculiar to contracts of utmost
good faith, the right to avoid for misrepresentation is part of the general law of contract. The
reason for the special rule relating to non-disclosure in insurance contracts is that in the usual
case it is the assured alone who knows ‘the special facts, upon which the contingent chance is to
be computed’ (see 3 Burr 1905 at 1909, 97 ER 1162 at 1164 per Lord Mansfield). The purpose
of the rule is to rectify that imbalance. But in the case of misrepresentation there is no need to
differentiate between a contract of insurance and any other contract. There is no reason to put the
insurer in a more favourable position than other contracting parties, and no justification for doing
so. The ordinary law suffices.
Page 623 of [1994] 3 All ER 581
Lastly, the duty of disclosure operates both ways. Although, in the usual case, it is the
assured who knows everything, and the insurer who knows nothing, there may be special facts
within the knowledge of the insurer which it is his duty to disclose, as where (to take the
example given by Lord Mansfield in Carter v Boehm) the insurer knows at the time of entering
into the contract that the vessel has already arrived. Thus the obligation of utmost good faith is
reciprocal: see Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1990] 2 All ER
947 at 950, 960, [1991] 2 AC 249 at 268, 281 per Lord Bridge of Harwich and Lord Jauncey of
Tullichettle. Nor is the obligation of good faith limited to one of disclosure. As Lord Mansfield
warned in Carter v Boehm, there may be circumstances in which an insurer, by asserting a right
to avoid for non-disclosure, would himself be guilty of want of utmost good faith.
The prudent insurer
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I have already mentioned the three possible tests which were canvassed in argument
before your Lordships. Before discussing them, it is appropriate to quote certain passages from
the CTI case on which Mr Hamilton strongly relied.
The leading judgment was given by Kerr LJ. After referring to s 18(1) and (2), Kerr LJ
said ([1984] 1 Lloyd’s Rep 476 at 492):
‘The word “judgment”—to quote the Oxford English Dictionary to which we were
referred—is used in the sense of “the formation of an opinion”. To prove the materiality of an
undisclosed circumstance, the insurer must satisfy the Court on a balance of probability—by
evidence or from the nature of the undisclosed circumstance itself—that the judgment, in this
sense, of a prudent insurer would have been influenced if the circumstance in question had been
disclosed. The word “influenced” means that the disclosure is one which would have had an
impact on the formation of his opinion and on his decision-making process in relation to the
matters covered by s. 18(2).’
A little later he said:
‘He [the prudent insurer] is in a hypothetical position, and evidence to support the
materiality of the undisclosed circumstance, from this point of view, is therefore often given by
an independent expert witness whose evidence has to be assessed by the Court long after the
event. He, or the actual insurer, or both, may then be asked: “What would have been your
reaction if you had known of this undisclosed fact?” Both would in my view give relevant
evidence on materiality if they replied: “I would then have regarded the risk in a different light. I
would have taken this circumstance into account. As a first step I might have asked some
questions before making up my mind about the risk. What my final decision would have been, I
cannot now say for certain. I might have declined the risk altogether, or increased the premium,
or altered the terms in some other way.” And it would make no difference if the witness went on:
‘I might even have taken the chance, or given credit for the frankness of the disclosure, by
writing the risk as I did. But I should obviously have been told about this fact before being asked
to make up my mind’’.’
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Parker LJ accepted the proposition advanced by Mr Waller QC that an insurer is entitled

to avoid a contract under s 18(1) if there was undisclosed before the contract was concluded any
circumstance which a prudent insurer would take into account when reaching his decision
whether to take the risk or what premium to charge and that the position of the particular insurer
is irrelevant (see [1984] 1 Lloyd’s Rep 476 at 507).
Stephenson LJ said (at 527):
‘Provided that there is some information which a prudent insurer would obviously want
to know, or which a credible expert swears he would want to know, in considering an offer of a
risk, that is a material circumstance which the greatest good faith and the rule against
concealment require the assured or his agent to disclose …’
Later, he said (at 529):
‘I conclude from the language of the sub-sections [ss 18(2) and 20(2) of the 1906 Act] in
their context and from the authorities that everything is material to which a prudent insurer, if he
were in the proposed insurer’s place would wish to direct his mind in the course of considering
the proposed insurance with a view to deciding whether to take it up and on what terms,
including premium. His mind would, I think, be influenced in the process of judging whether to
do so, either temporarily where he can say that he would ultimately have reached the same
decision without it, or permanently where it would have led him to reach a different decision.’
Mr Beloff’s criticism of the CTI test can be encapsulated in a series of rhetorical

questions. If the prudent insurer, knowing of the undisclosed fact, would have accepted the risk
at the same premium and on the same terms, what right has the actual insurer to complain? What
injustice has he suffered? If the risk run is different from the risk understood or intended to be
run, then, as Lord Mansfield made plain in Carter v Boehm, the insurer can avoid; and rightly so.
But if the prudent insurer would have accepted the risk at the same premium and on the
same terms, it must be because, so far as he is concerned, the risk is the same risk. How, as a
authority.
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matter of ordinary language, can a circumstance be described as material, when it would not
have mattered to the prudent insurer whether the circumstance was disclosed or not? It is obvious
that the insurer cannot be required to disclose every circumstance, however remotely related to
the assessment of the risk. Why then should he be required to disclose a circumstance which
would not in fact have made any difference? How in those circumstances could it be said that the
actual insurer’s consent had been vitiated? And if not, on what other juristic basis could he claim
the right to avoid the contract?
Mr Hamilton’s answer to this line of criticism was that it is the insurer who is entitled to
decide whether to accept the risk or not, and if so at what premium. So it is for the assured to
disclose everything which the insurer would want to know, or would take into account, in
reaching that decision.
I do not find this answer satisfactory, not because, as is sometimes said, it makes the
insurer judge in his own cause; but rather because it blurs the edges of the prudent insurer test.
The purpose of the test, as will be seen when I
Page 625 of [1994] 3 All ER 581
come to the authorities, and in particular Ionides v Pender (1874) LR 9 QB 531, was to
establish an objective test of materiality, not dependent on the actual insurer’s own subjective
views. The test should therefore be clear and simple. A test which depends on what a prudent
insurer would have done satisfies this requirement. But a test which depends, not on what a
prudent insurer would have done, but on what he would have wanted to know, or taken into
account, in deciding what to do, involves an unnecessary step. It introduces a complication
which is not only undesirable in itself but is also, in the case of inadvertent non-disclosure,
capable of producing great injustice.
In the CTI case Stephenson LJ and Parker LJ attached great importance to the difficulty,
as they saw it, of applying the test proposed by Mr Beloff. Indeed it was one of the two factors
which Stephenson LJ regarded as decisive. He said ([1984] 1 Lloyd’s Rep 476 at 526–527):
authority.
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‘… two considerations prevent me from adopting [the judge’s] construction of the words.
The first, stressed by my brethren, is the practical difficulty, if not impossibility, of deciding
what factors would affect the result of a hypothetical prudent insurer’s consideration of a risk,
whether to accept it and on what terms; whereas there is no great difficulty in answering the
question whether any particular factor would be one which he would want to know and take into
consideration in determining whether to accept a risk and on what terms, without having to
decide whether he would ultimately disregard it altogether or give it much or little weight.’
With great respect, I take exactly the opposite view. What the prudent insurer would have
wanted to know is as nebulous and ill-defined as the alternative is precise and clear-cut. Parker
LJ made the same point at greater length (at 510–511):
‘The test submitted on behalf of the respondents [the plaintiffs] would involve the Court
in the task, perhaps years after the event, of endeavouring to ascertain what a prudent
underwriter would have done, first in the light of the circumstances actually disclosed by the
assured, and secondly, on the hypothesis that, in addition to those circumstances, the undisclosed
circumstance had been disclosed. Such a task is on its face impractical. Five experienced and
prudent underwriters might be called. At stage 1, one might say he would not have taken the risk
even on the facts disclosed; the other four might all have taken the risk but at different premiums.
At stage 2 the four remaining might all say “we regard the fact as significantly increasing the
risk” but one might say “not, but by the narrowest margin, sufficiently to demand a change in
premium, but it would call for a change in the policy wording”, one “sufficiently to put up the
premium”, and the last, “sufficiently to decline the risk”. Furthermore the one who would not
have taken the risk in the first place might say that he would, had the additional fact been
disclosed, have regarded it as an additional reason for declining the risk. In such circumstances
what is the Court to do? It cannot, as it seems to me, choose one prudent underwriter rather than
another. The very choice of a prudent underwriter as the yardstick in my view indicates that the
test intended was one which could sensibly be answered in relation to prudent underwriters in
general. It is possible to say that prudent underwriters in
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general would consider a particular circumstance as bearing on the risk and exercising an
influence on their judgment towards declining the risk or loading the premium. It is not possible
to say, save in extreme cases, that prudent underwriters in general would have acted differently,
because there is no absolute standard by which they would have acted in the first place or as to
the precise weight they would give to the undisclosed circumstance.’ (Parker LJ’s emphasis.)
I am unable to accept the reasoning in this paragraph. Five experienced and prudent
underwriters are just as likely—in my view more likely—to disagree about what they would
want to know as about what they would have done. If it were always possible to say what a
prudent underwriter would or would not want to know, as Parker LJ seems to have thought, it is
surprising that so many contested cases of non-disclosure have come before the courts since the
CTI case was decided.
In truth, wherever the line is drawn, there will always be expert witnesses prepared to
give evidence on either side; it is then always for the court to decide what evidence to accept, as
in every other case of conflicting expert testimony. I see no great practical difficulty on that
score. On the contrary, the certainty and practicality of Mr Beloff’s test is one of its strengths.
That brings me to the central question. What does s 18(2) of the 1906 Act mean? In
particular, what is meant by the words ‘would influence the judgment of a prudent insurer’? If I
ask myself what the phrase as a whole means, I would answer that it points to something more
than what the prudent insurer would want to know, or take into account. At the very least it
points to what the prudent insurer would perceive as increasing, or tending to increase the risk.
On this aspect of the case I agree entirely with the powerful analysis of Steyn LJ in the Court of
Appeal [1993] 1 Lloyd’s Rep 496 at 505. He said of the CTI case:
‘Having rejected the “decisive influence” construction, it seems to me that there were at
least two feasible alternative solutions to be considered in C.T.I. v. Oceanus ([1984] 1 Lloyd’s
Rep 476). The first solution was that a fact is material if a prudent insurer would have wished to
be aware of it in reaching his decision. The second solution involves taking account of the fact
that avoidance for non-disclosure is the remedy provided by law because the risk presented is
authority.
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different from the true risk. But for the non-disclosure the prudent underwriter would have
appreciated that it was a different and increased risk.’
Having set the scene in that way, Steyn LJ unhesitatingly rejected the first solution, and
chose the second. In other words he rejected the test proposed by Mr Hamilton. Whether, if he
had been free to do so, he would have chosen the test proposed by Mr Beloff, we shall never
know. But it matters not. The reasons given by Steyn LJ for rejecting the first solution and
preferring the second are based largely on the judgment of Lord Mansfield in Carter v Boehm. I
would adopt those reasons, and will not repeat them. I would only add that the increased risk
theory of materiality fits in neatly with the specific provision of s 18(3)(a) that the assured need
not disclose a circumstance by which the risk is diminished.
If I analyse the phrase word by word, I reach the same conclusion, but I am carried one
stage further. The ordinary meaning of ‘influence’ is to affect or
Page 627 of [1994] 3 All ER 581
alter. ‘Judgment’ is a word with a number of different meanings, so it is not possible to

identify the ordinary meaning in the abstract. In a legal or quasi-legal context it is often used in
the sense of a decision or determination, as in ‘the judgment of Solomon’ or ‘the judgment of
Paris’, or the formal judgment of a court of law. Kerr LJ in the CTI case [1984] 1 Lloyd’s Rep
476 at 492 considered that it meant not the decision itself, but what he called the decision-
making process. I accept that the word may bear that meaning. But it is not the primary meaning
given in the Oxford English Dictionary, as Kerr LJ’s judgment may suggest, and I see no reason
to give it that meaning in the present context. A Daniel come to judgment would not ordinarily
be understood to mean a Daniel come to a decision-making process.
In a commercial context ‘judgment’ is often used in the sense of ‘assessment’. A market

assessment means a judgment as to what the market is going to do, not the process by which a
stockbroker arrives at that judgment. That is, in my opinion, the sense in which the word is used
in s 18(2) of the 1906 Act. Parker LJ in the CTI case [1984] 1 Lloyd’s Rep 476 at 570, attached
importance to the words ‘in fixing’ the premium and ‘in … determining’ whether to take the risk.
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But I do not regard these words as pointing to a decision-making process, rather than the
decision itself.
Finally, there is the word ‘would’. Kerr LJ in the CTI case [1984] 1 Lloyd’s Rep 476 at
492 in a passage already quoted refers to things which the insurer might have done if he had been
told of the undisclosed fact. In my judgment it is never enough to show that a prudent insurer
might have declined the risk or charged an increased premium. It is necessary to show that he
would have done.
My provisional conclusion, before coming to the authorities, is that Mr Beloff succeeds

on the first half of his argument, and that in order to avoid a contract for non-disclosure it must
be shown that a prudent insurer, if he had known of the undisclosed fact, would either have
declined the risk altogether, or charged an increased premium. This goes further than Steyn LJ in
the Court of Appeal, but not by much. For in all ordinary cases where the prudent insurer would
have perceived an increase in the risk, he would presumably charge an increased premium. There
might be special circumstances in which the actual insurer would decide, for his own reasons, to
incur an increased risk at the same premium. But this consideration should not affect the
objective application of the prudent insurer test. My reasons for preferring Mr Beloff’s test are
that it does full justice to the language of s 18 of the 1906 Act. It is well-defined, and easily
applied. It does something to mitigate the harshness of the all-or-nothing approach which
disfigures this branch of the law, and it is consistent with the reasons given by the Court of
Appeal for rejecting the test proposed by Mr Hamilton.
In the course of his judgment Steyn LJ said that the CTI case had proved to be a
remarkably unpopular decision not only in the legal profession but also in the insurance markets
(see [1993] 1 Lloyd’s Rep 496 at 504). I have no reason to doubt that view. It certainly seems to
accord with the many articles and publications to which we were referred, some of which are
mentioned by Steyn LJ in his judgment, and all of which, without exception, are critical of the
CTI decision. Steyn LJ’s judgment in this case, with its decisive rejection of the ‘want to know’
or ‘take into account’ approach, has come far to meet these criticisms. Your Lordships are free to
go a little further. If, instead, we
authority.
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Page 628 of [1994] 3 All ER 581
were to accept Mr Hamilton’s argument, we would be reverting to the position as it was

before the decision in the court below. I suspect that this would cause widespread regret.
The authorities prior to 1906
A very large number of cases were cited on both sides. Mr Beloff submitted that they did
not help greatly one way or the other, since the precise point seems never to have arisen and the
result would in each case have been the same whichever test had been applied. In these
circumstances the language cited by judges, however eminent, is of little assistance. I agree with
this submission. I only mention the cases at all because they were regarded as helpful by the
Court of Appeal in the CTI case.
The first case cited by Kerr LJ was Carter v Boehm (1766) 3 Burr 1905, 97 ER 1162. In
my opinion, that case provides strong support for the increased risk test favoured by the court
below, and indirectly for the test proposed by Mr Beloff. It provides no support at all for the
‘take into account’ or ‘want to know’ approach.
Next I mention Ionides v Pender (1874) LR 9 QB 531. This case is important because, as
appears from Chalmers Digest of the Law Relating to Marine Insurance (1st edn, 1901) p 22, it
was the foundation of s 18 of the 1906 Act.
The case concerned a policy on goods, which were grossly overvalued. The vessel was
lost in circumstances which suggested that she might have been scuttled. To a claim on the
policy, the defence was non-disclosure of the excessive valuation. It was argued for the plaintiffs
that the excessive valuation was extraneous. It had no direct bearing on the risks insured, such as
perils of the sea. They cited Duer The Law and Practice of Marine Insurance (1846) vol II, p 388
(see (1874) LR 9 QB 531 at 537–538). But Blackburn J, giving the judgment of the court,
((1874) LR 9 QB 531 at 539), preferred the rule laid down in Parsons on Marine Insurance
(1868) vol I, p 495, that all should be disclosed which would affect the judgment of a rational
underwriter (see LR 9 QB 531 at 538). In other words, materiality is not limited, as Duer
thought, to the risks ‘considered in their own nature.’ It covers also what we would now call the
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moral hazard. The defendants called underwriters in support of their case. They said that the
overvaluation was a material fact. One class of underwriters regarded the risk as ‘speculative,’
and would have declined it altogether. Another class would have added 25 to 30% to the usual
premium. It will be noted that the evidence related to what the underwriters would have done,
not what they would have wanted to know, in order to arrive at a decision. So the facts of the
case reinforce Mr Beloff’s argument. So does the judgment. Blackburn J said (LR 9 QB 531 at
539):
‘We agree that it would be too much to put on the assured the duty of disclosing
everything which might influence the mind of an underwriter. Business could hardly be carried
on if this was required.’
Two years later, Blackburn J had to consider a similar point in Stribley v Imperial Marine
Insurance Co (1876) 1 QBD 507. The action was on a policy taken out on 27 February 1874. On
21 January the owner had received a letter from the master, dated 9 January, that the vessel had
been delayed by bad weather, and that he would write again before sailing. That was the last
which the owners heard. The defence was that the letter ought to have been
Page 629 of [1994] 3 All ER 581
disclosed. The jury found in favour of the plaintiffs, but the court ordered a new trial.
There are observations in the judgments of Lush J and Quain J which are helpful to Mr
Hamilton. But Blackburn J said ((1876) 1 QBD 507 at 512):
‘The question was, whether this letter, and the time which had elapsed since it was
received, ought to have been communicated to the underwriter. I think the test is, whether a fair
and reasonable underwriter, looking at this letter and the circumstances under which it was
received, would say, “I think this is a speculative risk, which I will either decline to take, or, if I
do take, it shall be at a greater premium than is usual’’.’
Once again, there is no hint in Blackburn J’s judgment that the test depends on what the
fair and reasonable underwriter would want to know. It depends on what he would have done.
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The next case was Rivaz v Gerussi Bros & Co (1880) 6 QBD 222. There is a lengthy
citation from the decision in the judgment of Parker LJ in the CTI case [1984] 1 Lloyd’s Rep 476
at 507. The facts were that the defendants, who were merchants, had systematically and
fraudulently undervalued shipments of fruit from Greece on certain open policies, with the result
that those policies were in truth all but exhausted. It was held that the plaintiff, who underwrote
two later policies to follow the earlier policies, was entitled to avoid for non-disclosure.
The point in the case was exactly the same as the point in Ionides v Pender (1874) LR 9
QB 531. It was argued that the non-disclosure did not affect the insured risks in the narrow
sense. Once again the defendants relied on Duer vol II, p 390. But Brett LJ pointed out in the
course of argument, that the rule laid down by Duer had not been accepted by Blackburn LJ (see
(1880) 6 QBD 222 at 226). On the facts, the non-disclosure was obviously material, first,
because the later policies would be called on sooner than the plaintiff had been led to expect,
and, secondly, because the undervaluation of the earlier policies was fraudulent. In the latter
respect, it is another example of what we would now call ‘the moral hazard’. Tate & Sons v
Hyslop (1885) 15 QBD 368, [1881–85] All ER Rep 861 illustrates better than any other case to
which we were referred the dangers of taking general statements out of context. The plaintiffs
insured a consignment of sugar in course of carriage to their refinery at Silvertown, including all
risks of transshipment into lighters. The sugar was damaged while lying in lighters on the
Thames. It was the practice of underwriters in such cases to exercise their right of subrogation
against the lightermen. The lightermen found that the liabilities so imposed on them were
onerous. So in April 1982 an association of Thames lightermen published a notice that they
would no longer accept liability as common carriers, but only for the negligence or wilful acts of
their servants. The underwriters at Lloyd’s responded at once. They passed a resolution by
which, if the lighterage was to be subject to the new terms, the premium would be increased by
up to 2s.6d.%. The plaintiffs had an arrangement with one of the lightermen whereby his liability
as common carrier was excluded. They failed to disclose this arrangement when placing the
insurance. The jury found that the non-disclosure was material. The Court of Appeal refused to
disturb the verdict.
Page 630 of [1994] 3 All ER 581
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The judgment of Brett MR is of particular interest. He held that if the only effect of the
arrangement was to minimise the underwriters’ right of salvage, that is to say, the right of
recourse against the lighterman, that would not be a material fact. But here the non-disclosure
was material because the underwriters had made known to the market that they would charge an
increased premium if the liability of the lighterman was limited:
‘The authorities shew that the materiality is not as to the risk, but as to whether it would
influence the underwriters in entering upon the insurance or the terms on which they would
insure.’ (See (1885) 15 QBD 368 at 376, [1881–5] All ER Rep 875 at 879.)
So far from supporting the views expressed by the Court of Appeal in the CTI case, Tate
& Sons v Hyslop is, if anything, a case the other way. The verdict of the jury was upheld because
there was evidence that underwriters would in fact have charged an increased premium if the
arrangement had been disclosed. The case is thus in direct line with Ionides v Pender and Rivaz v
Gerussi Bros & Co. All three cases establish that materiality is not limited to the insured risks, in
the narrow sense, as Duer thought; but covers everything which would influence or affect the
mind of underwriters, so as to decline the business, or increase the premium.
Finally, the Court of Appeal in the CTI case attached importance to Traill v Baring
(1864) 4 De GJ & SM 318, 46 ER 941. The case is a well-known authority for the proposition
that a representation which is true when made must be corrected if, before the contract is
concluded, it becomes untrue to the knowledge of the representor. So far as I know, it has never
been mentioned in connection with non-disclosure until it was relied on by Samuels J in Mayne
Nickless Ltd v Pegler [1974] 1 NSWLR 228 at 239 and cited by Mr Hutchinson QC in his
argument in Commonwealth Insurance Co of Vancouver v Groupe Sprinks SA [1983] 1 Lloyd’s
Rep 67 at 78. It is true that there is a passage in Turner LJ’s judgment which supports Mr
Hamilton’s argument. But the passage in question is at odds with the judgment of Knight Bruce
LJ who said (4 De GJ & SM 318 at 326, 46 ER 941 at 945):
‘It appears to me, I repeat, that the Plaintiffs are entitled to assert, and to be believed in
asserting, that they would not have acted as they have done if they had known, as they ought to
have been informed by the society represented by the Defendants of, the real facts.’
authority.
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In these circumstances I attach little weight to the isolated observation of Turner LJ.
Returning now to the mainstream of authority leading up to the passage of the 1906 Act, I
can find little if anything to support Mr Hamilton’s construction of s 18(1) and (2). On the
contrary, the evidence in two of the cases, Ionides v Pender (1874) LR 9 QB 531 and Tate &
Sons v Hyslop (1885) 15 QBD 368, [1881–5] All ER Rep 875, was plainly directed to what
underwriters would have done, rather than to what they would have wanted to know; and in all
three cases the emphasis was on repudiating the restricted view expressed by Duer vol II, pp
388–390, in preference to the wider view expressed by Parsons on Marine Insurance vol I, p 495
and Phillips on Insurance (5th edn, 1867) vol I, s 531, p 277. It is this wider view which is
reproduced in the 1906 Act. There is nothing in Parsons or Phillips which suggests that
materiality
Page 631 of [1994] 3 All ER 581
extends to what insurers would have ‘taken into account’ or ‘wanted to know’, even
though it would have made no difference to the result.
The authorities since 1906
The leading authority on the meaning of ‘material’ since the passing of the Act of 1906 is
Mutual Life Insurance Co of New York v Ontario Metal Products Co Ltd [1925] AC 344. The
case was one of life insurance. The headnote reads (at 344):
‘When statements made by an insured person upon his application for a policy of life
insurance are not made the basis of the contract but are to be treated merely as representations,
an inaccurate statement is material so as to vitiate the policy if the matters concealed or
misrepresented, had they been truly disclosed, would have influenced a reasonable insurer to
decline the risk, or to have stipulated for a higher premium; it is not sufficient that they would
merely have caused delay in issuing the policy while further inquiries were being made.’
Kerr LJ in the CTI case [1984] 1 Lloyd’s Rep 476 at 495, regarded the decision as being
‘no authority for present purposes’ because it depended on the particular provisions of the
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Ontario Insurance Act 1914. Parker LJ and Stephenson LJ took the same view. I am unable to
agree.
Section 156 of the 1914 Act provided:
‘(3) The proposal or application of the assured shall not as against him be deemed a part
of or be considered with the contract of insurance except in so far as the Court may determine
that it contains a material misrepresentation by which the insurer was induced to enter into the
contract.
(4) No contract shall be avoided by reason of the inaccuracy of any such statement unless
it is material to the contract. …
(6) The question of materiality in any contract of insurance shall be a question of fact for
the jury, or for the Court if there is no jury.’
Kerr LJ seems to have thought that, because the Ontario statute required proof of
inducement, the case did not help on materiality. But the reasoning of Lord Salvesen, tendering
the advice of a strong Board, shows that this is not so. Materiality, as a separate consideration,
lies at the heart of the case.
A policy was taken out on the life of the deceased. One of the questions in the proposal
form was whether he had seen a doctor within the last five years. It was found that the answer to
this question was inaccurate. The deceased had been seen by a Dr Fierheller. The question then
arose whether this non-disclosure was material. The test of materiality suggested by the insurers
was ([1925] AC 344 at 351)—
‘whether, if the fact concealed had been disclosed, the insurers would have acted
differently, either by declining the risk at the proposed premium or at least by delaying
consideration of its acceptance until they had consulted Dr. Fierheller.’
The Board accepted the first half of this proposition, but rejected the second (at 351–
352):
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Page 632 of [1994] 3 All ER 581
‘If the former proposition were established in the sense that a reasonable insurer would
have so acted, materiality would, their Lordships think, be established, but not in the latter if the
difference of action would have been delay and delay alone. In their view, it is a question of fact
in each case whether, if the matters concealed or misrepresented had been truly disclosed, they
would, on a fair consideration of the evidence, have influenced a reasonable insurer to decline
the risk or to have stipulated for a higher premium.’
The Board was thus deciding that something which the insurers would have wanted to
know, or taken into account, and which might have led on to further inquiries, with consequential
delay, is not by itself material, unless it would have led to a different result.
The Board then went on to apply the test which they had just laid down:
‘Dealing with the evidence as a whole the learned trial judge came to the conclusion that
“if the facts as stated in the evidence of Dr. Fierheller with relation to the condition of [the
deceased] and his treatment had been known to the defendant company, it was not at all probable
that they would have refused the premium and the issue of the policy, nor do I think they would
even have required the examination which the officials now think they would have required.” In
this finding their Lordships substantially concur, although they would have expressed the finding
somewhat differently and would have preferred to say that had the facts concealed being
disclosed, they would not have influenced a reasonable insurer so as to induce him to refuse the
risk or alter the premium. Their Lordships, therefore, concur in the conclusion of the trial judge
that the non-disclosure or misstatement was not material to the contract and therefore, under the
law of Ontario, is not a ground for avoiding it.’ (See [1925] AC 344 at 352.)
In my opinion, the Mutual Life Insurance case remains the leading authority on the
application of the prudent insurer test, and the meaning of materiality in English law. It was so
treated by Lord Greene MR in Zurich General Accident and Liability Insurance Co Ltd v
Morrison [1942] 1 All ER 529 at 537, [1942] 2 KB 53 at 58, by Jordan CJ in Southern Cross
Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1939) 39 SR (NSW) 174
authority.
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at 187–188 and in the current edition of Spencer Bower Actionable Non-Disclosure (2nd edn,
1990) p 32. It cannot be relegated into the background or treated as turning solely on the
provisions of the Ontario statute. If that be right, then it provides strong support for Mr Beloff’s
argument.
Only three other cases need be mentioned. The first is Mayne Nickless Ltd v Pegler
[1974] 1 NSWLR 228. I find the case confusing, since Samuels J does not always distinguish
clearly between the proper application of the prudent insurer test, and the separate question
whether the insurer must prove actual inducement. The test of materiality which he proposes is
([1974] 1 NSWLR 228 at 239):
‘It seems to me that the test of materiality is this: a fact is material if it would have
reasonably affected the mind of a prudent insurer in determining whether he will accept the
insurance, and if so, at what premium and on what conditions.’
Page 633 of [1994] 3 All ER 581
To this test, there could be no possible objection, except that it is hardly very helpful
since it merely restates s 18 of the 1906 Act in almost identical language. But in so far as
Samuels J treated the Mutual Life Insurance case as depending on the Ontario statute, I would
respectfully disagree.
In Marene Knitting Mills Pty Ltd v Greater Pacific General Insurance Ltd [1976] 2
Lloyd’s Rep 631 Yeldham J applied the test stated by Samuels J. When the case reached the
Privy Council, it was argued that the test was inconsistent with the Mutual Life Insurance case.
Lord Fraser of Tullybelton did not find it necessary to deal with the point, since the undisclosed
facts were obviously material, ‘whatever may be the precise words in which the test of
materiality is formulated’ (see at 642). Indeed the facts of the case a policy of fire insurance in
which the plaintiffs had failed to disclose two previous fires at different premises afford a good
example of the need for, and application of, the prudent insurer test. As already mentioned,
Samuels J’s formulation of the prudent insurer test is unexceptionable. The only problem in the
case is that in the previous paragraph Samuels J had rejected any need for the insurer to show
authority.
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actual inducement. It is in that respect, and in that respect alone, that there is any conflict with
the Mutual Life Insurance case. I return to that aspect of the case when I deal with the second
half of Mr Beloff’s argument.
Finally, I should mention Barclay Holdings (Australia) Pty Ltd v British National
Insurance Co Ltd (1987) NSWLR 514, in which the Court of Appeal of New South Wales
declined to follow the CTI case. Glass JA described it as sounding ‘a discordant note’ (at 523).
Kirby P said (at 519):
‘As expressed by Samuels J in Mayne Nickless Ltd v Pegler the issue is not whether the
insurer would have been interested in the information or would have liked to have had it in order
to consider it. It is whether the insurer, acting reasonably, would have been affected in deciding
the critical questions mentioned. Such a test is to be preferred to one which affords the insurer
the privilege of insisting upon the disclosure of any material whatsoever that could have had an
impact on the formation of the insurer’s opinion and on its decision making process, even
though, in the end, such information was not critical to or determinative of the conclusions
finally reached …’
I have not attempted to deal with more than a few of the many cases cited. I mention
them only because the Court of Appeal in the CTI case regarded them as important in
establishing what Kerr LJ, had ‘always understood to be the law’ (see [1984] 1 Lloyd’s Rep 476
at 492). My own view is that they do not help greatly one way or the other; but on balance are in
favour of Mr Beloff’s argument. For reasons mentioned earlier, I regard that argument as
compelling.
Since writing the above, I have had the opportunity of reading in draft the speech of my
noble and learned friend, Lord Mustill. He attaches great weight to the view of the nineteenth
century textbook writers, as does my noble and learned friend, Lord Goff. I have not examined
these writings myself, since they were not mentioned in argument, save in passing, by Mr
Hamilton or Mr Beloff.
Page 634 of [1994] 3 All ER 581
authority.
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The actual insurer
I now turn to the second half of Mr Beloff’s argument, which I can deal with more
shortly.
In Berger v Pollock [1973] 2 Lloyd’s Rep 442, Kerr J considered at length the question
whether an insurer can avoid a policy for misrepresentation or non-disclosure without his going
into the witness box to say how he would himself have been affected. Relying especially on the
judgment of Scrutton LJ in Visscherij Maatschappij Nieuw Onderneming Co Ltd v Scottish
Metropolitan Assurance Co Ltd (1922) 10 Ll L Rep 579, he answered that question in the
negative. It should be the practice, he said, to call the underwriter concerned ‘in all doubtful
cases even if an independent underwriter or broker is called as well’.
‘Otherwise one could in theory reach the absurd position where the Court might be
satisfied that the insurer in question would in fact not have been so influenced but that other
prudent insurers would have been. It would then be a very odd result if the defendant insurer
could nevertheless avoid the policy. I do not think that this is the correct interpretation of sect. 18
despite the generality of the language used in sub-s. (2).’ (See [1973] 2 Lloyd’s Rep 442 at 463.)
Twelve years later in the CTI case [1984] 1 Lloyd’s Rep 476 at 495 Kerr LJ was
persuaded to change his mind. He said that he had been wrong in his reasoning in Berger v
Pollock, perhaps because he had not been referred to the judgment of MacKinnon LJ in the
Zurich General Accident and Liability Insurance Co Ltd v Morrison [1942] 1 All ER 529, [1942]
2 KB 53. Kerr LJ held that any effect on the mind of the actual insurer is irrelevant, and the other
members of the court agreed.
Mr Beloff submits that Kerr LJ was right the first time, and that it would indeed be
absurd, as Kerr LJ then thought, to allow an insurer to avoid for non-disclosure when the
undisclosed fact would, ex hypothesi, have made no difference to him. It was common ground
that in the ordinary law of contract a party seeking to avoid for misrepresentation must show that
he was induced to enter into the contract by the misrepresentation. Why then, asks Mr Beloff,
should the law be more favourable to an insurer seeking to avoid a contract of insurance? Why
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should utmost good faith require the assured to disclose a fact which the actual insurer would not
recognise as material?
Mr Hamilton conceded that until the middle of the nineteenth century the test, whatever it
may have been, required an impact on the mind of the actual insurer. The prudent insurer did not
emerge until Ionides v Pender (1874) LR 9 QB 531. Mr Hamilton argued that the effect of
Ionides v Pender was to substitute the prudent insurer for the actual insurer, and that the actual
insurer thereafter disappeared from the scene. I can find no support for this theory in Blackburn
J’s language. It is true that Blackburn J refers to ‘a rational underwriter’ ((1874) LR 9 QB 531 at
539). But this was by way of addition, not substitution. It was because the issue was whether the
evidence of the underwriters called by the defendants in that case was properly left to the jury,
that is to say, evidence that underwriters do in practice charge an increased premium or decline
altogether, if the overvaluation is so great as to make the risk speculative. It was held that this
was a rational practice and that the question was therefore properly left to the jury.
Page 635 of [1994] 3 All ER 581
If proof of inducement were no longer required, following the decision in Ionides v

Pender, it would be impossible to explain Brett LJ’s citation six years later in Rivaz v Gerussi
Bros & Co (1880) 6 QBD 222 at 229 of Phillips on Insurance (5th edn) s 531 p 277, where the
author says:
‘Concealment in insurance is where, in reference to a negotiation therefor, one party

suppresses, or neglects to communicate to the other, a material fact, which, if communicated,
would tend directly to prevent the other from entering into the contract, or to induce him to
demand terms more favourable to himself.’ (Parker LJ’s emphasis.)
It is interesting to note that Parker LJ emphasised the words in the above quotation from
Phillips in his judgment in the CTI case but did not draw what would seem to be the inevitable
conclusion (see [1984] 1 Lloyd’s Rep 476 at 508).
Successive editions of Arnould on Marine Insurance and Average support Mr Beloff’s

argument. Thus in Arnould (2nd edn, 1857) vol I, p 584 we find:
authority.
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‘CONCEALMENT, in the law of insurance, is the suppression of a material fact within

the knowledge of the assured, which the underwriter has not the means of knowing, or is not
presumed to know; by a material fact is meant, one which, if communicated to the underwriter,
would induce him either to refuse the insurance altogether, or not to effect it except at a higher
premium …’
This was, of course, before Ionides v Pender. But there is a similar passage in Arnould
( 6th edn, 1887) vol 1, p 548:
‘A material fact in this connection is one which, if communicated to the other of the
parties, would induce him either to refrain altogether from the contract, or not to enter into it on
the same terms.’
The editor of the sixth edition was Mr David Maclachlan. He has always been regarded
as a writer of great authority. Clearly it did not occur to Mr MacLachlan that Ionides v Pender
had made any great change in the law, with the result that inducement was no longer necessary.
In the current edition ((16th edn, 1981) vol 2, para 627, p 475) we find:
‘A material fact is one which is likely, if communicated to the other of the parties, to
induce him either to refrain altogether from the contract or not to enter into it except on more
favourable terms. Defined in these terms, the principle is equally applicable to the assured and
the underwriter. The contract is one uberrimae fidei, and on the plainest principles of equity such
a contract which one party has thus been induced to enter upon from his ignorance of the thing
not disclosed may not be enforced against him by the other who has failed to disclose it.’
The editors return to the same point in para 641 (at p 489):
‘Even though a circumstance may be material, in the sense that it would influence a
prudent insurer, if the underwriter concerned would not have been influenced by that
circumstance if disclosed, he cannot rely on the non-disclosure to avoid the policy.’ (Citing
Berger v Pollock [1973] 2 Lloyd’s Rep 442 at 463.)
Page 636 of [1994] 3 All ER 581
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Turning to misrepresentation, the distinction between materiality and inducement, and the
need to prove both is even more clearly stated. Thus in Arnould (8th edn, 1909) p 694 we find:
‘Even where the representation is of material facts, yet, if it satisfactorily appears that it
did not influence the judgment of the underwriter, its falsity will be held not to avoid the policy.’
In footnote (z) the editors draw attention to the then recently enacted s 20 of the 1906 Act
(pp 694–695). It is pointed out that on a literal construction of s 20 inducement is not required.
But such a construction would involve—
‘an anomalous state of the law. For it is clear that, apart from marine insurance, even a
fraudulent misrepresentation gives no right to rescind a contract, when it has not influenced the
party to whom it was made.’
This footnote is reproduced in substantially the same terms in the current edition of
Arnould p 463.
Arnould’s view of the law was expressly approved and adopted by Mr Arthur Cohen KC,
another eminent authority in this branch of the law, in 17 Halsbury’s Laws (1st edn) para 809.
Furthermore, Sir Mackenzie Chalmers in his Digest refers to the passage which I have already
quoted from Arnould (6th edn) p 548 as the foundation for cl 18(1) of the Marine Insurance Bill
(HL, 1894–99).
I turn now to the main authorities in favour of Mr Hamilton’s contention that any impact
on the mind of the actual insurer is irrelevant. The first is Cantiere Meccanico Brindisino v
Janson [1912] 3 KB 352 at 460 where Vaughan Williams LJ quoted Scrutton J at first instance
([1912] 2 KB 112) as having said that it was sufficient to avoid a contract of insurance that a
material representation was untrue, and that it was not necessary that the underwriter should have
relied upon it. The second is the Zurich General Accident and Liability Insurance Co Ltd v
Morrison [1942] 1 All ER 529 at 539, [1942] 2 KB 53 at 60 where MacKinnon LJ said:
‘What is material is that which would influence the mind of a prudent insurer in deciding
whether to accept the risk or fix the premium. If this be proved, it is not necessary further to
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prove that the mind of the actual insurer was so affected. In other words, the insured could not
rebut the claim to avoid the policy because of a material representation by a plea that the
particular insurer concerned was so stupid, ignorant, or reckless that he could not exercise the
judgment of a prudent insurer and was in fact unaffected by anything the assured had represented
or concealed.’
The latter observation is cited as authority for a statement to the same effect in the current
edition of Spencer Bower and Turner Actionable Non-Disclosure (2nd edn) p 37. In the first
edition 1915 Mr Spencer Bower cited the judgment of Turner LJ in Traill v Baring (1864) 4 De
GJ & SM 318 at 330, 46 ER 941 for the proposition that it is enough to show that disclosure
would have given the insurer pause (see para 32, p 17). I have already expressed my reservations
about Traill v Baring in this connection. But in any event, it was decided 10 years before
IIonides v Pender (1874) LR 9 QB 531, so it cannot provide support for the radical change said
to have been brought about by the latter case. In Mayne Nickless Ltd v Pegler [1974] 1 NSWLR
228 at 239 Samuels J said :
Page 637 of [1994] 3 All ER 581
‘Accordingly, I do not think that it is generally open to examine what the insurer would
in fact have done had he had the information not disclosed.’
But it is far from clear whether Samuels J was here referring to the prudent insurer or the
actual insurer; I suspect the former. If so, I have already given my reasons for disagreeing.
Finally, Mr Hamilton referred us to the passage in Jessel MR’s judgment in Redgrave v Hurd
(1881) 20 Ch D 1 at 21, [1881–5] All ER Rep 77 at 83, where it is said that inducement can be
inferred from proven materiality, as a matter of law. Despite receiving the ‘embarrassing
imprimatur’ of so eminent a judge I quote from Spencer Bower and Turner The Law of
Actionable Misrepresentation (3rd edn, 1974) p 154 this heresy has long since been exploded by,
among others, Lord Blackburn in Smith v Chadwick Smith v Chadwick (1884) 9 App Cas 187 at
196, [1881–5] All ER Rep 242 at 247.
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That brings me to the language of s 18 of the 1906 Act itself. Mr Hamilton relies
strongly, as was to be expected, on the last sentence of s 18(1) which provides:
‘If the assured fails to make such disclosure, the insurer may avoid the contract.’
He points out that there is nothing in s 18 which requires the insurers to prove
inducement. Nor, he says, can such a requirement be implied. According to the language of
s 18(1) it is sufficient for the insurer to prove the materiality of the undisclosed fact. That was
clearly the view of MacKinnon LJ in the Zurich General Accident case and of Scrutton J in
Cantiere Meccanico Brindisino v Jansen.
This is a formidable argument. But there is a stronger argument the other way. It was
common ground that s 18 was based on Ionides v Pender. If Ionides v Pender had brought about
a substitution of the prudent insurer for the actual insurer, and if the actual insurer had thereafter
‘dropped out,’ as Mr Hamilton argued, then it would be natural to read s 18 of the 1906 Act in
the manner for which Mr Hamilton contended. But for reasons already mentioned Ionides v
Pender brought about no such change. This is one of those rare cases when it is permissible to
look at the pre-existing law as an aid to the construction of a codifying statute. Of course it
would have been open to Parliament to go beyond the common law. But this does not appear to
have been the draftsman’s intention, since the sentence on which Mr Hamilton relies was omitted
altogether from cl 16 of the Marine Insurance Bill as originally introduced in the House of Lords
in 1894, a clause which in all other respects is identical to s 18.
Nor does the original Bill contain the second sentence in what was to become s 20. In the
case of a misrepresentation in the ordinary law of contract it has always been necessary for the
party seeking to avoid the contract to show that he relied on the misrepresentation. It seems most
unlikely that Parliament, by enacting the second sentence of s 20, intended to exclude this rule of
common law for no apparent reason. It is much more likely that the intention was to codify the
common law on materiality, without touching the common law on inducement. This is consistent
with the comment on s 17 in Chalmers’ Digest (1st edn, 1901) p 22:
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‘The contract is often said to be rendered void by concealment or misrepresentation, but

it is clear that it is only voidable at the option of
Page 638 of [1994] 3 All ER 581
the party prejudiced, and that the ordinary rules of law as to voidable contracts apply to
insurance.’
There is no presumption that a codifying Act covers the whole of the relevant common
law: see Shiloh Spinners Ltd v Harding [1973] 1 All ER 90 at 102, [1973] AC 691 at 724–725,
per Lord Wilberforce. In any event, s 91(2) of the Act preserves the common law save insofar as
it is inconsistent with the express provisions of the Act. The short answer to Mr Hamilton’s
argument is therefore that s 18 does not exclude inducement. It is dealing with a different subject
matter altogether.
As for what MacKinnon LJ said in the Zurich General Accident case [1942] 1 All ER 529
at 539, [1942] 2 KB 53 at 60, it is reassuring to notice that his observations were obiter, and not
reflected in the judgments of Lord Greene MR and Goddard LJ. It is sometimes forgotten that
Lord Goddard’s knowledge of insurance law was almost as great as that of MacKinnon LJ.
I conclude that what Kerr LJ said in Berger v Pollock [1973] 2 Lloyd’s Rep 442 at 463
was a correct statement of the law, and that his second thoughts in the CTI case [1984] Lloyd’s
Rep 476 at 495 were erroneous. It follows that Mr Beloff is entitled to succeed on the second
half of his argument, as well as the first.
If your Lordships accept this conclusion, the position will be as follows. Whenever an
insurer seeks to avoid a contract of insurance or re-insurance on the ground of misrepresentation
or non-disclosure, there will be two separate but closely related questions. (1) Did the
misrepresentation or non-disclosure induce the actual insurer to enter into the contract on those
terms? (2) Would the prudent insurer have entered into the contract on the same terms if he had
known of the misrepresentation or non-disclosure immediately before the contract was
concluded? If both questions are answered in favour of the insurer, he will be entitled to avoid
the contract, but not otherwise.
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The evidence of the insurer himself will normally be required to satisfy the court on the
first question. The evidence of an independent broker or underwriter will normally be required to
satisfy the court on the second question. This produces a uniform and workable solution, which
has the further advantage, as I see it, of according with good commercial common sense. It
follows that the CTI case was wrongly decided, and should be overruled.
The facts
I come at long last to the facts. Mr Hamilton argued that Waller J ([1982] 1 Lloyd’s Rep
101) should have found that Mr Robinson failed to disclose the figures for 1977 to 1979. It was
common ground that these figures were material. Indeed, the experts were agreed that they gave
a much better indication of the business than the figures for 1980 and 1981. Mr Hamilton’s
difficulty is that the judge found as a fact that the figures were available for Mr O’Keefe to look
at, and that they were ‘a perfectly fair presentation’ of the years in question (see [1982] 1 Lloyd’s
Rep 101 at 106). It was no part of Mr Robinson’s duty to compel Mr O’Keefe to look at the
figures if he did not wish to do so. Mr Hamilton relied on the comment that Mr Robinson had
broked the risk in a way which was designed to concentrate Mr O’Keefe’s mind on the later
years, and that, in so doing, he had successfully taken Mr O’Keefe’s ‘eye off the ball’. But there
was never any suggestion of bad faith on the part of Mr Robinson; and the comments on which
Mr Hamilton relied cannot undermine
Page 639 of [1994] 3 All ER 581
the judge’s finding that the presentation was perfectly fair. This was the view of the Court
of Appeal. It is sufficient to say that I agree.
Turning to 1981, it was common ground that Pan Atlantic failed to disclose the two
additional claims which had already been advised before Mr O’Keefe signed the slip on 13
January 1982. The question is whether that non-disclosure was material. Mr Beloff mounted an
elaborate attack on the judge’s finding in that respect. It occupies some 25 pages of the
appellants’ printed case. The attack had three prongs. (1) Since the judge applied the wrong test
of materiality, his findings do not help one way or the other. (2) The losses disclosed for the
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years 1977 to 1979 were so bad that they eclipsed the two undisclosed 1981 claims. No prudent
insurer would have accepted the risk on any terms, so the undisclosed claims would have made
no difference. (3) The findings made by the judge, when applying the prudent insurer test which
he favoured, were in any event vitiated by two errors of fact.
It is convenient to deal first with the factual errors. The judge assumed that the
undisclosed claims fell in the fourth quarter of 1981, and that there had therefore been a very
rapid acceleration of claims in that quarter from $US235,768 at the end of the third quarter to
$US468,168 at the end of the fourth quarter. In truth, over three-quarters of the two undisclosed
claims fell, not in the fourth quarter, but in the second and third quarters. So there was not the
rapid acceleration in the fourth quarter which the judge assumed.
Secondly, both the judge and the Court of Appeal attached importance to tables which the
judge himself prepared showing the development of loss ratios over the years 1980 to 1982. In
particular the 1980 year showed a loss ratio of 15% at 8 December 1980, whereas the 1981 year
showed a loss ratio of 30% at 30 September 1981. The tables thus appeared to show a doubling
of the loss ratio for the 1981 year at 12 months’ maturity.
But, as Mr Beloff pointed out, the tables are not comparing like with like. If one takes
year-end figures, the loss ratio for the 1980 year at 31 December 1980 was not 15% but 48%,
and the loss ratio for the 1981 year at an equivalent maturity was 58.8% Moreover, the judge
seems to have made certain assumptions as to the premium figures for the years in question,
which may well not be accurate. If the premiums are corrected, then the ratio for the 1980 year
becomes 59.8% and the ratio for the 1981 year drops to 45% or perhaps 54.4%, in which case the
1981 year was showing an improvement on the 1980 year. None of this was explored in
evidence. Mr Beloff’s criticism is that in attempting to draw any conclusion from the tables of
loss ratios the judge was engaged on a frolic of his own.
I agree with Mr Beloff that the tables do not, on the face of them, compare like with like.
But the judge was fully alive to this point. Indeed, it reinforced his conclusion as to the
materiality of the 1981 non-disclosure that the ‘dramatic rise’ in the fourth quarter occurred not
in one year only but in two years running.
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As for the rise in the fourth quarter of 1981, I accept that it was not quite so ‘dramatic’ as
the judge thought. But I do not accept that this vitiates the judge’s conclusion. The fact remains
that the figure disclosed by Mr Robinson was $US235,768, whereas it should have been
$US469,168. The judge was entitled to regard the difference as material, on the test which he
applied, whether the undisclosed claims fell in the fourth quarter as he thought, or in earlier
quarters. Indeed it might be thought that the earlier the claims were advised the more serious the
outlook became. On any view, the judge was
Page 640 of [1994] 3 All ER 581
entitled to regard a loss ratio of 58.8% at the end of the first year of what was expected to
be long-tail business as very high indeed, and something which a prudent insurer would want to
know about or take into account. It follows that it would not be right to disturb the judge’s
finding on the test which he applied, and the Court of Appeal were right to take that view.
The problem remains that the judge did not apply the right test. What follows? Mr Beloff
argues that it was for Pine Top to obtain the necessary findings on the basis of whatever test
should turn out to be right. Since they did not obtain such findings, their defence must fail.
Whether or not this argument is theoretically correct, I regard its application on the facts
of the present case as artificial, impractical and unfair. I take that view for two reasons. The first
is that the Court of Appeal, applying the increased risk test, found that the non-disclosure of the
two additional 1981 claims was material. For reasons already mentioned, there is little or no
practical distinction between the increased risk test, advocated by the Court of Appeal, and the
test which I believe to be correct. Secondly, Pan Atlantic made a specific written request for a
finding that ‘an objective prudent reinsurer would not have come to any different final decision if
the [additional] losses had been disclosed and included in the loss statistics’. But the judge made
no such finding, presumably because, in his view, it was not justified on the evidence. In those
circumstances I would be unwilling to decide the case against Pine Top on the ground that they
have failed to discharge the burden of proof. Nor would I regard it as appropriate to remit the
case to the judge for a further hearing, so long after the event.
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So it comes to this: that although the judge applied the wrong test in law, as he was
obliged to do in the light of the CTI case his conclusion on the facts must be accepted.
The same applies to his finding that the non-disclosure ‘might well have influenced’ the
actual insurer, Mr O’Keefe (see [1992] 1 Lloyd’s Rep 101 at 113). Mr Beloff argued that this
falls short of proof of inducement. He may be right. But once again Pan Atlantic had asked for a
finding that Mr O’Keefe would not have taken the additional claims into account ‘in his
decision.’ Once again the judge declined to make that finding.
The second prong of Mr Beloff’s three-pronged attack, which raises a novel and teasing
philosophical question, does not call for separate consideration.
The overall result is that the appellants win on the law but lose on the facts. It follows
that I would dismiss the appeal. I recognise that this result may be less than satisfying to the
plaintiff. But even if the case had gone back to the judge, and they had won on the facts, it might
well have proved a Pyrrhic victory.
Appeal dismissed.
THE MOTOR UNION INSURANCE CO LTD V AK DDAMBA [1963] 1 EA 271 (HCU)
Judgment
Jones J: This was an action by the plaintiff company for a declaration that they were entitled to
avoid a motor insurance policy No. 360362 issued to the defendant on January 5, 1962, on the
grounds that the policy of insurance was obtained by non-disclosure of material facts and/or by
representation of facts which were false in some particulars.
I should perhaps deal with a preliminary point which Mr. Pandit raised. Mr. Van Tijn, in
his opening, said the proceedings were instituted to protect the insurers as provided by s. 104 (4)
of the Traffic Ordinance. Pandit argued that the proceedings are incompetent until a judgment
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has been given in a case brought against the defendant as a result of which the defendant could
claim to be indemnified under the policy of insurance. He could not produce any authority, but
relied on the ordinary meanings of the words in the section.
The section seems perfectly clear to me. If an insured person is involved in an accident
with another person, he may be sued by that other person. If the suit is successful, then in the
normal course of events the insurance company would be bound to pay under the existing policy
of insurance with the insured.
This section, i.e. 104 (4) of the Traffic Ordinance, was designed to protect the insurance
company if they bring an action either (a) before an action is started against the insured; or (b)
within three months after it has been commenced; for a declaration that they are entitled to avoid
the contract subsisting between them as there has been non-disclosure of a material fact or that
there has been a representation of fact which was false in some material particular.
Once the insurance company has obtained such a declaration, they can produce such a
declaration in any subsequent action taken under the policy against the insured and deny liability
therefore.
Page 273 of [1963] 1 EA 271 (HCU)
No action has yet in fact been started against the defendant under this policy, so the
proviso in sub-s. (4) of s. 104 of the Traffic Ordinance is not applicable.
I have no doubt this action is competent, and I so rule.
The following facts are not denied by the defendant:
On January 7, 1958, he had an insurance policy with Sterling General Assurance

Company Limited in respect of a Simca car. That car was involved in two accidents involving
claims; two discharge receipts in respect of the claims were signed by the defendant (Ex. 6 and
Ex. 7).
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On August 6, 1960, he took out an insurance policy with the Indian Trade and General
Insurance Co. Ltd. in respect of a Ford Taunus saloon.
On December 22, 1961, he signed a proposal and declaration for an insurance policy in
respect of the same car with the Motor Union Insurance Company. A policy was issued on the
strength of the proposal form on January 5, 1962.
On March 9, 1962, at mile 3 on the Entebbe road Mr. Ddamba was involved in an
accident with another vehicle. He put in a claim to the plaintiff company on the following day.
Something in the claim form put the plaintiff company on enquiry, and they instructed
their advocates, Messrs. Russell & Co., to investigate. Mr. Ddamba was interviewed by Mr. Van
Tijn of Russell & Co. He volunteered a statement (Ex. 8) in which he admitted that his driver had
been involved in an accident in the Simca in 1958.
As soon as the plaintiffs knew of the claims history with Sterling Insurance Company,
they sent a letter by registered post disclaiming liability to Ddamba (Ex. 3). It was returned
unopened.
The plaintiffs claimed that in answer to the question in box 10 on the proposal form (Ex.
1) signed by him on December 22, 1961, he did not declared a material particular. Question 10
reads:
“Are you now or have you been insured in respect of any motor vehicle? If so, please
state name of company or underwriter.”
“Answer – “Yes. Indian Trade and General Insurance Co. Ltd.”
The answer should have read, according to the plaintiffs:
“Yes. With the Sterling General in respect of my Simca, and the Indian Trade and
General Insurance Co. Ltd.”
Further, in answer to the question 11 (b) –
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“If so, for how many years up to this date have you previously been insured continuously
without claim and with which companies?”
the proposal form reads:
“4. Companies as above”,
which the plaintiffs say is false, having regard to the statement made by the defendant to
Russell & Co., the discharge certificates Exs. 6 and 7 and the evidence of Mankikar (P. 3),
resident manager of Sterling General Insurance Co. They also complain that the answers to
questions 12 and 14 are untrue.
The defence was that a man called Kamya
(1) purported to be the agent of the insurance company;
(2) told Ddamba that all he had to do was to answer questions in Luganda and
that all he, the defendant, had to do was sign the completed form;
Page 274 of [1963] 1 EA 271 (HCU)
(3) that he, Kamya, said that he would only record that which was really
necessary;
(4) that the defendant signed the form blindly, placing implicit faith in
Kamya;
(5) that full and accurate disclosures were made orally to Kamya, who was the
agent of the plaintiff company.
It is admitted that the proposal form Ex. 1 was signed in Ddamba’s house during lunch
time on December 22, 1961. Wampamba (P. 1) and Kamya (P. 4) said in evidence that Ddamba
asked P. 4 to fill in the form as he was about to have lunch. That sounds very natural and
probable. Ddamba denied this, saying that Kamya wanted to assist him and volunteered to do so.
authority.
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Kamya denied that Ddamba had told him of his two previous accidents, or that his
previous insurers had asked him to pay the first £5 on any claim. Ddamba’s advocate urged that
as he had declared the matters quite voluntarily to Messrs. Russell & Co. in Ex. 8 after the
accident on March 9, 1962, one ought to deduce that it was probable that he had mentioned it to
Kamya on December 22, 1961.
Thirdly, P. 1 and P. 4 said Ddamba read Ex. 1 through before signing it.
Who, of the witnesses, is speaking the truth? Wampamba and Kamya were unshaken in
cross-examination. Ddamba, on the contrary, appeared harassed under cross-examination and
tried to fob off everything by saying that all this happened because everything was done in a
hurry during lunch time. Apart from his demeanour, I am satisfied that Mr. Ddamba has not been
speaking the truth as to what happened on December 22, 1961, for the following reasons:
He told Mr. Van Tijn that he had never completed a proposal form in his life, only signed
one. Later on in his cross-examination he had to admit that he had filled the one he took out with
the Indian Trade and General Insurance Co. Ltd.
Secondly, far from making a clean breast of things to Van Tijn in Ex. 8, he omits to
mention the second claim arising out of an accident in October, 1958. The first was one in which
his driver was involved, which he harped on, but seemed singularly anxious not to refer to the
one in which he was involved.
I find, from the evidence before me, that –
(1) Ddamba asked Kamya to fill in the proposal form.
(2) Kamya filled in exactly what Ddamba told him.
(3) Ddamba did not disclose that he had been insured with the Sterling
General or that he had been involved in any accidents during the previous four years or that there
were conditions on his policy.
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(4) He read the proposal form before he signed it. He is an intelligent man and
knew the importance of speaking the truth. This was in fact the third proposal he had made
within three years.
I also accept Fliess’ (P. 2’s) evidence that if he had known of Ddamba’s previous claims
history, he would have had to reconsider his position and either –
(1) refuse to accept the risk; or
(2) impose a possible £50 compulsory excess without a reduction in premium;

or
(3) refuse a 40 per cent. no-claim bonus.
In Newsholme Bros. v. Road Transport and General Insurance Co. Ltd. (1), [1929] All
E.R. Rep. 442, Lord Scrutton said at p. 444:
Page 275 of [1963] 1 EA 271 (HCU)
“The contract of insurance requires the utmost good faith; the insurer knows nothing; the
assured knows everything about the risk he wants to insure and he must disclose to the insurer
every fact material to the risk.”
Had the proposer disclosed all the relevant and material information in the proposal form,
the plaintiff company might very well have taken a different attitude to this risk.
It was claimed by the defendant that Kamya was the insurer’s agent and therefore any
knowledge he had was imputed to the company. I have decided that Kamya had no information
other than that disclosed on the proposal form, but even if he had, the insurers would not be
liable on the authority of Newsholme Bros. v. Road Transport and General Insurance Co. Ltd.
(1).
“A proposal form was handed by the agent of an insurance company to a partner in the
plaintiff firm who was minded to insure a motor omnibus, the property of the partnership, against
damage by accident and third-party risks. In answer to three of the questions set out in the
authority.
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INSURANCE LAW CASES
proposal form the partner gave the correct answers orally to the agent, but the agent wrote those
answers on the form incorrectly, either because he had misunderstood or forgotten what the
partner had told him or intentionally to earn a commission which otherwise he might not receive.
The partner then signed the form, which contained a warranty that the answers were true and a
statement that the warranty was promissory and should be the basis of the contract between
insurers and assured. The company issued a policy and accepted a premium. An accident having
occurred, the plaintiffs claimed to be indemnified under their policy, but the company repudiated
the claim on the ground that the written proposal contained untrue statements.
“Held: the agent was not authorised by the company to fill in the proposal form and in
doing so must be regarded as the agent of the proposer, and knowledge of the agent that the
answers to certain questions in the form were not true was not notice to the company; the written
contract alone could be looked at to ascertain the terms of the agreement between the parties;
and, therefore, the company was not liable to meet the plaintiff’s claim.
“Per Greer, L.J.: The acceptance of the premium cannot be regarded as an agreement to
vary the contract by inserting in it a promise to indemnify the assured if the statements contained
in the proposal form are untrue, nor can the company be said to be estopped by the receipt of the
premium from relying on the contract under which the premium was paid.”
In that case, it was held that the agent of the insurers was acting as an amanuensis of the
proposer in the completion of the form, and that his knowledge of the true facts could not in such
circumstances be imputed to the insurers. The proposal, accompanied by the signed warranty,
was the basis of the contract in this case.
The decision in Newsholme Bros. v. Road Transport and General Insurance Co. Ltd. (1)
was followed in Bhagat Ram s/o Guran Ditta v. Eagle Star and British Dominions Insurance Co.
Ltd (2) (1933), 15 K.L.R. 77.
Whether Ddamba’s version of what happened on December 22, 1961, is accepted, or

Kamya’s, on the authorities cited above the plaintiffs are entitled to the declaration they seek
under para. 10 of their plaint, i.e. a declaration that they are and have at all material times been
authority.
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INSURANCE LAW CASES
entitled to avoid the policy of insurance No. 360362 dated January 5, 1962, apart from any
provisions contained therein on the ground that the said policy of insurance was obtained
Page 276 of [1963] 1 EA 271 (HCU)
by the non-disclosure of material facts and/or by representation of facts which were false
in some material particular.
I give them their declaration and the costs of this suit.
Declaration granted as prayed.
BANQUE FINANCIÈRE DE LA CITÉ SA V WESTGATE INSURANCE CO LTD [1990]

2 ALL ER 947
Appeal
Banque Financiagère de la Cité SA (formerly Banque Keyser Ullmann en Suisse SA) appealed
with leave of the Court of Appeal against the decision of that court (Slade, Lloyd and Ralph
Gibson LJJ) ([1989] 2 All ER 952, [1990] QB 665) on 28 July 1988 allowing the appeal of the
respondents, Westgate Insurance Co Ltd (formerly Hodge General and Mercantile Insurance Co
Ltd), against the decision of Steyn J sub nom Banque Keyser Ullmann SA v Skandia (UK)
Insurance Co Ltd [1987] 2 All ER 923, [1990] QB 665, [1987] 1 Lloyd’s Rep 69 on 30
September 1986 giving judgment for the appellants in their action for damages against the
respondents and others for breach of the respondents’ duty of utmost good faith in respect of
certain credit insurance policies issued by them to idemnify losses arising on certain loans made
by the appellants. The facts are set out in the opinion of Lord Templeman.
Jonathan Sumption QC, Mark Hapgood and Hodge Malek for the appellants.
Sydney Kentridge QC and Jonathan Gaisman for the respondents.
authority.
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INSURANCE LAW CASES
19 July 1990. The following opinions were delivered.
LORD BRIDGE. My Lords, I gratefully adopt the lucid account given in the speech of
my noble and learned friend Lord Templeman of the facts of this case. As appears from that
account both the banks and the insurers were defrauded by the principal villain of the piece, Mr
Ballestero. It is not a little surprising that presumably hard-headed businessmen were taken in by
his barefaced deceptions. Quite independently of any fraud on the part of Mr Ballestero the
banks had the misfortune to employ insurance
Page 950 of [1990] 2 All ER 947
brokers whose dishonest servant, Mr Lee, twice deceived them into believing that they
had insurance cover to protect them in the event of non-repayment of their loans to Mr Ballestero
and his companies when in fact they had not. Mr Lee’s first fraud was in the issue of a cover note
in respect of the first and second excess layers of cover required in connection with the first
Ultron loan before he had found insurers willing to complete that cover. But by mid-June 1980
the necessary cover was completed. Mr Lee’s second fraud was to issue a cover note in respect
of the additional cover required in connection with the second Ultron loan when he had obtained
no effective insurance cover at all. Mr Dungate, the employee of Hodge, came to know of Mr
Lee’s first fraud and, as the judge held, could have foreseen his second.
There can never have been any doubt that the frauds of Mr Ballestero entitled the insurers
to repudiate liability under the fraud exclusion clause. But a question of central significance in
relation to the other issues in the case is whether Mr Lee’s fraud had the same effect. Both courts
below seem to have taken it for granted that it did. The clause provides that the insurers shall not
be liable for-
‘Any claim or claims arising directly or indirectly out of or caused directly or indirectly
by fraud, attempted fraud, misdescription or deception by any person, firm, organisation or
company.’
authority.
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INSURANCE LAW CASES
This is very wide language, but I cannot think that it embraces a fraud practised on the
insured by his own agent in a matter with which the insurers are not concerned. Hodge and the
other insurers who had covered the first and second excess layers were not affected in any way
by the fact that the banks were induced by Mr Lee’s first fraud to advance the first Ultron loan
before the insurance cover was complete. Still less was it any concern of theirs that when the
banks made the second Ultron loan they had not obtained the additional insurance cover they
wanted. If there had been no fraud on the part of Mr Ballestero, but he had simply become
insolvent, the claim by the banks to repayment in virtue of the insurance cover which they had
obtained could not in any sense be said to have arisen out of or been caused by Mr Lee’s fraud in
relation to the insurance cover which they had not obtained. In that event I would have regarded
an attempt by the insurers to repudiate liability under the fraud exclusion clause on the ground of
Mr Lee’s fraud as virtually unarguable.
This conclusion is of relevance first to the question whether Mr Dungate’s failure to

disclose to the banks his knowledge of Mr Lee’s first fraud to the banks his was a breach of duty
as falling within the ambit of the obligation of the utmost good faith which, it is common ground,
both insured and insurer owed to each other. Slade LJ, delivering the judgment of the Court of
Appeal, said ([1989] 2 All ER 952 at 990, [1990] QB 665 at 772).
‘In adapting the well-established principles relating to the duty of disclosure falling on
the insured to the obverse case of the insurer himself, due account must be taken of the rather
different reasons for which the insured and the insurer require the protection of full disclosure. In
our judgment, the duty falling on the insurer must at least extend to disclosing all facts known to
him which are material either to the nature of the risk sought to be covered or the recoverability
of a claim under the policy which a prudent insured would take into account in deciding whether
or not to place the risk for which he seeks cover with that insurer.’
I do not dissent from this statement of the ambit of the duty. But an obligation on Mr
Dungate to disclose what he knew of Mr Lee’s first fraud could only fall within the ambit of the
duty as ‘material … to the recoverability of a claim under the policy’ if Mr Lee’s frauds were
such as would entitle the insurer to repudiate liability. Having concluded that they were not, it
authority.
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INSURANCE LAW CASES
follows, in my opinion, that Mr Dungate’s failure to disclose to the banks the dishonesty of their
agent, whatever may be said about it as a matter of business ethics, did not amount to the breach
of any legal duty.
The second relevance of the conclusion that the insurers could not have repudiated
liability on the ground of Mr Lee’s fraud is that, even if Hodge, as employers of Mr
Page 951 of [1990] 2 All ER 947
Dungate, owed a duty of care to disclose Mr Lee’s fraud to the banks, the breach of that
duty did not cause the banks’ loss. The reasons for this conclusion are fully explained in the
speech of my noble and learned friend Lord Templeman and I need not repeat them.
Thus, at the end of this long and complex litigation the outcome is dictated by a short
point on the construction of the fraud exclusion clause as applied to a combination of
circumstances of a very unusual nature which is unlikely ever to be repeated. This ground alone
means that the appellants fail on the issues of both duty and causation. The result is that the
questions of law so fully and carefully canvassed in both judgments below become academic. I
reserve my opinion on the issues of law on which the judge and Court of Appeal differed,
thinking it better that they should be resolved if and when they arise again on facts which require
their determination.
I would accordingly dismiss the appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given in the speeches
of my noble and learned friends Lord Bridge, Lord Templeman and Lord Jauncey, I would
dismiss the appeal.
LORD TEMPLEMAN. My Lords, by an agreement the terms of which were embodied in

a consortium loan agreement dated 23 January 1980 (the loan agreement) the appellant, Banque
Financiagère de la Cité SA, then named Banque Keyser Ullman en Suisse SA (Keysers), with
two other banks, namely American Fletcher Bank and Banca Unione di Credito, agreed to
advance between them to Ultron AG (Ultron), a Liechtenstein company, 26·25m Swiss francs
authority.
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INSURANCE LAW CASES
for the purchase of the capital of certain Spanish companies which owned and were developing
property in Menorca appropriately named ‘Shangri-La’. The loan was for a limited period of two
years with interest payable on 20 June 1980 and thereafter at the end of every six months. The
advance was to be made after delivery of the specified guarantees. These guarantees included the
pledge of a parcel of gemstones (emeralds, rubies and sapphires) of a replacement value of 75m
Swiss francs, later increased to 95m Swiss francs, and an insurance for 37m Swiss francs
‘guaranteeing, in the event of the borrower defaulting, payment to the Banks of any outstanding
sum after realisation of the pledge’. Ultron was a company controlled by a Mr Ballestero.
Keysers appointed a firm of insurance brokers, Ernest A Notcutt & Co Ltd (Notcutts), to
be the agents of the banks in arranging the required insurance. The employee of the brokers who
undertook the task of effecting the insurance was a Mr Lee. He arranged the insurance in three
layers. Under the primary cover layer insurance, the respondent, Westgate Insurance Co Ltd
(then Hodge General and Mercantile Insurance Co Ltd) (Hodge), was the sole insurer. By the
terms of the primary cover the banks warranted that the contemplated advance to Ultron
including accumulated interest would not exceed 37m Swiss francs. Hodge agreed to insure the
banks against any difference between the proceeds of sale of the pledged gemstones and the
amount outstanding on the loan on 20 December 1981. The liability of Hodge was limited to
9·25m Swiss francs.
Under the first excess layer insurance each of a number of insurers agreed to pay a
proportion of any loss suffered by the banks so far as that loss exceeded the 9·25m Swiss francs
insured by the primary cover. The aggregate liability of the insurers under the first excess layer
was limited to 9·25m Swiss francs.
Under the second excess layer insurance each of a number of insurers agreed to pay a
proportion of any loss suffered by the banks so far as that loss exceeded the 18·5m Swiss francs
insured by the primary cover and the first excess layer. The aggregate liability of the insurers
under the second excess layer was limited to 18·5m Swiss francs. Thus the three insurances
together provided the cover of 37m Swiss francs required by the loan agreement.
authority.
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By 28 January 1980 Mr Lee had issued three cover notes certifying that total insurance
had been effected. The cover note in respect of the primary cover correctly stated that Hodge had
agreed to insure 9·25m Swiss francs. The cover note in respect of the first excess layer has been
held in these proceedings to have been fraudulent. The cover note showed Hodge as being liable
for 20% of the cover although Hodge had only agreed to
Page 952 of [1990] 2 All ER 947
insure for 14 days pending written confirmation from other insurers replacing them. The
cover note in respect of the second excess layer was also fraudulent because some promised lines
of insurance had not been confirmed and a substantial part of the cover had not been placed at
all.
The negotiations between Hodge, as insurers, and Mr Lee, representing the banks
proposing insurance, were undertaken by Mr Dungate, an employee of Hodge. Mr Dungate was
not aware in January 1980 that two of the cover notes issued by Mr Lee were fraudulent.
On 28 January 1980 the banks were induced by the three cover notes issued by Mr Lee to
advance 26·25m Swiss francs to Ultron pursuant to the terms of the loan agreement.
Mr Lee after January 1980 proceeded to complete the insurance. The first excess layer
was completed by 31 January 1980. The second excess layer was only completed to the extent of
12% by 19 March 1980, and of 52·5% by 22 April 1980 and was not fully completed until 11
June 1980. Thereafter the banks were fully covered by insurance for the amount of 37m Swiss
francs required by the loan agreement.
In May and June 1980 Mr Dungate received information which disclosed to him that full
cover for the first excess layer and the second excess layer had not been obtained before the
advance was made on 28 January 1980. Mr Dungate satisfied himself that full cover was
obtained by the middle of June 1980 but he did not report to the banks that their agent, Mr Lee,
had issued false cover notes in January 1980.
authority.
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On 24 June 1980, by an amendment indorsed on the policy, Hodge as insurers of the

primary cover agreed, in consideration of a premium, to amend the insurance for the primary
cover. The maximum loan which the banks could make to Ultron, including accumulated interest
was increased from 37m Swiss francs to 47m Swiss francs and the date of repayment extended to
10 February 1982. The object of this amendment, which was accepted also by the insurers of the
first and second excess layers, was to enable a further advance of 10·75m Swiss francs to be
made to Ultron on the terms of the loan agreement as amended and protected by the existing
insurances and by a third excess layer insurance for any loss sustained by the banks exceeding
37m Swiss francs, up to a maximum of 47m Swiss francs.
On 28 August 1980 Mr Lee issued a cover note which certified that the third excess layer
had been insured by an American insurer. The trial judge, Steyn J, has held that this cover note
was fraudulent because the American insurer which had agreed to insure was either a bogus
company or, contrary to representations made by Mr Lee, had not effected reinsurance with
reputable reinsurers (see [1987] 2 All ER 923, [1990] QB 665). Mr Dungate was not aware that
Mr Lee had issued a fraudulent cover note in connection with the third excess layer.
On 2 September 1980 three further banks, Arbuthnot Latham & Co, Kredietbank (Suisse)
SA and A Sarasin & Cie advanced 10·75m Swiss francs to Ultron. This advance, by agreement
with Keysers and the banks which had entered into the loan agreement in the first place, entitled
all the banks to share in the security constituted by the gemstones and in the insurances. Mr
Dungate on 1 October 1980 ceased to be employed by Hodge and joined another insurer,
Skandia. Thereafter the banks made loans to other companies controlled by Mr Ballestero, called
Deminter SA, Holdings St Georges SA and Etablissement St Georges. Mr Dungate, as the
employee of Skandia, was involved in insuring repayment of these advances. By 18 March 1981
the aggregate amount advanced by banks at the request of Mr Ballestero to his companies
totalled 80m Swiss francs.
In the second half of 1981 Ultron defaulted in the payment of interest and it was revealed
that Shangri-La was a myth, that the gemstones were baubles of little value and that Mr
Ballestero had dissipated and embezzled the assets of Ultron and his other companies. If the
authority.
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banks had inspected Shangri-La they would not have paid out 80m Swiss francs to a common
swindler. The banks made claims under the first primary cover and first and second excess layers
and endeavoured to make a claim under the third excess layer. Each insurance contained a fraud
exemption clause which defeated the claims under the policy because the claims had been caused
by the fraud of Mr Ballestero. The insurers rejected the claims. The banks sued everyone in
sight. Mr Ballestero and
Page 953 of [1990] 2 All ER 947
the American insurer were not to be seen. In 1983 the banks sued all the insurers on the
policies. They sued Hodge and Skandia for negligence and breach of duty owed by them as
insurers to the banks as assured. They sued Notcutts and Mr Lee for fraud. The actions related to
all the loans amounting to 80m Swiss francs. The proceedings must now have cost the parties
millions of pounds sterling borne ultimately by helpless customers and hapless shareholders.
Before the trial of the actions all the issues between the banks and Notcutts were settled
on payment by Notcutts of £10·5m, the amount of the liability insurance of Notcutts. At the trial
which began on 12 May 1986 the banks abandoned their claims under the policies. The fraud of
Mr Lee was proved from the documents discovered because Mr Lee chose not to give evidence.
There was no connection between the fraud of Mr Ballestero and the fraud of Mr Lee. The
knowledge acquired by Mr Dungate of the activities of Mr Lee was apparent from the
correspondence. The banks adduced oral evidence that they relied on the insurance policies and
did not place any or, at any rate, much reliance on Ultron or on the gemstones. This evidence
which, was of doubtful relevance and admissibility, is surprising in view of the terms of the loan
agreement and the terms of the fraud exemption clauses contained in the insurance policies. The
banks called oral evidence to prove that if they had been informed of the misconduct of Mr Lee,
they would not have continued to employ Notcutts even if Mr Lee had been dismissed. They said
they would not have employed any other firm of insurance brokers but would have broken off all
dealings with Ultron and Mr Ballestero and would not have made the advance of 10·75m Swiss
francs on 2 September 1980. The banks called witnesses who stated that they would have
disclosed the knowledge obtained by Mr Dungate to the banks. Oral evidence does not affect the
authority.
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INSURANCE LAW CASES
outcome of these proceedings. Steyn J found every disputed fact in favour of the banks, relied to
a substantial extent on the oral evidence and gave judgment in favour of the banks, acquitting the
banks of contributory negligence. The proceedings before Steyn J endured for 38 days. He gave
judgment against Hodge, the employer of Mr Dungate down to 1 October 1980, in respect of the
loan of 10·75m Swiss francs advanced in September 1980. He gave judgment against Skandia,
the employer of Mr Dungate after 1 October 1980, in respect of losses incurred by the banks
when Deminter SA failed to repay a loan of 17m Swiss francs advanced in November and
December 1980 and when Holdings St Georges SA failed to repay a loan of 13m Swiss francs
advanced in January 1981 and when Etablissement St Georges failed to repay a loan of 13m
Swiss francs advanced in March 1981. After Steyn J had pronounced judgment Hodge and
Skandia appealed. Skandia withdrew its appeal. Hodge persisted. The appeal occupied 23 days
before the Court of appeal; 51 authorities are cited in the judgment of Slade LJ, 74 additional
authorities were cited in argument. A further 32 authorities were referred to in counsel’s skeleton
arguments submitted in writing to the court. That is a grand total of 157 authorities (see [1989] 3
WLR 25 at 27–32).
The Court of Appeal (Slade, Lloyd and Ralph Gibson LJJ) reversed the decision of
Steyn J and dismissed the actions against Hodge (see [1989] 2 All ER 952, [1990] QB 665).
Keysers appealed to this House. The appeal occupied six and a half days. Your Lordships were
greatly assisted by the careful and detailed judgment of Steyn J, which occupied 36 pages of
Lloyd’s Law Reports (see [1987] 1 Lloyd’s Rep 69) and the comprehensive judgment of
Slade LJ which in view of the barrage of authorities and arguments required 58 pages (see [1988]
2 Lloyd’s Rep 515 at 516–574).
Keysers submit that Hodge, as insurers, owed the banks, as the assured, a common law
duty of care in negligence. Keysers also submit that Hodge, as insurers, owed the banks, as the
assured, a duty of utmost good faith. Keysers assert that Hodge through their employee, Mr
Dungate, committed a breach of the duties owed to the banks and continued in breach at all times
after May 1980 when he discovered but failed to disclose to the banks his knowledge that Mr
Lee had issued fraudulent cover notes in January 1980. The damages claimed for this breach are
authority.
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INSURANCE LAW CASES
the sum of 10·75m Swiss francs advanced to Ultron on 2 September 1980. The benefit of the
claims by any other banks for these damages has been assigned to Keysers.
Page 954 of [1990] 2 All ER 947
The first objection to the cause of action based on negligence at common law is that Mr
Dungate did not owe a duty of disclosure. Hodge and the banks entered into an insurance
contract in January 1980. In January 1980 Mr Lee, who was the representative of Notcutts, the
agents for the banks, negotiated with Mr Dungate who was representing Hodge. Mr Lee
committed a breach of the duty which he owed to his principals, the banks, by pretending that the
first and second excess layers had been completed. That breach of duty was not known to Mr
Dungate and did not affect the primary cover insurance. Hodge and the banks negotiated and
entered into a second insurance contract on 24 June 1980 when in consideration of a premium
Hodge indorsed an amendment on the insurance policy. Prior to the insurance contract of 24 June
1980 Mr Dungate became apprised of information from which he deduced that Mr Lee had
committed, in January 1980, a breach of duty to his principles and had remedied that breach by
11 June 1980. No breach of duty by Mr Lee could by June 1980 affect the insurances made in
January 1980 and on 24 June 1980. Mr Dungate did not do or say anything. Mr Dungate did not
by his silence assume any responsibility for the trustworthiness in the future of Mr Lee and the
banks did not rely on his silence as a representation that Mr Dungate believed Mr Lee to be
honest.
It would be strange if in these circumstances one party to a contract owed a duty in

negligence to the other party to warn the other party of his suspicions of former misconduct by
the agent of that other party; it would be stranger still if the party who failed to disclose his
suspicions were liable in damages for the misconduct of the agent thereafter. I am talking now
about liability in law. Hodge, a firm of reputable insurers, might have thought it right to inform
Notcutts of the suspicions which their employee, Mr Lee, had aroused. In the absence of a
reasonable explanation, Hodge might have declined to have any dealings with Mr Lee. Notcutts,
a reputable firm of insurance brokers, would no doubt have investigated any suspicions reported
to them by Hodge and dismissed Mr Lee if those suspicions proved well founded. The judge held
authority.
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that Hodge were, and Notcutts would have been, under a legal duty to report the misconduct of
Mr Lee to the banks even if that misconduct had been remedied by the completion of the first
and second excess layers and even if Mr Lee had been dismissed from the employment of
Notcutts. I do not agree. A professional should wear a halo but need not wear a hair shirt.
No authority was cited for the proposition that a negotiating party owes a duty to disclose
to the opposite party information that the agent of the opposite party had committed a breach of
the duty he owed to his principal in an earlier transaction. The party possessing the information
will no longer himself trust the agent and may refuse to deal with the agent. The party possessing
the information must not himself become involved with any misconduct by the agent and the
courts will naturally consider whether he is or has become involved. Subject to these
reservations, a duty to disclose sounding in damages for breach would give rise to great
difficulties. The information may be unreliable or doubtful or inconclusive. Disclosure may
expose the informer to criticism or litigation.
Counsel for the banks, in urging that Mr Dungate and Hodge owed a duty of disclosure to
the banks, referred to Governors of Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd
[1984] 3 All ER 529, [1985] AC 210, which dealt with the liability of a local authority for
defective drains, Smith v Eric S Bush (a firm), Harris v Wyre Forest DC [1989] 2 All ER 514,
[1989] 2 WLR 790, which dealt with the liability of a valuer to a mortgagor, and Caparo
Industries plc v Dickman [1990] 1 All ER 568, [1990] 2 WLR 358, which dealt with the liability
of auditors to shareholders. These cases are far removed from the suggested liability of a
negotiating party to disclose information concerning the conduct of the agent of the opposite
party.
The banks relied on cases dealing with a customer of a bank who knows that his signature
has been forged and that the bank is relying on the signature being genuine. If the customer does
not inform the bank of the fraud until the bank has paid out, the customer is estopped from
asserting that his signature has been forged: see McKenzie v British Linen Co (1881) 6 App Cas
82. In Ogilvie v Western Australian Mortgage Co [1896]
Page 955 of [1990] 2 All ER 947
authority.
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AC 257 a customer kept quiet about his knowledge of forgery because he was requested
so to do by an agent of the bank. In William Ewing & Co v Dominion Bank (1904) 25 SCR 133
a customer who failed to disclose that his signature had been forged was estopped from denying
his signature. In Greenwood v Martins Bank Ltd [1932] 1 KB 371 a husband who failed to
disclose that his signature had been forged by his wife was estopped from asserting the forgery.
In Fung Kai Sun v Chan Fui Hing [1951] AC 489 a mortgagee who had notice that a mortgage
was forged delayed in disclosing this fact and the forger escaped. The mortgagee was held to be
estopped from asserting that the mortgage was forged. In Tai Hing Cotton Mill Ltd v Liu Chong
Hing Bank Ltd [1985] 2 All ER 947, [1986] AC 80 the customer’s clerk forged his principal’s
signature and it was held that the customer was not liable to the bank in negligence for failing to
maintain a proper system of detecting fraud or for failing to examine his bank accounts and he
was not estopped from asserting the forgery.
All these decisions are concerned with estoppel. In the present case Hodge and the other
insurers are not asserting any fraud on the part of Mr Lee as a reason for disclaiming liability
under the insurance policies. The insurers rely on the fraud of Mr Ballestero of which the
insurers had no knowledge.
The other cases cited by the banks in support of the proposition that Mr Dungate owed a
duty to disclose to the banks his knowledge of the earlier misconduct of Mr Lee were the cases
dealing with negligent misstatements such as Hedley Byrne & Co Ltd v Heller & Partners Ltd
[1963] 2 All ER 575, [1964] AC 465 and Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5,
[1976] QB 801. The person who makes a negligent misstatement which is relied on by a
negotiating or contracting party may be liable in damages. In the present case there was no
negligent misstatement and the silence of Mr Dungate did not amount to an assertion that Mr Lee
was trustworthy and the banks did not rely on the silence of Mr Dungate.
The second obstacle which confronts the banks on this appeal is that the losses suffered
by the banks were not the consequences of any breach of duty on the part of Hodge to disclose to
the banks the misconduct of Mr Lee. The banks did not suffer any loss by reason of the fact that
authority.
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they were not informed of the misconduct of Mr Lee. This objection applies both to the claim in
negligence and to the claim based on the duty of insurers to act with the utmost good faith.
The banks adduced evidence that if they had known of the misconduct of Mr Lee in
connection with the first and second excess layers then the banks would have made no more
loans at the behest of Mr Ballestero. But the banks did not lose the 10·75m Swiss francs
advanced to Ultron at the date of the advance. The banks lost the 10·75m Swiss francs and
interest which Ultron should have paid.
When the banks advanced 10·75m Swiss francs in September 1980 the banks acquired
three assets in consideration of the advance. The banks acquired the right to receive from Ultron
10·75m Swiss francs on 10 February 1982 and to receive interest in the meantime plus the right
to the proceeds of sale of the gemstones, so far as this was necessary to reimburse the banks, and
the right to claim any deficiency from the insurers. The failure of Mr Dungate to disclose the
misconduct of Mr Lee did not deprive the banks of the right to receive 10·75m Swiss francs and
interest from Ultron and did not deprive the banks of the right to the proceeds of the sale of the
gemstones.
Liability and damages at law for breach of duty are confined to the foreseeable
consequences of the act or omission which constitutes the breach: see Overseas Tankship
(UK)Ltd v Morts Dock and Engineering Co Ltd, The Wagon Mound (No 1) [1961] 1 All ER
404, [1961] AC 388.
If Hodge were under any duty in negligence or as insurers to the banks in June 1980 or
subsequently, that duty was to inform the banks of the knowledge acquired by Mr Dungate of the
fraudulent conduct of Mr Lee in January 1980. That fraud consisted of certifying that the banks
were insured when they were only partially insured. The banks were induced by that fraud to
advance 26·25m Swiss francs on the security of partially non-existent insurance. If Mr Dungate
and Hodge did not expose the fraud which Mr Lee had committed in January 1980, Mr Lee
might again certify that the banks were
Page 956 of [1990] 2 All ER 947
authority.
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INSURANCE LAW CASES
insured when they were not. The banks might again be induced to advance money on the
security of non-existent insurance. If and when the banks sought to make a claim for policy
moneys the banks would suffer a loss if the claim were valid but the policy was non-existent.
This sequence of events was foreseeable. Mr Lee fraudulently certified that he had effected the
third excess layer insurance. The banks were induced to advance 10·75m Swiss francs on the
security of the non-existent third excess layer insurance for 10m Swiss francs. The banks made a
claim for the policy moneys. If that claim was a valid claim which should have been paid, then
the banks lost the amount of the policy moneys and Hodge are liable to the banks for the policy
moneys which would have been forthcoming but for the concealed failure of Mr Lee to effect the
insurance. But if the claim was not a valid claim, the banks have lost nothing because they would
not have recovered the policy moneys even if Mr Lee had effected the insurance and Hodge are
not liable for a loss which the banks did not incur as a result of Mr Lee’s fraud. It follows that in
order to determine the damage (if any) suffered by the banks for the failure of Mr Dungate to
disclose the earlier fraud of Mr Lee, the third excess layer policy must be examined. If the banks
made a valid claim under that policy, then they suffered damage of 10m Swiss francs for which
Hodge are liable. But if the banks made a claim which would not have been met, even if the
policy had been effected, then the banks suffered no loss as a result of the silence of Mr Dungate.
The policy for the primary cover and the policies for the first and second excess layers
which together insured the banks up to a maximum of 37m Swiss francs were in the same form
and the cover for the third excess layer increasing the total maximum cover from 37m Swiss
francs to 47m Swiss francs was in the same form. The primary cover policy was dated 16 May
1980. All the policies were amended on or about 24 June 1980 in the manner I have indicated
and thereafter the primary cover and the first and second excess layers covered the banks against
a loss of up to 37m Swiss francs on a loan of 47m Swiss francs repayable on 10 February 1982.
The third excess layer which Mr Lee was instructed to negotiate and which he said he had
effected was for payment of up to 10m Swiss francs on a loss sustained by the banks in excess of
37m Swiss francs on a loan of 47m Swiss francs repayable on 10 February 1982.
The primary cover policy and each of the other policies as amended defined ‘the Insured’
as Ultron or the banks to which the policy might be assigned. The policies were assigned to the
authority.
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INSURANCE LAW CASES
banks who made the initial advance of 26·25m Swiss francs in January 1980 and the banks
which made the advance of 10·75m Swiss francs on 2 September 1980. ‘The Security’ was
defined in each policy and included:
‘Precious stones deposited with [Keysers], as valued in a detailed written valuation by the
Gemmological Institute of Antwerp as certified by Professor Juergen Pens of the University of
Mayence and Koenigstein and as valued in writing by Professor Demuth of the Swiss
Association of Gemmology of Zurich … ’
The banks warranted that they would not advance to Ultron a sum which with
accumulated interest exceeded 47m Swiss francs. The insurers agreed that if capital and interest
were not repaid by Ultron to the banks by 10 February 1982 then if the banks made a claim on
the insurers within 30 days, the insurers would take possession of the pledged gemstones, sell the
gemstones and pay the proceeds of sale to the banks so far as was necessary to achieve
repayment in full of the amount due to the banks from Ultron. The banks warranted that-
‘(iv) The total valuation or appraised value of The Security by the persons and
organisations set out herein … is not less than 95,000,000 Swiss Francs.’
The insurers for their part agreed that-
‘In the event of the net sale proceeds not realising sufficient moneys to reimburse the
banks, the Insurers undertake to deal with the claim for the difference between the net sale
proceeds and the amount outstanding on the line of credit up to a maximum limit of 47,000,000
Swiss Francs or 50 per cent. of the valuation of the
Page 957 of [1990] 2 All ER 947
stones at the time of depositing, whichever amount is the smaller, within the terms, and
conditions of the Policy.’
But this agreement by the insurers to pay the banks any shortfall was subject to the
following express fraud exclusion clause:
authority.
Page | 186
INSURANCE LAW CASES
‘EXCLUSIONS The insurers shall not be liable hereunder for (i) Any claim or claims
arising directly or indirectly out of or caused directly or indirectly by fraud attempted fraud
misdescription or deception by any person firm organisation or company.’
The banks accepted the policies containing fraud exclusion clauses.
The banks could not succeed in a claim under the primary cover and the first and second
excess layers because the claim was caused by the fraud of Mr Ballestero. The banks suffered no
damage from the absence of the third excess layer insurance. A claim under that insurance would
not have succeeded because the claim would have been caused by the fraud of Mr Ballestero.
The silence of Mr Dungate in not reporting the earlier fraud of Mr Lee only resulted in the banks
advancing 10·75m Swiss francs to Ultron without the protection of a third excess layer insurance
for 10m Swiss francs subject to a fraud exclusion clause.
It would be strange if a breach of duty by Mr Dungate in failing to disclose the fraud of

Mr Lee enabled the banks to claim damages which they would have been unable to recover if Mr
Lee had not be fraudulent. It would be strange if the silence of Mr Dungate in failing to warn the
banks that Mr Lee could not be relied on to effect the third excess layer insurance enabled the
banks to claim damages which they would not have been able to recover if the insurance had
been effected. It would be strange if the banks, which as against Hodge, had, by the terms of the
insurance policies, agreed to bear the risk of fraud by Mr Ballestero were enabled by Mr
Dungate’s silence to recover from Hodge the loss suffered by the banks as a result of the fraud
by Mr Ballestero.
On behalf of the banks it was submitted that the fraud exclusion clause of the policy
applied to the fraud of Mr Lee as well as the fraud of Mr Ballestero. In that event the insurers
could have rejected a claim in reliance on the fraud of Mr Lee. It was submitted that the damages
from the absence of the third excess layer were the insurance moneys which would have been
paid if Mr Lee had effected the third excess layer insurance and had by his fraud absolved the
insurers from meeting the claim. By not disclosing the fraud of Mr Lee, Hodge caused the banks
to lose the benefit of the insurance because a claim by the banks under the policy could have
been rejected by the banks in reliance on Mr Lee’s fraud. In my opinion the fraud exclusion
authority.
Page | 187
INSURANCE LAW CASES
clause did not apply to Mr Lee’s fraud because Mr Lee’s fraud did not cause a claim under the
policy to arise. The only fraud which caused the claim to arise was the fraud of Mr Ballestero
and the fraud of the gemstone valuations. The insurers were not absolved from paying 37m
Swiss francs because Mr Lee fraudulently informed the banks that he had effected insurance of
47m Swiss francs. If the third excess layer insurance had been effected the banks would have
recovered nothing.
The courts below were not invited to consider the significance of the fraud exemption
clause. Steyn J concluded that Mr Dungate should have foreseen and was liable for financial loss
to the banks caused by any fraud of Mr Lee and this financial loss was the advance of 10·75m
Swiss francs. My Lords, the fraud which Mr Lee committed was the fraud of certifying that the
banks were insured when in fact the banks were not assured. The only damage suffered by the
banks when they advanced 10·75m Swiss francs was the absence of the third excess cover policy
under which the banks would have been entitled to claim 10m Swiss francs subject to a fraud
exemption clause which applied to the fraud of Mr Ballestero but did not apply to the fraud of
Mr Lee. No moneys could have been recovered under such a policy and accordingly no damages
were suffered by the bank as a result of the silence of Mr Dungate.
In this House Keysers repeated the submission that the consequences of the negligence of
Mr Dungate in not disclosing the earlier fraud of Mr Lee included the consequences of any fraud
by Mr Lee and consisted of the sum of 10·75m Swiss francs which the banks
Page 958 of [1990] 2 All ER 947
·were induced to advance to Ultron by the fraud of Mr Lee. The only authority cited for
this submission was Hughes v Lord Advocate [1963] 1 All ER 705, [1963] AC 837. In that case
the defendants covered the site of an open manhole with a tent, unguarded but surrounded by
warning paraffin lamps. A boy playing with a lamp fell into the manhole and an immediate
combustion of paraffin vapour caused an explosion whereby the boy received burns which were
terribly severe because of the explosion. In that case the foreseeable danger was burns from the
lamp and the boy suffered burns from the lamp and the defendants were held liable. Lord Morris
authority.
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INSURANCE LAW CASES
said there was a foreseeable risk that the boy might in some way burn himself by playing with a
lamp ([1963] 1 All ER 705 at 711, [1963] AC 837 at 852):
‘Though his severe burns came about in a way that seems surprising, this only serves to
illustrate that boys can bring about a consequence which could be expected but yet can bring it
about in a most unusual manner and with unexpectedly severe results.’
In the present case the damage caused by the silence of Mr Dungate was not the loss of
the sum of 10·75m Swiss francs advanced by the banks but the loss of insurance for 10m Swiss
francs caused by the fraud of Mr Lee in asserting that he had obtained insurance for 10m Swiss
francs subject to a fraud exclusion clause when he had not obtained such insurance.
The banks argue that they would not have advanced 10·75m Swiss francs on 2 September
1989 if Mr Dungate had disclosed the earlier fraud of Mr Lee and therefore they lost 10·75m
Swiss francs because of the silence of Mr Dungate. My Lords, this argument confuses the cause
of the advance and the cause of the loss of the advance. The cause of the advance was the fraud
of Mr Lee. That fraud was foreseeable by Mr Dungate, who is liable (if at all) for the
consequences of that fraud. The consequence of Mr Lee’s fraud was that the advance was
uninsured. Mr Dungate is liable (if at all) for the fact that the advance was uninsured. The
advance would have been lost whether the advance was insured or not because the banks had
accepted and paid a premium for insurance which contained a fraud exemption clause. The fraud
of Mr Ballestero caused the loss of the advance and caused the rejection by the insurers of any
claim under the policy. The fraud of Mr Ballestero which caused the loss of the advance and the
rejection of the claims under the insurance policies was, as the judge found, not foreseeable. The
fraud of Mr Lee which caused the advance to be made did not affect the rights of the banks to
recover their loss and therefore did not cause the loss of the advance. The policies of insurance
did not or would not have protected the banks against the fraud of Mr Ballestero and his fraud
was causative of the loss of the advance. Accordingly, the failure by Mr Dungate to inform the
banks of the fraud of Mr Lee was not causative of the banks’ loss.
In September 1980 when the banks were induced by the fraud of Mr Lee to advance
10·75m Swiss francs to Ultron on the security of the primary, and the first and second excess
authority.
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INSURANCE LAW CASES
layers and (as they thought) on the security of the non-existent third excess layer, the fraud of Mr
Ballestero, which in 1981 brought into operation the fraud exemption clauses, was not
foreseeable by Hodge and was not the concern of Hodge or any other insurer. No one suggests
that Mr Lee should not have negotiated policies containing fraud exemption clauses. Those
clauses prevented the banks from receiving the policy moneys under the policies of the primary
cover and first and second excess layers, and would have prevented them from recovering under
the third excess layer insurance.
The banks suffered a loss and damages of 10·75m Swiss francs and interest when Ultron
failed to repay the advance. Ultron could not repay because Mr Ballestero was fraudulent. There
was no recovery from the gemstones because the valuations were fraudulent. There was no
recovery from the insurances because of the fraud exemption clause and the fraud of Mr
Ballestero. If there had been a third excess layer of 10m Swiss francs there would have been no
recovery from the insurers because of the fraud exemption clause and the fraud of Mr Ballestero.
The damages suffered by the banks were the consequences of the fraud of Mr Ballestero and not
the consequences of the silence of Mr Dungate. My noble and learned friend Lord Griffiths
remarked in another
Page 959 of [1990] 2 All ER 947
context that for want of a nail the Kingdom was lost (see Smith v Littlewoods
Organisation Ltd (Chief Constable, Fife Constabulary, third party) [1987] 1 All ER 710 at 713,
[1987] AC 241 at 251); but the farrier was not mulcted in damages for the defeat.
In the circumstances it is not necessary to consider whether Hodge were under a duty to
disclose the misconduct of Mr Lee by reason of the obligation of an insurer to deal with the
proposer of insurance with the utmost good faith. If Hodge were in breach of that duty no
damage flowed from the breach for the reasons I have already given. But it may be helpful to
observe that I agree with the Court of Appeal that a breach of the obligation does not sound in
damages. The only remedy open to the insured is to rescind the policy and recover the premium.
The authorities cited and the cogent reasons advanced by Slade LJ are to be found in the report
authority.
Page | 190
INSURANCE LAW CASES
of the proceedings in the Court of Appeal (see [1989] 2 All ER 952 at 991–997, [1990] QB 665
at 773–781).
Before parting with this appeal I draw attention again to the length and complexity of the
proceedings as they appear from the chronological account given earlier in this speech. As early
as 1961 in an appeal which lasted 16 days Donovan LJ recorded ‘that the questions in this case,
one of fact, and four of the construction of the contract, have been resolved with the aid of only
fifty-five authorities’: see Reardon Smith Line Ltd v Ministry of Agriculture Fisheries and Food
[1961] 2 All ER 577 at 625, [1962] 1 QB 42 at 131. In Maclaine Watson & Co Ltd v Dept of
Trade and Industry [1989] 3 All ER 523 at 531, [1989] 3 WLR 969 at 986 I complained of an
appeal to this House which occupied 26 days and for which copies of 200 authorities were
available. I commented that the vast amount of written and oral material tended to obscure three
fundamental principles decisive of the International Tin Council litigation.
Proceedings in which all or some of the litigants indulge in over-elaboration cause

difficulties to judges at all levels in the achievement of a just result. Such proceedings obstruct
the hearing of other litigation. A litigant faced with expense and delay on the part of his
opponent which threaten to rival the excesses of Jarndyce v Jarndyce must perforce compromise
or withdraw with a real grievance. In the present case the burdens placed on Steyn J and the
Court of Appeal were very great. The problems were complex but the resolution of these
problems was not assisted by the length of the hearings or the complexity of the oral evidence
and oral argument. The costs must be formidable. I have no doubt that every effort was made in
the courts below to alleviate the ordeal but the history of these proceedings is disquieting. The
present practice is to allow every litigant unlimited time and unlimited scope so that the litigant
and his advisers are able to conduct their case in all respects in the way which seems best to
them. The results not infrequently are torrents of words, written and oral, which are oppressive
and which the judge must examine in an attempt to eliminate everything which is not relevant,
helpful and persuasive. The remedy lies in the judge taking time to read in advance pleadings,
documents certified by counsel to be necessary, proofs of witnesses certified by counsel to be
necessary and short skeleton arguments of counsel, and for the judge then, after a short
discussion in open court, to limit the time and scope of oral evidence and the time and scope of
authority.
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INSURANCE LAW CASES
oral argument. The appellate courts should be unwilling to entertain complaints concerning the
results of this practice.
This appeal must be dismissed.
LORD ACKNER. My Lords, for the reasons given by my noble and learned friends Lord
Bridge, Lord Templeman and Lord Jauncey in their speeches, which I have had the advantage of
reading in draft, I too would dismiss this appeal. To my mind, the first and vital issue is whether
the insurers could have successfully relied on the fraud exclusion clause to repudiate liability by
reason of the fraud of Mr Lee. Once that issue is, as it must be, determined adversely to the
appellants, the very foundation of their claim disintegrates, since it has the following
consequences. Mr Dungate’s obligation to the banks to act with the utmost good faith did not
involve disclosing to the banks Mr Lee’s dishonesty. That being so, the first step towards
establishing the necessary proximity to found a duty of care at common law did not exist.
Finally, the inability of the insurers to rely on the fraud exclusion clause in relation to Mr Lee’s
dishonesty is fatal to the
Page 960 of [1990] 2 All ER 947
appellants’ cris de coeur, if we had known of Mr Lee’s fraud we would not have entered
into the loan agreement, since that fraud did not cause their loss. That was caused by the fraud of
Mr Ballestero and his companies.
LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the advantage of reading

in draft the speeches of my noble and learned friends Lord Bridge and Lord Templeman and I
am in entire agreement with the reasons which they give for dismissing the appeal. I share the
concern of Lord Templeman that this litigation should have imposed so great a burden on
judicial time in its earlier stages.
The appellants relied on the duty of disclosure incumbent on a party to a contract

uberrimae fidei in support of two propositions, namely (1) that breach of the duty sounded in
damages and (2) that the existence of the duty created the necessary proximity between insurers
and insured to give rise to a duty of care on the part of the former to the latter. I agree with the
authority.
Page | 192
INSURANCE LAW CASES
compelling reasons of the Court of Appeal for rejecting the first proposition and cannot usefully
add to those reasons. I should, however, like to say a few words about the second proposition.
The duty of disclosure arises because the facts relevant to the estimation of the risk are
most likely to be within the knowledge of the insured and the insurer therefore has to rely on him
to disclose matters material to that risk. The duty extends to the insurer as well as to the insured:
see Carter v Boehm (1766) 3 Burr 1905, [1558–1774] All ER Rep 183. The duty is, however,
limited to facts which are material to the risk insured, that is to say facts which would influence a
prudent insurer in deciding whether to accept the risk and, if so, on what terms, and a prudent
insured in entering into the contract on the terms proposed by the insurer. Thus any facts which
would increase the risk should be disclosed by the insured and any facts known to the insurer but
not to the insured, which would reduce the risk, should be disclosed by the insurer. There is, in
general, no obligation to disclose supervening facts which come to the knowledge of either party
after conclusion of the contract (Lishman v Northern Maritime Insurance Co (1875) LR 10 CP
179), subject always to such exceptional cases as a ship entering a war zone or an insured failing
to disclose all facts relevant to a claim.
What is said in this appeal is that when Mr Dungate discovered in early June 1980 that
Mr Lee had issued fraudulent cover notes in January of that year he, as insurer, came under a
duty to disclose this fact to the banks. I do not consider that the obligation of disclosure extends
to such a matter. Although there have been no reported cases involving the failure of an insurer
to disclose material facts to an insured the example given by Lord Mansfield CJ in Carter v
Boehm 3 Burr 1905 at 1909, [1558–1774] All ER Rep 183 at 184 is of an insurer who insured a
ship for a voyage knowing that she had already arrived. Another example would be the insurance
against fire of a house which the insurer knew had been demolished. In these cases the
undisclosed information would have had a material and direct effect on the risk against which the
insured was seeking to protect himself. Indeed, the insured would have said that the risk no
longer existed. In the present case the risk to be insured was the inability, otherwise than by
reason of fraud, of Mr Ballestero and his companies to repay the loan to the banks. Mr Lee’s
dishonesty neither increased nor decreased that risk. Indeed it was irrelevant thereto. It follows
that the obligation of disclosure incumbent on Mr Dungate, as the insurer, did not extend to
authority.
Page | 193
INSURANCE LAW CASES
telling the banks that their agent Mr Lee was dishonest. If the obligation of disclosure incumbent
on parties to a contract of insurance could ever per se create the necessary proximity to give rise
to a duty of care, a matter on which I reserve my opinion, it is clear that the scope of any such
duty would not extend to the disclosure of facts which are not material to the risk insured. It
follows that the appellants’ reliance on the duty of disclosure does not assist them to establish
negligence on the part of Mr Dungate.
Appeal dismissed.
JUBILEE INSURANCE CO LTD V. JOHN SEMATENGO [1965] EA 233
Judgment
Sir Udo Udoma CJ: This is a claim by the plaintiff for a declaration that it is and was at all
material times entitled to avoid the policy of insurance, No. UCV/7457, dated June 10, 1963,
apart from any provisions contained therein, on the ground that the said policy was obtained (by
the defendant) by the nondisclosure of material facts or by misrepresentation of facts which were
false in some material particular or by both ways.
The material facts alleged to have been misrepresented or not to have been disclosed (or
both) are pleaded in para. 4 of the plaint filed in the following terms:
Page 234 of [1965] 1 EA 233 (HCU)
“4. The said proposal form and the said declaration contained (inter alia) the
following questions to and answers by the defendant:
Question No. 16. Is the vehicle at present in a thorough state of repair?
Answer: Yes.
authority.
Page | 194
INSURANCE LAW CASES
Question No. 19. Give record of accident and/or loss during the past five
years in connection with any motor vehicle owned or driven by you, whether insured including
any claim outstanding.
Answer: None.”
The allegation of the plaintiff company is that the proposal form and the declaration
contained therein formed the basis of the policy of insurance and were incorporated in the said
policy. The plaintiff company now complains that the answers to questions Nos. 16 and 19 set
out above were false in material particulars in that, as regards the answer to question No. 16, the
motor lorry, No. UFY 420, had, at the material time, broken down on the Kampala-Jinja road
owing to a major mechanical defect, and was not therefore then in a thorough state of repair; and,
in respect of the answer to question No. 19, the motor lorry aforesaid had been involved in a
collision in the night of April 24, 1963, and was then lying on the Kampala-Jinja road; both
which material facts the defendant had not only failed to disclose to the plaintiff company at the
material time, but had also misrepresented.
In his written statement of defence the defendant denies that:
(1) the answers to the questions set out in para. 4 of the plaint were material
“in or about the making of the said policy”;
(2) he obtained the said policy by nondisclosure by misrepresentation of

material facts as alleged or at all; or both and
(3) whatever facts were within his knowledge regarding his said motor lorry
were disclosed for (sic) the plaintiff’s servant or agent when he wrote down the answers on the
said piece of paper.
The defendant therefore “contends that the plaintiff is not entitled to avoid the said policy
either by reason of the provisions of sub-s. 4 of s. 4 of the Traffic Ordinance of (sic) otherwise”.
authority.
Page | 195
INSURANCE LAW CASES
At the hearing, the defendant neither gave nor called any evidence in support of any of
the averments contained in his statement of defence. The only evidence before the court was
given by the plaintiff and its witnesses.
On the evidence, which has not been contradicted and which I accept, I think it has been
established that the defendant is the registered owner of the motor lorry, No. UFY 420, which
had previously been insured with the plaintiff company and the policy of which insurance
expired on March, 4 1963, without any renewal.
On April 24, 1963, in the night, the motor lorry No. UFY 420 was involved in a collision
with a Peugeot estate car No. USB 683 at mile 8 on the Kampala -Jinja road. At about 9.30 p.m.
that night Cpl. James Ahenda, No. 7494, visited the locus in quo. He found both the lorry, No.
UFY 420, and the Peugeot estate car, No. USB 683, lying in line on the road. He inspected both
vehicles and took measurements and drew a sketch plan of the scene.
Between 8.30 a.m. and 9 a.m. on April 25, 1963, the defendant went to the plaintiff
company. He applied for the renewal of his previous policy. He was informed that the policy
could not be renewed owing to effluxion of time. The defendant thereupon applied for a new
third party insurance policy as prescribed under the Traffic Ordinance, 1951, to cover his said
motor lorry for
Page 235 of [1965] 1 EA 233 (HCU)
only a period of three months. He explained that he could not afford to insure the said
motor lorry for a longer period. On enquiry, he also explained that he had brought his lorry No.
UFY 420 with him to Kampala, and that it was then stationary at the Nakivubo motor park,
Kampala, loaded with matoke.
At his request the proposal form, Ex. A, was supplied to him for completion. As the
defendant does not understand English, at his request, and on his instructions and on his behalf
the proposal form, Ex. A, was completed by Charles Kulabiwo Serumaga (P.W. 1), a clerk
employed by the plaintiff company, to whom the defendant spoke in Luganda the answers
required for completing the form Ex. A; which answers Charles Kulabiwo Serumaga (P.W. 1)
authority.
Page | 196
INSURANCE LAW CASES
duly and correctly translated into English from Luganda and recorded on the said form. The
completed form, Ex. A, was then read over and again translated from English into Luganda for
the benefit of the defendant, who, thereupon on being satisfied, signed the declaration of
warranty on the reverse side of the form aforesaid, thereby signifying that his answers had been
correctly and faithfully recorded thereon.
The form, Ex. A, thus completed was submitted to the plaintiff company’s representative,
Sadrudin Jamal (P.W. 7), who, after having examined it and being satisfied with the answers
given thereon, immediately the same day and in consideration of the payment of the premium of
the sum of Shs. 26/- by the defendant, issued to the defendant the cover note, Exhibit B.
Thereafter Sadrudin Jamal (P.W. 7) issued to the defendant a policy of insurance, and pursuant
the provisions of s. 101 of the Traffic Ordinance, 1951, also a certificate of insurance; copies of
both which documents are in these proceedings exhibited and marked Exhibits E and F
respectively.
The defendant later the same day at about 11 a.m. went to Yokana Muwange (P.W. 5), a
motor mechanic, at his workshop situate at some 2½ miles on the Gayaza-Kampala road. He
reported to him that his lorry was lying on the Kampala-Jinja road in a bad state of repairs, the
same having broken down. He requested the latter to accompany him to the site on the road
where the lorry was lying in order to effect repairs. Yokana Muwange (P.W. 5) went with him.
He found the motor lorry on the road. The bearings of the near wheel of the motor lorry were
broken and the wheel itself rendered immobile. It was stiff. The defendant requested Yokana
Muwange (P.W. 5) to repair the said lorry for him.
Yokana Muwange (P.W. 5) set at once to work on the lorry, having first obtained the
requisite spare parts from Kampala. The work of repairing the motor lorry continued late into the
night, and a hurricane lantern had to be placed on the top of the lorry. While the lorry was
stationary on the Kampala -Jinja road undergoing repairs, a Fiat motorcar ran into and collided
with it from behind, that night.
In June, 1963, it came to the knowledge of the plaintiff company that the motor lorry, No.
UFY 420, property of the defendant insured with it had been involved in a collision with another
authority.
Page | 197
INSURANCE LAW CASES
vehicle on April 25, 1963. The plaintiff company was thereupon put on an enquiry. As a result it
was further discovered that on April 24, 1963, that is, the day before the defendant insured the
motor lorry with the plaintiff company, the motor lorry, No. UFY 420, had also been involved in
a collision with a Peugeot estate car No. USB 683, in consequence of which the motor lorry, No.
UFY 420, was lying immobile with a major mechanical defect on the Kampala-Jinja road.
After due enquiry, the plaintiff company on January 16, 1964, addressed the letter, Ex. D,
in these proceedings to the defendant repudiating the policy of insurance, and subsequently filed
this suit seeking the declaration hereinbefore mentioned.
Page 236 of [1965] 1 EA 233 (HCU)
Counsel for the defendant, has submitted that having regard to the provisions of s. 104 (4)
of the Traffic Ordinance, 1951, this action is not maintainable in law. Counsel contended that
before an action for a declaration of the plaintiff’s right to avoid the defendant’s insurance policy
can be maintained there ought to be either an action commenced and pending, or a judgment
obtained against the defendant in respect of the accident; and since there is no such action or
judgment in this case this action cannot be maintained in law.
Counsel referred the court to the case of The Motor Union Insurance Co. Ltd. v. A. K.
Ddamba (1) and contended that the decision therein did not deal with the question as to whether
or not that action was maintainable in law pursuant the provisions of s. 104 (4) of the Traffic
Ordinance.
For the plaintiff company, counsel submitted that the plaintiff company is entitled to
judgment both on the evidence and in law; and that under the provisions of s. 104 (4) of the
ordinance the plaintiff company is entitled to the declaration sought regardless of the fact that
there is pending neither suit nor any unsatisfied judgment recovered against the defendant. In
support of this submission counsel cited and relied on The Motor Union Insurance Co. Ltd. v. A.
K. Ddamba (1).
Now the provisions of s. 104 (4) of the Traffic Ordinance, 1951, without its proviso,
which I consider irrelevant to the issue in controversy in the instant case, are as follows:
authority.
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“No sum shall be payable by an insurer under the foregoing provisions of this section, if,
in an action commenced before, or within three months after, the commencement of the
proceedings in which the judgment was given, he has obtained a declaration that, apart from any
provisions contained in the policy, he is entitled to avoid it on the ground that it was obtained by
the nondisclosure of a material fact, or by a representation of fact which was false in some
material particular, or, if he has avoided the policy on that ground, that he was entitled so to do
apart from any provision contained in it.”
The contention of counsel for the defendant is that by reason of the above provisions the
present action is not maintainable in law because no action has been taken nor judgment obtained
against the defendant against which the defendant can claim to be indemnified by the plaintiff
company. In the absence of such action or judgment there can be no question of the plaintiff
company being called upon to make payment to anyone. In other words, it is only when anyone
who has obtained judgment against the defendant seeks to enforce such a judgment against the
plaintiff company, contended counsel, that the latter can come to the court and ask for a
declaration. Counsel’s submission therefore resolves itself to the construction of the provisions
of s. 104 (4) of the Traffic Ordinance, 1951.
It is of interest to note that the provisions of s. 104 (4) of the Uganda Traffic Ordinance,
1951, are taken verbatim from the provisions of s. 10 (3) of the English Road Traffic Act, 1934.
The point raised in the instant case would appear not to have been raised in the English Courts,
which of course is not surprising as the provisions of the Act appear very clear and are devoid of
any ambiguity.
Commenting on the provisions of s. 10 (3) of the Traffic Act 1934, C. N. Shawcross in

his book The Law of Motor Insurance (1936 Edn.) at p. 404 said:
“Unless the policy has been cancelled before liability to a third party is incurred and the
certificate of insurance has been surrendered by the assured, insurers are not entitled to rely upon
nondisclosure or misrepresentation by
Page 237 of [1965] 1 EA 233 (HCU)
authority.
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INSURANCE LAW CASES
the assured as a ground upon which to avoid liability to that third party who has obtained
judgment against the assured in respect of death or bodily injury arising out of the use of the
assured’s motor vehicle on the road. In order to avoid such liability to a third party the insurer
must go further and commence proceedings, within a specified time, for a declaration that he is
or was entitled to avoid the assured’s policy upon the ground of non-disclosure or
misrepresentation of a material fact, apart from the terms of the policy.”
It would appear that the purpose and intent of the provisions of s. 104 (4) of the Traffic
Ordinance was to enable an insurance company to seek a declaration from the court that it is
entitled to avoid an insurance policy on the ground of nondisclosure of a material fact or
misrepresentation of fact which is false in some material particular, regardless of any provisions
in the insurance policy contained. Where an insurer has obtained such a declaration either before
or three months after the commencement of proceedings by a third party in which the party had
obtained judgment against the assured, the insurer cannot be called upon to satisfy such a
judgment.
In my view the effect of these provisions, on a true construction, like the effect of the
provisions of the corresponding English Act, is to prevent an insurer without resort to the court
from relying solely upon nondisclosure or misrepresentation by the assured as the ground upon
which to avoid his liability to a third party who has already obtained judgment against the
assured. There is nothing in the provisions of the Ordinance to support counsel for the defendants
submission that before an action for a declaration can be maintained in law, a judgment must
have been obtained against an insured. The submission is unconvincing. It is misconceived and
must be over-ruled. In my opinion this action is maintainable in law and has been properly
brought before this court.
I think counsel was in error in his contention that the decision of the court in The Motor
Union Insurance Co. Ltd. v. A. K. Ddamba (1) did not deal specifically with the question as to
whether or not that action was maintainable in law. It is of course true that the learned trial Judge
used the word “competent” instead of maintainable. I am satisfied that the point was indeed one
of the main issues decided in that case. In dealing with that point Jeffreys Jones, J. had said:
authority.
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INSURANCE LAW CASES
“This Section, i.e. 104 (4) of the Traffic Ordinance was designed to protect the insurance
company if they bring an action either (a) before an action is started against the insured, or (b)
within three months after it has been commenced for a declaration that they are entitled to avoid
the contract subsisting between them as there has been nondisclosure of a material fact or that
there has been a representation of fact which was false in some material particular. Once the
insurance company has obtained such a declaration, they can produce such a declaration in any
subsequent action taken under the policy against the insured and deny liability therefor.”
With the above quoted passage of the learned judge’s judgment I respectfully agree.
Accepting the evidence of the plaintiff company and its witnesses as I do, the question
must be, is the plaintiff company entitled to the declaration which it seeks on the grounds that the
insurance policy, Ex. E, was obtained by the nondisclosure of a material fact, or by a
misrepresentation of fact which was false in some material particular, or both? I think so.
The representative of the plaintiff company, Sadrudin Jamal (P.W. 7) has sworn that if at
the time the form, Ex. A, was submitted to him it had been disclosed that the motor lorry, No.
UFY 420, had been involved in an accident
Page 238 of [1965] 1 EA 233 (HCU)
the previous day he would not have issued the defendant with the cover note, Ex. B, or
agreed to have the motor lorry insured at all, and that he relied entirely on Ex. A in accepting to
insure the motor lorry. He said further that even in August 1963 during an interview, the
defendant only admitted the accident which had occurred on April 25, 1963 but not that of April
24, 1963.
It is well established that a contract of insurance is uberrimae fidei and therefore requires
the utmost good faith from both parties during the making of it. Nondisclosure of a material fact
or a representation of fact false in some material particular renders the contract voidable.
Nondisclosure of a material fact as such may not by itself be a ground for damages, the only
remedy available would appear to be the avoidance of the contract. The contract being uberrimae
authority.
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INSURANCE LAW CASES
fidei the insurer is entitled to be put in possession of all material information possessed by the
insured.
As was said in Joel v. Law Union & Crown Insurance Co. (2) ([1908] 2 K.B. at p. 883)
by Fletcher Moulton, L.J.:
“The contract of life insurance is one uberrimae fidei. The insurer is entitled to be put in
possession of all material information possessed by the insured. This is authoritatively laid down
in the clearest language by Lord Blackburn in Brownlee v. Campbell 5 A.C. 925 at p. 954:
‘In policies of insurance, whether marine insurance or life insurance, there is an

understanding that the contract is uberrimae fidei, that, if you know any circumstance at all that
may influence the underwriter’s opinion as to the risk he is incurring, and consequently as to
whether he will take it, you will state what you know. There is an obligation there to disclose
what you know, and the concealment of a material circumstance known to you, whether you
thought it material or not, avoids the policy.’
There is, therefore, something more than an obligation to treat the insurer honestly and
frankly, and freely to tell him what the applicant thinks it is material he should know.”
In Macdonald v. The Law Union Fire & Life Insurance Co. (3) the plaintiff therein
effected a policy of insurance with the defendants therein on the life of a K. M. Taylor, which
was under the seal of the defendants, but the plaintiff was not made a party to the policy. In it
there was the proviso “that if the declaration under the hand of the plaintiff delivered at the
defendants’ office as the basis of the insurance is not in every respect true – then the insurance
shall be void.”
On proposing the insurance, the plaintiff had answered in writing certain questions; and
at the foot he had signed, as the person proposing the insurance, a declaration in the following
terms:–
“I declare that the above particulars are truly set forth”.
authority.
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INSURANCE LAW CASES
It was held that the proviso in the policy, by the terms of which the plaintiff having
accepted it was bound, avoided the insurance if the particulars in the declaration were untrue in
fact, on a material matter, although not untrue to the plaintiff’s knowledge.
In Thompson v. Weems (4), William Weems applied to an insurance office to effect a

policy on his life. He received a printed form of proposal containing certain questions. Among
the questions there were the following:
“Question 7 (a) Are you temperate in your habits?
(b) and have you always been strictly so?
Answer to (a) “Temperate”; and
(b) “Yes”.
Page 239 of [1965] 1 EA 233 (HCU)
Subjointed to the printed questions, there was a declaration which was signed by Weems
to the effect that the foregoing statements were true and that the assured agreed that this
declaration should be the basis of the contract; and that if any untrue averment etc. was made the
policy was to be absolutely void and all moneys received as premium forfeited. The policy
recited the above declaration as the basis of the contact.
After Weems’ death the insurance company refused payment of the sum of £1,500, being
the amount due on the policy on the ground that the answers given by Weems on the proposal
form were false in fact. In an action to recover the amount of the policy, it was held by the House
of Lords, reversing the decision of the court below, that the declaration of Weems taken, in
connection with the policy, constituted an express warranty that the answer to question 7 was
true in fact; and that as the evidence clearly proved that Weems’ averment as to his temperance
was untrue, the policy was absolutely null and void.
In the instant case, I find as a fact on the evidence that the answer given by the defendant
to question No. 16 was false in material fact; and false within the knowledge of the defendant as
authority.
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INSURANCE LAW CASES
it is highly probable that at the material time when the defendant applied on April 25, 1963 to
have his motor vehicle, No. UFY 420, insured and in pursuance thereof had completed the
proposal form, Ex. A, he knew that the said motor vehicle had broken down and was immobile
on the Kampala-Jinja road, owing to a major mechanical defect; and that the same was therefore
not in a thorough state of repair. I think that the answer, “yes”, given by the defendant constitutes
a representation of facts false in some material particular.
The fact that the defendant told a false tale when in reply to enquiries he had said to
Charles Kulabiwo Serumaga (P.W. 1) that the said motor lorry was loaded that morning with
matoke and was then at the Nakivubo motor park, whereas in fact the said lorry was at the time
on the Kampala-Jinja road; the fact also that the defendant went that same morning to Yokana
Muwange (P.W. 5) and took him to the Kampala-Jinja road for the express purpose of repairing
the said motor lorry; the fact that the previous policy had expired on March 4, 1964 and no
attempt had been made to renew it until the morning on April 25, 1963, that is to say, the
morning after the accident resulting in the breakdown of the motor vehicle, No. UFY, 420 on the
road; all these facts must lead irresistibly to the inference that the defendant knew full well
before his visit to the office of the plaintiff company’s representative, of the accident of the night
of April 24, 1963, and that the said motor vehicle was then immobile on the Kampala-Jinja road.
From the evidence as a whole and the above findings, I also draw the inference that the
defendant deliberately left question No. 19 unanswered even though he well knew that the motor
lorry aforesaid had been involved in an accident on April 24, 1963. It follows I think that by
deliberately refusing to give any answer to question No. 19 the defendant had failed to disclose
to the plaintiff company the record of accident involving the motor lorry No. UFY 420. Thus the
defendant had obtained the policy, Ex. E, and the certificate, Ex. F, by the nondisclosure of a
material fact and by a representation of fact false in some material particular.
This action is technically founded on the provisions of s. 104 (4) of the Traffic
Ordinance, that is to say, quite independently of the terms contained in the policy, Ex. A. It has
been brought pursuant those provisions. Whether or not the declaration of warranty contained in
authority.
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INSURANCE LAW CASES
the proposal form, Ex. A, forms the basis of the contract and is incorporated therein seems to me
of little moment.
The right of action provided for under s. 104 (4) of the Ordinance is entirely separate,
distinct and independent of any provision contained in the policy,
Page 240 of [1965] 1 EA 233 (HCU)
Ex. E, and would appear to be narrower than any right of action which might accrue
under the contract of insurance as such. In an action brought pursuant these provisions the
nondisclosure must be of a material fact and the misrepresentation false in some material
particular. In the case of an action founded upon the terms of the policy as a contract it seems to
me that a misrepresentation need not necessarily be material so long as it forms the basis of the
contract of insurance.
In the Australian case of Condogianis v. Guardian Assurance Co. Ltd. (5) the appellant
sued the respondent upon a policy issued by them insuring certain laundry premises against fire.
A proposal form filled up by the appellant when applying for the policy contained the following
questions:
“Has the proponent ever been a claimant on a fire insurance company in respect of the
property now proposed, or any other property?
If so, state when and name of company.”
The appellant’s answer to the question was “Yes. 1917. ‘Ocean’.” The answer was
literally true as in 1917 he had claimed against Ocean Insurance Co. in respect of the burning of
a motorcar; but in 1912 he had made a claim against another company in respect of a similar
loss. The proposal form stated that it was the basis of the policy and that the particulars given by
the appellant were to be express warranties. The policy contained a condition that if there was
any misrepresentation as to any fact material to be known in estimating the risk, the respondents
were not to be liable upon the policy.
authority.
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It was held by the Privy Council that the answer was untrue since the question could not
reasonably be read as being intended to have the limited scope which would render the answer
true; that there was a breach of warranty whether or not the misrepresentation was as to a
material fact; and that the appellant could not recover.
Although in para. 9 of his statement of defence, the defendant had averred that the
plaintiff company’s servant or agent had not read over his answers to him before he, the
defendant, signed Ex. A, no evidence was called in substantiation of that averment; nor was any
argument addressed to the court on the issue. In order, however, that there should be no doubt as
to the view of the court on the issue, suffice it to say that I am satisfied on the evidence that the
defendant’s answers were not only read over but were interpreted to the defendant, who clearly
understood them before he signed Ex. A.
It was the defendant’s duty to insist that his answers be read and interpreted to him before
signing Ex. A; and if he had failed in that duty, which on my findings is not the case, he must be
taken to have had the answers read and interpreted to him. For the servant or agent of the
plaintiff company, in filling the answers on the proposal form, Ex. A, was not at the material
time the agent of the plaintiff company but of the defendant for the purposes of the proposal
form, Ex. A. (See Biggar v. Rock Life Assurance Co. (6)).
In my judgment the plaintiff company is entitled to the declaration sought because it has
satisfactorily discharged the onus which is upon it of establishing by preponderance of evidence
that the insurance policy, Ex. E, and the certificate, Ex. F, were obtained by the defendant by the
nondisclosure of a material fact and/or by a representation of fact which was false in some
particular. I accordingly enter judgment for the plaintiff and grant it the declaration asked for in
terms of the plaint filed in this action, with costs.
Declaration as prayed.
authority.
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BANQUE KEYSER ULLMANN SA V SKANDIA (UK) INSURANCE CO LTD AND

OTHERS AND RELATED ACTIONS [1987] 2 ALL ER 923
Actions
Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd
By a writ and points of claim the plaintiffs, Banque Keyser Ullman SA, brought an action against
the defendants, Skandia (UK) Insurance Co Ltd, Ennia Insurance Co (UK) Ltd,
Page 929 of [1987] 2 All ER 923
Prudential Assurance Co Ltd, Cia Americana de Seguros y Reaseguros SA, Ernest A Notcutt &
Co Ltd, the Bank of Ireland and Hodge General and Mercantile Insurance Co Ltd, claiming
indemnity under the terms of certain credit insurance policies issued by the defendants to
indemnify any loss arising in respect of loans amounting to 37m Swiss francs made by the
plaintiffs under two contracts of loan dated 23 January and 2 September 1980 to Ultron AG, a
company registered in Liechtenstein and owned and controlled by Jaime Ballestero, or
alternatively damages for breach of the duty of utmost good faith, breach of contract or
alternatively breach of fiduciary duty or breach of a duty of care owed by the defendants to the
plaintiffs. The defendants counterclaimed against the plaintiffs for a declaration that they were
not liable under the relevant insurance policies or alternatively recission of the policies or
damages and/or an indemnity, alleging that the plaintiffs had acted recklessly in failing to
investigate the creditworthiness of Mr Ballestero. The defendants also alleged contributory
negligence against the plaintiffs. The plaintiffs’ claim against Ernest A Notcutt & Co Ltd was
settled before the trial, the plaintiff sought no order against Cia Americana de Seguros y
Reaseguros SA and the claim against the Bank of Ireland was stood over. The facts are set out in
the judgment.
Skandia (UK) Insurance Co Ltd v Slavenburg’s Banque (Suisse) SA and others
authority.
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INSURANCE LAW CASES
By a writ and points of claim the plaintiffs, Skandia (UK) Insurance Co Ltd (Skandia), suing on
their own behalf and on behalf of other interested underwriters, brought an action seeking as
against the defendants, Slavenburg’s Banque (Suisse) SA, American Fletcher Bank (Suisse) SA,
Chemical Bank, Credit Lyonnais, Bank Nederland NV and American Fletcher National Bank
and Trust Co, for a declaration that they were not liable under certain credit insurance policies
issued by them to indemnify losses arising in respect of two loans totalling 17m Swiss francs
made by the plaintiffs to Deminter SA, a company owned and controlled by Jaime Ballestero,
and/or damages for breach of duty to act in the utmost good faith or for acting recklessly. Crédit
Lyonnais and American Fletcher National Bank and Trust Co counterclaimed against Skandia,
Ernest A Notcutt & Co Ltd and Albert Ray Lee for an indemnity under the insurance policies
and/or damages for misstatement or misrepresentation or return of premiums. Chemical Bank
counterclaimed against Skandia, Ernest A Notcutt & Co Ltd and Mr Lee for damages for
negligence or failure to act in the utmost good faith or for misrepresentation or the return of the
premiums. Skandia’s claim in the original action was stood over, the counterclaims by Crédit
Lyonnais, American Fletcher National Bank and Trust Co and Chemical Bank’s counterclaim
against Ernest A Notcutt & Co Ltd were settled before the trial, and the counterclaims against Mr
Lee were stood over to be heard later. The trial proceeded in respect of the counterclaims against
Skandia. The facts are set out in the judgment.
Skandia (UK) Insurance Co Ltd v Chemical Bank and another
By a writ and points of claim the plaintiffs, Skandia (UK) Insurance Co Ltd (Skandia), brought
an action against the defendants, Chemical Bank, American Fletcher Bank (Suisse) SA and
American Fletcher National Bank and Trust Co, seeking a declaration that they were not liable
under certain credit insurance policies issued by them to indemnify certain loans made by the
plaintiffs under a contract of loan dated 6 January 1981 to Holdings St George SA, a company
owned and controlled by Jaime Ballestero and registered in Switzerland, and/or damages or the
return of premiums paid for breach of duty to act in the utmost good faith and the plaintiffs’
failure not to act recklessly. Chemical Bank and American Fletcher National Bank and Trust Co
counterclaimed against Skandia, Ernest A Notcutt & Co Ltd and Albert Roy Lee for damages for
the plaintiffs’ failure to disclose certain dishonest acts done by Mr Lee as an employee of the
authority.
Page | 208
INSURANCE LAW CASES
plaintiffs’ brokers or alternatively for the plaintiffs’ failure to act in the utmost good faith. The
plaintiffs’ claim was stood over and the counterclaims against Ernest A Notcutt & Co Ltd were
settled before the trial. The counterclaim against Mr Lee was stood over to be
Page 930 of [1987] 2 All ER 923
tried later. The trial proceeded in respect of counterclaim against Skandia. The facts are set out in
the judgment.
Banque Keyser Ullmann SA and others v Skandia (UK) Insurance Co Ltd
By a writ and points of claim the plaintiffs, Banque Keyser Ullmann SA, Banque Arabe et
International d’Investissements and Arbuthnot Latham & Co Ltd, brought an action against the
defendants, Skandia (UK) Insurance Co Ltd (Skandia) and Ernest A Notcutt & Co Ltd, claiming
an indemnity against the loss of a loan of 13m Swiss francs made by the plaintiffs under a
contract of loan dated 18 March 1981 to Ets St Georges, a Leichtenstein company owned and
controlled by Jaime Ballestero, pursuant to the terms of a credit insurance policy issued by the
defendants or alternatively damages for breach of the duty to act in the utmost good faith. The
defendants counterclaimed for rectification of the insurance policy, a declaration that they were
not liable to the plaintiffs under the policy or alternatively recission of the contract of insurance
or damages for failing to act in the utmost good faith. The defendants also alleged contributory
negligence on the part of the plaintiffs. The plaintiffs’ claim against Ernest A Notcutt & Co Ltd
was settled before the trial. The facts are set out in the judgment.
John Griffiths QC, Mark Hapgood and Hodge Malek for the plaintiff banks except Chemical
Bank.
S A Stamler QC (until 4 June 1986), Nicholas Strauss QC and Kenneth Maclean for Chemical
Bank.
Richard Yorke QC, Crawford Lindsay and Charles Cory-Wright for the defendant insurers.
Mr Lee did not appear after the first day.
authority.
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Cur adv vult
30 September 1986. The following judgment was delivered.
STEYN J.
Introduction
Posing questions of law in too abstract a form, divorced from the hard facts of the case, is often
an exercise of dubious value. That risk must be enhanced after a trial involving four Commercial
Court actions which lasted some three months. Yet, in a case in which it was always apparent
that certain questions of law might be of critical importance, this judgment may be rendered a
little more intelligible if I give, by way of introduction, a brief sketch of the shape of the case as
it emerged in the evidence and state the principal questions of law in summary form. But this
introduction must be read as being subordinate to the detailed findings of fact which will follow.
The story is one of fraud on a massive scale. During the years 1979 to 1981 Mr Jaime Ballestero
persuaded syndicates of banks to enter into separate loan agreements with four companies which
he owned or controlled. The details of the four transactions are as follows:
Borrower Date of loan Amount
(Swiss francs)
(A) Ultron SA 23 January 1980 26.25m
Ultron SA 2 September 1980 10.75m
(B) Deminter SA 17 November 1980 and 15 December 1980 17m
(C) Holdings St Georges SA 6 January 1981 13m
(D) Ets St Georges18 March 1981 13m
80m
authority.
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INSURANCE LAW CASES
Page 931 of [1987] 2 All ER 923
I will refer to the corporate borrowers as Ultron, Deminter, HSG and ESG. Each of the loans was
for a period of two years. The purpose of the Ultron transactions, as explained to the banks by
Mr Ballestero, was to provide finance for a development of a tourist complex in Menorca. It was
called the Shangri-La project. The purpose of the other transactions, according to Mr Ballestero,
was to provide finance for Cia Frutera Sud-Americana SA (Safco), a Chilean fruit exporting
company, which was owned and controlled by Mr Ballestero. The principal securities offered by
Mr Ballestero in support of each loan were a pledge of gemstones (consisting of emeralds,
sapphires and rubies) and a credit insurance policy. The value of the securities in Swiss francs
was stated to be as follows:
Loan Gemstones Insurance
Ultron 37m (total) 95m (total) 47m (total)
Deminter 17m (total) 40m (total) 20m (total)
HSG 13m 31m 15.3m
ESG 13m 32m 16m
The value of the pledges of gemstones was certified by the Gemmologisch Instituut Antwerpen
(GIA), which was managed by Mr F Verbruggen. GIA acted on behalf of the borrowing
companies. Professor Jurgen Pense issued certificates that the gemstones were as described in the
certificates of GIA. He also acted on behalf of the borrowing companies. The lending banks
obtained a form of ‘counter-expertise’ from Mr Eric Demuth, a Zurich jeweller and former
chairman of the Swiss Association of Gemmology. On the face of it the values of the pledges of
authority.
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INSURANCE LAW CASES
gemstones seemed satisfactorily established. In any event, the banks primarily relied (as I find)
on the benefit of the credit insurance. The borrowing companies were named as the insured
under the policies save in the case of the loan to ESG, where the lending banks were named as
the insured. But the purpose of the insurance was to provide insurance protection to the banks in
the event of a failure of the borrowing companies to repay the loans. Moreover, the banks were
either named as co-insured or to the knowledge of the insurers were to be the assignees under the
policies. Each policy did, however, contain a so-called fraud exclusion clause. The insurances
were throughout arranged by Ernest A Notcutt & Co Ltd (Notcutts), a reputable firm of Lloyd’s
brokers with offices in London, Beckenham and Cardiff. In 1979 Mr Roy Lee was the manager
of Notcutts’ Cardiff office but in 1980 he became their regional development manager. He left
Notcutts in late 1981. He was the broker who negotiated and arranged all the relevant insurances.
Relying on the principal securities being in place, the syndicates of banks duly advanced the
sums in question to Mr Ballestero’s companies. In due course the borrowing companies
defaulted on all the loans. It was discovered that Mr Ballestero had perpetrated a massive fraud
on the banks; in the context of the sums in question the value of the gemstones proved to be
negligible. Mr Ballestero had been assisted in his fraud by experts who issued fraudulent
valuations of the gemstones. The banks held some subsidiary forms of security such as pledges
of the shares of the borrowing companies and personal guarantees of Mr Ballestero and an
associate, but these proved worthless. Needless to say Mr Ballestero and the funds which he
extracted from the banks have disappeared. The banks claimed reimbursement under the policies
of insurance against the insurers. Not surprisingly, the insurers’ reply was that they are under no
liability: the banks’ loss was caused by Mr Ballestero’s fraud, the fraud exclusion clause under
each policy applies and accordingly they are not liable under any of the policies. Litigation
commenced in the Commercial Court in the form of four separate actions, respectively dealing
with the loans to the four borrowing companies. Initially, it was contended by the banks that the
insurers were liable to them under the policies. During the course of the trial it was, however,
conceded by all the banks that by reason of the fraud exclusion clauses the insurers are not so
liable.
But the banks discovered that Mr Lee had repeatedly deceived them in relation to the
authority.
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INSURANCE LAW CASES
Page 932 of [1987] 2 All ER 923
insurances which he arranged on their behalf. The rule that in arranging insurance cover the
broker acts on behalf of the insured is applicable. Notcutts were therefore the agents of the
banks. Notcutts were vicariously responsible for the frauds committed by Mr Lee on the banks.
The banks joined Notcutts as defendants. On the first day of the trial, the banks and Notcutts
arrived at a full and final settlement of all issues between them in the four pending actions. The
precise details of the settlement do not matter. The rationale of the settlement was that Notcutts
accepted liability in the sum of £10·5m, being the sum in respect of which Notcutts were
protected by liability insurance cover.
That left as principal protagonists in the trial the banks and the insurance companies. The banks
also seek judgment against Mr Lee. Their cause of action against Mr Lee is fraud. Mr Lee was
represented by counsel on the first day of the trial but his counsel then withdrew. Mr Lee also
chose not to give evidence. I must turn to the ways in which Mr Lee’s conduct impinges on the
extant issues between the banks and the insurers.
While the banks alleged that Mr Lee deceived them on a number of occasions, it is his conduct
between January and June 1980 which led the banks to contend that, arising from the insurers’
knowledge of Mr Lee’s conduct, they have a cause of action against the insurers. It was a
condition of each of the loan agreements that the banks would only advance the moneys when
the promised securities were in place. This necessarily involved that binding contracts of
insurance in the stipulated sums had to be concluded. It was quite plain to all concerned that the
banks would advance no money until this condition had been fulfilled. The first Ultron loan for
26·25m Swiss francs, which was led by Banque Keyser Ullman en Suisse SA (Keysers), was due
for completion in January 1980. Mr Lee found it impossible to place the required insurance as
one risk. He decided to place it in layers as follows: primary layer: 9·25m Swiss francs; first
excess layer: 9·25m Swiss francs in excess of 9·25m Swiss francs; second excess layer: 18·5m
Swiss francs in excess of 18·5m Swiss francs.
Mr Lee placed the primary layer with Hodge Mercantile and General Insurance Co Ltd (Hodge).
Mr Lee had approached Mr A C Dungate, the senior underwriter of Hodge, and Mr Dungate had
authority.
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INSURANCE LAW CASES
agreed to sign a slip taking a 100% line on the primary layer. Bearing in mind the capacity of
Hodge, there was never any possibility that Hodge could take anything but a relatively modest
line on the first and second excess layers. Mr Lee realised that, unless he could complete those
layers quickly, the Ultron loan would not be completed. The business would fall through. There
would be no commission for his firm and for himself. Moreover, anticipated future business from
Mr Ballestero would not materialise. But completion of the first and second excess layers proved
a stumbling block. Mr Lee turned to Mr Dungate for help. For Mr Dungate the transaction was
attractive: it was the largest contingency risk which he had ever underwritten. In the result he
made two ‘held covered’ arrangements with Mr Lee. The first was in respect of the first excess
layer. That layer was effectively completed by 30 January 1980, and the held covered
arrangement was cancelled on that date. That left the second excess layer to be completed. That
layer was, I find, substantially incomplete towards the end of January 1980 as (a) some promised
lines had not been confirmed and (b) a substantial part of the cover had not been placed at all.
Again, Mr Dungate responded to Mr Lee’s request for assistance. He signed a slip on behalf of
Hodge reading as follows: ‘H/C 73·5% 14 days at 28/1/80 HODGE ACD 28/1/80.’
Although the insurance cover in respect of the second excess layer was plainly incomplete Mr
Lee promptly issued cover notes to Keysers, as lead bank on the Ultron loan, which represented
that the insurance cover in respect of all layers was complete. In respect of the second excess
layer the cover note recorded that Hodge had taken a 78·25% line. This was, to Mr Lee’s
knowledge, false in two respects: (a) Hodge had only taken a line of 73·5% and (b) more
importantly, the loan was for two years and the banks required insurance cover for the whole
period but Hodge had only given a ‘held covered’ arrangement for 14 days.
Relying on the truthfulness of their brokers’ cover notes, the relevant banks promptly
Page 933 of [1987] 2 All ER 923
advanced the moneys under the 26·25m Swiss francs Ultron loan. Had the banks known the true
position, completion would not have taken place. From February to June 1980 Mr Lee proceeded
to place the missing cover on the second excess layer, most of it being placed between the end of
February and the end of April 1980. But, I find, the last 6% was only placed on or about 9 June
authority.
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INSURANCE LAW CASES
1980. Shortly before the final completion of the slip, and by a quirk of fate, Mr Lee’s deceit was
discovered by Hodge.
Hodge was a company in the Standard Chartered Group. The Swiss banking arm of that group,
Standard Chartered Group AG, which was a company based in Zurich, Switzerland, was a
participant in the Ultron loan. Having regard to Standard Chartered’s exposure as a participant in
the loan, and the total exposure of Hodge, as shown in the cover notes, Mr C Jekyll, the
managing director of Standard Chartered Bank AG, raised with Mr Dungate by telephone and
subsequently by letter a question as to the extent of the exposure of Hodge on the Ultron
transaction. What then happened lies at the heart of the dispute between the banks and the
insurance companies. It is common ground that Mr Dungate spoke to Mr Lee on at least one or
two occasions, and that Mr Dungate was shown the slips relating to the transaction. In
anticipation of more detailed findings, I record at this stage only that in early June 1980 Mr
Dungate became fully aware (a) that Mr Lee had deliberately deceived the banks by the issue of
the false cover notes and (b) that following that deception, which Mr Lee maintained from the
end of January to June 1980, there had been a substantial gap throughout this period in the
insurance cover to the potential detriment of the banks. Mr Dungate testified that he reported
what he had discovered to Mr Wilkinson, a director of Notcutts. I find that he did not do so. He
also did not report the matter to his superiors in Hodge. It is common ground that Mr Dungate
never informed the insured (the banks) of the deceit of their agents. Instead, Mr Dungate, to use
his own phrase, ‘condoned Mr Lee’s dishonesty’, and proceeded to underwrite on behalf of
Hodge the 2 September 1980 Ultron loan (10·75m Swiss francs) and, on behalf of Skandia
Insurance Co Ltd (Skandia), his employers after October 1890, the loans to Deminter, HSG and
ESG. In other words, he wrote lines in respect of new loans, amounting in aggregate to 53·75m
Swiss francs, after the discovery of the deceit of Mr Lee.
Against this background the banks contend that their losses were caused by the insurers’ failure
to disclose to them how the banks were deceived by Mr Lee by the issue of the false cover notes.
The banks contend, and for convenience I refer to them collectively at this stage, that if the
insurers, Hodge and subsequently Skandia, had disclosed to the banks Mr Lee’s deceit no further
loans would have been made, and the loss on the first Ultron loan would also have been averted.
authority.
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INSURANCE LAW CASES
At the trial there was a great multiplicity of issues. Of central importance, however, was the legal
question whether the insurers owed a legal duty to the banks to disclose to them the deceit of
their brokers. The banks argue that in the particular circumstances such a duty did exist. They
seek to justify this assertion on various grounds. If there was such a legal duty, matters of breach,
causation, remoteness of damages and so forth are in issue. Specifically, it is in issue not only
whether the banks were solely responsible for their own loss but, if not, whether the banks were
contributorily negligent. But it was agreed that matters of quantum ought to stand over for
subsequent adjudication.
[His Lordship listed the matters to be dealt with and continued:]
The principal characters
In commercial affairs the device of incorporation is usually of paramount importance.

Occasionally it is profitable to concentrate attention on the individuals who were the leading
actors in the story. That is certainly so in this case. In any dramatis personae of this case the
principal characters must be Mr Ballestero, Mr Lee and Mr Dungate.
Mr Ballestero has disappeared with the banks’ money. That is what he set out to do. In the
pantheon of international fraudsters the ingenuity and scale of Mr Ballestero’s fraud entitles him
to a high place. He was said to be the scion of a very wealthy South American
Page 934 of [1987] 2 All ER 923
family. There was probably some truth in this assertion. He had a controlling or large interest in
Safco, which at one time was regarded as a thriving Chilean export business. It seems, however,
that it was experiencing lean times by 1979. His family was involved in banking. That is a career
which he also pursued. In due course he became the manager of the Barcelona branch of Banco
Español de Credito, a large Spanish bank. He left the service of the bank in 1975 in order to
concentrate his attention on more entrepreneurial activities. Precisely what that involved is
unclear and, in any event, not material. The story of the present litigation starts with his
negotiations in 1979 to obtain a syndicated bank loan in favour of Ultron, a Liechtenstein
company, in order (as he informed the banks) to finance a development project in Menorca. He
authority.
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INSURANCE LAW CASES
impressed the conservative bankers with whom he negotiated as a very able and impressive
individual. That may be a trite observation: projecting such an image is no doubt an
indespensable requirement for the commission of the type of sophisticated fraud which Mr
Ballestero embarked on.
Now I turn to Mr Lee. He was said to be somewhat deficient in insurance broking skills but good
at obtaining business. He impressed his employers and banking clients as a man of good
character: it was repeatedly emphasised in evidence that he was a teetotaller, a lay preacher, hard
working and a family man. Nevertheless, he perpetrated a number of frauds on his banking
clients in each of the four transactions. In a sense this statement may seem to prejudge my
consideration of the case against Mr Lee personally. It is, however, on the totality of the
evidence an inescapable conclusion. Mr Lee was a party to the litigation but chose not to give
evidence. That is understandable since his guilt was manifest on a perusal of the
contemporaneous documents. The nature of the relationship between Mr Ballestero and Mr Lee
is not clear. When Mr Lee left the service of Notcutts in late 1981 he commenced employment
with Vesed International Ltd. Mr Ballestero had been a director of this company since 1980.
Vesed became involved in the insurances which stood as security for the loans to HSG and ESG.
Mr Lee also acted for Mr Ballestero under a power of attorney. Clearly, there are grounds for
suspecting that Mr Ballestero and Mr Lee had conspired to defraud the banks. It has not,
however, been proved that Mr Lee was in effect a co-conspirator of Mr Ballestero in his scheme
to defraud the banks. What is clear is that Mr Ballestero could not have obtained the Ultron,
Deminter, HSG and ESG loans without Mr Lee’s assistance. I will assume that Mr Lee misled
the banks in relation to the insurance simply in order to ensure that the loan transactions, and the
supporting insurance transactions, were completed. His motive was, I find, to obtain for himself,
and for his firm, substantial brokerage in very large transactions.
Mr Dungate was Hodge’s senior underwriter. He played a pivotal role in the completion of the
contracts of insurance. While Mr Dungate’s motivation and role lies at the heart of the factual
disputes in this case, it is right that I should record at once that he was in no way involved in Mr
Ballestero’s fraud and that he was not an active participant in Mr Lee’s deception of the banks.
authority.
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INSURANCE LAW CASES
The case against him is that he ought to have disclosed to the banks in or after June 1980 what he
had learnt of Mr Lee’s deception of the banks.
The Ultron transactions until June 1980
I propose to give a somewhat more detailed account of the sequence of events until June 1980
than I will give of subsequent events. That course is justified on two grounds. Firstly, the
subsequent loans followed the pattern of the first. Secondly, it is the events between January to
June 1980 which give rise to the banks’ case against the insurers.
The first Ultron loans, like all subsequent loans to Ultron, Deminter, HSG and ESG, were
negotiated between Mr Ballestero and the bank representatives in Switzerland. The first loan was
made available to Ultron by Keysers and American Fletcher Bank (Suisse) SA (American
Fletcher). It was in a sum of 8·75m Swiss francs for a two-year period. The securities offered
were (a) a pledge of precious stones, (b) credit insurance in the sum of 37m Swiss francs, and (c)
a pledge of the shares in Ultron. But Mr Ballestero was seeking a far more substantial loan. By a
letter dated 14 January 1980 Keysers made available a bridging loan in the sum of 4·5m Swiss
francs ‘pending availability of final loan planned
Page 935 of [1987] 2 All ER 923
for about 24 January 1980’. It was advanced on current account for about ten days and repayable
at the time of the making of the final loan. The ‘final loan’ was made on 24 January 1980. It was
for a sum of 26·25m Swiss francs but was in effect a consolidation loan inasmuch as there was
subsumed in it the two earlier loans. It will be convenient to describe these transactions as the
first Ultron loan or transaction. The participants in the loan agreement of 23 January 1980 were:
Amount
(Swiss francs)
Keysers 18.75m
authority.
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American Fletcher 4.5m
Banque Union de Credito 3m
26.25m
Keyers acted as agent on behalf of the participating banks. The borrower was, of course, Ultron.
Subsequent variations in the participations, and the arranging of sub-participations, do not affect
the issues of principle under consideration. (That also applies to the subsequent loans.) It is,
however, necessary to examine the material terms of the loan agreement of 23 January 1980. The
opening words record the granting of the loan ‘subject to all the necessary security being
lodged’. The following terms are also material:
‘Purpose of the Loan: acquisition by the company ULTRON A.G. of 70% of the capital of 6
Spanish companies which hold all the assets (land, real property, etc.) of the project in question,
known as ”SHANGRI-LA“. The said assets include, inter alia, 540 hectares all in one block, in
the vicinity of Mahon, capital of Menorca (Balearic Islands). The remaining 30% of the shares is
already the personal property of the sole shareholder of ULTRON A.G., a sum equivalent to Frs.
15,000,000— having moreover already been invested by the Promoters from their own
resources.
Term and repayment of loan: Fixed term loan for two years from the 20.12.1979, automatically
extendable for the period from the 20.12.1981 to the 20.1.1982, and thereafter by mutual
agreement from year to year, for a maximum of 5 years for all or part of the amount of the loan,
this upon condition that the below mentioned security remains completely valid …
Guarantees: 1. Pledging of a parcel of precious stones (emeralds, rubies and saphires) the
replacement of which in the opinion of experts is estimated at Frs. 75,000,000.— approx., and
deposited in the name of BANQUE KEYSER ULLMANN EN SUISSE S.A., Geneva, in the
bonded warehouse of Zurich-Kloten, with access limited to 1 representative of each of our 3
Banks together with a respresentative of the insurance group guaranteeing payment in the event
authority.
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INSURANCE LAW CASES
of the borrower’s defaulting in accordance with the conditions set out below; 2. Assignment with
notification by ULTRON A.G. of an insurance policy of the English insurance group, the lead
company of which is the HODGE GENERAL AND MERCANTILE INSURANCE COMPANY
LIMITED, London, subsidiary wholly owned by the STANDARD CHARTERED BANKING
GROUP, for an amount of Frs. 37,000,000.— guaranteeing, in the event of the borrower
defaulting, payment to the Banks of any outstanding sum after realisation of the pledge. 3. The
share capital (US$25,000) namely 250 shares having a nominal value of US $100.— each of
your company, pledged in favour of the Banks by its owner.
Default in payment: The Banks reserve the right to demand repayment of the loan, both as to the
principal sum and any interest, should any of the following events occur: (1) should any sum
payable, by way of principal, interest or otherwise, not have been paid within 10 working days
from the date when payment should have been made; (2) should your company have suspended
its payments or be in a situation in which it clearly would not be able to meet its commitments;
(3) should your company have applied for and/or obtained an order to be wound up subject to
supervision by the court or should it have become bankrupt; (4) should your company have gone
into voluntary liquidation …
Page 936 of [1987] 2 All ER 923
Availability of the Loan: Two working days after signature of this agreement and delivery of all
the afore-mentioned documentation and guarantees.’
The governing law was expressed to be Swiss law.
It is manifest from this loan agreement, and all subsequent loan agreements, and is in any event
established beyond doubt on the evidence, that the banks were only prepared to advance the
money once they were satisfied that the securities were properly in place. The loan agreement
contemplated a closing transaction. That is what in fact happened shortly after the conclusion of
the loan agreement. Having been satisfied as to the fulfilment of all conditions precedent, the
advance of 26·25m Swiss francs was duly completed. It is only necessary to examine how
Keysers, as agent of the consortium, was satisfied about the pledge of gemstones and the credit
authority.
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insurance. Needless to say the pledge of shares in Ultron was always regarded as of minimal
value.
A pledge of gemstones is an unusual form of security in support of a bank loan. It is a well-

known fact that the international diamond cartel ensures that the price of diamonds is relatively
stable. By contrast there is no cartel which regulates the gemstones market, and the values of
gemstones are consequently more volatile. Mr Ballestero placed before Keysers the following
expert evidence as to the gemstones: (a) certificates and valuations by GIA, signed by Mr
Verbruggen and Mr Fuhrmann; (b) certificates by Professor Pense of the Johannes-Gutenburg
University of Mainz that the gemstones were as described in the certificates of GIA. When
Professor Pense handed over his certificates he orally assured Keysers that the valuations of GIA
were correct. It is common ground that the GIA certificates and valuations were fraudulent. The
real value of the gemstones never exceeded a sum of the order of 5m Swiss francs. One is
inevitably driven to the conclusion that Professor Pense’s oral statement confirming the
correctness of the GIA certificates was made either fraudulently or recklessly. But the banks
were not prepared to rely only on Mr Ballestero’s experts. They retained Mr Eric Demuth, a
Zurich jeweller and former chairman of the Swiss Association of Gemmology, to provide them
with ‘counter-expertise’ as it was described. He examined random samples of the gemstones,
selected by a Keyser official, and certified that the details corresponded with the GIA
certificates. He did not furnish valuations of the selected gemstones. Relying on this substantial
body of expert evidence, the banks accepted the closing documents as to the gemstones.
But in my judgment it is clearly established that the banks, who had no expertise or experience in
the field of gemmology, relied on the credit insurance as their principal security, viz the banks
relied on the insurers’ undertaking, subject to the terms of the contract, to reimburse the banks if
the borrower failed to honour the terms of the loan agreement. Mr Ballestero introduced Mr Lee
to the banks. Mr Lee undertook to arrange the necessary insurance. He turned to Mr Dungate of
Hodge to take the lead. Initially, Mr Lee intended to arrange the 37m Swiss francs insurance
cover in respect of the first Ultron loan as a single risk. That proved impossible. Accordingly, he
decided to place the insurance in three layers: (a) primary layer: 9·25m Swiss francs; (b) first
excess layer: 9·25m Swiss francs in excess of 9·25m Swiss francs; (c) second excess layer:
authority.
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18·5m Swiss francs in excess of 18·5m Swiss francs. The primary layer was negotiated between
Mr Lee and Mr Dungate in the latter part of 1979. But in January 1980 Mr Lee was experiencing
difficulty in completing the first and second excess layers. He was under great pressure to
complete these layers. The consolidation loan of 26·5m Swiss francs was due to be completed in
January 1980. Without 100% insurance cover in the sum of 37m Swiss francs the banks would
not proceed. There was a substantial risk that this loan, and anticipated future business of the
same kind, would fall away. I have already mentioned how Mr Lee turned to Mr Dungate for
help. It will be recalled that Mr Dungate initialled ‘20% Hodge’ in respect of the first excess
layer on 15 January 1980. It was intended as 14 days temporary cover only. On 28 January 1980
Mr Dungate cancelled this indorsement on the slip. At the same time Mr Lee asked Mr Dungate
to hold covered for 73·5% on the second excess layer for 14 days. Mr Dungate agreed to do so
and wrote on the back of the slip: ‘H/C 73·5% 14 days 28/1/80 HODGE ACD 28/1/80.’
Page 937 of [1987] 2 All ER 923
In order to satisfy the banks that the insurance cover was in place Mr Lee sent three cover notes
to Keysers, as agent bank on the Ultron loan. The first was dated 18 December 1979 and related
to the primary layer. It correctly represented Hodge as having taken a 100% line. The second
cover note is dated 15 January and relates to the first excess layer. Although Hodge had only
agreed to ‘hold covered’ for 14 days, it untruthfully represented that Hodge had taken this line
for the two-year period of the loan. The third cover note is dated 28 January 1980, ie the date of
the second ‘held covered’ indorsement. It relates to the second excess layer. This cover note
falsely represented that Hodge was on cover for 78·25% for the full two-year period. The truth
was, of course, that Hodge was only on cover for 73·5% for 14 days, and the cover was
substantially incomplete. Indeed, it was only progressively completed during the period January
to June 1980. But the banks relied on the truthfulness of the cover notes, and parted with their
money.
I propose to defer more detailed examination of Mr Lee’s actions until I have completed the
general description of the background. But is it necessary to look a little more closely at the
terms of the contract of insurance. For this purpose I turn to the policy on the primary layer
authority.
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which was issued in May 1980. The relevant terms of the first and second excess layer policies
are, however, the same. The insurance was—
‘in the event of and to the extent of the non repayment by or on behalf of Ultron AG as or by the
end of 24(twenty-four) calendar months from the inception of the line of credit granted to Ultron
A.G. by the Bank or Banks to whom this Policy has been or may be assigned.’
Departing from the terms of the slip, the fraud exclusion clause in its final form reads as follows:
‘The Insurers shall not be liable hereunder for (i) Any claim or claims arising directly or
indirectly by fraud attempted fraud misdescription or deception by any person firm organization
or company … ’
Clause 9(b) reads as follows:
‘In the event of a claim being notified not later than 30 days from the end of the period of the
loan and subject to the stones held in the bank being those listed in the appraisals and valuations
by the Gemmological Institute of Antwerp, counter expertized by Professor Juergen Pens of the
University of Mayence and Koenigstain and Professor E Demuth, Chairman of Swiss
Association of Gemmology in Zurich, the Insurers agree (i) To take possession of the precious
stones referred to above. (ii) To appoint an agent to sell the stones. (iii) To hold the proceeds of
the sale and to pay all relevant fees. (iv) To pay out of the balance of the sale proceeds to the lead
and agent bank, on behalf of the banks concerned, such monies as are outstanding at the time of
default, at the lastest nine months after notification of the claim, and hold the balance to the order
of the Insured. (v) In the event of the net sale proceeds not realising sufficient monies to
reimburse the banks, the Insurers undertake to deal with the claim for the difference between the
net sale proceeds and the amount outstanding on the line of credit up to a maximum limit of
37,000,000 Swiss Francs or 50 per cent of the valuation of the stones at the time of depositing,
whichever amount is the smaller, within the terms and conditions of the Policy. For the total of
the 37,000,000 Swiss Francs cover 30 days notice to commence with effect from the 10th day of
February 1982.’
authority.
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Bearing in mind that the banks no longer sue on the policies, the above provisions are a sufficient
description of the scheme of the insurance cover.
Reverting now to the sequence of events, I turn briefly to the events in June 1980. The banks
were throughout unaware of Mr Lee’s deception and of any gap in their insurance cover. But in
June 1980 Mr Dungate became aware of Mr Lee’s dishonest conduct. That came about, as I
explained in the introduction to this judgment, because Hodge was a
Page 938 of [1987] 2 All ER 923
company in the Standard Chartered Group. As a participant in the Ultron loan, Standard
Chartered Bank AG, based in Zurich, received copies of the three cover notes. Mr Jekyll, the
managing director of the latter company, noticed Hodge’s exposure on the three layers, viz
100%, 20% and 78·25%. It called for explanation. He raised the matter with Mr Dungate by
telephone and subsequently by letter. When I come to discuss the events between January and
June 1980 it will be necessary to pay particular attention to Mr Dungate’s state of knowledge,
and his acts and omissions, during this critical period. At this stage I content myself with quoting
in extenso four important letters. Mr Jekyll’s letter dated 28 May 1980 to Mr Dungate reads as
follows:
‘Three Cover Notes totalling SFr 37,000,000 issued by Ernest A. Notcutt & Company Ltd.
indemnifying Ultron AG, Geneva
As agreed in our telephone conversation today I am enclosing copies of the above Cover Notes
for your perusal. The benefits of the underlying insurances have been assigned to a group of
lending bankers, in which we are participating, headed by Banque Keyser Ullmann en Suisse
SA, Geneva, and my purpose in forwarding Notcutt’s Cover Notes to you is to assist in
establishing the exact extent of your exposure on Ultron AG in these insurances. I look forward
to receiving your further advices in due course.’
After discussions between Mr Lee and Mr Dungate, in the course of which Mr Dungate
examined the slips, Mr Lee wrote to Mr Verkooyen, a joint manager of Keysers, on 4 June 1980
in the following terms:
authority.
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‘Re ULTRON AG.
Further to our telephone conversation 2 June 1980, I would confirm our mutual understanding of
the security which has been placed on cover. As advised initially, Hodge General and Mercantile
Insurance Company are the complete security for the first loss primary cover of 9,250,000·00
Swiss Francs. This Company were also shown as security on the first excess and second excess
layers, but as advised only on a provisional basis to be replaced either by direct or reinsurers
lines. I apologise for not advising you in writing of the Companies who replaced Hodge General
and Mercantile Insurance Company Limited on both of these layers, but now enclose a complete
list of security for your retention, and would confirm that the only involvement of Hodge
General and Mercantile Insurance Company Limited is for the primary layer of 9,250,000·00
Swiss Francs. No doubt you will take whatever steps you think fit to advise the various
participating Companies of the complete security as per the attached lists.’
On the same date Mr Lee wrote to Mr Dungate as follows:
‘Re ULTRON AG.
I am enclosing a copy of a letter sent today to Mr Verkooyen of Banque Keyser Ullmann en

Suisse, Geneva, giving the revised lists of security on the first excess and second excess layers
for the above cover. I am sorry that the fact that we did not advise Keyser Ullmann in writing of
the revised security, prior to this day may have caused you an inconvenience. I am also bring
[sic] with me, for your inspection, the slips showing the full hundred per cent cover on both
excess layers. I now trust that this matter can be resolved satisfactorily and look forward to
dealing with the endorsement increasing the total Sum Insured with you at the same time.’
Mr Dungate replied to Mr Jekyll on 9 June 1980:
‘Three Cover Notes totalling SFr. 37,000,000 issued by Ernest A. Notcutt & Company Limited,
indemnifying Ultron AG, Geneva.
Thank you for your letter of the 28th May, together with enclosures for which I am extremely
obliged. I would refer to our subsequent telephone [sic] and take the opportunity copy of
authority.
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enclosing letter [sic] received from Notcutts together with various documents received with the
letter. After considerable enquiries with the
Page 939 of [1987] 2 All ER 923
various Underwriters concerned, I have satisfied myself that the cover has been correctly placed,
but this does not in anyway detract from the unprofessional manner in which Notcutts have
acted, and would probably have never been brought to my notice had it not been for your
kindness in drawing my attention to same. May I express my appreciation of your highlighting a
situation which should never have arisen.’
These letters must be placed in context, even at this preliminary stage, by making clear that the
inference is irresistible, as I find, that Mr Lee’s letter to Keysers was not intended to alert Mr
Verkooyen or Keysers to Mr Lee’s deception, and the gap in the insurance cover, and that it did
not in fact do so. On the other hand Mr Dungate realised at the very least in June 1980 that Mr
Lee had deceived the banks. He did not, I find, report that fact to his superiors in Hodge, to Mr
Jekyll, to any director of Notcutts or to the banks. He was aware that there was then a distinct
prospect, offered by Mr Lee, of underwriting further bank loans to Mr Ballestero’s companies.
Mr Dungate continued to do business with Mr Lee. After June 1980 Mr Dungate underwrote
lines on insurances which served as securities in support of bank loans which amounted in
aggregate to 53·75m Swiss francs.
The final Ultron loan
Mr Ballestero proved insatiable. Before June 1980 he was already pressing for an increase in the
Ultron loan. A further loan was eventually made on 2 September 1980. The further sum
advanced was 10·75m Swiss francs. The original participants in the loan were:
Amount
(Swiss francs)
authority.
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Arburthnot Latham & Co Ltd 2.75m
Kredietbank (Suisse) SA 7m
A Sarasin et Cie 1m
10.75m
The purpose of the loan was said to be the payment of fees and costs needed by Ultron to obtain
a declaration that some 100 hectares of the land on which the Shangri-La project was to be built
was of touristic interest, that being an administrative step which would have facilitated
development of the site. The terms of the loan were similar to those which I have already set out
in respect of the earlier Ultron loans. The principal securities were gemstones, now revalued at
95·253m Swiss francs, and an increase of the credit insurance limit from 37m Swiss francs to
47m Swiss francs. The genesis of the revaluation was a letter from GIA to Mr Ballestero dated 8
May 1980 revaluing the gemstones at 95·253m Swiss francs, supported by documents dated May
1980 from Professor Pense and Mr Demuth recording an increase in the value of gemstones
since the end of 1979 or beginning of 1980. This revaluation was, of course, totally flawed
inasmuch as its starting point was the original valuation which was a fraudulent one. But, on the
evidence placed before them, the banks were satisfied on this aspect of their security. The
security in the form of an increase of the credit insurance constitutes the third excess layer. It was
for 10m Swiss francs in excess of 37m Swiss francs. Again, the banks lent on the strength of a
cover note sent by Mr Lee. The insurer was said to be a Californian entity bearing the name Cia
Americana de Seguros y Reaseguros SA. The Californian entity was a bogus company. The
policy had a ‘cut through clause’ enabling the insured (the banks) to claim against reinsurers but
Mr Lee had not satisfied himself that satisfactory and enforceable reinsurances existed.
Mr Dungate leaves Hodge for Skandia
In late 1980 the Standard Chartered Group decided to sell Hodge. There was a risk that the new
parent company of Hodge might wish the company to cease writing contingency
authority.
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Page 940 of [1987] 2 All ER 923
business. In these circumstances Mr Dungage was approached by Skandia to join them as senior
underwriter of their contingency business. Mr Dungate accepted the offer, and on 1 October
1980 he commenced employment at Skandia, with his assistant, Mr Robin Wood. By an
indorsement (no 4) to the Ultron policy, Hodge, acting on its own behalf and on behalf of the
following market, assigned their interest, responsibilities and liabilities in the policy to Skandia,
and the banks consented to the assignment. From October 1980 Mr Lee dealt with Mr Dungate
as Skandia’s underwriter, viz in relation to the Deminter, HSG and ESG transactions.
[His Lordship then described the Deminter, HSG and ESG transactions, the premiums and
brokerage earned by the insurers and brokers, and the role played by Mr Lee and Mr Dungate.
Applying Burnell v British Transport Commission [1955] 3 All ER 822, [1956] 1 QB 187 and
Great Atlantic Insurance Co v Home Insurance Co [1981] 2 All ER 485, [1981] 1 WLR 529 his
Lordship allowed a statement made by Mr Dungate in November 1982 to the insurers’ solicitors
concerning his knowledge of Mr Lee’s false cover notes and his consequent actions to be
admitted in evidence. His Lordship then considered the definition of fraud in civil law in
Barclays Bank Ltd v Cole [1966] 3 All ER 948, [1967] 2 QB 738, and concluded that Mr
Dungate was aware in June 1980 that Mr Lee had been guilty of deceiving his employers, the
underwriters and the banks, and that Mr Lee’s dishonesty had potentially exposed the banks to
great loss, that he was attracted by the prospect of future profits and that he realised that if he
reported Mr Lee’s dishonesty the insurers would have taken up the matter with the brokers and
the banks, with the result that the business would have come to an end. His Lordship continued:]
The market view as to an underwriter’s duty on discovery of the broker’s deception of his
principal
A great deal of evidence was led as to the view taken in the London insurance market of an
underwriter’s professional duty when he becomes aware that a broker has deceived his principal.
This evidence came not only from the two rival expert witnesses but also from witnesses of fact
who were nevertheless experienced market men. The admissibility of this evidence was not
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challenged. Nevertheless, it seems right that I should consider whether such evidence is
admissible and, if so, for what purpose. Cross on Evidence (6th edn, 1985) p 25 states:
‘Whenever it is necessary to determine whether someone’s conduct complies with some

objective standard, as where negligence is alleged, evidence is admissible to show how others
might be expected to behave in similar circumstances.’
Two recent illustrations of this principle will suffice. In Fraser v Thames Television Ltd [1983] 2
All ER 101, [1984] QB 44 Hirst J had to decide whether an idea developed for a television series
was entitled to protection against unauthorised use by a television company. The relevant rubric
of the law was that regarding the protection of confidential information. Hirst J said ([1983] 2
All ER 101 at 121–122, [1984] QB 44 at 66):
‘To the best of my recollection, every witness in the theatre or television business on both sides
agreed that if he or she received an idea from another it would be wrong to make use of it
without the consent of the communicator. They of course were expressing their views in the
context of a moral usage in their profession rather than of a strict legal obligation. However, the
authorities … strongly support counsel for the plaintiffs’ argument that the existence of such a
usage is a factor of considerable force in deciding whether a legal obligation exists. I think the
law as laid down in the authorities I have cited clearly establishes that the obligation which the
witnesses saw as moral is in fact also legal in character.’
The second illustration is provided by the admissibility of medical evidence in relation to the
question whether a surgeon is under a duty to warn a patient of a risk inherent in an operation:
see Sidaway v Bethlem Royal Hospital Governors [1985] 1 All ER 643, [1985] AC 871. In these
cases evidence of a perceived morality (Fraser) and professional standards (Sidaway) were
regarded as relevant to the question whether a relevant legal duty existed.
Page 941 of [1987] 2 All ER 923
A caveat must be that such evidence must be more than remotely relevant to the issue, and
unlikely to raise collateral issues. In my judgment the evidence as to the market view in this case
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was admissible and is relevant to the question whether Mr Dungate owed a duty to the banks to
disclose to them Mr Lee’s dishonesty. But it is, of course, not determinative of that question.
It is necessary to emphasise the context against which this evidence must be seen. For all
relevant purposes in the present proceedings the brokers were the insured’s agents. That is by no
means universally the rule abroad, and the foreign banks involved in these transactions were not
aware of the applicable English rule. For this they cannot be blamed. A consequence of the
general rule that the broker is the agent of the insured is that generally speaking underwriters are
not prepared to communicate with an insured except through the brokers. [His Lordship
considered the expert evidence relating to the insurance market and continued:] By market
understanding I do not mean a custom or usage in a technical sense. Rather I have in mind that
the evidence reveals moral standards of the day which were and are accepted by the
professionals in the market. For the avoidance of doubt I make clear that this was already the
case in June 1980. The following propositions, germane to the present case, are clearly
established by the evidence for the London insurance market. (a) If an underwriter discovers that
an individual broker has deceived an insured in and about an insurance transaction, he will
decline to have any further dealings with him. (b) In such a case the underwriter will report the
facts to the chairman or chief executive of the broking company, leaving it to the latter to report
the matter to the insured. (c) The response of the broking company will be twofold: it will
dismiss the broker and it will report the matter to the insured. (d) If, exceptionally, the broking
company (as agent of the insured) refuses or fails to inform the insured of the brokers dishonesty,
the underwriter will be under a direct duty to disclose the facts to the insured.
It would therefore be regarded as unprofessional for an underwriter to continue to underwrite

further business from the insured, offered through the dishonest broker, unless the true facts of
the deception have been disclosed to the insured. In my judgment the evidence in favour of these
propositions is overwhelming.
Lastly, I must record that I am satisfied that none of the professional duties which I have
described are regarded as undly burdensome in the London insurance market. Moreover, these
duties are perceived to be essential for upholding the standing of the London insurance market
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and for the proper functioning of that market. Indeed, they are regarded not as technical rules
governing the relations of those who participate in the affairs of the market but simply as
manifestations of the general principles of good faith and fair dealing to which both the Lloyd’s
and non-Lloyd’s markets in London explicitly and unreservedly subscribe.
Legal duty
The banks assert that the insurers were under a legal duty to disclose to the banks, directly or
indirectly, the dishonesty of Mr Lee. This assertion is made in a novel situation. Not surprisingly
every remotely relevant rubric of the law has been invoked. The pleadings run to many hundreds
of pages and are an enduring tribute to the ingenuity of junior counsel. Legal argument has
ranged from the principles governing the disclosure of ships’ papers in marine insurance cases to
the ambit of the Chancery Amendment Act 1858(Lord Cairns’s Act). A judge’s duty is to try to
keep his eye on the ball, and I shall not attempt to do justice to all the arguments. But it is right to
say that the banks always put in the forefront of their submissions the allegations that the insurers
were in breach of the common law duty of care or, alternatively, the duty of the utmost good
faith. For convenience I will reverse the order of dealing with these two causes of action. Then I
will briefly refer to the other ways in which the banks formulated their case. In doing so I will
not distinguish between the submissions of counsel for Keysers and the other banks and counsel
for Chemical Bank since they broadly speaking covered the same ground and in any event adopt
one another’s submissions.
Page 942 of [1987] 2 All ER 923
(a) The duty of the utmost good faith
The banks submit that reciprocal duties of the utmost good faith are owed between an insurer and
an insured, that the insurers in the present case were in breach of that duty and that as a result the
banks are entitled to recovery damages from the insurers, or, alternatively, they are entitled to
recovery of the premiums. Not surprisingly, the banks put forward the prayer for a return of the
premiums as a claim of last resort. The insurers dispute every proposition advanced on behalf of
the banks.
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The first question to be considered is whether reciprocal duties of good faith are owed to one
another by an insurer and are insured. The insurers deny that any such duty rests on them or,
alternatively, that it has any relevant content. With due deference to the submissions of counsel
for the insurers, which were advanced with great skill and vigour, I am of the opinion that it is
established beyond doubt that the uberrima fides principle, as it is sometimes called, imposes
reciprocal duties on the insured and insurer. Indeed, the principle was settled by the celebrated
judgment of Lord Mansfield CJ in Carter v Boehm (1766) 3 Burr 1905, [1558–1774] All ER
Rep 183. The contingency insured against by the Governor of Fort Marlborough in Sumatra was
whether the fort would be taken by a European enemy between October 1759 and October 1760.
In April 1760 a French man-of-war captured the fort. The governor claimed on the policy. The
underwriters put forward a defence of non-disclosure, viz that the weakness of the fort, and the
probability of it being attacked, was not disclosed. It was established that the fort was not
designed to resist European enemies but only ‘for defence against the natives of Sumatra’. The
defence failed for reasons which are perhaps summarised in the following observation of Lord
Mansfield CJ (3 Burr 1905 at 1918, [1558–1774] All ER Rep 183 at 189):
‘The underwriter, here, knowing the governor to be acquainted with the state of the place;
knowing that he apprehended danger, and must have some ground for his apprehension; being
told nothing of either; signed this policy, without asking a question.’ (Lord Mansfield CJ’s
emphasis.)
But the judgment of Lord Mansfield CJ is important for his lucid statement of the principles
governing non-disclosure in insurance transactions. The following passage in his judgment is
relevant to the issues in this case (3 Burr 1905 at 1909–1910, [1558–1774] All ER Rep 183 at
184–185):
‘Insurance is a contract upon speculation. The special facts, upon which the contingent chance is
to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts
to his representation, and proceeds upon confidence that he does not keep back any circumstance
in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist,
and to induce him to estimate the risque, as if it did not exist. The keeping back such
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circumstance is a fraud, and therefore the policy is void. Although the suppression should happen
through mistake, without any fraudulent intention; yet still the under-writer is deceived, and the
policy is void; because the risque run is really different from the risque understood and intended
to be run, at the time of the agreement. The policy would equally be void, against the under-
writer, if he concealed; as, if he insured a ship on her voyage, which he privately knew to be
arrived: and an action would lie to recover the premium. The governing principle is applicable to
all contracts and dealings. Good faith forbids either party by concealing what he privately knows,
to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.
But either party may be innocently silent, as to grounds open to both, to exercise their judgment
upon. Aliud est celare; aliud, tacere; neque enim id est celare quicquid reticeas; sed cum quod
tuscias, id ignorare emolumenti tui causa velis eos, quorum intersit id scire. This definition of
concealment, restrained to the efficient motives and precise subject of any contract, will
generally hold to make it void, in favour of the party misled by his ignorance of the thing
concealed.’ (Lord Mansfield CJ’s emphasis.)
Page 943 of [1987] 2 All ER 923
In other words, reciprocal duties rest on both parties to an insurance contract not only to abstain
from bad faith but to observe in a positive sense the utmost good faith by disclosing all material
circumstances. That principle, Lord Mansfield CJ said, is applicable to all contracts. To that
extent Lord Mansfield CJ’s generalised statement has not prevailed. Admittedly, there are other
contracts which are sometimes described as contracts of the utmost good faith, such as contracts
of suretyship, partnership and salvage, but the principles of disclosure applicable to those
contracts cannot be equated with those applicable to contracts of insurance. Generally speaking,
in the subsequent developments of the common law the idea that parties when negotiating a
contract are dealing at arms length won the day: the philosophy of caveat emptor prevailed. This
does not detract from the validity of Lord Mansfield CJ’s observation in relation to contracts of
insurance, namely that reciprocal duties of the utmost good faith are owed to one another by an
insured and an insurer. There has been a considerable controversy about the ambit of an
insured’s duty of disclosure: see Container Transport International Inc v Oceanus Mutual
Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476. But the proposition that the
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duties of utmost good faith rests on both parties has been repeated on many occasions in
judgments, and appears in leading textbooks. It has, to date, never been questioned. Section 17 of
the Marine Insurance Act 1906 enacted it in the following terms:
‘A contract of maritime insurance is a contract based upon the utmost good faith, and, if the
utmost good faith be not observed by either party, the contract may be avoided by the other
party.’
The 1906 Act was a codification of the common law, and it is inconceivable that the common
law regarded marine insurers as bound by a duty of the utmost good faith but not other insurers
(see also Container Transport International Inc v Oceanus Mutual Underwriting Association
(Bermuda) Ltd [1984] 1 Lloyds Rep 476 at 496, 525 per Kerr and Stephenson LJJ. The rationale
of the rule imposing a duty of utmost good faith on the insured is that matters material to the risk
are generally speaking peculiarly in his knowledge. In so far as matters are peculiarly in the
insurer’s knowledge, as in Lord Mansfield CJ’s example of the arrived ship, principle and
fairness require the imposition of a similar duty on the insurer. Indeed, it is difficult to imagine a
more retrograde step, subversive of the standing of our insurance law and our insurance markets,
than a ruling today that the great judge erred in Carter v Boehm in stating that the principle of
good faith rests on both parties. I unhesitatingly reject this contention.
It will be necessary to consider briefly the rubric in which these rules ought to be placed. That is
so because there has been some controversy about this aspect: on behalf of the banks the utmost
good faith principle was said to be an implied term of an insurance contract, while the insurers
submitted that it was simply a rule, or more accurately a set of rules, of positive law. But there is
possibly another reason why the exercise may be relevant: the rubric in which a rule is placed
often has an important influence on its width of application and future development. The banks
cited a number of decisions in which courts have referred to the implied obligation or duty of an
insured to make a fair disclosure. These observations were not made in the context of the issue
now under consideration, and do not assist in deciding the concrete issue before me. After all, it
is often said that a term is implied in a contract when in truth a positive rule of contract law is
applied because of the category in which a particular contract falls. In March Cabaret Club and
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Casino Ltd v London Assurance [1975] 1 Lloyd’s Rep 169 at 175 May J carefully considered
this point and concluded:
‘… in my judgment the duty to disclose is not based upon an implied term in the contract of
insurance at all; it arises outside the contract … ’
The banks relied strongly on the judgment in Black King Shipping Corp v Massie, The Litsion
Pride [1985] 1 Lloyd’s Rep 437. Hirst J had to consider the application of a post-contractual
Page 944 of [1987] 2 All ER 923
duty of the utmost good faith in the context of an insured shipowner who failed to honour an
express contractual obligation to notify the underwriters of a voyage to an excluded Persian Gulf
area. In my respectful view the actual decision in The Litsion Pride is concerned with the scope
of the duty of the utmost good faith on special facts, and not with the question whether it is a rule
of positive law, or an implied term in the sense of a term derivable from the terms of the
particular contract, read in the light of the subject matter and contextual scene. In my respectful
view the body of rules which are described as the uberrima fides principle are rules of law
developed by the judges. The relevant duties apply before the contract comes into existence, and
they apply to every contract of insurance. In my judgment it is incorrect to categorise them as
implied terms, in the sense in which the banks seek to do so. I also reject the contention that
these rules become applicable by way of a collateral contract.
The preceding discussion must appear somewhat recondite. There was, however, a practical
reason for the banks’ submissions that the duties of the utmost good faith arise by implication.
So far I have referred to Hodge and Skandia as the insurers. There is, however, a following
market of insurers. They are not vicariously responsible for Mr Dungate’s actions. It is conceded
that the only possible case against the following insurers must be based on the assertion that they
owed a duty of the utmost good faith to the banks because that duty is an implied term of the
policy, or the basis of a collateral contract, to which they were parties. Having rejected that
submission, the conclusion must be that the following market is not liable to the banks.
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Now I turn to the submission that the duty of the utmost good faith resting on the insurer has no
relevant content. In the absence of clarification, by way of alternative submission, I am not sure
what this submission involves. If there is such a duty on an underwriter, it must have some utility
beyond the example given by Lord Mansfield CJ. In my judgment the principle cannot be
confined to a closed category of cases. I do not propose a definition. In considering the ambit of
the duty of the disclosure of the insurers, the starting point seems to me as follows: in a proper
case it will cover matters peculiarly within the knowledge of the insurers, which the insurers
know that the insured is ignorant of and unable to discover but which are material in the sense of
being calculated to influence the decision of the insured to conclude the contract of insurance. In
considering whether the duty of disclosure is activated in a given case a court ought, in my
judgment, to test any provisional conclusion by asking the simple question: did good faith and
fair dealing require a disclosure?
That brings me to the application of these principles to the facts of the present case. Given the
background and specific findings which I have already made, it is only necessary to draw
attention to the following distinctive features of the present case which have been established. (a)
Mr Dungate knew (i) that the policies of insurance were the banks’ principal security in granting
the loans, (ii) that the banks were named policyholders or that the policies were to be assigned to
the banks and (iii) that the banks, rather than the borrowing companies, were interested in the
insurance. (b) Mr Dungate knew in June 1980 that Mr Lee had been guilty of a grave deception
of his client, sustained over many months and potentially highly prejudicial to the banks. (c) Mr
Dungate knew that Mr Lee was the banks’ sole source of information as to the cover, past and
future, and that he could not be trusted. (d) Mr Dungate knew that the banks were unaware of Mr
Lee’s dishonest conduct, and that the banks had no means of discovering it. (e) Mr Dungate
appreciated that the banks were exposed on the first Ultron transaction and all the subsequent
transactions, particularly in the light of the fraud exclusion clause which entitled the insurers to
escape liability on the ground of the fraud of a third party indirectly leading to a claim and the
risk of misrepresentations by Mr Lee as to the nature of the risk. (f) Mr Dungate chose to enter
into further contracts of insurance with the banks, knowing that the banks were exposed to a
concealed risk that, if Mr Lee committed another fraud or misrepresented the risk, the insurers
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could resist any claim. (g) Mr Dungate did not trust Mr Lee after June 1980 but he considered
that he could look after
Page 945 of [1987] 2 All ER 923
the insurers’ interests, but in the pursuant of profitable business he was not prepared to disclose
Mr Lee’s dishonesty to the banks. (h) Mr Dungate knew that disclosure would spell the end of
any further business similar to the first Ultron transaction.
If good faith and fair dealing has any meaning at all, it seems to me that there was a clear duty on
Mr Dungate to place the relevant facts before the banks. This view is reinforced by the
contemporary morality of the market. Lord Mansfield CJ’s words in Carter v Boehm (1766) 3
Burr 1905 at 1910, [1558–1774] All ER Rep 183 at 185 are worth repeating:
‘Good faith forbids either party by concealing what he privately knows, to draw the other into a
bargain, from his ignorance of that fact, and his believing the contrary.’
That is exactly what happened in the present case.
So far I have referred to the banks collectively. Mr Dungate drew a distinction. He mentioned in
evidence that he did not, at the relevant time, know the names of all the leading banks involved.
It is sufficient, in my judgment, to record that he either knew the precise identity of the leading
banks or knew how their identities could be ascertained. This factor has no relevance to the
realities of the present litigation.
But it is necessary to explain the relative positions of Hodge and Skandia. Mr Dungate was an
employee of Hodge until 1 October 1980. It is true that there was an assignment of rights and
obligations under the existing policy. It plainly does not transfer to Skandia vicarious
responsibility for the acts of Mr Dungate between June and October 1980. The liability, if any, in
respect of the first and second Ultron transactions therefore rests with Hodge. If there is any
liability of an insurer in respect of losses under subsequent loan transactions, it must rest with
Skandia. I have not lost sight of an argument advanced to the effect that Skandia cannot be held
liable on the basis of knowledge obtained by Mr Dungate while he worked for Hodge. One is
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here considering the vicarious responsibility of Skandia for the actions of an underwriter
employed by them. If Mr Dungate acted wrongfully or in breach of duty failed to act, during the
course of his employment with Skandia, it does not matter whether he acquired the relevant
knowledge before or after the commencement of his employment with Skandia. This argument is
devoid of merit.
That brings me to what may well be the most contentious issue in relation to the duty of the
utmost good faith, viz whether the only remedy of the insured is avoidance of the contract and a
claim for a return of the premium. In Lord Mansfield CJ’s example in Carter v Boehm, of the
insurance of a ship which had already arrived, his observation was that an ‘action would lie to
recover the premium’. That was plainly the only appropriate remedy on the facts of that case. No
case has come before the courts in which a claim for damages for breach of the duty of the
utmost good faith has been put forward. That is not particularly surprising: in the nature of things
such a claim by an insured, represented by a professional broker, will be rare. Moreover, if a
broker’s dishonesty is involved, it will usually be in the very transaction in question: if the
insurer is aware that the broker is deceiving his client in the very transaction presented to him,
there can surely be no doubt about his liability in an action for damages. The problem raised by
the present case is that of the broker’s dishonesty in a preceding transaction, the first in a number
of syndicated loans. It is therefore not altogether surprising that no such claim has arisen. But,
although there is no binding authority on the point, there is an obiter dictum by Scrutton J which
must be considered. The observation was made in Glasgow Assurance Corp Ltd v William
Symondson & Co (1911) 104 LT 254. The claim was by underwriters against marine insurance
brokers to set aside a treaty and all policies effected by the brokers with the underwriters under
it. The crux of the judgment is that the intention of the broker to declare his own underwriting
partners as assured who would make a profit by difference of premiums was not a fact material
to be disclosed. But then Scrutton J added (at 258):
Page 946 of [1987] 2 All ER 923
‘If I had found concealment of a material fact, the plaintiffs would have had to face the question,
to which in my opinion they gave no satisfactory answer, as to how they could cancel the
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policies when underwriters parties to them such as Freeland, the Blaibergs, Peech, and Sheppard
were not before the court; for non-disclosure is not a breach of a contract giving rise to a claim
for damages, but a ground of avoiding a contract.’
This observation has led writers to assert that no damages can be claimed for breach of the duty
of the utmost good faith: see Spencer Bower on Actionable Non-Disclosure (1915) p 196,
para 223 Colinvaux The Law of Insurance (5th edn, 1984) p 93. This is an observation by a
judge who was a matchless commercial lawyer. I attach very great importance to any observation
by him. Here there are factors which detract from the weight of this particular observation.
Firstly, Scrutton J had found that there was no material non-disclosure: the further observation
was strictly unnecessary. Secondly, it must be borne in mind that there was no claim for
damages. Thirdly, the point concerning recovery of damages for breach of the duty of the utmost
good faith was not argued. Moreover, it seems doubtful that Scrutton J had in mind a case where
the remedy of avoidance proved wholly ineffective. Fourthly, in so far as the judge observed that
‘non-disclosure is not a breach of contract giving rise to a claim for damages’, this observation
accords with the conclusion set out above. But, I have to add, it is unlikely that Scrutton J would
have made that statement if he considered that damages could be claimed for breach of the duty
of the utmost good faith. Finally, it seems realistic to point out that the action would appear to
have suffered from the fatal flaw that all the necessary parties were not before the court, and
neither avoidance nor damages for non-disclosure could properly be ordered. On balance it
seems to me that I ought not to give undue weight to this observation of Scrutton J.
The question whether an action for damages lies for breach of the obligation of the utmost good
faith in an insurance context must be considered from the point of view of legal principle and
policy. Once it is accepted that the principle of the utmost good faith imposes meaningful
reciprocal duties, owed by the insured to the insurers and vice versa, it seems anomalous that
there should be no claim for damages for breach of those duties in a case where that is the only
effective remedy. The principle ubi jus ibi remedium succinctly expresses the policy of our law.
Yet, if the insurers’ submissions are correct, the rights of the banks arising from a breach of
obligation of the utmost good faith in this case are inadequately protected, viz the only claim is
for a return of the premium. That leads to an imbalance and unfairness in the relationship
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between the insured and insurer. Avoidance is almost invariably the only remedy an insurer
needs in cases of non-disclosure. It is just conceivable that a case can arise where the insurer’s
interests ought to be protected by an action for damages, eg where an insurer incurs expense in
the surveying of a rig which proves to be wasted because the insurer subsequently avoids the
policy for non-disclosure. But such cases must be very rare. On the other hand, avoidance of a
policy and a claim for return of the premium will be a wholly ineffective remedy if the breach of
the duty of the utmost good faith by the insurer caused the insured to be unprotected and exposed
to great loss. It is not necessary to go further than the facts of the present case, where it is the
case of the banks that they lost the sums advanced, amounting in aggregate to 80m Swiss francs,
as a result of the failure of the insurers to disclose to them Mr Lee’s dishonesty. An order for
return of the premiums, even if still available, is a derisory remedy in relation to the true loss if
there has been a breach of duty by the insurers which caused the loss. A point which has caused
me some concern is the rule established by Container Transport International Inc v Oceanus
Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476 that the actual effect
of the non-disclosure on the underwriter is irrelevant: the effect on the prudent underwriter is the
sole criterion. That rule was laid down by the Court of Appeal in a marine insurance case, but in
Highlands Insurance Co v Continental Insurance Co [1987] 1 Lloyd’s Rep 109 I
Page 947 of [1987] 2 All ER 923
ruled that a judge of first instance must also apply it in a non-marine insurance case. In the
present case that ruling was not disputed. Assuming therefore that in the case of an insurer’s
alleged breach of the duty of the utmost good faith a similar principle applies, viz that the test is
the effect on the notional insured only, it could legitimately be asked how damages could be
awarded if the non-disclosure had no effect on the insured. In my judgment the only conceivable
answer is that the requirements for avoidance are less than for an action for damages. That is
illustrated by the former rule that a contract could be rescinded for innocent misrepresentation
but that no damages could be claimed for it. In order to claim damages on the ground of a breach
of the obligation of utmost good faith it will, in my judgment, be incumbent on the insured to
prove that the non-disclosure induced him to enter into the contract.
authority.
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Plainly, the problem confronting me is a novel one. Occasionally judges have to apply an
existing remedy to a new situation when a right already recognised by the law is not adequately
protected. I was attracted at one stage to the idea of saying that such a development, if it is to
take place, ought to take place at an appellate level. Bearing in mind, however, that there is no
binding authority precluding such a development, I have come to the conclusion that such a
decision would involve a shirking of responsibility. In my judgment justice and policy
considerations combine in requiring me to rule that in principle an insured can claim damages
from an insurer arising from loss suffered by the insured as a result of a breach of the obligation
of the utmost good faith by the insurer. That is my ruling.
I will deal separately with the banks’ alternative claim for a return of the premiums below.
(b) The common law duty of care
During December 1979, when Mr Verkooyen of Keysers attempted to obtain information from
Mr Dungate about the proposed insurance, he was told to address all questions to Mr Lee of
Notcutts. That, it is said, amounted to an implied representation that Mr Lee was a reliable
broker. Consequently, it is argued that when Mr Dungate learnt in June 1980 of Mr Lee’s
dishonesty he came under a duty to disclose this to Keyser. The submission is based on a well-
established principle: see Spencer Bower and Turner on Actionable Misrepresentation (3rd edn,
1974) pp 85–87. Mr Dungate’s evidence was that he did not remember this conversation, which
according to Mr Verkooyen only lasted some 15 seconds. I accept Mr Dungate’s evidence on this
point. Moreover, it seems to me unrealistic and unfair to suggest that Mr Dungate should have
remembered this conversation in June 1980. I find no duty of care established on this basis.
I have found that Mr Dungate assisted Mr Lee in June 1980 in covering up Mr Lee’s dishonesty,
and that Mr Dungate knew that Mr Lee’s letter of 4 June 1980 to Mr Verkooyen told a lie. It was
not alleged that there was a conspiracy between Mr Dungate and Mr Lee, and these matters are
not relied on as separate and independent causes of action. But they are, of course, strongly
relied on in support of the banks’ case that there was a breach of the common law duty of care.
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Counsel for the insurers submitted that the banks are seeking to establish a duty of care in a
novel situation. That is correct: the case is not covered by any authority directly in point. This
factor does not trouble me. Since Lord Atkin enunciated the principle of neighbourhood or
proximity in Donoghue v Stevenson [1932] AC 562 at 580, [1932] All ER Rep 1 at 11, the
history of the tort of negligence has been the story of courts, confronted with new situations,
having to decide whether a duty of care existed or not. Sometimes the arguments succeeded and
sometimes they failed. Always the decisive matter has been the particular facts of each case. The
novelty of the case has never, in itself, been any obstacle or disincentive to declaring that a duty
arises. Precedents are not exhaustive of duty situations but mere illustrations of cases where the
courts have held a duty to exist.
The particular facts of this case, as I have found they were, will obviously be of
Page 948 of [1987] 2 All ER 923
paramount importance. I resist any temptation to summarise. But it may be helpful to identify the
principal distinguishing features, seen from the insurers’ point of view. These features are as
follows. (A) The court ought not to impose liability in tort since the banks and insurers are in a
contractual relationship. (B) The banks are seeking to establish liability for pure omission. The
particular duty asserted required affirmative action on the part of insurers. (C) The banks’ case
involves the proposition that Mr Dungate had to make a judgment whether a third party (Mr Lee)
would in future attempt to deceive the banks. The threshold requirement of reasonable
foreseeability cannot therefore be fulfilled. These matters will have to be examined, individually
and cumulatively, in some detail.
Now I turn to the way in which the matter ought to be approached. The starting point must be the
well-known passage in Lord Wilberforce’s speech in Anns v Merton London Borough [1977] 2
All ER 492 at 498–499, [1978] AC 728 at 751–752:
Through the trilogy of cases in this House, Donoghue v Stevenson [1932] AC 562, [1932] All
ER Rep 1, Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465
and Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, the position has
authority.
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now been reached that in order to establish that a duty of care arises in a particular situation, it is
not necessary to bring the facts of that situation within those of previous situations in which a
duty of care has been held to exist. Rather the question has to be approached in two stages. First
one has to ask whether, as between the alleged wrongdoer and the person who has suffered
damage there is a sufficient relationship of proximity or neighbourhood such that, in the
reasonable contemplation of the former, carelessness on his part may be likely to cause damage
to the latter, in which case a prima facie duty of care arises. Secondly, if the first question is
answered affirmatively, it is necessary to consider whether there are any considerations which
ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is
owed or the damages to which a breach of it may give rise (see the Dorset Yacht case [1970] 2
All ER 294 at 297–298, [1970] AC 1004 at 1027, per Lord Reid). Examples of this are Hedley
Byrne & Co Ltd v Heller & Partners Ltd where the class of potential plaintiffs was reduced to
those shown to have relief on the correctness of statements made, and Weller & Co v Foot and
Mouth Disease Research Institute [1965] 3 All ER 560, [1966] 1 QB 569 and (I cite these merely
as illustrations, without discussion) cases about ‘economic loss’ where, a duty having been held
to exist, the nature of the recoverable damages was limited (see SCM (UK) Ltd v W J Whittall &
Son Ltd [1970] 3 All ER 245, [1971] 1 QB 337, Spartan Steel and Alloys Ltd v Martin & Co
(Contractors) Ltd [1972] 3 All ER 557, [1973] QB 27.’
This passage echoes an earlier observation of Lord Reid in Home Office v Dorset Yacht Co Ltd
[1970] 2 All ER 294 at 297–298, [1970] AC 1004 at 1027. In Peabody Donation Fund
(Governors) v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529 at 534, [1985] AC 210 at
240–241 Lord Keith referred to these passages in a speech which carried the approval of all their
Lordships. He said:
‘There has been a tendency in some recent cases to treat these passages as being themselves of a
definitive character. This is a temptation which should be resisted. The true question in each case
is whether the particular defendant owed to the particular plaintiff a duty of care having the
scope which is contended for, and whether he was in breach of that duty with consequent loss to
the plaintiff. A relationship of proximity in Lord Atkin’s sense must exist before any duty of care
can arise, but the scope of the duty must depend on all the circumstances of the case. In Home
authority.
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Office v Dorset Yacht Co Ltd [1970] 2 All ER 294 at 307–308, [1970] AC 1004 at 1038–1039
Lord Morris, after observing that at the conclusion of his speech in Donoghue v Stevenson
[1932] AC 562 at 599, [1932] All ER Rep 1 at 20 Lord Atkin said that it was advantageous if the
law “is in accordance with sound common sense”
Page 949 of [1987] 2 All ER 923
and expressing the view that a special relation existed between the prison officers and the yacht
company which gave rise to a duty on the former to control their charges so as to prevent them
doing damage, continued: “Apart from this I would conclude that in the situation stipulated in the
present case it would not only be fair and reasonable that a duty of care should exist but that it
would be contrary to the fitness of things were it not so. I doubt whether it is necessary to say, in
cases where the court is asked whether in a particular situation a duty existed, that the court is
called on to make a decision as to policy. Policy need not be invoked where reason and good
sense will at once point the way. If the test whether in some particular situation a duty of care
arises may in some cases have to be whether it is fair and reasonable that it should so arise the
court must not shrink from being the arbiter. As Lord Radcliffe said in his speech in Davis
Contractors Ltd v Fareham UDC [1956] 2 All ER 145 at 160, [1956] AC 696 at 728, the court is
‘the spokesman of the fair and reasonable man’.” So in determining whether or not a duty of care
of particular scope was incumbent on a defendant it is material to take into consideration whether
it is just and reasonable that it should be so.’
In Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] 2 All ER 145 at
153, [1986] AC 785 at 815 Lord Brandon, speaking again for all their Lordships, reiterated the
view that Lord Wilberforce’s observations in Anns v Merton London Borough are not a
universally applicable test of the existence and scope of a duty of care in the law of negligence.
He added:
‘The second observation which I would make is that Lord Wilberforce was dealing, as is clear
from what he said, with the approach to the questions of the existence and scope of a duty of care
in a novel type of factual situation which was not analogous to any factual situation in which the
existence of such a duty had already been held to exist. He was not, as I understand the passage,
authority.
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suggesting that the same approach should be adopted to the existence of a duty of care in a
factual situation in which the existence of such a duty had repeatedly been held not to exist.’
I take the position to be that Lord Wilberforce’s observations in Anns v Merton London Borough
are still a useful guide, notably in so far as they emphasise that a plaintiff, in order to establish a
duty in a novel situation, has to establish in limine the element of neighbourhood or proximity
(which I described as the threshold question) and then, in addition, he has to satisfy the court that
it is just and reasonable that a duty of care of particular scope should be held to exist. That is
how I propose to approach the present case.
But before I examine those questions I ought to consider briefly how the three special features of
this case, which the insurers so strongly rely on, affect the matter. The question is whether any of
these features precludes, as a matter of established legal principle, a ruling that a duty of care
exists. In other words, it is necessary to consider whether settled principles remove this case
altogether from the two-stage inquiry envisaged by Lord Wilberforce in Anns v Merton London
Borough. The first point to be considered is whether the contractual setting in which the question
arises precludes a ruling that a duty of care arises. The insurers’ submissions were based on
observations of Lord Scarman in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2
All ER 947, [1986] AC 80. Due to forgeries by an employee of a corporate customer of three
banks its current accounts were debited with payments on a large number of cheques. It was
common ground that the customer owed a duty to exercise due care in drawing cheques so as not
to facilitate forgery and a duty to notify the bank immediately of any authorised cheques of
which he became aware. But it was alleged that the customer had in a wider sense failed to
prevent forgeries. It had been expressly agreed that the customer should notify the banks within a
specified time of errors in the monthly bank statements. The Privy Council concluded that the
argument that the customer owed a wider contractual
Page 950 of [1987] 2 All ER 923
duty than that set out above must fail. Then it considered whether the customer owed a wider
duty in tort. Lord Scarman, giving the opinion of the Board, said ([1985] 2 All ER 947 at 957,
[1986] AC 80 at 107):
authority.
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‘Their Lordships do not believe that there is anything to the advantage of the law’s development
in searching for a liability in tort where the parties are in a contractual relationship. This is
particularly so in a commercial relationship. Though it is possible as a matter of legal semantics
to conduct an analysis of the rights and duties inherent in some contractual relationships
including that of banker and customer either as a matter of contract law when the question will
be what, if any, terms are to be implied or as a matter of tort law when the task will be to identify
a duty arising from the proximity and character of the relationship between the parties, their
Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the
law to adhere to the contractual analysis: on principle because it is a relationship in which the
parties have, subject to a few exceptions, the right to determine their obligations to each other,
and for the avoidance of confusion because different consequences do follow according to
whether liability arises from contract or tort, eg in the limitation of action. Their Lordships
respectfully agree with some wise words of Lord Radcliffe in his dissenting speech in Lister v
Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125 at 139, [1957] AC 555 at 587. After
indicating that there are cases in which a duty arising out of the relationship between employer
and employee could be analysed as contractual or tortious Lord Radcliffe said: “Since, in any
event, the duty in question is one which exists by imputation or implication of law and not by
virtue of any express negotiation between the parties, I should be inclined to say that there is no
real distinction between the two possible sources of obligation. But it is certainly, I think, as
much contractual as tortious. Since, in modern times, the relationship between master and
servant, between employer and employed, is inherently one of contract, it seems to me entirely
correct to attribute the duties which arise from that relationship to implied contract.” Their
Lordships do not, therefore, embark on an investigation whether in the relationship of banker and
customer it is possible to identify tort as well as contract as a source of the obligations owed by
the one to the other. Their Lordships do not, however, accept that the parties’ mutual obligations
in tort can be any greater than those to be found expressly or by necessary implication in their
contract. If, therefore, as their Lordships have concluded, no duty wider than that recognised in
[London Joint Stock Bank Ltd v Macmillan [1918] AC 777, [1918–19] All ER Rep 30 and
Greenwood v Martins Bank Ltd [1933] AC 51, [1932] All ER Rep 318] can be implied into the
banking contract in the absence of express terms to that effect, the respondent banks cannot rely
authority.
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on the law of tort to provide them with greater protection than that for which they have
contracted.’
The actual decision, if I may respectfully say so, seems inescapable, since the parties had set out
the duties of the customer in the contract. A further reason might be the policy reasons discussed
in the Tai Hing Cotton Mill case [1985] 2 All ER 947 at 956, [1986] AC 80 at 106. But it will be
noted that the broader observations of Lord Scarman were, as is plain from the report, tentative
in character. They do not import the proposition that a duty of care cannot ever arise in a
precontractual setting. In Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5, [1976] QB 574 it
was established that, if there is a special relationship between the parties, a duty of care not to
make careless statements in precontractual negotiations can arise; see also Midland Bank Trust
Co Ltd v Hett Stubbs & Kemp (a firm) [1978] 3 All ER 571, [1979] Ch 384. Significantly,
although the decision in the Esso Petroleum Co case was cited in the Tai Hing Cotton Mill case,
it is not mentioned in the Board’s judgment. That cannot be an oversight: it underlines my
impression that Lord Scarman’s observations were not intended to be of general application. In
the present case the duty is alleged to have arisen in June 1980 and thereafter, viz, it arose
Page 951 of [1987] 2 All ER 923
after the first Ultron transaction but before the subsequent Ultron, Deminter, HSG and ESG loan
transactions were negotiated and concluded. None of the loan agreements contain any provision
which in any way impinges on the question under consideration. In my judgment, the contractual
setting does not preclude a ruling that a duty of care existed. Moreover, for reasons which I will
explain below, the relationship between the parties was plainly very special in character.
The second feature to be considered is the submission that one is dealing here with a case of pure
omission. English law has always adopted a robust approach to any suggestion that, in the
absence of a special relationship, somebody owes a legal duty to rescue another from physical
harm or financial ruin. That is so no matter how simple and easy the intervention to rescue the
other might be. In Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294 at 326, [1970] AC
1004 at 1060 Lord Diplock gave the following illustrations:
authority.
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‘The branch of English law which deals with civil wrongs abounds with instances of acts and,
more particularly, of omissions which give rise to no legal liability in the doer or omitter for loss
or damage sustained by others as a consequence of the act or omission, however reasonably or
probably that loss or damage might have been anticipated. The very parable of the good
Samaritan (Luke 10:30) which was evoked by Lord Atkin in Donoghue v Stevenson [1932] AC
562, [1932] All ER Rep 1 illustrates, in the conduct of the priest and of the Levite who passed by
on the other side, an omission which was likely to have as its reasonable and probable
consequence damage to the health of the victim of the thieves, but for which the priest and Levite
would have incurred no civil liability in English law. Examples could be multiplied. One may
cause loss to a tradesman by withdrawing one’s custom although the goods which he supplies are
entirely satisfactory; one may damage one’s neighbour’s land by intercepting the flow of
percolating water to it even though the interception is of not advantage to oneself; one need not
warn him of a risk of physical danger to which he is about to expose himself unless there is some
special relationship between one and him such as that of occupier of land and visitor; one may
watch one’s neighbour’s goods being ruined by a thunderstorm although the slightest effort on
one’s part could protect them from the rain and one may do so with impunity unless there is
some special relationship between one and him such as that of bailor and bailee.’
Leaving aside simple ‘no duty to rescue’ cases, it is today difficult to draw a conceptual line
between misfeasance and non-feasance: see Winfield and Jolowicz on Tort (12th edn, 1984)
p 81. Indeed, it has been suggested that the distinction has gone: see Winfield and Jolowicz p 83.
I would not go so far. But the present case is in my judgment not a case of pure omission. The
relationship between the parties involved obligations of good faith and fair dealing. Moreover,
the alleged duty arises in the context of insurers who had an established business relationship
with the banks, and continued to transact further with the banks (and to make profits) in the
knowledge that a risk, viz further dishonesty by Mr Lee, which was obvious to the insurers, was
not appreciated by the banks and could not be discovered by them. It is a situation essentially
different from pure omission cases. In my judgment the fact that the duty relied on by the banks
required affirmative action on the part of the insurers (unless they simply decided in the
circumstances not to insure) does not preclude a ruling that such a duty existed. But in my
authority.
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overall assessment of the case I shall, of course, bear in mind the particular nature of the duty
which has been advanced.
The third matter to be considered is the fact that there are two relationships involved: that
between the insurers (Mr Dungate) and the brokers (Mr Lee), and then the relationship between
the insurers and the banks. The insurers submit that the banks’ case involves the proposition that
Mr Dungate had to make a judgment whether a third party (Mr Lee) would in future attempt to
deceive the banks. There is no authority directly in point, but the courts have, on a number of
occasions, had to consider whether
Page 952 of [1987] 2 All ER 923
a duty to control the act of third persons exists. An exhaustive survey of the authorities will serve
no purpose. The best known example is Home Office v Dorset Yacht Co Ltd. Borstal boys, who
were working on an island, left the island at night on the plaintiff’s yacht, which was moored
offshore. They caused the yacht to be damaged. It was alleged that the officer in charge of the
boys had failed to exercise proper control over them. On a preliminary issue whether, on the
pleaded facts, the Home Office owed a duty of care to the plaintiffs, the House of Lords held
that, depending on the facts, such a duty may arise. The decision in Paterson Zochonis Ltd v
Merfarken Packaging Ltd (1982) [1986] 3 All ER 522 went the other way. The Court of Appeal
had to consider a number of issues. On a striking out application, and on assumed facts, the
Court of Appeal had to decide, in effect, whether there was a general duty of care imposed on
traders to satisfy themselves that the goods which they sold would not be used to facilitate some
dishonest purpose which would damage others. This question was answered in the negative. The
judgments emphasise that no knowledge of an improper motive was alleged. In the
circumstances, it was held, a ruling that there was a duty of care resting on the traders would be
to place an impossible burden on them. But Robert Goff LJ expressly stated (at 540):
‘The first special feature is that there is here said to be a duty of care on the defendant to avoid
providing a third party with the means of committing a tort against the plaintiff. Is there any
general principle which excludes or limits liability in such a case? In my judgment, there is no
principle which excludes liability.’
authority.
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He then gave a number of examples to substantiate this point. On balance it seems to me that the
applicable rule can best be summarised in the following words of Dixon J in Smith v Leurs
(1945) 70 CLR 256 at 262:
‘The general rule is that one man is under no duty of controlling another man to prevent his
doing damage to a third. There are, however, special relations which are the source of a duty of
this nature.’
That observation was approved in Home Office v Dorset Yacht Co Ltd. In my judgment, as I
have already said, the relationship between the insurers and the banks was special in character in
the respects which I have outlined. There is, therefore, no rule requiring the court to hold that no
duty existed. But the decisions in Home Office v Dorset Yacht Co Ltd and Paterson Zochonis
Ltd v Merfarken Packaging Ltd clearly show that the interposition of a third party in the alleged
duty situation requires most careful consideration. And in particular it will be necessary to
consider what the requirement of reasonable foresight comprehends in such a case.
Having considered that none of the insurers’ preliminary objections ought to be sustained, I turn
to the threshold question of reasonable foreseeability. In a case such as the present it is, in my
judgment, insufficient, in order to establish liability, that it was in the reasonable contemplation
of the insurers that a failure to disclose Mr Lee’s dishonestly might possibly result in financial
harm to the banks. A bare possibility is not enough. In my judgment it must be shown that it was
reasonably foreseeable by the insurers that there was a manifest and obvious risk that a failure to
disclose would lead to financial loss by the banks. That is how I approach the matter. No purpose
would be served in repeating or summarising the findings of fact which I have already made. I
am entirely satisfied that it was reasonably foreseeable that, if Mr Lee’s dishonesty was not
disclosed to the banks, there was a manifest and obvious risk that the banks might suffer
financial loss as a result of Mr Lee’s future dishonesty. That, in my judgment, is the foresight
which a reasonable underwriter would have had. But I am also satisfied that Mr Dungate in fact
distrusted Mr Lee, and realised that there was a substantial risk that Mr Lee might again deceive
the banks to their financial detriment. He chose to ignore the banks’ position, and was content to
proceed on the basis that, exercising ‘care’, he could look after his employers’ interests. In all the
authority.
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circumstances I am satisfied that the banks have satisfied the threshold requirement of proximity
and neighbourhood.
Page 953 of [1987] 2 All ER 923
Adopting the reasoning in Peabody Donation Fund (Governors) v Sir Lindsay Parkinson & Co
Ltd [1984] 3 All ER 529, [1985] AC 210, I do not conclude that a prima facie duty of care arises.
Instead, I will consider with as open a mind as I can command the question whether, in all the
circumstances, it is just and reasonable to hold that the duty of care advanced in this case rested
on the insurers. Now, it is necessary to take into consideration the factors which are said to
militate for and against such a duty. Looking first at the negative factors, it is, of course, right
that the imposition of a duty of care in this case would involve interference in the affairs of the
insurers. But, as Holmes pointed out in The Common Law (1881) p 144, the law of tort is a
compromise between ‘the reasonable freedom of others with the protection of the individual’. In
considering how the issue should be resolved I must take into account not only the magnitude of
the potential loss to the banks and the manifest and obvious character of the risk but also the
nature of the burden of taking precautions. The present case is very different from the Paterson
Zochonis Ltd v Merfarken Packaging Ltd. The duty was a very simple one to discharge. It could,
in my judgment, have been discharged in a number of ways, viz by reporting the matter to the
brokers as agents of the banks, or directly to the banks, or even by refusing to proceed with the
business. But it was said that disclosure would have involved the risk of libel proceedings. The
answer is, in my judgment, that the suggested duty arises not in a case where Mr Dungate
suspected dishonesty but in a case in which he had received incontrovertible proof of the
broker’s deceit. In any event, disclosure of the relevant facts would be protected by qualified
privilege. But counsel for the insurers also referred me to the famous passage in Sanders Bros v
Maclean & Co (1883) 11 QBD 327 at 343 where Bowen LJ observed that ‘credit, not distrust, is
the basis of commercial dealings’. That is an important factor to take into account in many cases
but it is not relevant in the present case. It is irrelevant because Mr Lee’s dishonest conduct had
destroyed Mr Dungate’s trust in him by early June 1980. The final policy argument advanced
against the imposition of a duty is that it will lead to a flood of unmeritorious claims. That is an
unnecessarily alarmist view. My judgment is squarely grounded on the very special facts of this
authority.
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case. It is not necessary to consider what the position will be if one or more of special features of
this case are absent. I give the traditional answer of a judge of first instance: the problems which
will arise on different facts will be considered when such issues come before the court and not
before.
It will be apparent that I am not impressed with the catalogue of negative factors which have
been advanced. But there are, in my judgment, positive factors which militate in favour of
holding that a duty exists. Firstly, there is the factor that, in my judgment, such a decision would
in all the circumstances be just as between the parties in this case. Secondly, the existence of a
duty of care is consistent with the requirement of good faith and fair dealing which ought to
govern the relations between insured and insurer. Thirdly, it is reinforced by the contemporary
market understanding of an underwriter’s duty in such circumstances. Lastly, one cannot lose
sight of the fact that we live in a world in which commercial fraud is rampant. It knows no
boundaries, and is not restricted to particular trades. It has particularly bedevilled the insurance
markets of the world. It is a notorious fact that the London insurance market has by no means
been immune from it. If a duty is held to exist, it may help to expose and eradicate fraud in the
London insurance market. Here I have in mind the wise words spoken by Lord Atkin on an
extra-judicial occasion, the 1930 presidential address to the Holdsworth Club, Birmingham
University (see Harvey (ed) The Lawyer and Justice (1978) p 131):
‘[The law] maintains and publicly maintains and enforces a very high standard of integrity. Law
and morality are, of course, not synonymous, and the demands of morality and the moral code no
doubt extend into spheres where the law does not set its foot. But in dealings as between man
and man the English law does set up a high, but not too high, attainable standard of honesty and
fair dealing which, to my mind, is of the very greatest value to the whole community and
especially to the commercial community.’
Page 954 of [1987] 2 All ER 923
Cumulatively, these policy considerations cogently support the existence of a duty of care. For
all these reasons I conclude that a duty of care did exist.
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(c) The other causes of action advanced by the banks
The banks invoked a number of other rubrics of the law in support of the proposition that the
insurers were under a legal duty to disclose to them Mr Lee’s dishonesty, or to take reasonable
precautions to avoid the banks being harmed. One such argument I have already considered, and
rejected, when dealing with duty of the utmost good faith, viz the contention that the contract of
insurance contained implied terms, or was linked with a collateral contract, imposing a duty of
care on the insurers. I say no more about that point. But without any great enthusiasm counsel for
the banks also relied on the following causes of action. (a) The banks alleged that the insurers
owed fiduciary duties to the banks. (b) The banks asserted a claim under s 2 of the
Misrepresentation Act 1967. (c) Finally, the banks relied on s 50 of the Supreme Court Act 1981,
which is the successor to s 2 of the Chancery Amendment Act 1858(Lord Cairn’s Act). Having
come to a clear conclusion that the banks have established a legal duty, deriving from the
uberrima fides principle and the common law duty of care, it is, in my judgment, unnecessary to
discuss these alternative causes of action. But I will simply record my conclusion that none of
these causes of action are sustainable on the facts of the present case.
Breach of duty
I have concluded that the insurers, as an incident of the duty of the utmost good faith, owed a
duty to the banks to disclose to them Mr Lee’s dishonesty in issuing fraudulent cover notes. I
have rejected Mr Dungate’s evidence that he reported the matter to Mr Wilkinson of Notcutts. I
find that no attempt was ever made by the insurers to disclose Mr Lee’s dishonesty to the banks
or to report the material facts to the banks. Indeed, the banks remained in ignorance of the issue
of the fraudulent cover notes until after the commencement of the litigation. It follows that a
breach of this duty has been established.
The banks have also established a common law duty of care. The insurers could, in my
judgment, have fulfilled this duty by disclosing to the banks, directly or through the brokers, Mr
Lee’s dishonesty in issuing the fraudulent cover notes, or by disclosing to the banks the material
facts. The insurers took none of these precautions. Alternatively, the insurers could have
abstained from entering into further insurance contracts through Mr Lee after June 1980. Instead
authority.
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of taking this course, the insurers continued to enter into further insurance contracts with banks.
A breach of the common law duty of care has been established.
Causation
[His Lordship considered the expert evidence given by bankers and continued:]
The general thrust of the evidence of all the banking witnesses was that, if Mr Lee’s dishonesty
in issuing the false cover notes had been disclosed to the banks, that would have spelt the end of
the negotiations in respect of all loan transactions after June 1980. I accept that this is so in
respect of all loans after June 1980. It is not only my acceptance of the evidence of the banking
witnesses which leads me to this conclusion. It also accords, in my view, with the inherent
probabilities. Deception and fraud are strong words in banking parlance. In a case where the
dishonesty related to the banks’ primary security in very large loan transactions, viz the
insurance policies, the disincentive to dealing further with the broker or to continuing the loan
negotiations would have been overwhelming. The fact that no loss had occurred by June 1980,
when the cover was completed, would not have altered the bankers’ view. It is the fact of the
fraud, and the potentiality of loss, which would have mattered. It is clearly established, in my
judgment, that, if a full disclosure of the facts relating to Mr Lee’s dishonesty in issuing the false
cover notes had been made, none of the banks would have entered into any further loans after
June 1980.
Page 955 of [1987] 2 All ER 923
But the first Ultron loan of 26·5m Swiss francs was advanced in early 1980. The discovery of Mr
Lee’s dishonesty took place in June 1980. What would the banks involved in this transaction
have done if they had discovered, in June 1980 or thereafter, that Mr Lee had deceived them?
Would they have called in the loan? At that stage the borrower was not in default. Admittedly,
the loan agreement recorded that the granting of the loan was ‘subject to all the necessary
security being lodged’. But it is by no means clear that this provision would, in the
circumstances, have entitled the lending banks to call in the loan. Having carefully considered
the oral evidence, I record my conclusion that the banks in question have not satisfied me that
authority.
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they would have adopted that course. It will, therefore, be unnecessary to consider what could
have been recovered by the banks in June 1980, or until the maturity date of the loan. But the
banks put forward another argument. They submit that, but for the insurers’ breach of duty, the
relevant banks would have recovered their losses on the first Ultron loan from Notcutts, who
were (it is agreed) protected by liability insurance with a liability limit of £10·5m. This argument
is based, of course, on the assumption that none of the other loans would have been granted if Mr
Lee’s dishonesty had been disclosed to the banks. That premise is established. Given that
assumption, and on the evidence, a ‘pot’ of £10·5m would have been available to satisfy the
lending banks’ claims when Ultron defaulted. That is how I understand the alternative way of
advancing this part of the claim. But in my judgment the banks would in any event have taken
action against the borrowers if the loan were not repaid on its maturity date. In the circumstances
I find that there is no causal connection between the insurers’ breach of duty and the banks’
losses in respect of the first Ultron loan. In view of this conclusion it will be unnecessary to
consider whether this part of the claim is too remote.
Now I turn to what appeared to be the principal plank in the submissions of counsel for the
insurers on causation. He emphasised the element of reasonable foreseeability. Clearly, it is a
vital factor, and it straddles issues relating to duty, breach, causation and remoteness. Counsel for
the insurers argued that Mr Lee’s frauds after June 1980 were different in kind from the fraud
perpetrated by the issue of false cover notes. I repeat my finding that it was reasonably
foreseeable by the insurers from June 1980 that there was a manifest and obvious risk that Mr
Lee would again deceive the banks and insurers in and about the insurance transactions, thereby
affording the insurers with a complete defence to any claim on the policies. In so far as it was
argued that Mr Lee’s subsequent frauds were different in kind from the fraud perpetrated by him
in the first Ultron transaction, I disagree. It is, of course, true that the precise manner of his future
fraudulent conduct was not foreseeable. But Mr Lee’s subsequent frauds were of the same
general character as his earlier fraud. Mr Lee committed the very kind of frauds in and about the
insurance transactions which were reasonably foreseeable by an underwriter in Mr Dungate’s
position in June 1980 or subsequently.
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But the gravamen of the submission of counsel for the insurers was that the real cause of the
banks’ losses was the fraud of Mr Ballestero. His fraud was not foreseeable in June 1980. Mr
Ballestero’s fraud was a cause of the banks’ losses. But for his fraud no loan transactions would
have taken place. On the other hand, as I have found, the insurers ought to have disclosed Mr
Lee’s dishonesty, and if they had done so the banks would not have suffered losses. The insurers’
breach of duty was therefore also a cause of the banks’ losses. The question is whether it affords
the insurers a defence to say that Mr Ballestero’s fraud was also a cause of the banks’ losses.
There is no more difficult area of our law than causation. Scientific precepts and philosophical
notions are frequently invoked. Ultimately, it seems to me, a judge is on safer ground if he puts
his trust in precedent, or, in its absence, in common sense. That is the approach adopted by
Devlin J in Heskell v Continental Express Ltd [1950] 1 All ER 1033 at 1047. Devlin J said:
‘Where the wrong is a tort, it is clearly settled that the wrongdoer cannot excuse himself by
pointing to another cause. It is enough that the tort should be a cause
Page 956 of [1987] 2 All ER 923
and it is unnecessary to evaluate competing causes and ascertain which of them is dominant … ’
To the best of my knowledge this proposition has not been questioned since the decision in
Heskell v Continental Express Ltd. It is relevant, of course, to the banks’ case based on a breach
of the common law duty of care. But what about the breach of the duty of the utmost good faith?
That cause of action has a contractual foundation. In Heskell’s case Devlin J pointed out that in
the case of a breach of contract the position is not so clear. After a careful review of the
authorities Devlin J concluded (at 1048):
‘It may be that the term “a cause” is, whether in tort or in contract, not rightly used as a term of
legal significance unless it denotes a cause of equal efficacy with one or more other causes.
Whatever the true rule of causation may be I am satisfied that if a breach of contract is one of
two causes, both co-operating and both of equal efficacy, as I find in this case, it is sufficient to
carry judgment for damages. Reischer v. Borwick ([1894] 2 QB 548, [1891–4] All ER Rep 531)
establishes that for the purposes of a contract of insurance it is sufficient if an insured event is, in
authority.
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this sense, a co-operating cause of the loss. I do not think that Yorkshire Dale S.S. Co., Ltd. v.
Minister of War Transport ([1942] 2 All ER 6, [1942] AC 691) with its insistence on the
ascertainment of “the cause,” disapproved this principle. The case decided that the cause of a
loss has to be ascertained by the standard of common sense of the ordinary man. Common sense
is a blunt instrument not suited for probing into minute points, and I cannot believe that if the
ordinary man thinks that two causes are of approximately equal efficacy, he cannot say so
without being interrogated on fine distinctions. I note also that since Yorkshire Dale S.S. Co.,
Ltd. v. Minister of War Transport was decided, SCOTT, L.J., in Ocean Steamship Co. v.
Liverpool and London War Risks Insurance Association Ltd ([1946] 2 All ER 355 at 363, [1946]
KB 561 at 574) treated the rule laid down in Reischer v. Borwick as still effective.’
The correctness of this conclusion of Devlin J was not challenged. In my respectful judgment
Devlin J’s analysis is plainly correct, and I adopt it. In the present case one is, in my judgment,
dealing with two causes of equal efficacy: Mr Ballestero’s fraud and the insurers’ breach of duty.
The fact that the breach of duty, based on the uberrima fides principle or the tort of negligence, is
one of two causes of equal efficacy is sufficient to sustain the banks’ case on this aspect.
Finally, under the heading of causation I must consider the argument that because of the banks’
carelessness in and about the negotiation of the loan transactions they were (as counsel put it) the
authors of their own misfortune. For the reasons given above, I conclude that, even if such
carelessness is established, it does not negative the causal connection between the insurers’
breach of duty and the banks’ resultant losses. But when I turn to contributory negligence I will
have to examine the merits of these allegations.
Remoteness
The consequences of liability for an act or omission are in theory boundless. The law must and
does draw a practical line, separating those consequences for which the wrongdoer will be held
liable and those for which he will not be held to be accountable. Where the line is to be drawn
depends on a number of factors. Germane to the present case, it seems to me that the only factors
which could conceivably come into play are the degree of foreseeability of the banks’ losses and
policy considerations. Having concluded that it was reasonably foreseeable from June 1980 that
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there was a manifest and obvious risk that Mr Lee might again deceive the banks, I conclude that
the foreseeability requirement is fulfilled. In my judgment there are also no policy considerations
militating against the imposition of liability on the insurers for the financial losses which the
banks suffered. Certainly, the fact that the banks’ losses were economic in character cannot
operate against the imposition of liability on the insurers. After all, the insurers’
Page 957 of [1987] 2 All ER 923
liability is in principle not dissimilar from liability for economic loss under the principle laid
down in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465.
No spectre of liability to an indeterminate class of claimants arises. And the extent of the banks’
losses, although very large, is also confined to losses flowing from the loan transactions.
In my judgment the banks’ losses are not too remote.
The remaining issues
Prima facie the conclusions which I have recorded appear to entitle the banks to judgment on
liability against the insurers. There are, however, other issues to which I must now turn. These
issues are as follows. (a) The insurers contend that the banks, through their brokers (that is
through Mr Lee), misrepresented the risk to the insurers, or failed to disclose material facts to the
insurers, who in turn are entitled to recover damages against the banks in a like amount as the
banks are entitled from the insurers. This was described as the ‘mirror image’ argument. (b) The
insurers contend that the banks are entitled to no damages, or, alternatively, to substantially
reduced damages, by reason of the contributory negligence of each of the banks. (c) The
quantum of the banks’ losses.
(a) The mirror image argument
Under this heading the insurers argue that, if they owed a duty of the utmost good faith to the
insured banks, each bank owed a like duty to them. This proposition cannot, in my view, be in
doubt. The insurers also submit that each of the banks was in breach to them of the duty of the
utmost good faith. It is alleged, for example, that the banks failed to disclose that they had not
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made any or any sufficient investigations as to the ‘moral’ risk of Mr Ballestero, ie as to his
general creditworthiness, including his personal standing, integrity, reputation and past loan
experience. A number of other matters are relied on. Without expressing a view on all the
matters relied on, or on the particular example which I cited, it seems to be clearly established
that Mr Lee, who was, of course, the banks’ agent, misled the insurers in a number of respects
and that by reason of his actions the insurers would have been entitled to avoid each of the
insurance policies. So far the premises of the ‘mirror image’ argument are not seriously in doubt.
But the question is whether these premises will yield the legal result which the insurers put
forward. The way in which the insurers put their case is spelt out in the insurers’ defence in the
Ultron action as finally amended. It is asserted:
‘6. (a)(i) Therefore if insurers are held liable to the Banks by reason of this alleged breach of
duty insurers will have suffered loss and damage by reason of the Banks’ breaches. (ii)
Accordingly insurers are entitled to recover from the Banks damages and costs equivalent to
those awarded against them in favour of the Banks. Alternatively, insurers are entitled to an
indemnity from the Banks. Alternatively the Banks are unable to recover from Insurers for
circuity of action.
(b)(i) Further or in the alternative, if any Bank is entitled to recover from Insurers in either this
action or in actions 1983 S. No. 763, 1983 S. No. 764 or 1982 B. No. 3436 then Insurers will
have suffered loss and damage by reason of the breaches of the Banks parties to this action or
each of them. For the avoidance of doubt, Insurers will contend in this event that breaches by
each Bank a party to this action were causative of Insurers’ loss not only in this action but also in
relation to any damages or costs awarded to any Bank against Insurers in any action of which a
subsequent related loan agreement is the subject. (ii) Accordingly Insurers are entitled to recover
from the Bank parties to this action or each of them damages and costs equivalent to any
awarded to any Bank in this action and in any of the actions referred to in sub-paragraph (b)(i)
above. Alternatively, Insurers are entitled to an indemnity from the Banks parties to this action or
each of them against any sums
Page 958 of [1987] 2 All ER 923
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awarded against Insurers in this action or in any of the actions referred to in sub-paragraph (b)(i)
above’.
It will immediately be obvious that the critical question is how such breaches on the part of the
banks were causative of losses on the part of the insurers. Since the insurers’ defence that they
were never liable under the policies of insurance has prevailed, it is difficult to see how a breach
of duty by the insured in respect of those policies could have caused losses to the insurers. With
due deference to the arguments which were advanced on behalf of the insurers, I must record my
understanding that no arguable contention in support of a causal link between the alleged losses
sustained by the banks as a result of the insurers’ breach of duty and the insurers’ losses (if held
liable to the banks) was ever put forward. I can see none. In so far as it has been put forward as
what is commonly called a ‘prejudice point’, I have noted it. I doubt that the point is capable of
yielding service even in such an extra-legal pursuit. But proved facts which are not relevant to
the legal issues must be firmly put aside. In my judgment this particular line of defence is
without merit.
(b) Contributory negligence
The insurers submitted that the banks are entitled to no damages, or, alternatively, only to
substantially reduced damages, by reason of the contributory negligence of each of the banks.
But it must be borne in mind that I have come to the conclusion that the insurers are liable to the
banks by reason of the insurers’ breach of the duty of the utmost good faith. That is a form of
liability which is not dependent on fault or negligence. A breach of that duty does not per se
amount to a tort. The relevant provisions of the Law Reform (Contributory Negligence) Act
1945 are as follows:
‘1.—(1) Where any person suffers damage as the result partly of his own fault and partly of the
fault of any other person or persons, a claim in respect of that damage shall not be defeated by
reason of the fault of the person suffering the damage, but the damages recoverable in respect
thereof shall be reduced to such extent as the court thinks just and equitable having regard to the
claimant’s share in the responsibility for the damage: Provided that—(a) this subsection shall not
operate to defeat any defence arising under a contract; (b) where any contract or enactment
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providing for the limitation of liability is applicable to the claim, the amount of damages
recoverable by the claimant by virtue of this subsection shall not exceed the maximum limit so
applicable …
4. The following expressions have the meanings hereby respectfully assigned to them, that is to
say … “fault” means negligence, breach of statutory duty or other act or omission which gives
rise to a liability in tort or would, apart from this Act, give rise to the defence of contributory
negligence … ’
On behalf of the insurers the right was reserved to argue on appeal that the 1945 Act covers a
case where a defendant is held liable on the basis of a breach of the duty of the utmost good
faith. But before me no such argument was advanced. In my view such a case falls outside the
scope of the 1945 Act. Various situations in which the Act is applicable, and not applicable, were
reviewed by Hobhouse J in Forsikringsaktieselskapet Vesta v Butcher [1986] 2 All ER 488. He
identified one such category as follows (at 508):
‘(1) Where the defendant’s liability arises from some contractual provision which does not
depend on negligence on the part of the defendant.’
About the category he added that ‘one would not expect there to be much dispute that the Act
does not apply’ (at 509).
While there has been considerable controversy about the scope of the 1945 Act, that controversy
does not extend to the narrow point before me. My conclusion is that, since the banks are entitled
to judgment on the basis of a breach by the insurers of the duty of
Page 959 of [1987] 2 All ER 923
the utmost good faith, the 1945 Act does not apply. The defence of contributory negligence
therefore fails.
In view of this conclusion it is strictly unnecessary to consider the defence of contributory

negligence in relation to the alternative basis on which I have held that the banks are entitled to
succeed, viz a breach by the insurers of the common law duty of care. But I must bear in mind
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that on appeal it may be held that the insurers are only liable to the banks for a breach of the
common law duty of care. On that hypothesis it is common ground that the 1945 Act does apply.
It is therefore necessary to consider the defence of contributory negligence on its merits.
In this context contributory negligence means that the banks failed to use reasonable care to
prevent loss to themselves as a result of the loan transactions and so contributed to their own
financial losses. In other words, the defence asserts carelessness by the banks in and about the
loan transactions. The burden of proving contributory negligence rests on the insurers.
Subject to a qualification in the case of Chemical Bank, I have come to the conclusion that the
defence of contributory negligence is not made out. A great multiplicity of issues was canvassed
in the evidence. Ultimately, the points can be taken quite shortly. The insurers’ allegations
included the following propositions: the banks failed to investigate the integrity, character and
financial standing of Mr Ballestero; they did not investigate the Menorcan project; they did not
investigate the financial position, and method of conducting business, of Safco; they lent money
against the security of a collection of gemstones which had unrealistically been valued on a retail
replacement value basis; they failed to ensure that the funds were applied to their proper purpose;
they failed to take into account exchange control difficulties which might have prevented the
borrowing companies from transferring the sums borrowed to the lending banks on the relevant
maturity dates. This is not an exhaustive catalogue of the allegations but it gives the flavour of
the case of the insurers on contributory negligence against the banks, other than Chemical Bank.
The answer to the allegations of contributory negligence is, in my view, quite simple. While I
have considered the evidence in relation to each bank separately, I can deal with the position of
the banks, other than Chemical Bank, at the same time. On the oral and documentary evidence I
am satisfied that each of the banks was entitled to regard Mr Ballestero as an honest and reliable
borrower. Secondly, I am satisfied that the banks, in accordance with the then current banking
practice, regarded the loans as falling into two broad classes: crédit financière (an asset-backed
loan) and crédit commerciale (a loan dependent on the success of underlying commercial
projects). In the case of loans in the latter category prudent banking practice required
investigation of the borrower and the underlying transaction. But in my view the banks rightly
regarded the loans as falling into the first category. The banks viewed the loans as being asset-
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backed, viz by a pledge of gemstones and by 100% credit insurance which (subject to the fraud
exclusion clause) they regarded as virtually equivalent to a bank guarantee. Against this
background I have come to the conclusion that none of the pleaded allegations of contributory
negligence against the banks are established.
My conclusions also apply in general terms to the allegations of contributory negligence against
Chemical Bank. But in the case of Chemical Bank a number of special features are relied on. But
only one of the features has impressed me. It relates to special knowledge of Chemical Bank in
relation to GIA. By early December 1980, and before Chemical Bank had in fact advanced any
money, Chemical Bank had received a number of highly critical assessments of GIA and Mr
Verbruggen. These assessments, coming from a number of independent and well-qualified
sources, not only questioned the expertise of GIA and Mr Verbruggen but seriously questioned
their integrity. Subsequently Mr Berti of Chemical Bank described these checkings as ‘not
exactly satisfactory’. That was the information passed on to American Fletcher and Slavenburg’s
in December 1980, after they had lent 7m Swiss francs to Deminter. In my view American
Fletcher and Slavenburg’s cannot be said to have been careless. But Chemical
Page 960 of [1987] 2 All ER 923
Bank knew a great deal more. The information before them cast serious doubt on the integrity of
GIA and Mr Verbruggen. It is true that Chemical Bank primarily relied on the credit insurance as
security. Nevertheless, the pledge of gemstones was also relevant. Moreover, a doubt about the
integrity of GIA and Mr Verbruggen, Mr Ballestero’s valuers, ought to have raised suspicions as
to Mr Ballestero in the minds of those at Chemical Bank who dealt with the matter. In my
judgment Chemical Bank’s carelessness in dealing with the GIA checkings amounted to
negligence which contributed to Chemical Bank’s losses. While I have found Mr Berti to be a
reliable witness, I do not accept his evidence that Chemical Bank acted reasonably. In all the
circumstances I have come to the conclusion (on the hypothesis that the insurers are only liable
to the banks on the basis of a breach of the common law duty of care) that it is just and equitable
within the meaning of s 1(1) of the 1945 Act that Chemical Bank’s damages be reduced by 50%.
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Save as set out above, I conclude that all allegations of contributory negligence, whether
specifically referred to above or not, must fail against each of the banks.
(c) Quantum of damages
In effect it was agreed that there should be a trial as to the merits only, leaving over for
subsequent adjudication the quantum of damages.
Conclusions
As to the insurers
(1) In a case which spawned an enormous multiplicity of issues, I hope that I have dealt
explicitly with the important matters which were live issues at the end of the case. But, if I have
neglected to do so in any respect, I ought to make clear that in my judgment it has been
established that (a) Hodge is only liable to the relevant banks in respect of their losses on the
second Ultron loan (September 1980) and (b) Skandia is liable to the relevant banks in respect of
their losses on the Deminter, HSG and ESG loans made after June 1980. (2) The following
market are not liable.
As to Mr Lee
The banks seek judgment against Mr Lee. His employers accepted that they were vicariously
liable for his wrongdoing. That does not bind Mr Lee. On the evidence, I am satisfied that he
deceived the banks on a number of occasions. But very little attention was paid during the
hearing to the extent of Mr Lee’s liability. Further submissions will be required on this aspect. I
rule that this aspect stand over for subsequent adjudication.
Judgment accordingly.
2 December. His Lordship ordered that Hodge and Skandia pay 60% of the costs of the banks,
other than Chemical Bank, that Skandia pay 40% of Chemical Bank’s costs and that Hodge and
Skandia pay the costs of the following market.
Leave to appeal granted.
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BEAUCHAMP V NATIONAL MUTUAL INDEMNITY INSURANCE CO LTD [1937] 3

ALL ER 19
FINLAY J. This action is one on a policy of insurance, and it has reference to a most disastrous
accident, which occurred at Alexandra Mill, at Oldham, on 15 July 1936, whereby three persons
lost their lives. The plaintiff is a builder, who had not previously carried out demolition work,
but he acquired this mill and was minded to demolish it. A great deal turns on the proposal form.
It refers to the particulars of the work, which was said to be “demolishing and building,” and the
building is set out as being “the Alexandra Mill at Oldham.” The usual series of questions, more
or less in the usual form, was put and answered, and the most important for the present purpose
is No 3:
‘Are any acids, gases, chemicals, explosives, or any other dangerous preparations used in
your business?’
That was answered “No.” The plaintiff signed the proposal form, and he said that he
agreed that his declaration should be the basis of the contract between himself and the company.
Upon that, a policy was issued by the company, and it contained a memorandum to this effect:
‘It is hereby understood and agreed notwithstanding anything herein contained to the
contrary, that the within insurance is only to indemnify the insured in respect of the work
involved in the demolition of the building previously known as Alexandra Mill off Oldham
Road, Oldham, and that such indemnity shall continue until the completion of such work or the
date of expiry of this policy within mentioned, whichever date shall precede the other.’
The schedule shows that the insurance is in respect of employees engaged in demolition
at Alexandra Mill. The date of the policy was 31 October 1935.
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The insurance policy is a policy indemnifying the insured in respect of injury by accident
or disease, as described in Sched 3 to the Workmen’s Compensation Act, and it covers the Fatal
Accidents Act, the
Page 21 of [1937] 3 All ER 19
Employers’ Liability Act, the Workmen’s Compensation Acts and common law liability.
One condition, and one condition only, it is convenient to read now, for something which will
have to be said about it later. It is No 4:
‘The insured shall take reasonable precautions to prevent accidents, and to comply with
all statutory obligations.’
The defendant company repudiated liability, and four points were taken. The first was
that the answer which I have already read as to the use of explosives was, in its nature,
promissory, and was, therefore, a warranty. The second point taken was that, even if it was not
regarded as a warranty, but merely as descriptive of the risk, the cause, or a contributing cause,
of the disaster which happened was the use of explosives. The third point, and closely connected
with the others, was that there was a change in the risk, and the fourth point (quite a different
point) was that there was a breach of condition 4. These matters involve some examination of the
evidence, and, though they rather run into each other, they are, no doubt, distinct points. The first
is as to this answer as to the use of explosives. I have come to the conclusion (although I regard
this point as not free from difficulty) that on that point the defendant company is right, though I
do not think it essential to base my decision upon that, for, as I shall explain in a few moments, I
think it is also right on the second point; but, as the first point was argued as a point of some
importance, it is desirable that I express the view which I form on it.
As to the law, it is not necessary that I should say much. The latest case is the decision in
the House of Lords in Provincial Insurance Co v Morgan and Foxon which has a general
statement of the law; I may read the passage in the opinion of Lord Wright, at p 253, because it
really summarises the law on this matter. Lord Wright says:
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‘Before examining these provisions in detail, certain principles laid down in the
authorities may be referred to. It was decided by this House in Dawsons, Ltd. v. Bonnin that
words in a policy analogous to those in the present policy, stating that “the proposal shall be the
basis of the contract and be held as incorporated therein,” are words apt to convert answers to
questions into conditions of the policy. The answer there in question was to the question “state
full address at which the vehicle will usually be garaged.” By a pure inadvertence a wrong
address was given. Neither at the inception of the policy period nor at any subsequent date, nor at
the time of the loss had the vehicle been garaged at that address. It was held by this House that
the assured could not recover because the assured had broken the condition in the policy as to the
usual place where the car was garaged. It was held that the incorporation of the answer into the
contract as its basis constituted it a condition: it was not relevant to consider whether the matter
of question and answer was or was not material. That decision involved an extension of the
earlier judgment of this House, in Thomson v. Weems, where the policy expressly provided that
“if anything averred in the declaration … shall be untrue, this policy shall be void, and all
moneys received by the said company in respect thereof shall belong to the said company for
their own benefit.” The later case held that the same effect resulted from the word “basis.” On
the other hand it is clear law that in insurance a warranty or condition (because these words are
used as equivalent in insurance law, which in that respect differs in its use of the terms from the
law of sale of goods), though it must be strictly complied with, must be strictly though
reasonably construed. In the present case the appellants do not allege that there was any
concealment or misrepresentation
Page 22 of [1937] 3 All ER 19
nor do they complain of any of the other answers. The relevant answer, which I have
quoted above, does, I think, refer to the future and is, in my opinion, of a promissory nature and
is apt to create a warranty or condition.’
That lays down in a convenient form the general law. It is necessary here to ascertain
what was being insured and what was being referred to. The plaintiff, as I mentioned, was a
builder. He was a person who was not doing any other demolition work. This insurance was
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solely in respect of the one isolated demolition job, so to speak, at this Alexandra Mill, at
Oldham, and it seems to me, therefore, that the proposal form must inevitably have reference to
the future, because, though, in fact, the plaintiff was in business, he was not insuring anything
with regard to his general business, but was insuring in respect only of this special job in the
future. Accordingly, it seems to me that the whole of the proposal must be regarded as having
reference to a future event, and when, in these circumstances, he is asked, “Are any acids, gases,
chemicals, explosives, or any other dangerous preparations used in your business,” that does not,
of course, mean his present business of a builder: it means the business on which he is going to
embark, the business of demolition. Accordingly, it seems to me that it does have the nature of a
warranty or a condition. I think that the true view to take is that he was insuring what I may
conveniently call (the phrase is not elegant, but intelligible) a non-explosive demolition. I think
the risk, where the demolition is an explosive one, is greater than where it is a non-explosive one,
and what he was insuring was, I think, a non-explosive demolition. It is, perhaps, significant that
Mr Beauchamp made it quite clear to me that, but for one circumstance, as to which he was
clearly mistaken, he would have thought it right to inform the insurance company with reference
to the use of explosives. That point was this. He seemed to think that it was not necessary so to
do because the explosives were not being used by him, but by a gentleman whom he had
employed for the purpose. Quite clearly, that could make no difference. I cannot resist the view
that, in the first place, this was, as I think, a warranty. If it is necessary to go into the matter—I
do not think it is at this point, though I shall say something about it later—I should say that there
was a change in the risk, and, as to what, the evidence of Mr Beauchamp may usefully be looked
at.
On the evidence I hold that this series of explosions caused, or contributed to cause, the
disaster. That is sufficient to dispose of the case, but I am anxious to cover, though briefly, the
whole of the ground. A point was raised which really, as I think, runs into the other matters; it is
rather difficult to consider these things entirely separately, but a point was raised, to some extent
at all events as a separate point, that there was a change in the risk, and on that my attention was
called to a decision of Denison v Modigliani, where the question which arose was this. A vessel
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was insured as a merchant vessel, and then she took on board a letter of marque, and the point
was whether that avoided the
Page 23 of [1937] 3 All ER 19
insurance. The judgment was given by Lord Kenyon CJ and Grose J, and it may be
convenient to read a short passage from the judgment of Grose J, who says at p 582:
‘The question turns on the intention of the parties to the contract; and therefore it is
material to consider what was intended to be insured. The risk of insuring a mere trading ship, is
very different from that of one carrying letters of marque: the premium is certainly higher in the
latter than in the former case.’
If I apply the language of Grose J to the present case, it appears to me to be certain that
the risk of insuring a demolition where there is no explosion going on is entirely different from
the risk of insuring a demolition where there is explosion. It is difficult, I think, to doubt that. It
is, perhaps, worth, on this point, just referring to the evidence which was given by Mr Coope, an
agent of the insurance company, who was asked:
‘This may or may not be important: if there had been explosives used, would you have
recommended acceptance?
‘(A.) I should definitely have turned it down.
‘(Q.) Would you, or your company, have touched it?
‘(A.) My company would not have entertained it at all.’
Whether it would have entertained it or not, I cannot doubt that the view taken by an
insurance company of a case where explosives were to be used would be widely different from
that taken of a case where explosives were not to be used.
There remains another matter, which I do not propose to decide, for this reason, that, in
my opinion, having heard Mr Lynskey and Mr Maxwell Fyfe upon it, it raises a question of
much difficulty, and it is, I think, undesirable that I should, at the end of a judgment, deal with a
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matter which certainly is a matter of difficulty, and requires careful consideration, and which, if
my answers to the earlier questions are, or if any of those answers is, correct, does not arise. The
fourth condition I have already read, and it was said by Mr Maxwell Fyfe that, on various
grounds, there was a breach of that condition; that is to say, that the insured had failed to take
reasonable precautions to prevent accidents. I was impressed by the argument of Mr Lynskey,
who pointed out to me that some, at least, of the matters insured against are matters involving
negligence, and that, if condition 4 were construed without any limitation, it would, at all events
as to that part of it which has reference to taking reasonable precautions to prevent accidents, be
difficult to avoid the view that, wherever there was a liability established at common law, or
under Lord Campbell’s Act, it would inevitably follow that the policy could not attach. That is a
matter, I repeat, to be fully considered in some future case, and I do not propose to decide it now
but, as it was to some extent relied upon, it is perhaps proper that I should, although only in a
sentence or two, indicate the view I have formed as to the four points which Mr Maxwell Fyfe
took. As to the first, McCormick, in my opinion, was not a qualified foreman. I think he was a
very decent man, and that he was probably a very good and a very intelligent
Page 24 of [1937] 3 All ER 19
labourer, but he was a young man, and I am satisfied, on the evidence, that he had not
gone through the training necessary to enable him to be a foreman responsible for work so
anxious and difficult as the demolishing of a mill. The evidence was that a foreman required to
have a knowledge of stresses, and things of that sort, the weight which a floor would bear, and so
forth. I do not think that McCormick had that sort of training, and, from that point of view, I
should agree, on the second point, that insufficient precautions were taken.
On the third and fourth points, I think there was more débris than there ought to have
been, and no doubt, so far as there was more débris than there ought to have been, that would be
a cause contributing to the accident. Naturally, a thing, if it were heavily weighted would tend to
fall more readily than it would otherwise. The same conclusion applies to the withdrawal of
support. I think that support was improperly withdrawn. With regard to 3 and 4 of these matters,
I think Mr Maxwell Fyfe really conceded that they would be purely matters of negligence, and
authority.
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that he would be in considerable difficulty as regards those, and the question is not free from
difficulty with regard to the first and second points, but, I repeat, I am not deciding the case upon
that ground. I think the question of how to reconcile condition 4 with the risk insured against is a
difficult matter, which may have to be raised in some future case.
In this case, I decide, first, that the answer to question No 3 was promissory, and was a
warranty; secondly, that the risk was, in the events which happened, entirely changed and (and
this is based upon the view which I take of the evidence) that the series of explosions did by their
cumulative effect, contribute to causing the disaster which happened. Upon these grounds, I shall
have to decide the case in favour of the defendant company.
Judgment for the defendant company with costs.
WAYNE TANK AND PUMP CO LTD V THE EMPLOYERS’ LIABILITY ASSURANCE

CORPORATION LTD [1973] 3 ALL ER 825
Appeal
The plaintiffs, Wayne Tank and Pump Co Ltd, were specialists in complete liquid control
installations involving storage, pumping and metering of industrial fluids such as petrol.
Following on a proposal and declaration dated 1 December 1968 the defendants, The Employers’
Liability Assurance Corporation Ltd, issued a policy of insurance, no 190413, described as a
public liability policy, whereby they agreed to indemnify the plaintiffs against all sums which the
plaintiffs should become legally liable to pay as damages consequent upon, inter alia, damage to
property as a result of certain specified accidents. The terms of the policy, so far as material, are
set out at p 828 e f and h, post.
authority.
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By a contract made in or about March 1962 between the plaintiffs and Harbutt’s
Plasticine Ltd, the plaintiffs had agreed to design and install equipment for storing and
dispensing stearine in a molten state (ie at a temperature between 120 degree F and 160 degree
F) at a factory belonging to Harbutt’s Plasticine Ltd. For that purpose the plaintiffs specified
durapipe, a form of plastic pipe, which was to be heated by electrical tapes wound round the pipe
controlled by a thermostat. In fact durapipe was wholly unsuitable for the purpose because it was
liable to distort at temperatures above 187 degree F and had a low thermal conductivity. The
installation was completed on 5 February 1963 and both parties intended to test it the next day.
As it was very cold, an employee of the plaintiffs, in order to ensure that the stearine would be
molten for the tests, switched on the heating tapes on the night of 5 February and the installation
was left unattended during that night. In the early hours of 6 February there was a fire which
destroyed the factory. The fire was caused by distortion of the durapipe under heat causing
molten stearine to escape and ignite.
Harbutt’s Plasticine Ltd brought an action against the plaintiffs for breach of contract and
negligence and on 8 November 1968 John Stephenson J ordered that judgment be entered for
Harbutt’s Plasticine Ltd against the plaintiffs for £146,581 with interest of £23,385, amounting in
all to the sum of £172,966. On 5 December 1969 the Court of Appeala (Lord Denning MR,
Widgery and Cross LJJ) affirmed that decision on the issue of liability and damages but varied
the amount of interest from £23,385 to £4,839, the total sum awarded being varied to £151,420.
By a writ issued on 28 January 1969 the plaintiffs brought an action against the
defendants claiming, inter alia, a declaration that the defendants were liable to indemnify the
plaintiffs under Public Liability Policy EA 190413 in respect of the sums awarded against them
pursuant to the judgment in the action by Harbutt’s Plasticine Ltd. On 17 December 1971
Mocatta J adjudged that the plaintiffs were entitled to a declaration that the defendants should
indemnify the plaintiffs under the policy in respect of, inter alia: (i) the damages paid to
Harbutt’s Plasticine Ltd limited to the sum of £100,000; (ii) the proportion of the interest paid to
Harbutt’s Plasticine Ltd attributable to the limit of £100,000, ie £3,328·50; and (iii) the taxed
costs of the action including the appeal. The defendants appealed.
authority.
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Michael Ogden QC, John Griffiths QC and C P B Purchas for the defendants.
J G Le Quesne QC and Adrian Hamilton QC for the plaintiffs.
7 June 1973. The following judgments were delivered.
LORD DENNING MR. This is another sequel to a fire which took place on 5/6 February
1963. An old mill at Bathampton in Somerset went up in flames. It was the subject of a reported
caseb. The owners of the factory, Harbutt’s Plasticine Ltd, brought an action for damages against
the present plaintiffs, Wayne Tank and Pump Co Ltd (‘Wayne Tank’), who were installing new
equipment into this old mill. Harbutt’s Plasticine said that the fire was due to their negligence in
installing the equipment. In their defence Wayne Tank relied on an exempting condition.
Page 828 of [1973] 3 All ER 825
But in this court ([1970] 1 All ER 225, [1970] 1 QB 447) it was held, affirming John
Stephenson J, that Wayne Tank had been guilty of a fundamental breach of their contract, and
that in consequence they could not rely on the exemption clause. Wayne Tank were held liable
for the damages, which we were told came to £150,000.
Now Wayne Tank seek to claim indemnity from an insurance company. It appears that
Wayne Tank had several insurance policies, each for a different aspect of business. They had an
employers’ liability policy in respect of their liability as the employers of their servants. They
had a motor vehicle policy in respect of their motor vehicles on the road. They had a products
liability policy in respect of their products which they supplied to customers. They had the policy
with which we are concerned in this case—a public liability policy—which they took out with
the defendants, The Employers’ Liability Assurance Corporation Ltd (‘Employers’ Liability’). It
is on the public liability policy that Wayne Tank now claim that they should be indemnified
against the liability which they have been held to be under to Harbutt’s Plasticine.
That is not all. In addition Wayne Tank took out one more policy. It may be called a
reserve policy or a blanket policy. It covered them for accidents that were not covered by the
particular policies which I have already mentioned. This blanket reserve policy was issued by an
authority.
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INSURANCE LAW CASES
American company, the Insurance Co of North America. That company paid Wayne Tank or lent
them money to the full extent of the loss due to the fire. Now it is using the name of Wayne Tank
to recover against Employers’ Liability.
Such being the background, the one question is whether the damage due to the fire is
covered by the words of the public liability policy issued by Employers’ Liability. The principal
clause contains general words giving cover as follows:
‘… the company will indemnify the Insured against all sums which the Insured shall
become legally liable to pay as damages consequent upon … damage to property as a result of
accidents as described in the Schedule … ’
Turning to the schedule, we find:
‘DESCRIPTION OF ACCIDENTS. Accidents happening in the course of the Business

and causing death injury or damage (a) Upon or about the premises [at Western Road, Bracknell,
Berks] (b) elsewhere other than on premises owned or occupied by the Insured.’
It is common ground that the fire causing the damage did occur ‘elsewhere’, that is, at
Bathampton, and it occurred on the premises of Harbutt’s Plasticine which were not ‘premises
owned or occupied by the Insured’. The fire was an accident coming within these general words.
But, in order to escape liability, Employers’ Liability rely on one of the exceptions. It is this:
‘The Company will not indemnify the Insured in respect of liability consequent upon …
(5) death injury or damage caused by the nature or condition of any goods or the containers
thereof sold or supplied by or on behalf of the Insured … ’
In applying the clause, the first question is whether the equipment and apparatus which
Wayne Tank supplied and put into the mill were ‘goods supplied’ by the insured. The judge was
inclined to think they were not; but to my mind clearly they were ‘goods supplied’ by the
insured. It is not necessary to decide whether the property had passed, nor whether the
installation had been completed. Suffice it that the equipment and apparatus were goods supplied
by the insured.
authority.
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The next question is whether the damage was caused by the nature or condition of these
goods supplied. In short, was the fire caused by the nature or condition of the equipment and
apparatus supplied by Wayne Tank? The parties have agreed that
Page 829 of [1973] 3 All ER 825
we can go by the findings in the original case by John Stephenson J at the trial, together
with the views of the Court of Appeal ([1970] 1 All ER 225, [1970] 1 QB 447). On those
findings it is plain that there were two causes of this disaster. (1) The first cause was the conduct
of Wayne Tank in supplying the useless and dangerous material called durapipe coupled with a
useless thermostat. That installation was completely unsuitable for the purpose. It was a gross
danger, because, when heated up, the durapipe would sag, the wax would escape, and, the whole
thing would go up in flames. (2) The second cause was the conduct of Mr Duncan, the servant of
Wayne Tank, in switching on the heating tape and leaving it unattended throughout the night and
at a time when the installation had not been tested.
Those were the two causes of the disaster. The first cause, namely, the dangerous nature
of installation, was plainly within the exception clause. The damage due to it was caused by the
nature or condition of the goods supplied by Wayne Tank. Taking that clause alone, Employers’
Liability would be exempt, by reason of the exception clause. The second cause, namely, the
conduct of the man in switching on the heating tank and leaving it unattended all night, was not
within the exception clause. Taking that cause alone, the insurance company would be liable
under the general words and would not be exempted by the exceptions.
So we have the question: what is to happen when there are two causes of the damage—
one of which is within the exceptions and the other is not? Up until 1918 there was a strong
current of opinion that in insurance cases you looked at the cause which was latest in point of
time. The Latin maxim was causa proxima non remota spectatur. In English it was that you
should look at the proximate cause and not the remote cause. The lawyers used to say that the
proximate cause was the immediate cause, that is, the cause which was latest in point of time: see
Ionides v Universal Marine Insurance Co. As recently as 1918 Mr Leslie Scott KC, arguing in
Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd ([1918] AC 350 at 351,
authority.
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[1918–19] All ER Rep 443), put forward the proposition that ‘according to the English law, the
last cause only must be regarded and the others rejected, although they contributed to the result’.
That proposition was emphatically rejected by the House. Lord Shaw of Dunfermline said in
terms ([1918] AC at 369, [1918–19] All ER Rep at 453):
‘To treat proximate cause as if it was the cause which is proximate in time is, as I have
said, out of the question. The cause which is truly proximate is that which is proximate in
efficiency.’
Since Leyland’s case it has been settled in insurance law that the ‘cause’ of a loss is that
which is the effective or dominant cause of the occurrence, or, as it is sometimes put, that which
is in substance the cause, even though it is more remote in point of time, such cause to be
determined by common sense: see Gray v Barr ([1971] 2 All ER 949 at 955, [1971] 2 QB 554 at
567). So I would approach this case by asking which of the two causes was the effective or
dominant cause? I should have thought that it was the first cause, the dangerous nature of the
installation, and thus within the exception. So that Employers’ Liability were not liable under
this policy.
The judge was much inclined to hold that it was the dangerous installation which was the
dominant cause. But he was dissuaded (See [1972] 2 Lloyd’s Rep 141 at 151) from that view by
counsel for Wayne Tank, who argued, with his usual persuasiveness, that the act of the man (in
switching on the heating tape) was a novus actus interveniens which was predominant in
effectiveness. It was the cause of the fire. It did not come within the exceptions. So Employers’
Liability were liable.
Page 830 of [1973] 3 All ER 825
I must say that I do not care for this emphasis on novus actus interveniens. It seems to me
to be going back to the old and forsaken test of the latest in time. I would reject novus actus. I
would ask, as a matter of common sense, what was the effective or dominant cause of the fire?
To that question I would answer that it was the dangerous installation of a pipe which was likely
to melt under heat. It seems to me that the conduct of the man in switching on the heating tape
authority.
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was just the trigger—the precipitating event—which brought about the disaster. There would
have been no trouble whatever if the system had been properly designed and installed. Seeing
that the dangerous installation was the dominant cause, it comes within the exceptions and
Employers’ Liability are not liable on this policy.
That is enough to decide the case. But I will assume, for the sake of argument, that I am
wrong about this: and that there was not one dominant cause, but two causes which were equal or
nearly equal in their efficiency in bringing about the damage. One of them is within the general
words and would render the insurers liable. The other is within the exception and would exempt
them from liability. In such a case it would seem that the insurers can rely on the exception
clause. There is not much authority on it, but it seems to be implied in Cory & Sons v Burr,
especially from what Lord Blackburn said ((1883) 8 App Cas at 400, 401, [1881–85] All ER Rep
at 418, 419). That case was submitted, as used by Mr R A Wright KC arguing in Leyland
Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd ([1918] AC at 353), for the
proposition that—
‘where there are two perils both of which are proximate causes of the loss and in an open
policy the shipowner could have recovered on either, then, if one of those perils is excepted by
the warranty the underwriters are not liable.’
Lord Shaw of Dunfermline ([1918] AC at 371) expressed his indebtedness to that

argument. In addition there is Board of Trade v Hain Steamship Co Ltd, where Viscount Sumner
([1929] AC at 541, [1929] All ER Rep at 30, 31) says that where there is one loss which is the
product of two causes, joint and simultaneous—and loss due to one of the causes is exempt being
‘warranted free’—then the underwriters are not liable. The reason is that if the underwriters were
held liable for loss, they would not be free of it. Seeing that they have stipulated for freedom, the
only way of giving effect to it is by exempting them altogether. The loss is not apportionable.
Hence no part of it can fall on the policy. Lord Atkin ([1929] AC at 544, [1929] All ER Rep at
32) agreed with that judgment. Counsel for Wayne Tank sought to avoid the impact of that
judgment by submitting that ‘warranted free’ in a marine insurance policy had a different effect
authority.
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from an exception in a non-marine policy. But it seems to me that it has no different effect. It is
simply a different mode of expression.
The result is that, although this accident comes within the general words at the opening of
the policy, nevertheless seeing that there is a particular exception, the exception takes priority
over the general words. General words always have to give way to particular provisions. In the
present case one of the causes which was efficient to produce the damage was the nature of the
goods supplied by the insured. The insurers are exempt from liability for it. Their exemption is
not taken away by the fact that there was another cause equally efficient also operating to cause
the loss.
But I do not rest my opinion on this alternative ground. I rest it on the final ground that
the dominant and effective cause of the loss was the nature of the goods supplied. It is within the
exceptions. Employers’ Liability are not liable. I would allow the appeal accordingly.
Page 831 of [1973] 3 All ER 825
CAIRNS LJ. I agree that this appeal should be allowed. There were two causes of this
lamentable fire: the defects in the equipment and the operation of it without testing. By ‘testing’ I
mean running it for a time immediately after its installation under close inspection. There is a
certain artificiality in trying to specify one of these as the dominant cause. The defects would
have caused no trouble if there had been proper testing. The failure to test would have led to no
trouble if the apparatus had not been grossly defective. If compelled to make a selection between
the two causes, I would select the defect as dominant, because, following the common sense test
which Viscount Simon LC said in Yorkshire Dale Steamship Co Ltd v Minister of War
Transport (The Coxwold) ([1942] 2 All ER 6 at 9, [1942] AC 691 at 698) was the right approach,
I think that the man in the street, if asked what caused this damage, would be far more likely to
say ‘They supplied faulty equipment’ than to say ‘They ran the system without testing it’. As to
the two Privy Council cases relied on by Mocatta J in reaching a different conclusion, I think
they are to be explained not by considering whether there was a novus actus interveniens, but on
the simple common sense basis. In Fidelity and Casualty Co of New York v Mitchell a man with
latent tuberculosis in his system accidentally sprained his wrist. He became disabled because the
authority.
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tuberculosis was activated by the sprain. It was held that the disability was caused by the
accident. This is similar to the well-known type of case where an industrial accident activates
latent arthritis and the resulting disablement is always considered to be caused by the accident.
The other case is Boiler Inspection and Insurance Co of Canada v Sherwin-Williams Co of
Canada Ltd. That was a case where the tank door of a bleaching tank blew off and gas escaped
from it. The gas in some way became ignited and caused a great deal of damage. There I think
that if anyone had been asked what was the cause of the damage he would have been likely to
say ‘The tank burst’ rather than to say ‘Some gas caught fire’.
Another case mentioned in argument in this court was Lawrence v The Accidental
Insurance Co Ltd. Mr Lawrence had had a fit and had fallen on to a railway line and been killed
by a passing train. It was held that his death was due to an accident which was covered by a
policy rather than to a fit, which was within the exceptions; and that appears to me to be in
accordance with the common sense approach. If anybody had been asked ‘How did Mr
Lawrence meet his death?’ and had named a single cause for it, he would have been much more
likely to say ‘He was run over by a train’ than to say ‘He had a fit’.
But for my part I do not consider that the court should strain to find a dominant cause if,
as here, there are two causes both of which can properly be described as effective causes of the
loss. Counsel for the plaintiffs recognised that if there are two causes which are approximately
equal in effectiveness, then it is impossible to call one rather than the other the dominant cause. I
should prefer to say that unless one cause is clearly more decisive than the other, it should be
accepted that there are two causes of the loss and no attempt should be made to give one of them
the quality of dominance. On this approach if one cause is within the words of the policy and the
other comes within an exception in the policy, it must be taken that the loss cannot be recovered
under the policy. The effect of an exception is to save the insurer from liability for a loss which
but for the exception would be covered. The effect of the cover is not to impose on the insurer
liability for something which is within the exception. This was a view of the case which was
suggested by Roskill LJ in the course of the argument, and I am satisfied that it is right in
principle and that support can be found for it in reported cases. I refer, without quoting the
passages,
authority.
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Page 832 of [1973] 3 All ER 825
to Cory & Sons v Burr, per the Earl of Selborne LC ((1883) 8 App Cas at 397, [1881–85]
Alkl ER Rep at 417) and per Lord Blackburn ((1883) 8 App Cas at 401, [1881–85] All ER Rep
at 419); to P Samuel & Co Ltd v Dumas ([1924] AC 431 at 467, 468, [1924] All ER Rep 66 at
86) per Lord Sumner; and to Atlantic Maritime Co Inc v Gibbon ([1953] 2 All ER 1086 at 1098,
1099, [1954] 1 QB 88 at 118, 119) per Sir Raymond Evershed MR; and Morris LJ ([1953] 2 All
ER at 1110, 1111, [1954] 1 QB at 138).
I do not consider that the distinction which counsel for Wayne Tank sought to draw
between ‘warranted free’ and an exception is a valid one. I conclude that the loss here was within
exception (5) of the policy unless at the material time the apparatus was not within the
description ‘goods supplied’.
As to that, I am quite satisfied that these goods were goods supplied within the meaning
of the exception. I see no room for any enquiry as to what other policies Harbutt’s Plasticine may
have had. The court has to construe the word ‘supplied’. Once goods have been brought to
Harbutt’s premises and installed there, then, in any ordinary sense of the word, they were goods
supplied.
For these reasons, I would allow the appeal.
ROSKILL LJ. The plaintiffs (who were the defendants in the original action heard by
John Stephenson J in 1968 and by this court in 1969) now seek to claim from the defendants
partial indemnity in respect of the liability under which they were held to be to the plaintiffs in
the original action of Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd. The defendants
had insured the plaintiffs on the terms of a public liability policy originally issued in 1958 and
subsequently renewed annually with certain variations and in force at the time of the disastrous
fire on the night of 5/6 February 1963 out of which the plaintiffs’ liability to the original
plaintiffs arose. We were told that the plaintiffs most prudently had at least three policies of
insurance in force at the material time, one with the Insurance Co of North America, to which
Lord Denning MR has alluded; one the public liability policy with the defendants which is now
authority.
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sued on; and one a products liability insurance policy with the Ocean Insurance. We were also
told that the plaintiffs had settled with the Insurance Co of North America on a loan basis
pending the decision in this action, since that company was only liable to the extent that the
plaintiffs were not otherwise insured. Since the defendants’ policy covered the plaintiffs up to a
limit (so far as relevant) of £100,000, any liability on the defendants would enure to the benefit
of the Insurance Co of North America to that amount, the judgment against the plaintiffs being
for a much larger sum. The statement by the learned judge in his judgment that this action was
brought by the Insurance Co of North America by virtue of subrogation rights was agreed by
counsel to be incorrect and based on a misunderstanding of something which had been said at the
trial. Whether the defendants are so liable turns on whether or not the loss now claimed is
excluded by exception (5) of the policy. The judge has held that it is not and that the defendants
must pay. The defendants appeal from that decision. It was agreed before us that unless
exception (5) protects the defendants, they are liable, since it was admitted that prima facie the
loss fell within the cover indemnifying the defendants—and I quote the relevant words—
‘against all sums which the Insured shall become legally liable to pay as damages
consequent upon … damage to property as a result of accidents as described in the Schedule
under Description of Accidents … ’
Page 833 of [1973] 3 All ER 825
It was common ground that what happened fell within that description of accidents.
Exception (5) provides (omitting irrelevant words):
‘The Company will not indemnify the Insured in respect of liability consequent upon …
(5) … damage caused by the nature or condition of any goods … sold or supplied by or on behalf
of the Insured’.
The plaintiffs contended and the judge accepted, first, that the damage in question was
not so caused; and, secondly, that the goods in question were not at the time of the disaster
‘goods … supplied by … the Insured’. It was conceded by the plaintiffs that what I will call for
authority.
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brevity the ‘defective apparatus’ constructed (to use a neutral word at this juncture) by them for
the original plaintiffs were ‘goods’ for the purpose of exception (5).
The first question is, what caused the loss? The defendants argued that it was caused by
the nature or condition of the goods; that is, of the defective apparatus which the plaintiffs had
supplied. The plaintiffs argued that it was caused by wrongful handling of the defendants’
apparatus by switching it on and leaving it unattended and not by the nature or condition of the
goods themselves. If the former be right, the appeal succeeds. If the latter be right, the appeal
fails and the judgment of Mocatta J must be affirmed.
A further point raised in argument in this court, but not below, was what the position was
if we took the view that both the matters just referred to were effective or proximate causes of
the disaster. The defendants argued that in that event the claim failed. The plaintiffs argued that
in that event the claim succeeded because the defendants could not bring themselves within the
exception since they could not show that the loss was proximately caused by an excepted peril.
I unhesitatingly accept counsel for the plaintiffs’ submission that, it being conceded that,
apart from exception (5), the loss falls within the policy, it is for the defendants to bring
themselves clearly within the exception. If they cannot do so, the defence fails and the claim
must succeed.
It was agreed that the relevant facts should be taken to be those found by John
Stephenson J and by the Court of Appeal ([1970] 1 All ER 225, [1970] 1 QB 447) in the original
proceedings. This sensible agreement had the result (perhaps inevitably) of both learned counsel
avidly selecting phrases in the four judgments in the earlier proceedings as pointing to one result
or the other in the present case. With respect, this is not the right approach. None of the judges
was concerned with the present issue—that of causation under a policy of insurance, and it
would be quite wrong to take phrases used in an alien context and to seek to turn them to
advantage in the present litigation one way or the other. What matters are the primary facts found
—not the language in which such findings were recorded.
authority.
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John Stephenson J found that the plaintiffs’ installation, defective as it was, was the sole
cause of the fire. He also found that the supply system which was installed constituted a serious
potential fire hazard. I need not read his further findings beyond recording that the judge found
that the fire not only could have been caused by stearine leaking through the overheated distorted
durapipe as a result of what he called ‘this major blunder’ on the part of the plaintiffs, but was so
caused. There are further relevant findings on which counsel for the defendants relied in reply. In
conclusion the judge found, as did this court ([1970] 1 All ER at 235, 239, 240, 241, [1970] 1
QB at 466, 472, 475), that the plaintiffs had been guilty of a fundamental breach of their contract
with the original plaintiffs for which they were liable in damages.
The whole position was summarised by Lord Denning MR in his original judgment
([1970] 1 All ER at 231, [1970] 1 QB at 461, 462) and quoted by Mocatta J in his judgment in
the present case. It is important
Page 834 of [1973] 3 All ER 825
to observe that the third matter dealt with by Lord Denning MR in this summary was
([1970] 1 All ER at 231, [1970] 1 QB at 462):
‘… it was a mistake for the defendantsc to switch on the heating tape on the evening of
5th February 1963 and to leave it unattended throughout the night. If it had been switched on
during the daytime and a watch kept on it, the sagging of the pipe would have become apparent
before the fire broke out; and the heater would have been switched off.’
It was urged on us that this finding was determination of the present dispute in favour of
the plaintiffs. It was said that this act of turning on the heating tape and leaving it on unattended
was the act which caused the fire. Until then, it was argued that there was only a serious potential
fire hazard resulting from the plaintiffs’ defective installation, but that defective installation of
itself did not cause the fire and the resulting loss: that fire and loss were caused by and only by
the switching on of the heating tape and the leaving of that heating tape unattended.
Many well-known authorities on causation were cited to us as to the learned judge below.
Both sides sought support from Cory & Sons v Burr. The plaintiffs relied strongly on Leyland
authority.
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Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd and Yorkshire Dale Steamship Co
Ltd v Minister of War Transport, commonly called The Coxwold. It is I think clear law that the
court must, if it can, determine the proximate cause of the loss. In marine insurance that is the
relevant statutory requirement: see s 55 of the Marine Insurance Act 1906. In non-marine
insurance that has always been the rule at common law. Counsel for the plaintiffs relied much on
Lord Dunedin’s speech in the Leyland case ([1918] AC at 363, [1918–19] All ER Rep at 450). If
there were two competing causes the court must select the dominant cause of the two as the
proximate cause, it being well understood that the problem is not solved by mere point of order
in time. There the loss was caused by the torpedo—the first event which happened in point of
time. What happened afterwards was not causally effective to prevent the total loss which
ultimately took place being caused by the torpedo. In Cory v Burr the loss was caused by the
seizure—the last event as it happened in point of time. What happened before was not the
effective cause of the loss. Thus, counsel for the plaintiffs argued, the court must, if it can, select
the cause which was dominant as the effective or proximate cause, though he did not, as I
understand him, go so far as to argue that in every case a single dominant cause must be so
selected. But, applying the principles just quoted, he contended that, on the findings referred to,
it was the switching on of the heating tape and leaving it on unattended which alone was the
dominant and therefore the effective and proximate cause of the loss—not because it happened
last but because in the event it was that which was the dominant cause of the fire.
Counsel for the defendants argued that although the switching on the heating tape and
leaving it unattended was the last event in point of time, it was not the dominant, and thus the
effective and proximate cause of the loss. He relied on the first two of the findings summarised
by Lord Denning MR in his previous judgment ([1970] 1 All ER at 231, [1970] 1 QB at 461,
462) as showing that the defective installation was the proximate cause, especially in the light of
John Stephenson J’s findings in his judgment.
The learned judge, Mocatta J, founded much on the argument of counsel for the plaintiffs
which was based on Leyland v Norwich Union regarding novus actus interveniens: see the
passage ([1972] 2 Lloyd’s Rep 141 at 151) to which Lord Denning MR has referred. What the
House
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Page 835 of [1973] 3 All ER 825
of Lords held in Leyland was that the event subsequent to the torpedoing was not a novus
actus interveniens so as to make what was prima facie at least a war loss a marine loss. The
novus actus doctrine is usually invoked to break the alleged chain of causation between a
casualty and the loss so as to defeat a claim. But the learned judge here appears (with the greatest
possible respect to him) to have invoked the doctrine to create or sustain a claim. I cannot think
that this approach is correct. The plaintiffs’ case properly understood is not founded on the
doctrine of novus actus as such, but on the contention that it was the event which happened last
in point of time which was the effective or proximate cause of the loss. Prima facie therefore
there was a loss by an insured peril. The defendants can only escape through reliance on
exception (5). But I do not think that on the facts any question of novus actus arises. The critical
events in this case happened in point of time in the reverse order from that in which the
supposedly analogous events occurred in the Leyland case.
I therefore return to the question—have the defendants brought themselves within the
exception? To my mind the crucial fact is that the defective installation was brought into being
and left in being and was always a serious potential fire hazard. True that of itself would
probably not have caused the fire had the installation simply been left as it was with no further
action taken any more than the barratry in Cory v Burr of itself led to the loss of the ship.
In Monarch Steamship Co Ltd v A/B Karlshamns Oljefabriker, which I will call for
brevity the British Monarch case, a difficult question of causation arose not under a policy of
insurance but under a contract of affreightment, namely, a bill of lading. The British Monarch
was unseaworthy. As a result she could not sail timeously. War broke out. She was thereupon
lawfully diverted and stopped from reaching her original contractual destination, so that the
consignees suffered loss in not getting their cargo at the originally agreed place of delivery. The
problem was whether the unseaworthiness caused the loss, delivery at the alternative destination
having been good contractual delivery under the war clause. All the courts concerned, both in
Scotland and in the House of Lords, held that it did. Lord Wright said ([1949] 1 All ER at 16,
[1949] AC at 228): ‘I think the common law would be right in picking out unseaworthiness from
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the whole complex of circumstances as the dominant cause’. Earlier ([1949] 1 All ER at 16,
[1949] AC at 227), he had said: ‘In this way unseaworthiness is a decisive cause, or, as it is
called, a dominant cause’. There the unseaworthiness, as here the unfitness, of itself would have
caused no loss without the subsequent occurrence of another event—in that case the outbreak of
war and the diversion: in this case the switching on and leaving on unattended of the heating
tape. The unseaworthiness was there held to be the cause of the loss. Why should a different
result follow in the case of the present unfitness? It will be observed that in his speech in the
Leyland case ([1918] AC at 368, [1918–19] All ER Rep at 452, 453) Lord Shaw of Dunfermline
clearly thought that the doctrine of proximate cause should be considered in the same light
whether it arose in contracts of marine insurance or in contracts of carriage by sea; and added
‘good sense suggests that it should be so’.
Counsel for the plaintiffs argued that unseaworthiness was a breach of contract of a
special kind which when it occurs is always a dominant cause whatever may later lead to the
actual loss; and he relied on the explanation of Lord Wright’s speech in the British Monarch case
given by Devlin J in Heskell v Continental Express Ltd. But that decision of Devlin J must itself
now be regarded with caution—for two reasons: first, Lord Devlin himself in Hedley Byrne &
Co Ltd v Heller & Partners Ltd ([1963] 2 All ER 575 at 612, [1964] AC 465 at 532)
Page 836 of [1973] 3 All ER 825
said that his earlier decision was no longer to be regarded as authoritative; and, secondly,
that his remarks about the nature of unseaworthiness must be read in the light of the recent
decision of this court ([1962] 1 All ER 474, [1962] 2 QB 26) affirming the decision of Salmon J
in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, and holding that the express
or implied obligation of seaworthiness was not a condition of the charterparty any breach of
which entitled the charterers without more to repudiate the charterparty.
For my part I think that where a manufacturer supplies to the other contracting party, as
did the plaintiffs in the present case, a wholly defective apparatus, the position is analogous
(though I accept that the analogy, like most analogies, is not exact) to a case where a shipowner
supplies his cargo owner or charterer with an unseaworthy ship. In both cases there is a breach of
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a contractual obligation which in some cases at least may be so serious in character as to entitle
the innocent party to terminate the contract and to deprive the guilty party of the right to rely on
exception clauses. In both cases the other contracting party is likely to be unaware that there has
been this breach when it first occurs. In some cases no doubt the event which ‘triggers off’ the
untoward consequences of the defective state of the apparatus or of the unseaworthiness of the
ship may be so far removed, either in time or in nature or for some other reason as to break the
chain of causation. But in the present case I think this apparatus was so defective that what
happened thereafter, though aggravating the defects and precipitating the ultimate result, never
prevented the defective nature of the apparatus from being the effective cause of this loss. I
would respectfully borrow the language of Lord Shaw in the penultimate paragraph of his speech
in the Leyland case ([1918] AC at 370, 371, [1918–19] All ER Rep at 454) and adapt that
passage to the present case by substituting for the word ‘vessel’ the words ‘defective apparatus’.
So, like Lord Denning MR, I take the view that the proximate cause of this loss falls within the
exception clause (5).
But even if I am wrong in this view, there seems to me, as it does to Lord Denning MR,
to be a further difficulty in the plaintiffs’ way. I find it impossible in any event to say that the
sole proximate cause of this disaster was switching on and leaving unattended the heating tape.
This being so, even if I am wrong in saying that the defective nature and condition of the
apparatus was the sole proximate cause of the disaster, there were at best for the plaintiffs two
effective proximate causes. What then is the position.
In marine insurance law the position is I think clear. It was succinctly summarised by Mr
Wright in his argument in the Leyland case ([1918] AC at 353) in the passage which Lord
Denning MR has quoted and which I will not again read, an argument seemingly approved by
Lord Shaw ([1918] AC at 371). I think, if I may respectfully say so, that argument of Mr Wright
was well justified at the time it was advanced by what had been said by Lord Blackburn as well
as by Lord Selborne LC, and Lord Bramwell in Cory v Burr on which Mr Wright relied. But
subsequently the matter is, as I see it, put beyond doubt by a passage in Lord Sumner’s
dissenting speech in P Samuel & Co Ltd v Dumas ([1924] AC at 467, [1924] All ER Rep at 86):
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‘Where a loss is caused by two perils operating simultaneously at the time of loss and one
is wholly excluded because the policy is warranted free of it, the question is whether it can be
denied that the loss was so caused, for if not the warranty operates.’
Lord Sumner said much the same thing in Board of Trade v Hain Steamship Co Ltd
([1929] AC at 541, [1929] All ER Rep at 30, 31); and the passage which I have quoted from the
dissenting speech in P Samuel & Co Ltd
Page 837 of [1973] 3 All ER 825
v Dumas ([1924] AC at 467, [1924] All ER Rep at 86) was expressly approved by
Morris LJ in this court in Atlantic Maritime Co Inc v Gibbon ([1953] 2 All ER at 1110, 1111,
[1954] 1 QB at 138).
Counsel for the plaintiffs argued that this was because of the words ‘warranted free’ in a
marine policy which do not appear in the present policy, and suggested that a different rule
applies to a non-marine policy such as the present policy now under consideration. But in Sir
Mackenzie Chalmers’s book on the Marine Insurance Act 1906d the learned editor says—and
this passage goes back to the author’s editions—in relation to the words ‘warranted free from’:
‘But take the case of the warranty “free from capture and seizure“. The assured does not
undertake that the ship or cargo shall not be captured. There is merely a stipulation that the
policy shall not apply to such a loss … ’
An exception clause is inserted into a policy of insurance (whether marine or not marine)
in order to exclude liability which—apart from the exception clause—would rest on the
underwriter. I cannot think that the effect of the exception clause depends on whether it is
preceded by the traditional words—one might almost say traditional jargon—in a marine
insurance policy ‘warranted free of’, or the less romantic and more mundane words of a non-
marine policy: ‘The company will not indemnify.' I think the law in this respect is the same both
for marine and non-marine, namely, that if the loss is caused by two causes effectively operating
at the same time and one is wholly expressly excluded from the policy, the policy does not pay.
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For this further reason, on which the learned judge did not have the benefit of the
arguments which we have heard, I think the appeal must be allowed, unless the plaintiffs can
succeed on the second ground.
On that second ground I have very little to add to what has just fallen from Cairns LJ,
with which I agree. Counsel for the plaintiffs did not rely on the word ‘sold’; but he sought to
argue that the defective apparatus had not been ‘supplied’, and could not be ‘supplied’ until the
entire contract had been completed. But I see no reason why this exception clause does not
operate before the completion of the contract. Nor do I think so to hold creates the capriciousness
mentioned by Mocatta J in his judgment. In the events to be considered there would be legal
liability on the assured in any event and the question merely becomes which policy should pay
for the loss that occurs.
In truth the plaintiffs are seeking to cast on their underwriters on a public liability policy
the liability falling on the plaintiffs by virtue not of any liability of theirs to any member of the
public but of a serious breach of their contract with the plaintiffs in the original action. Such
liability can scarcely be called public liability policy. It would be strange, though perhaps not
impossible, if the language of a public liability policy produced the result for which the plaintiffs
contend; and I do not think that this court should strain to produce a result so obviously contrary
to the plain intention of the policy as a whole. I do not think the policy does have that result. I
think the liability here rests ultimately on underwriters other than the defendants. For all those
reasons, in addition to those given by Lord Denning MR and Cairns LJ, I too would allow the
appeal, reverse the judgment of Mocatta J and enter judgment for the defendants.
KELLY V NORWICH UNION FIRE INSURANCE SOCIETY LTD [1989] 2 ALL ER 888
Appeal
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By a writ indorsed with a statement of claim issued on 1 August 1985 the plaintiff, Nicholas
Christopher Kelly, claimed against the defendants, Norwich Union Fire Insurance Society Ltd
(the Norwich Union), the costs of repairing damage to Mr Kelly’s bungalow at 21 Castleton
Road, Wickford, Essex under Home Plus policies Mr Kelly had taken out with the Norwich
Union. The Norwich Union by their defence denied that Mr Kelly was entitled to claim under the
policies in respect of the loss or damage in question. At the trial of the action on 16 March 1987
his Honour Judge Butler QC sitting as a judge of the High Court dismissed Mr Kelly’s claim. Mr
Kelly appealed. The facts are set out in the judgment of Croom-Johnson LJ.
Anthony Speaight for Mr Kelly.
John E A Samuels QC and Andrew Burr for the Norwich Union.
5 April 1989. The following judgments were delivered.
CROOM-JOHNSON LJ. A bungalow was erected at 21 Castledon Road, Wickford in

Essex in the 1920s. In 1940 a Mr and Mrs Manzi moved into it, and in 1961 the plaintiff, Mr
Kelly, went to live there as a lodger and he stayed as such until 1969. In 1971 he bought the
bungalow from Mrs Manzi, who lived there until 1975. After 1975 Mr Kelly, who is a builders’
labourer, lived there on his own. In about 1977 he painted and decorated the bungalow and put in
some new floorboards. He said that he observed no cracks or trouble with the structure. He
decided to insure it, and he did so, through brokers, with the defendants, Norwich Union Fire
Insurance Ltd (the Norwich Union). The insurance policy began on 29 October 1977. It lasted
for 12 months until 28 October 1978. He insured the building for £15,000 and also the contents
for a lesser sum.
The policy he took out was in two parts. The first part referred to the buildings; the
second part referred to the contents. The cover which was given to the buildings begins in this
way:
‘The Company will indemnify the Insured by payment reinstatement replacement or

repair as provided below
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1 The Buildings Loss or damage to the buildings caused by any of the insured perils.’
There were other matters included, to which it is unnecessary to refer.
The rest of this part of the policy, dealing with the insurance of the buildings, covers loss
of rent and the cost of alternative accommodation, accidental damage by external means to
underground services, the breakage of glass and sanitary fixtures, and cl 5 provides cover against
the property owner’s liability at law for accidental bodily injury or accidental loss of, or damage
to, material property, and there are various exclusions. That part of the policy is described as the
‘Cover’.
There is then a section marked B, giving the special exclusions, to which I need not refer.
There is then section C, which defines what the buildings are, and section D is of importance. It
is headed ‘Definition of Insured Perils’ and it goes through altogether 11 kinds of insured peril,
beginning with fire and explosion and continuing with storm and flood, riot, civil commotion and
matters of that kind. It is necessary to refer only to two of them. Number (5) reads:
Page 890 of [1989] 2 All ER 888
‘Bursting or overflowing of water tanks apparatus or pipes (forming part of the domestic
fixed water system) washing machines or water mains … ’
and no (10) is:
‘Landslip or subsidence of the site on which the building stands’
with certain exclusions.
There is also a clause at the end of the definition of insured perils, which reads as
follows:
‘The cover in respect of the Insured perils (3) [that is riot or civil commotion] (5) bursting
or overflowing of water tanks apparatus or pipes forming part of the domestic fixed water system
or washing machines or water mains and (6) theft or any attempt thereat shall be inoperative
when the private dwelling is unfurnished other than when there is a change of occupier when the
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cover shall apply whilst the premises are unfurnished for a period(s) not exceeding 30 days
during any one period of insurance such period(s) to commence on the date when the outgoing
occupier vacates the private dwelling.’
There are two other sections of the first part of the policy, to which it is unnecessary to
make any reference.
The second part of the policy deals with the cover for the contents; instead of dealing
with the building, as does the first part, it deals with the contents of the insured private dwelling.
It deals with the contents which are temporarily removed; it provides under para 4 cover for the
tenant’s liability, namely all sums for which the insured is liable as tenant not as owner. Also,
under para 6, it provides cover for personal and employers’ liability at law for damages and
claimants’ costs in respect of accidental bodily injury, with various terms and conditions and
exclusions. Under para 7 it deals with compensation for the death of the insured or his or her
spouse. There are again, in this part of the policy dealing with the contents, special exclusions;
there is a definition of what is meant by ‘Contents’ and there is a definition of the insured perils.
After these first two sections of the policy there is a section dealing with special safety
precautions which the insured is advised to take, as to how to prevent burst pipes and how to
prevent theft.
At the end of the policy there are also incorporated some general conditions. For present
purposes it is only necessary to deal with one, which is general condition 3, which reads:
‘On the happening of any event likely to give rise to a claim under this policy the Insured
shall (a) immediately report in writing to the Company and provide all particulars and evidence
and do all such things as the Company may reasonably require Unless notice in writing is
received by the Company within 30 days of the happening of such event the Company will not
be liable (b) immediately forward all correspondence legal process or any other document to the
Company unanswered (c) refrain from discussing liability with any third party.’
The whole policy document finishes up with the clause on which this appeal principally
depends. It reads as follows:
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‘The Company named in the schedule will in the terms of this policy indemnify or pay
the Insured in respect of events occurring during the period of insurance or any subsequent
period for which the Insured pays and the Company agrees to accept a renewal premium.’
There is then a provision that the proposal is the basis of, and forms part of, the contract.
That was the first of two policies taken out by Mr Kelly. It was renewed at the end of the
year, on 29 October 1978, to expire on 28 October 1979. The next renewal, at a
Page 891 of [1989] 2 All ER 888
slightly increased sum, was on 29 October 1979 for a 12-month period. It was not the
same policy; on this occasion the company substituted a different policy for both the building
and the contents. The wording was slightly different; the only relevant difference, which is not
significant, was that the insured peril no (5) was in respect of the ‘Escape of water from the
domestic fixed water system … or water mains … ' It also had the description of landslip or
subsidence as an insured peril. The clause at the end, which I have already read out, namely ‘The
Company named in the schedule will in the terms of this policy indemnify’ and so on, remained
the same.
The last renewal was of the second policy; it took place on 29 October 1980 and expired
on 28 October 1981.
During those years there were certain facts which were found by the judge and which
must be recorded. The bungalow was built on clay. From the years 1974 to 1976 there was a
period of dry weather and an exceptionally hot summer in 1976. All this led to the dessication of
the site by the drying of the clay. The bungalow had no storage tank inside; the water supply was
direct from the mains in the roadway. In 1977 there was observed what I shall call ‘the first
break’ in a pipe coming to the bungalow from the main. There was a lead pipe leading to a
stopcock just inside the garden, and from there to another pipe which was two metres outside the
wall of the house. At that point the lead pipe joined a copper pipe, which was then the main
supply into the bungalow. It seems that that was not a satisfactory way of running those pipes,
because there is a difficulty in joining two such substances (that is to say lead to copper)
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satisfactorily. Mr Kelly first noticed that there was a fall-off in the pressure from taps in the
bungalow. According to an answer which he gave to the judge and which the judge adopted, he
did not call a plumber for some months, but he did eventually call a plumber, who made a repair
at the joint where the two pipes met and had come apart. At that point it seems that he himself
dug a trench to enable the repair to be carried out. All that happened before he took out the first
policy of insurance.
In 1978 there was a second break at the same point; it seems that the repair had not been
a satisfactory job. Again Mr Kelly noticed a loss of water pressure, and he then saw a pool of
water at the point where the break had taken place. On this occasion, as the judge found, he
called in a plumber very quickly and the repair was done immediately. On the plumber’s advice
Mr Kelly then stopped using the water at full pressure. This was to avoid a third break which
might have been caused had he gone on using the water at full pressure.
The next date which requires mention is in February 1980, when a contractor employed
by Mr Kelly did some pebble-dashing on the outside of the bungalow. The only significance of
that at this stage, about which there was some dispute, was that when it was done it would have
been apparent if cracks in the structure had by then developed, but it seems that there were none.
In 1980 there was a third escape of water. There was a leak at the stopcock and a leak at
the joint of the two pipes and thereafter, when water was not required by Mr Kelly, he simply
turned it off at the stopcock. He noticed at that time that in the trench round the stopcock there
was water tending to lie.
He made his first claim against the Norwich Union under the policy with which we are
concerned on 23 March 1981. He described the date on which he had discovered the damage as
the morning of 23 March 1981, but I think that was really the date on which he was making the
claim. In describing fully what happened he said:
‘I noticed hairline cracks appearing in the walls over the past few months. I went away to
a friends for a while & when I returned the cracks had opened up, the door step has fallen away
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and the tiles on the roof are parting. Windows have been broken by the pressure & [I] had to take
locks off of doors before I could open them’.
It does appear that there was then serious displacement of the building.
Page 892 of [1989] 2 All ER 888
On 30 April 1981 a claims controller from the Norwich Union, a Mr Anderson, visited
the premises. He was told by Mr Kelly that the damage had been taking place since about
October or November 1979, and Mr Anderson’s view was that this was damage due to
subsidence.
In June 1981 the Norwich Union sent a Mr Rudkins, a civil engineer, to the premises. He
appears to have been puzzled by what he found and to have been uncertain what the cause was,
but he was inclined to say that it was not subsidence. The result was that a soil investigation was
carried out by experts, and it was found that the soil was highly susceptible to volumetric change
when there was a change in the moisture content. The result of that was that Mr Rudkins still
considered that there had been no subsidence.
In July 1982 a structural engineer, Mr Kelsey, attended and carried out an examination
for Mr Kelly. He came to the conclusion that this was damage caused by subsidence. I think at
that time he was inclined to blame some trees as having absorbed the moisture from the subsoil,
making it dry; that was his view. As it turned out, and as I shall explain later on, the theory that
this was subsidence was all wrong.
The Norwich Union were refusing to pay out on the claim for reasons which are obscure
but which seem to have been detailed much later by their eventual amendment to the defence in
this action. They were alleging that Mr Kelly was in breach of conditions in the policy because
he had not immediately reported in writing within 30 days, that he had wrongly said in his
proposal that the building was in good condition and would be so maintained by him, which was
wrong, and that the water main was defective and that he had not repaired it, and that therefore,
for that and possibly other reasons as to which one does not speculate, liability under the policy
was repudiated.
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Meanwhile, Mr Kelly had begun an action based on the damage having been caused, as
Mr Kelsey had said, by subsidence. It is right to say that the allegations made in the amended
defence were negatived at the trial by the judge.
The case came on for trial on 10 November 1986. Counsel for Mr Kelly asked the judge
to have a view, which took place. One of the things which I think was exercising him was that by
now Mr Kelsey was puzzled about whether the damage was caused by subsidence. What had
puzzled Mr Kelsey was that the effect on the soil seemed only to be underneath the house and
not outside it, and there were other inconsistencies in the nature of the damage which puzzled
him. As a result of a further inspection he had now decided that the damage had been caused, not
by subsidence but by what is known as ‘heave’. Heave is the opposite of subsidence; instead of
the soil being let down, it is the soil rising up and causing damage to the structure on top of it. If,
of course, there has been something like desiccated clay at the site of the house, caused by very
dry weather, and then the incursion into the site of a lot of water, the clay will swell up and it
may well be that with clay of the type on which this bungalow was built it will overdo itself and
rise up much too much. At all events, as a result of the visit to the site in November 1987, and a
further report by Mr Kelsey, there was a reamendment, with the permission of the judge, on 12
December 1986, after the trial had begun; that denoted that this was not a case of subsidence but
was a case of heave. It was after that that the Norwich Union put in their defence with a great
deal more, as I have mentioned, in the way of merely putting Mr Kelly to proof.
When Mr Kelsey went back to the site on his second visit in November or December
1986 he found something which had not been discovered before. Lying under the ground
between the stopcock and very close to the wall of the bungalow he found a totally disconnected
lead pipe. It was what was referred to throughout the case and in this court as ‘the coiled pipe’.
Apparently at some stage it had formed part of the way of bringing water to the bungalow, but it
had been disconnected and instead of being removed it had remained under ground all this time.
I do not think it was ever established when that was done, but at all events it was certainly there
by 1977 and it was something which could possibly have been there even longer. It was
something which was unknown to Mr Kelly.
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Page 893 of [1989] 2 All ER 888
The result of it, as tested by Mr Kelsey, the engineer, was that he was able to establish
that, when the stopcock was turned on in its trench just inside the garden wall, the effect of it was
to fill the little trench by the stopcock, either from a leak or for some other reason, and the water
would then run from that trench, through the coiled pipe, which acted as a kind of conduit from
the stopcock trench to just in front of the house, and Mr Kelsey was of the view, which I think
was accepted by the judge, that this coiled pipe must have been the means of producing
quantities of additional water onto the clay subsoil under the bungalow when the stopcock was
turned on or when it was leaking. What the judge found on those facts was that by the time the
trial eventually took place both Mr Rudkins and Mr Kelsey agreed that this was a case of heave
and not a case of subsidence. The judge found that between 1974 and 1976 there had been a
desiccation of the clay site, that subsequently to that water had been entering the clay and
causing it to expand.
In the course of his judgment he made some findings of fact as to how the water got
there. I quote from his judgment:
‘From the evidence it is apparent that this might have occurred in a number of ways and
at different times. Firstly, there was the lengthy discharge at mains pressure in the summer of
1977; secondly, there was the water leak that was repaired in 1978; thirdly, there was, beginning
early in 1980, the overflow from the trench at the stopcock and the consequential discharge from
the coil of pipe by the front door. But it was only in the summer of 1977 that water escaped into
the clay for a prolonged and uninterrupted period at full mains pressure. And, putting on one side
the consequential discharge from the coil of pipe, the overflow from the trench at the stopcock
was of minimal effect. Mr Kelsey said that there would have been no significant discharge of
water from the stopcock into the clay under the house without the presence of the coil. Nor, on
the evidence, would there have been any significant or substantial discharge as a consequence of
the leak that necessitated the 1978 repair. So there remain, as the significant or substantial causes
of water entering the clay and causing “heave”, firstly the discharge of water in the summer of
1977 and secondly the discharge of water from the coil from early 1980. Neither of the experts
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has attempted to apportion the relative contribution of these causes. Perhaps it is impossible to do
so. The importance of this will shortly be apparent.’
He went on in his judgment to make one further finding. He said:
‘I accept that heave commenced immediately consequent on the summer 1977 burst and
continued thereafter throughout the period of insurance.’
In this action Mr Kelly has relied on both the 1977 burst and the 1980-onwards incursion
of water from the coiled pipe. The 1977 burst was what one can roughly call pre-policy water,
and the other, in 1980, was the incursion of water after the insurance had begun. The judge found
that the circumstances of both incursions of water came within the wording of insured peril no
(5) in the policy which was in force at the time when the incursion took place, and the contrary
has not been argued before us. The judge found that the 1977 incursion, not having happened
during the currency of the insurance, was not an ‘insured peril’ within the meaning of the policy
at that time, notwithstanding that it caused loss or damage to the buildings after the insurance
had begun in October 1977.
In coming to that conclusion he relied on Hutchins Bros v Royal Exchange Assurance

Corp [1911] 2 KB 398. We have been referred to that case, but with respect to the judge I do not
think that that case supports the conclusion that he had come to. It was a case on a somewhat
different point, but in the end that does not affect the decision of this appeal.
There can be no dispute that the incursion of water from the coiled pipe in 1980, and the
damage which it caused, was an insured peril and caused loss or damage within the meaning of
the policy. The damage to the building began in 1980, or perhaps late 1979;
Page 894 of [1989] 2 All ER 888
it continued; if it had been possible to say how much of it was due to the 1977 incursion
and its continuing effects, and how much was due to the further incursion which began early in
1980, it might have been possible to ask the judge to apportion the blame between the two.
authority.
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INSURANCE LAW CASES
However, such an apportionment was not asked for by counsel for Mr Kelly for the excellent
reason that it was not possible for it to have been done. As the judge said in his judgment:
‘Can I apportion here? I think not. The only event within the policy with which I am
concerned is that relating to the discharge through the coil of pipe. I have no evidence
whatsoever which would allow me to make an assessment of the damage caused by this event, or
the extent of its contribution to the “heave“. In appropriate circumstances I would have thought it
right to adopt such an approach, although I have been referred to no English case where this has
been done. Indeed, I was never invited by counsel for Mr Kelly so to apportion, and there has
been no argument about it.’
Of course, the ‘excellent reason’ was that the two experts, Mr Rudkins and Mr Kelsey,
had both said that they were totally unable to apportion the responsibility for the final damage to
the bungalow to whichever of the two causes which the judge found were operative.
Counsel who has appeared for Mr Kelly both in the court below and in this court has
accordingly conceded that in order to succeed in this court he must succeed on the 1977 burst as
well as on the 1980 leak. The way he puts his argument is attractively simple. He said that in the
first part (and for present purposes I take the first policy) the words
‘The Company will indemnify the Insured by payment reinstatement replacement or

repair as provided below
1 The Buildings Loss or damage to the buildings caused by any of the insured perils’
mean that all he has to do is to point to loss or damage which occurs during the currency
of the policy and to prove that it was caused by one of the insured perils. It is submitted that Mr
Kelly was then entitled to his indemnity notwithstanding that the insured peril, that is to say the
escape of water from the mains, occurred before the policy was taken out. In other words it is
submitted that it is the loss or damage that is the event which has to occur during the period of
insurance in order to comply with the clause at the end of the policy. This would have the result,
perhaps a surprising one, that, as here, the insurers on granting the policy would be taking on a
authority.
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INSURANCE LAW CASES
potential liability which might become actual in the future and about which no one knew
anything at the time; but if that is what the policy means, so be it.
The alternative argument, put on behalf of the Norwich Union, is that the events which
must have occurred during the period of insurance are the events which are the happening of the
insured perils, that those are matters which will be apparent and of which there must be, or
would normally be, knowledge of when they take place. There is only one other place in the
policy where the words ‘event’ or ‘events’ are used, and that is in general condition 3, which I
have already read. It is submitted on behalf of the Norwich Union that the word ‘events’ there
used suggests that an event is something which is known, or at least knowable. In my own view,
I get no assistance at all from general condition 3. It does not deal with matters like underground
water or anything of that kind. In my view it is there in order that the insured may give
information to the insurance company of events ‘likely to give rise to a claim’, because to my
mind that is dealing with third party liability, a matter which is covered under both sections of
both policies. That reasoning of the Norwich Union does not deal satisfactorily with the insured
peril of subsidence of the site. That is something which may well take place
Page 895 of [1989] 2 All ER 888
unknown to anybody, without immediately causing damage to the building, and therefore
counsel for Mr Kelly submits that accordingly the only safe meaning to be given to the word
‘events’ during the period of insurance, in the final clause, is the happening of the loss or
damage, about which there can be no ignorance, so as to enable the insured householder to make
his claim.
Curiously enough, the industry of counsel, which has provided us with a number of
authorities, has not enabled them to find any direct authority in any branch of insurance which
has dealt directly with this point. Accordingly, in my view it is necessary to return to first
principles.
This policy is a contract in writing. It contains, as one would expect, an effective clause
which defines the date on which the insurer will come on risk, the risks that he is accepting and
authority.
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INSURANCE LAW CASES
the circumstances in which he becomes liable to indemnify. It does that by reference to the terms
of the policy, the schedule and so on. Until that time (when he becomes liable) arrives, the
insurer is liable for nothing. The rest of the policy defines and limits his liability when any
liability does attach and the construction of the remainder of the policy is subject to that effective
clause. In this policy the liability is brought about by the happening of one of the insured perils,
and the very description of the peril as being an insured peril means that at the time when it
becomes fact the insurance is already effective, in other words, that the insurance period has
begun when that event takes place. The words of indemnity on which Mr Kelly relies must be
subject to the words in the effective clause, and the risk must take place, as an event, during the
period of the insurance. The later occurrence of the damage is not in my view an ‘event’ within
the meaning of the policy. Accordingly, in my view the meaning of the word ‘events’ contended
for by the Norwich Union is the correct one. It is referring to any of the events which brings
about the liability of the insurance company once the policy has become effective, and does not
deal simply with the occurrence of the damage as counsel for Mr Kelly submits.
Mention was made during the argument as to what effect this clause might have on
certain hypothetical sets of circumstances. One such was a leaking of the water main which set in
train a process of dry rot which might only result in loss or damage after the period of insurance,
or any subsequent period for which the insurance was renewed, had expired. It is not necessary
to express any view on that problem in this appeal. Problems such as that, and others that were
instanced, can be dealt with if and when they ever arise.
Accordingly, I would dismiss this appeal.
BINGHAM LJ. An insurance policy of the kind here under consideration is a contract of
indemnity. By it the insurer undertakes to indemnify the insured against loss or damage to the
subject property caused by certain perils specified in the policy.
The leakage of water which took place in 1978 was quickly remedied and was held to be
of no significance. That finding has not been challenged.
authority.
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INSURANCE LAW CASES
The leakage of water during 1980 is accepted as a peril specified in the policy then
current, and occurred during the policy term. But the insured cannot show that his house suffered
any quantifiable loss or damage as a result of that leakage alone. It is accordingly accepted on his
behalf that he must, to make good his claim against these insurers, show that they agreed to
indemnify him against loss or damage suffered by his house during the four policy years when
the insurer was on risk as a result of the water leakage in 1977. It is accepted that that leakage
was a peril specified in the policies, and despite the argument of counsel for the Norwich Union
to the contrary I am satisfied that the judge found the resulting damage to have occurred during
the cumulative term of the policies. The insured’s problem is that the 1977 leakage admittedly
began and ended before the term of the first policy began.
The insured argues that under the policies he is entitled to be indemnified if damage
Page 896 of [1989] 2 All ER 888
caused by a specified peril occurs during the cumulative term of the policies, even though
the peril occurred before that term began.
The insurers argue that the insured is under the policies entitled to be indemnified if the
insured peril occurs during the term of one or other policy and causes damage, even though the
damage may occur, or become evident, after expiry of the term of any policy or the cumulative
term of all the policies.
Neither party contends that the right to indemnity is dependent on the occurrence of both
the specified peril and the resulting damage during the term of one or all of the policies, and
neither party contends that there can be a right to indemnity if neither the specified peril nor the
resulting damage occurs during the term of one or all of the policies.
In agreement with Croom-Johnson LJ I am of the clear opinion that under these policies
the insured’s right to indemnity is dependent on his showing that the specified peril in question
occurred during the term of one or other policy. I give five reasons for that conclusion. (1) The
reference to ‘events occurring during the period of insurance’ in the insurers’ crucial contractual
undertaking most aptly applies to the occurrence of specific perils and not to the occurrence of
authority.
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INSURANCE LAW CASES
damage resulting therefrom. (2) Subsidence is specified as an insured peril. Heave is not. Heave
is not a phenomenon of which I was formerly aware, but one should not assume that the insurers
were similarly ignorant. It is noticeable that, whereas the insured warranted in his initial proposal
that the house had not been damaged by subsidence, the insurers are not similarly protected in
the case of heave. The two cases are not the same, since even on the insured’s argument he can
recover for damage caused by heave only where that is caused by a specified peril, whereas
subsidence of itself founds a claim unless its cause is one of those specifically excluded. But, if
this policy had intended to cover an insured against loss or damage to the house caused by heave
caused by a specified peril occurring before the policy began, I think it overwhelmingly likely
that an appropriate warranty would have been exacted from the insured at the outset. (3) I think it
contrary to common understanding that an event may qualify as an insured peril if occurring
before the policy term. This common understanding is reflected in the traditional language of the
Lloyd’s ship and goods voyage policy scheduled to the Marine Insurance Act 1906:
‘Touching the adventures and perils which we the assurers are contented to bear and do
take upon us in this voyage: they are of the seas … ’ etc.
It would be somewhat startling if a claim would lie for damage suffered during a voyage
as a result of perils which had occurred before the insurers came on risk, or if (in the non-marine
field) an insurer were liable for dry or wet rot which became apparent during his policy term
although caused by an escape of water years earlier when another insurer, or no insurer, had been
on risk. (4) If asked what he had insured against during the policy year, an insured under a policy
such as these (if he knew the policy terms) would in my view reply ‘fire, explosion, lightning,
earthquake, storm, flood … ’ etc not ‘loss or damage caused by fire, explosion, lightning,
earthquake, storm, flood … ’ etc. This is in my view a case where the colloquial response
accurately reflects the legal reality. (5) The researches of counsel unearthed no reported case in
which an insurer had been held liable to indemnify the insured although the specified peril
occurred before the insurer came on risk. While ultimately all must turn on the wording of the
policy in question, it would in my view need compelling language of a kind not found here to
lead to so unusual a result.
authority.
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INSURANCE LAW CASES
The insurers may well be right to accept that if the specified peril occurs during the
policy term it makes no difference that the resulting damage occurs after, perhaps well after, its
expiry. But the point does not arise for decision here and I think it is best not to decide it until it
does.
My conclusion is in all essentials the same as that of the judge, as also of Croom-
Johnson LJ. I too would dismiss the appeal.
Page 897 of [1989] 2 All ER 888
TAYLOR LJ. I agree, and would add only one further reference to the policy in support
of the construction favoured by Croom-Johnson and Bingham LJJ.
Under section D of the first policy there is a heading ‘Definition of Insured Perils’.
Thereafter there are the eleven tabulated headings to which Croom-Johnson LJ has already
referred. There follows a provision in each of the two policies which is very similar I read it from
the second policy:
‘The cover in respect of the insured perils (3) loss or damage by malicious persons (5)
escape of water and (6) theft or attempted theft will not operate when (a) the private dwelling is
unfurnished or (b) the private dwelling is unoccupied because of a change of occupier. In the
event of a change of occupier cover will apply for a period not exceeding 30 days during any one
period of insurance such period to commence on the date when the outgoing occupier vacates the
private dwelling.’
That provision clearly envisages that the insured peril will occur during the operational
period of the policy moreover, it could not sensibly apply to the occurrence of an insured peril
prior to the commencement of that period.
I too would dismiss this appeal.
Appeal dismissed. Leave to appeal to House of Lords refused.
authority.
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KANTI & CO LTD V. BRITISH TRADERS’ INSURANCE CO LTD [1965] 1 EA 108

(CAN)
Judgment
Newbold Ag V-P: This appeal raises an important point of insurance law. As it is a second
appeal it is, by reason of ss. 72 and 73 of the Civil Procedure Act, limited to matters of law.
The relevant facts are that the appellant company, which I shall call “the trader”, insured
seven cases of enamelware during transit from Liverpool to
Page 110 of [1965] 1 EA 108 (CAN)
Nairobi with the respondent insurance company, which I shall call “the insurer”. The
insurance was what is known as an all-risks insurance and was against “All risks of loss or
damage subject to the Institute Cargo Clauses (All Risks)”. The insurance attached while the
goods were being carried by steamer, conveyance, air, parcel post either singly or severaly and
by cl. 1 of the Institute Cargo Clauses (All Risks) it attached from the warehouse of the place of
commencement of transit to the final warehouse at destination. Clause 6 of these clauses reads as
follows:
“This insurance is against all risks of loss or damage to the subject-matter insured but
shall in no case be deemed to extend to cover loss damage or expense proximately caused by
delay or inherent vice or nature of the subject-matter insured. Claims recoverable hereunder shall
be payable irrespective of percentage.”
On arrival in Nairobi the cases appeared to be in good condition but on being opened a
very high percentage of the enamelware inside was found to be badly chipped. The goods were
surveyed by an insurance surveyor who; in respect of the articles damaged, agreed that the
damage extended to 50 per cent of their value. In his original report he stated that the articles of
enamelware were wrapped in paper in nailed wood cases packed in wood wool and that the
nature and cause of the damage was chipping of the enamel probably due to rough-handling in
authority.
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INSURANCE LAW CASES
transit. In his evidence he stated that at the time he made his first report he thought the goods had
been transported from Mombasa to Nairobi by rail and it was for that reason that he stated the
main cause of damage to be rough-handling. Having learned, however, that the goods were
transported by motor transport, he considered that the main cause of damage was motor transport
as, due to the continual jolting, the packing had settled or become loose. He stated also that in his
opinion the packing was probably sufficient for rail transport but insufficient for road transport,
and that it was unusual to get so much chipping of the enamel.
The resident magistrate before whom the case was heard found as a fact that transport by
road between Mombasa and Nairobi was not contrary to the terms of the policy, that the packing
was reasonably adequate, that the trader had proved that some fortuitous circumstance had
occurred to the goods and it was not for him to show how the goods were damaged, that the
insurer had failed to prove that the damage was caused by inherent vice in the packing; and,
accordingly, he gave judgment in favour of the trader for the amount claimed.
On appeal to the Supreme Court this decision was reversed, the Chief Justice holding that
the trader had failed to discharge the light onus that lay on it to prove that a casualty had
occurred which resulted in the damage. From that decision the trader has appealed. In essence
the main ground of appeal was that having regard to the facts found by the resident magistrate,
the approach of the Chief Justice was wrong in law in that he placed upon the trader an onus
which did not lie upon him.
Both counsel who appeared for the trader, and counsel who appeared for the insurer, in
the course of interesting submissions accepted the law to be that a plaintiff must prove that the
loss in respect of which the claim was made must have been caused by some casualty during
transit, but they differed as to the precise manner in which this could be done. They differed also
in relation to the judgment of the Chief Justice. Counsel for the appellants submitted that the
Chief Justice, without disturbing the findings of fact of the resident magistrate that the packing
was adequate and that there was no inherent vice, had arrived at his decision on a finding that the
plaintiff had not proved a casualty, a matter which was not directly in issue before the resident
magistrate, and which,
authority.
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INSURANCE LAW CASES
Page 111 of [1965] 1 EA 108 (CAN)
having regard to the facts found and to the extent of the damage, it was not open to the
Chief Justice to find. Counsel for the respondents submitted that the finding of no casualty by the
Chief Justice was in effect a finding that the loss was caused by inherent vice due to inadequate
packing and that in any event the plaintiff must prove casualty either directly or by inference
from exceptional damage and that the damage in this case was not exceptional. During the
submissions reference was made to the cases of British and Foreign Marine Insurance Co. Ltd. v.
Gaunt (1), Gee and Garnham Ltd. v. Whittall (2), Berk and Co. Ltd. v. Style (3) and Theodorou
v. Chester (4) upon which last case counsel for the respondent relied strongly.
As Lord Birkenhead said in Gaunt’s case (1) an all-risks policy does not cover all damage
however caused; the damage must be due directly to some accidental cause of any kind which
occurred during transit. There is thus an onus on a plaintiff to show that the damage occurred
from some act or omission, either deliberate or unintended, which directly resulted in the
damage. It is this act or omission which is usually referred to as a casualty; and a casualty, as
Lord Sumner said in Gaunt’s case (1), is something which injures the goods from without and
not something which develops from within. An examination of the relatively few authorities on
the position under an all-risks insurance, some of which authorities are not consistent one with
the other, leads me to the conclusion that a plaintiff cannot succeed under an all-risks policy of
the type in question in this appeal unless he proves that the damage resulted directly from some
act or omission deliberate or unintended, to the goods during the period of transit covered by the
policy and that the damage was not such as was natural and inevitable in any circumstances. For
example, it is natural and inevitable that a piece of enamelware should receive minor abrasions
and scratches either from use or from being put in proximity to anything else. Such damage may
be described as fair wear and tear and, as it must inevitably arise quite irrespective of the transit,
it cannot be the subject of a claim under a policy which, even though it covers all risks, does not
cover damage which is in any circumstances inevitable and which, therefore, does not result
from a risk. On the other hand, it is not natural and inevitable that any appreciable chipping
should occur; if it does, then this must have been caused by some act from outside the article.
Again, to take the example referred to by the Chief Justice in his judgment, if a fragile glass is
authority.
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INSURANCE LAW CASES
placed in an iron box for transport, it is neither natural nor inevitable that the glass should be
broken during transit. It may be so wrapped and packed as to enable it to withstand the normal
jolts of the transport without damage, or, though this would be a much more difficult matter, the
box might be so handled as to preclude any jolt which would result in the breaking of the glass
during transport. It is thus neither natural nor inevitable that where a glass is transported in an
iron box the glass should be broken. If it is, the damage will arise from some outside act and this
outside act is a casualty.
As I have said, a plaintiff has to prove that the damage resulted from some casualty
during the period of transport covered by the policy and that it was neither natural nor inevitable.
Having said that, however, the question remains as to how he can prove it. In normal cases he
can prove that the damage was neither natural nor inevitable from the mere nature of the damage;
that is, he proves that it is damage of a kind which has been referred to in the cases as either
exceptional or abnormal. These adjectives do not mean that the damage must be of an
extraordinary nature; they merely mean that the damage is not such as must inevitably arise. The
use of the epithets exceptional and abnormal has, I think, created an impression that before a
plaintiff can succeed he must prove damage of an extraordinary nature; this is not so. Having
proved, however, that the damage is of a nature which is neither natural nor
Page 112 of [1965] 1 EA 108 (CAN)
inevitable, the question still remains as to how a plaintiff is to prove the casualty. It is
obvious that in the vast majority of cases the plaintiff would be completely unable to prove any
specific act or omission which gave rise to the damage. As, however, the policy is against all
risks, it is unnecessary, as Lord Birkenhead said in Gaunt’s case (1), to show the exact nature of
the casualty. It is sufficient, as Lord Sumner said in the same case, if evidence is given
“reasonably showing that the loss was due to a casualty”. If, therefore, it is admitted or proved
that the goods were undamaged at the commencement of the period of insurance, that they
arrived damaged and that the damage was of a nature which was neither natural nor inevitable,
then the plaintiff has led evidence from which a casualty may reasonably be inferred and he has,
therefore, subject to any further evidence, proved a casualty. It is at this point, with respect, that I
authority.
Page | 308
INSURANCE LAW CASES
consider that the Chief Justice erred. The difference between his approach to the onus which lay
on the plaintiff and the approach of the resident magistrate to that some onus is exemplified by
the difference between the approach of Croom-Johnson, J. in the Theodorou case (4) and that of
Sellers, J., in Electro Motion Ltd. v. Maritime Insurance Co. Ltd. (5), a case which was not
referred to by either counsel.
In the Theodorou case (4), Croom-Johnson, J., at the end of a very long judgment said:
“In those circumstances, it seems to me that the only possible conclusion at which the
court can arrive is, as I say, that, for some unexplained reason, in some unexplained way, which
it is not for the plaintiff to prove, there was a casualty . . .”.
He had, however, during the course of his judgment approached the problem on the basis
that the onus was on the plaintiff to show that on a balance of probabilities the damage had not
been caused by any theoretical way in which, according to the defendant, it could have been
caused. As he said [1951] 1 Lloyd’s Rep. at p. 238):
“It is, I think, for the plaintiff to satisfy me that these theories, if I come to the conclusion
that they are reasonable possible theories, are not right.”
In contrast to that, Sellers, J. in the Electro Motion Ltd. case (5) said:
“The evidence establishes that the goods complied with the contract when delivered free
on board at Dublin that they arrived damaged in the way that has been indicated and although the
precise instant which caused the damage cannot be ascertained on the evidence before this court,
it is damage in transit which is covered by the policy of insurance . . . That policy covered transit
from warehouse to warehouse and it occurred in the course of that period.”
I consider that having regard to the terms of the policy and the speeches in the Gaunt case
(1), the approach of Sellers, J. is correct and that of Croom-Johnson, J. is not. I do not consider
that Gee’s case (2) is of any assistance on this point as in that case the goods were not proved to
have been undamaged at the commencement of the transport.
authority.
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INSURANCE LAW CASES
On the facts of this case it is not in dispute that the enamelware started the journey
undamaged. It is also not in dispute that on arrival of 360 saucepans and lids 99 were undamaged
but 261 were damaged to the extent of one half of their value and that the percentage of damage
of the other articles was similar. On these facts I have no doubt that in law the appellant had
discharged the onus on him of proving that the damage had resulted from a casualty. Indeed, as
Law, J.A. has pointed out in his judgment, which I have had the advantage of reading in draft,
this was accepted by the parties during the hearing of the case before the resident magistrate.
Page 113 of [1965] 1 EA 108 (CAN)
In this policy, as indeed in almost every all-risks policy, there are exceptions whereby the
insurer excludes liability under the policy if the damage results from a risk which is excepted. In
this case, by cl. 6 of the Institute Cargo Clauses (All-Risks), damage from inherent vice or the
nature of the subject matter was excluded. It is clear that if an insurer seeks to avoid liability on
the ground that the damage resulted from an excepted risk, then the onus is on him to prove that
the damage was a direct result of the excluded risk. It is not, I think, suggested that the damage in
this case occurred from the nature of the subject matter. That exception is intended to refer to
damage which results naturally from within, irrespective of any outside act, though, of course,
any such damage may be augmented by an outside act. An example of such damage would be for
perishable goods to go bad or for certain chemical reaction to take place merely by reason of
exposure to air. This type of damage is frequently referred to as inherent vice. But where, as in
this case, there is a reference both to inherent vice and to the nature of the subject matter, I
understand inherent vice to be somewhat different. I understand it to be a quality in the insured
article which may, though it need not necessarily, result in damage in the circumstances in which
the goods may be expected to be transported. An example of this would be fragile or brittle
articles which, unless adequately packed, will in all probability suffer damage in the normal
conditions to which they would be subjected in the course of transit. Another example is the
propensity which certain articles, such as coal, have to spontaneous combustion under certain
conditions.
authority.
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INSURANCE LAW CASES
As I have said, if an insured package contains an article of such a nature that it will,
unless adequately packed, suffer damage from the conditions to which the package would be
expected to be subjected during normal transit, then in my view such damage would arise from
inherent vice. In this case, as damage from inherent vice was damage from an excepted risk, if
the insurer could have shown that the damage to the enamelware was directly caused by
inadequate packing it would have been entitled to judgment. This is precisely what the insurer
sought to do before the resident magistrate but, on the balance of probabilities, the resident
magistrate was not satisfied that it had succeeded and he therefore gave judgment in favour of
the trader. In my view the resident magistrate was correct in law in placing the onus on this
matter on the insurer and in holding that, as on the facts found that onus had not been discharged
and as damage from a casualty had already been sufficiently proved or admitted, therefore
judgment in favour of the trader followed. With respect, I consider that the Chief Justice erred in
law in placing on the trader any onus of showing that the damage did not arise from inadequate
packing.
For these reasons I would allow the appeal, restore the judgment and decree of the
Resident Magistrate’s Court, set aside the judgment and decree of the Supreme Court and
substitute therefor a judgment and decree dismissing the appeal to the Supreme Court with costs.
I would allow the appellant his costs on the appeal to this court, with a certificate for two
counsel. As the other members of the court agree it is accordingly so ordered.
Spry JA: I agree that this appeal must be allowed. I have reached this conclusion with the
greatest reluctance, as I think that the judgment of the trial court might properly have been
reversed on grounds other than those on which the appeal to the Supreme Court was decided, in
particular, that the learned resident magistrate reached a conclusion on the question whether the
goods were reasonably packed which was so inconsistent with his findings of primary fact as to
amount to an error of law and that he misdirected himself in his approach to the expert evidence,
but there has been no cross-appeal and I do not think it would be proper for this court on a
second appeal to consider questions that have neither been advanced nor argued before us.
Page 114 of [1965] 1 EA 108 (CAN)
authority.
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INSURANCE LAW CASES
I am, if I may say so with great respect, substantially in agreement with the enunciation
of the relevant law contained in the judgment of the learned Vice-President but as the subject is
one of considerable importance, I think I should add certain comments.
It is clear on the authorities that in proceedings under an all-risks marine policy the initial
onus is on the plaintiff to show that a claim lies under the policy. To do this, he must show that
the goods started on their journey in good order and that they either failed to reach their
destination or arrived in a damaged condition. He must either prove that an accident or
“casualty” occurred or show that an accident should be presumed. The classic authority is the
observation of Lord Birkenhead, L.C., in British and Foreign Insurance Co. v. Gaunt (1), when
he said:
“We are, of course, to give effect to the rule that the plaintiff must establish his case, that
he must show that the loss comes within the terms of his policies; but where all risks are covered
by the policy and not merely risks of a specified class or classes, the plaintiff discharges his
special onus when he has proved that the loss was caused by some event covered by the general
expression, and he is not bound to go further and prove the exact nature of the accident or
casualty which, in fact, occasioned his loss.”
The presumption that an accident has occurred will readily be inferred where it is proved
that the goods were intact at the beginning of the journey and arrived in a damaged condition and
where the nature and extent of the damage is not such as must have been expected by both
parties having regard to all the circumstances. On the particular facts of Gaunt’s case (1), Lord
Birkenhead said:
“The damage proved was such as did not occur, and could not be expected to occur, in
the course of a normal transit. The inference remains that it was due to some abnormal
circumstances, some accident or casualty.”
The damage which the parties must be deemed to have expected, sometimes called
“natural and inevitable” and sometimes “fair wear and tear”, is not a “risk” and therefore not
covered by the policy. I do not, with respect, favour the use of the word “inevitable”, although
authority.
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INSURANCE LAW CASES
there is the highest authority for its use. No damage is inevitable: goods may, and sometimes do,
arrive undamaged. The matter is, I think, one of degree. Some goods are more fragile than
others, and some are more valuable than others. The more fragile the goods, the more desirable it
is that they be packed with care but obviously the time and money devoted to packing must be
related to the value of the goods. It is, I think, for the court to determine on the particular facts of
each case what measure of damage or “wear and tear” must be presumed to have been expected
by the parties when the contract of insurance was entered into.
The defence to such an action will normally consist either of a denial that there has been
a casualty or of a plea that an exception to the policy applies, or of both, and where an exception
is pleaded, the onus is, of course, on the defence.
Theodorou v. Chester (4), was a case in which the defence was that the damage sustained
by the goods was the ordinary wear and tear incidental to a long journey and was not the result of
any fortuitous circumstance or any peril insured against. The onus was therefore on the plaintiff
to satisfy the court that there had been a “casualty” and that involved rebutting various
alternative suggestions put forward by the defence.
On the other hand, the cases of Gee and Garnham Ltd. v. Whittall (2) and Electro Motion
Ltd. v. Maritime Insurance Co. Ltd. (5) were both cases where the defence was or included an
allegation of inherent vice. In the former case, the goods were of light metal and very prone to
denting and arrived, as in the present case, in a large number of boxes none of which showed any
outward
Page 115 of [1965] 1 EA 108 (CAN)
sign of injury (apart from certain boxes which were dealt with separately in the
judgment). There was no evidence of any accident or of anything unusual concerning the
journey. The trial judge concluded that the damage had occurred either in the course of packing
or as a result of defective packing and held that the onus of proving inherent vice had been
discharged. In the latter case, the defence of the insurers was that damage to a diesel engine, the
subject of the claim, had not occurred during the journey and there was an alternative defence
authority.
Page | 313
INSURANCE LAW CASES
that any damage that had occurred in transit was due to inherent vice, the engine being already
cracked at the time of shipping. The defence depended entirely on expert evidence that a crack in
the engine must have been antecedent to the loading of the engine on the ship. There was,
however, direct evidence, which the trial judge accepted, that the engine was in good order when
it was shipped and there was evidence, which the trial judge also accepted, which indicated that
the engine had received a severe blow. The trial judge found no difficulty on the evidence in
finding for the plaintiff company against the insurers.
I have dealt somewhat fully with these cases, because I think, with respect, that there is
nothing irreconcilable in the decisions and that they all accord with the general principles I have
sought to set out. Both Gee’s case (2) and Berk & Co. Ltd. v. Style (3) (which was referred to at
all stages of these proceedings) are clear authority for saying that inadequate packing may
constitute inherent vice.
Law JA: I have had the advantage of reading the judgment of Newbold, Ag. V.-P., with
which I agree. I wish to add a few observations on one aspect of this appeal, and that is the
effect, on the trial of a civil case, of issues which have been properly framed and recorded, as
was the case here.
The appellants (whom I shall refer to in this judgment as the plaintiffs) imported seven
cases of enamel-ware to Kenya from the United Kingdom. These goods were insured for £205 by
a certificate of insurance issued under a policy of marine insurance taken out by the plaintiffs
with the respondents (hereinafter referred to as the defendants). The certificate covered the
transit of the goods “at and from Liverpool to Nairobi” in respect of “All Risks of loss or
damage, Subject to the Institute Cargo Clauses (All Risks) Including War and Strikes risks as per
Institute Clauses”. The goods arrived in Nairobi towards the end of February, 1959, having
travelled from Liverpool to Mombasa by sea and from Mombasa to Nairobi by road. In Nairobi
there was no damage to the cases apparent on external examination, but when the cases were
opened it was found that the enamelware in all seven cases had suffered damage by chipping.
The defendants’ assessor examined the goods on March 4, 1959. He mistakenly assumed that the
authority.
Page | 314
INSURANCE LAW CASES
goods had travelled from Mombasa to Nairobi by rail. The following extracts are taken from his
report–
“Nature of packing. Pieces wrapped paper all in nailed wood cases packed with wood
wool.
External condition on arrival. Sound.
Nature and cause of damage. Chipping of enamel, probably rough handling in transit.”
The damage was estimated to amount to Shs. 1575/50. The defendants repudiated
liability on the grounds that “the losses are not recoverable under the relative certificate”.
The plaintiffs instituted a suit in the Resident Magistrate’s Court, Nairobi, by filing a
plaint claiming Shs. 1575/50, interest and costs from the defendants, alleging that their goods
“were damaged by one of the perils or causes” covered
Page 116 of [1965] 1 EA 108 (CAN)
by the certificate and policy of insurance issued by the defendants. The defendants in
their defence pleaded a number of defences, of which the only one which is still material is:
“. . . that the loss was not by one of the perils insured against”.
At the hearing before the learned resident magistrate, the issue arising out of this defence
was framed in the following terms:
“1(a) Are the defendants entitled to refuse to pay the claim on the grounds that
there was an ‘inherent vice’ in that the goods were insufficiently packed.”
This issue was obviously framed with regard to clause 6 of the Institute Cargo Clauses
(All Risks) which formed part of the policy of insurance and which reads as follows:
authority.
Page | 315
INSURANCE LAW CASES
“This insurance is against all risks of loss of or damage to the subject-matter insured but
shall in no case be deemed to extend to cover loss damage or expense proximately caused by
delay or inherent vice or nature of the subject-matter insured . . .”.
Counsel for the plaintiffs then submitted that the burden of proof was on the defendants.
The learned trial magistrate is recorded as having said “I think Mr. Ransley (counsel for the
defendants) has admitted the onus is on him to prove that the exceptions apply”, to which Mr.
Ransley is recorded as having replied “Yes”. To my mind this admission is of the utmost
importance in deciding this appeal. From the outset the trial proceeded on the basis that the
plaintiffs were relieved of the duty of proving a casualty, or accident, of such a nature as to bring
their loss within the policy and no issue was framed posing the question “was the damage to the
goods due to a risk covered by the policy?”. On the contrary, the defendants undertook the onus
of proving inherent vice in the goods. The learned resident magistrate, in a carefully considered
judgment, found that the evidence was insufficient for him to find that there was inherent vice in
the goods by reason of insufficient packing. He concluded “That being so, the damage was
caused through a risk which was covered by the policy and the insurers should pay. On issue 1
(a) there was no inherent vice’.”
The defendants appealed to the Supreme Court. The learned Chief Justice allowed the
appeal, for reasons which appear from the following extract taken from his judgment:
“Here however were seven cases, all undamaged, the contents of which had behaved in
just the same way. The packing had separated from the goods. On the evidence that was due to
‘somewhat continued shaking’. Upon the only evidence before the learned magistrate it does
seem to me that the most likely cause of that separation was the road journey. There is no
evidence at all that the road journey was other than normal. Given the packing used, the ordinary
incidents of the road journey would, on the surveyor’s evidence, cause the separation of the
utensils and packing. I say again that the separation could have been caused in other ways, that it
could have been caused by a casualty, but in a difficult case, and with respect to the learned
magistrate, I think that the balance of probabilities lay with the appellants, and that on the whole
of the evidence the respondents failed to discharge the admittedly light onus which lay on them.
authority.
Page | 316
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For these reasons I allow the appeal.”
With great respect, the learned Chief Justice decided the appeal on an issue which was
never an issue at the original hearing before the learned magistrate. As counsel has submitted for
the plaintiffs, there was no issue as to whether or not the plaintiffs had established that a casualty
had occurred, so as to bring their
Page 117 of [1965] 1 EA 108 (CAN)
loss within the terms of the policy. On the contrary, the relevant issue was framed by
agreement of the parties in such a way as to place on the defendants the onus of proving the
existence of inherent vice so as to entitle them to repudiate liability under the policy, and the
defendants’ counsel is on record as having specifically undertaken to discharge this onus. The
learned magistrate found that the defendants had failed to discharge this onus, and there is
nothing in the learned Chief Justice’s judgment to suggest that in his opinion they had discharged
this onus. The learned Chief Justice allowed the appeal solely on the ground that the plaintiffs
had failed to discharge the onus of proving the occurrence of a casualty. As to this, I am of
opinion that that onus was discharged, on the evidence, but even if the plaintiffs had not been
able to prove a casualty, the trial, with the agreement of the parties, proceeded on the basis that
the defendants had undertaken the burden of proving that they were entitled to repudiate liability
because of inherent vice, within the meaning of cl. 6 of the Institute Cargo Clauses. This they
failed to do. Where the parties agree an issue, the court should decide the case upon that issue, if
it is properly framed and arises out of the pleadings, as was the case here. As Gould, J.A. (as he
then was) said in Ayoub v. Standard Bank (6) ([1961] E.A. at p. 752):
“Mr. Gratiaen submitted that . . . once one specific issue had been agreed upon it was
wrong to take the view that even if the agreement did not create a trust certain other facts not
pleaded gave rise to an independent trust. The court was tied by the agreement between counsel.
I agree that, in the circumstances, what the court had to do was to decide the single issue
upon which counsel had agreed that the success or failure of the action depended . . . it was an
agreement between experienced counsel who had all the facts before them . . .”.
authority.
Page | 317
INSURANCE LAW CASES
In the same way, in the case now under consideration, experienced counsel who had all
the facts before them agreed that the main issue upon which the success or failure of the action
depended was:
“1(a) Are the defendants entitled to refuse to pay the claim on the grounds that
there was an ‘inherent vice’ in that the goods were insufficiently packed.”
and counsel for the defendants unequivocally undertook to discharge the onus of proving
that issue. It was never an issue that the plaintiffs should prove that a casualty or accident had
occurred, and it is in my opinion wrong that the plaintiffs should be non-suited for having failed
to prove something which was never made an issue between the parties at the trial.
For these reasons alone I would allow this appeal, set aside the judgment of the Supreme
Court and restore the judgment of the resident magistrate.
Appeal allowed.
KASEREKA V GATEWAY INSURANCE CO LTD [2003] 2 EA 502 (CCK)
Ruling
IBRAHIM J: This is the chamber summons dated 23 May 2003 filed on the defendant’s behalf.
It is made under Order VI, rule 1(b) and (d) of the Civil Procedure Rules. It seeks orders to strike
out the plaint dated 2 April 2003, the suit to be dismissed and costs. There are three grounds in
support of the application namely:
“(a) That the defendant is not under any obligation, either under statute or in
contract to satisfy the decretal amount in Machakos High Court civil case number 237 of 2000.
(b) By filing the present suit, the plaintiff is engaging in scandalous, frivolous
and/or vexatious litigation.
authority.
Page | 318
INSURANCE LAW CASES
(c) Otherwise, the plaintiff’s suit amounts to nothing more than an abuse of
the due process of the court”.
The application is opposed by the plaintiff. What is the plaint for and what does it say?
The plaintiff’s case is that he was the owner of motor vehicle registration number KV
1802C/KV 6088D Mercedes Benz lorry trailer. That on or about 19 October 2000 his motor
vehicle was involved in an accident with another vehicle which is identified as motor vehicle
registration number KAB 405K Mitsubishi lorry registered in the name of Hoe Engineering
Works Limited. The accident was along Mombasa-Nairobi Road and it took place as a result of
the negligence of the driver of motor vehicle registration number KAB 405K owned by Hoe
Engineering Works Limited. The plaintiff contends that the latter vehicle was insured by the
defendant, an insurance company. The plaintiff’s vehicle was extensively damaged and as a
result he instituted High Court civil case number 237 of 2000 at Machakos High Court. The said
court entered judgment in favour of the plaintiff for KShs 6 061 000 together with costs and
interest and issued warrants of attachment and sale of the defendant’s (Hoe
Page 504 of [2003] 2 EA 502 (CCK)
Engineering Works Limited’s) property for the total sum of KShs 8 216 988. The
plaintiff claims that the said defendant has failed to satisfy the said decree. That despite having
served Gateway Insurance Company Limited with all requisite statutory notices on the insurer of
the said vehicle it has failed to satisfy the judgment debt.
The plaintiff in this case seeks judgment against the defendant for a declaration that the
defendant is liable to satisfy the judgment debt/decretal amount in the suit Machakos case. The
total amount is for KShs 8 216 988. The defendant denies the alleged liability in its defence on
the following grounds:
“1. That there was no contract of insurance between itself and Hoe
Engineering Works Limited.
authority.
Page | 319
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2. That the defendant is not under any duty either statutory or contractual to
satisfy the judgment in Machakos High Court civil case number 237 of 2000.
3. That the plaintiff’s suit being founded on contract, the same is not legally
enforceable against the defendant as the plaintiff herein is not privy to the alleged contract of
insurance, and finally
4. That under the Insurance (Motor Vehicle Third Party Risks) Act (Chapter
405) Laws of Kenya, the plaintiff’s claim cannot stand for reasons that:
(a) The plaintiff’s claim in Machakos High Court civil case number 237 of
2000 is a material damage claim.
(b) Section 5 of Chapter 405 is only applicable to a claim arising out of the
death of or bodily injury to, any person, caused by the use of the insured’s motor vehicle on a
road.
(c) That material damage claim as the present claim is excluded by statute.
(d) That statutory notices that were served (if any) had therefore no legal force
or effect under (Chapter 405)”.
For this Court to make any finding in respect of this application, it must answer this
question – Was there any contract of insurance between the defendant and a company called Hoe
Engineering Works Limited in respect of motor vehicle registration number KAB 405K
Mitsubishi lorry?
The plaintiff’s supporting affidavit sworn by his counsel, Mr George Onyango Oloo is
quite useful in this regard. He has exhibited a copy of the abstract from police on a road accident
(Form P10A) dated 27 October 2000.
In the said abstract the owner of the motor vehicle registration number KAB 405K
Mitsubishi lorry is clearly stated as Hoe’s Engineering Works Limited. The insurer of the said
vehicle is stated to be Gateway Insurance Company Limited. The defendant apart from denying
authority.
Page | 320
INSURANCE LAW CASES
having covered the motor vehicle does not say why its name appears in the police abstract as the
insurer. The certificate number of the cover is stated to be number B-1213213 on the police
abstract. By a letter dated 5 February 2003 the Association of Kenya Insurers confirms that the
said certificate was issued to Gateway Insurance Company Limited on 7 July 1999. Again the
defendant did not rebut this evidence by way of any affidavit or other evidence sufficient to show
the contrary. It follows that for the purpose of this application, on a balance of probability, the
Court finds that the Gateway Insurance Company Limited appears to be the insurer of motor
vehicle registration number KAB 405K. I say “appears” because the contents of a police abstract
is rebuttable and is not conclusive. I refer to the reverse of this document. However, it suffices to
say that having been unchallenged by the defendant, the balance tilts in favour of the plaintiff.
This means the denial by the defendant that there was a contract of insurance between itself
Page 505 of [2003] 2 EA 502 (CCK)
and Hoe Engineering Works Limited is strictly a triable issue. It is true that the policy
document was not produced by the defendant, but this can be dealt with at the stage of discovery
and inspection during preparation for the trial.
The question of privity of contract is similarly disposed of. This can only be determined
once the policy document is availed to the Court and the issue heard on merit at the trial.
As an alternative ground of defence the defendant averred that even under statute and
more specifically the Insurance (Motor Vehicle Third Party Risks) Act (Chapter 405), Laws of
Kenya, the plaintiff’s claim cannot stand as the plaintiff’s claim in Machakos High Court civil
case number 237 of 2000 is a material damage claim and section 5 of (Chapter 405) is only
applicable to a claim arising out of the death of or bodily injury to, any person caused by the use
of the insured’s motor vehicle on a road. Hence material damage claim is excluded by statute.
When setting up this alternative defence, the Court will proceed to hear it on the basis that the
existence of an insurance cover and therefore an insurance policy under section 5 of the Act
exists or is not disputed. For the purposes of this defence, it is deemed that the defendant
concedes that an insurance cover or contract/policy exists for the purpose of section 4 or 5 of the
Insurance (Motor Vehicles Third Party Risks).
authority.
Page | 321
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Section 5 reads as follows:
“5. In order to comply with the requirements of section 4, the policy of

insurance must be a policy which:
(a) is issued by a company which is required under the Insurance Act of 1984
to carry on motor vehicle insurance business; and
(b) insures such persons, person or classes of persons as may be specified in

the policy in respect of any liability which may be incurred by him or them in respect of the
death of or bodily injury to, any person caused by or arising out of the use of the vehicle on a
road:
provided that a policy in terms of this section shall not be required to cover:
(i) … or
(ii) … or
(iii) any contractual liability”.
This is the section in the Act, that gives force to section 10 of the Act under which this
suit has been brought. Mr Oloo submits quite strongly that to preclude material damage under
this section would be giving it a very narrow interpretation. He refers to the title of the Act and
the preamble.
The title of the Act is “Insurance (Motor Vehicle’s Third Party Risks) Act”, while the
preamble reads: “An Act of Parliament to make provision against third party risks arising out of
the use of motor vehicles”. Mr Oloo argues that the word “risks” in both situations is plural and
all-inclusive. He says it means “any risks” that may arise out of the use of motor vehicles.
He says that had the draughtsman or Parliament intended otherwise, nothing would have
been easier than to call the Act “Insurance Motor Vehicles (Personal Injuries and Deaths) Act”.
Mr Oloo continues with this ingenious argument and adds that section 4(1) of the Act
(which to this Court is the provision underpinning the objects of the Act) does not limit “risks” to
authority.
Page | 322
INSURANCE LAW CASES
personal injuries and death. He argues that it is only section 5 which introduces the issue of
personal injuries or death. That this
Page 506 of [2003] 2 EA 502 (CCK)
section only indicated the basic requirements necessary under section 4 before one puts a
vehicle on the road. That it is not conclusive and leaves room for other risks. Then Mr Oloo says
that the provision in section 5 specifically excludes certain types of covered risks and that if
Parliament wanted to exclude material damage then it would have been quite easy for it to
include it in this part. Mr Oloo then referred the Court to Halsbury’s Laws of England (Reissue)
Volume 25 at 403. He asserts that in England the exclusions are specific and expressly provided
for.
He also cited the case: Kariuki v Lakestar Insurance Company High Court civil case
number 470 of 1998 (UR) which raised almost similar issues.
Having considered Chapter 5 of the said Halsbury’s Laws of England covering motor
vehicle insurance and in particular, Part 5 dealing with compulsory insurance in relation to motor
vehicles, I come to the conclusion that the provisions in our Chapter 405 are almost similar to the
Road Traffic Act of 1988 in United Kingdom. In the United Kingdom as in Kenya, the
conditions to be fulfilled in order to render the use of a motor vehicle are that:
“(i) there must be a policy of insurance in force in relation to the use of the
vehicle on a road,
(ii) the policy must comply with the relevant statutory requirements”.
This is similar to section 4 and 5 of our Act. What are the liabilities required to be
covered in the United Kingdom? In order to comply with the statutory requirements, a policy
must provide insurance cover in respect of any liability which may be incurred by such persons
or classes of persons as are specified in the policy in respect of the death of, or bodily injury to,
any person or damage to the property caused by, or arising out of the use of the vehicle on a road
authority.
Page | 323
INSURANCE LAW CASES
in Great Britain. I have lifted this from paragraph 733 of the said Halsbury’s Laws of England at
402.
It is clear from the foregoing that Mr Oloo is quite right about the position in the United
Kingdom. What about Kenya, is our law the same as that set out above in respect of material
damages or damage to property?
I have read section 5(b) of our Act and I think Mr Oloo will agree to this extent only –
that the said mandatory provision does not anywhere mention or refer to “material damage” or
“damage to property”.
A scrutiny of section 10(1) of the Act will reveal that the said words are also not
mentioned or referred to, that is “material damages” or “damage to property”.
I think it is for this reason that Mr Oloo invites this Court to use the Rules of Statutory
Interpretation to hold that by the words “third party risks” Parliament must have intended to
include all risks, including “material damage”, under the provisions of this Act.
To deal with this question I must ask myself as to the role of this Court in interpretation
of a statute. In Halsbury’s Laws of England (4 ed) (Reissue) at 1369 paragraph 833 it is stated:
“The court has the function of authoritatively construing legislation; that is, determining
its legal meaning so far as is necessary to decide a case before it …
It is usually said that the making of law, as opposed to its interpretation, is a matter for
the legislature, and not for the courts, but in so far as Parliament does not convey its intention
clearly, expressly and completely, it is taken to require the court to spell out that intention where
necessary”.
Page 507 of [2003] 2 EA 502 (CCK)
This Court will be guided by the said thinking. If that is the case, then I am bound to
apply the “plain meaning rule” of interpretation of statutes. Lord Reid in the case of Pinner v
Everett [1969] 1 WLR 1266 at 1273 expressed this rule as:
authority.
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“In determining the meaning of any word or phrase in a statute the first question to ask is
what is the natural or ordinary meaning of that word or phrase in its context in the statute? It is
only when that meaning leads to some result which cannot reasonably be supposed to have been
the intention of the legislature that it is proper to look for some other possible meaning of the
word or phrase”.
The Court has applied the said rule and is unable to find or hold that the words “third
party risks” within the meaning of section Act and particularly the application thereof to section
5(b) and 10(1) include the risk of material damage.
There is no ambiguity in the said words and this Court will not hypothesise or go on a
voyage of speculation as to what Parliament could have intended. The intention that this Court
finds clear, express and certain is that this Act makes it mandatory for any car user on the road to
take a third party insurance which must cover the risks of death and bodily injury as a bare
minimum.
I therefore, now come to the decision of this Court in Kariuki v Lakestar Insurance
Company referred to above. I proceed on the basis that there was no appeal against the said
ruling as none of the counsels said so and due to the lack of proper or up-to-date case reporting I
was unable to find out.
I would agree with the decision of my brother, Mwera J, in the case but I also agree with
Mrs Maina the defendant’s counsel view that the suit case is in effect distinguishable from the
facts herein. But to some extent only.
First and foremost, I notice that the Halsbury’s Laws of England (4 ed) Volume 25
referred to is the original one which was published last in 1987. It would appear that at the said
time the wording of the relevant United Kingdom statute was exactly the same as our present
Act, as the risk of material damage or damage to property does not seem to be covered.
The Halsbury’s Laws of England which is referred to herein is the 4 ed (Reissue) which
was published in 1994. By this time, the Road Traffic Act of the United Kingdom had been
enacted in 1988. This expressly covers damage to property. While the English law and statutes
authority.
Page | 325
INSURANCE LAW CASES
do not bind this Court, it is a telling factor to consider that in the Act of 1988, the risk of material
damage has been expressly included unlike the previous one cited in the Kariuki case.
The other distinguishing factor is that the application in the Kariuki case was one for
summary judgment in a declaratory suit under section 10(1) of the Act. The matter in this Court
is for striking out of a plaint under Order VI, rule 13(1)(b) and (d) of the Civil Procedure Rules
on the grounds that the suit is scandalous, frivolous and/or vexatious or in the alternative it is an
abuse of the process of the Court.
The principles of law applicable in respect of the said two types of applications are quite
and distinctively different.
Justice Mwera in refusing summary judgment said as follows (at 5–6):
“At this point the court is yet to know what kind of third party risks insurance cover the
insured of motor vehicle number KAA 024B took out with the present defendants, was it limited
to injury and death only or it was a wide one covering risks to the third party property for
example his motor vehicle? Such inquiry shall only come
Page 508 of [2003] 2 EA 502 (CCK)
at a trial of this suit. Indeed the claim by Mr Omuga that relief by declaration judgment
can only be sought where a third party was injured or killed cannot be taken to be the law in the
absence of any cited authorities. This court is not inclined to agree with Mr Omuga’s
understanding of the law in the light of reference Halsbury’s Laws of England (above). So his
prayer is refused with costs. What Mr Omuga claims must be inquired into by way of adducing
evidence at the trial of this suit not at this interlocutory stage”.
To my mind the Judge was in effect saying that there were triable issues raised by the
defendant faced with a summary judgment application in a suit for a declaratory suit under
section 10(1)(a). In the present case it is the defendant who is the aggressor taking up the cudgel
to strike out the plaint.
authority.
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INSURANCE LAW CASES
Having considered all foregoing pertinent matters, I now come to the substantive issue in
this application, namely, whether, if there was a policy of insurance which has been effected, in
respect of motor vehicle registration number KAB 405K under the provisions of section 4 and 5
of the Act, the defendant is liable to satisfy the decretal amount or judgment sum in High Court
civil case number 237 of 2000 Machakos under the provisions of section 10(1) of the Act?
I have already given the basis why this Court deems that there was an insurance cover for
the purpose of this application. I must add here that it has been noted in Halsbury’s that a cover
note (or disc) is a policy of insurance for this purpose.
Section 10(1) provides as follows:
“10(1) If after a policy of insurance has been effected, judgment in respect of any
such liability as is required to be covered by a policy under paragraph (b) of section 5 (being a
liability covered by the terms of the policy) is obtained against any person insured by the policy,
then notwithstanding that the insurer may be entitled to avoid or cancel, or may have avoided or
cancelled, the policy, the insurer shall, subject to the provisions of this section, pay to the persons
entitled to the benefit of the judgment any sum payable thereunder in respect of costs and any
sum payable in respect of interest or that sum by virtue of any enactment relating to interest on
judgments”.
There can be no dispute whatsoever that the plaintiff’s suit and prayer for a declaratory
judgment is brought under this provision. Before the suit was filed, the plaintiff served the
defendant with a notice pursuant to Chapter 405. See Exhibit G002. This is in compliance with
section 10(2)(a).
It follows that this Court must ask – in the judgment in the Machakos case what kind of
liability is being sought to be enforced? This can be found in paragraph 5 of the plaint “which
motor vehicle was extensively damaged”.
This was confirmed by both counsels during submissions and in the affidavit of Mr Oloo
advocate – paragraph 5.
authority.
Page | 327
INSURANCE LAW CASES
So, is this type of liability covered and provided for in section 10(1)?
Having carefully read the relevant provisions of the Act in question here, mindful of the
principles of precedent, having considered the law relating to interpretation of statutes and doing
the best I can, I hold the liability of material damage or damage to property is not one of the
liabilities required to be covered by an insurance policy under paragraph (b) of section 5 of the
Insurance (Motor Vehicles Third Party Risks) Act (Chapter 405) of the Laws of Kenya.
This Court further holds that the duty of an insurer to satisfy a judgment/s against persons
insured under the provisions of section 10(1) are only confined
Page 509 of [2003] 2 EA 502 (CCK)
and restricted to judgments in respect of the death of, or bodily injury to the third party or
parties. To put it in another way, the relief of declaratory judgment under section 10(1) above,
can only be granted where a third party has inter alia, a judgment in his/her favour in respect of
death or bodily injury.
So what happens when the liability is one involving material damages? The Court’s
answer is as follows:
“(i) If the insurance cover or policy in question is ‘comprehensive’ and

specifically covers the risk of material damage to third parties, then the aggrieved third party has
a right to sue the insured for recovery. It would then be the duty of the insured or defendant to
enjoin the insurer for indemnity and/or contribution under such a policy.
(ii) If the insurance cover or policy in question is a simple third party cover to
comply with sections 4 and 5 of the Act, then a claimant for material damage can only enforce
the judgment against the owner of the motor vehicle/insured”.
The present law may look unfair and unsatisfactory to a successful litigant like the
plaintiff who has a substantial award but is unable to get justice because the judgment debtor is
unable to satisfy the judgment yet there was no appropriate insurance cover to bring in the
insurer or the judgment debtor with such a cover fails to enjoin the insurer in the initial suit.
authority.
Page | 328
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However, as I have said earlier, the duty of this Court is to apply the statute as written by the
legislature.
In conclusion, I hold that the plaint herein is frivolous and vexatious within the meaning
of Order VI, rule 13(1)(b) and the same is struck out and the entire suit dismissed with costs to
the defendant. Costs of this application are also awarded to the defendant.
MARCEL BELLER LTD V HAYDEN [1978] 3 ALL ER 111
Action
The plaintiffs, Marcel Beller Ltd, insured the life of an employee, John Dudley McCredie (‘the
deceased’), under a Lloyds personal accident insurance policy in the sum of £15,000. The
deceased died on 24 December 1975 from injuries sustained when the car he was driving crashed
into some iron railings. The plaintiffs issued a writ claiming the sum
Page 113 of [1978] 3 All ER 111
insured from the defendant, Nicholas Charles Hayden, one of the underwriters of the
policy. By his defence the defendant denied that the plaintiffs were entitled to the sum claimed
and alleged that the deceased’s injuries did not amount to accidental bodily injury within the
meaning of the policy; or that his death resulted directly or indirectly from his deliberate conduct
in exposing himself to exceptional danger, within an exclusion clause in the policy; or that his
death resulted directly or indirectly from his own criminal act, within another exclusion clause,
namely driving under the influence of drink contrary to s 5 of the Road Traffic Act 1972, driving
with excess alcohol contrary to s 6 of the 1972 Act, dangerous driving contrary to s 2 of the 1972
Act, driving without due care and attention contrary to s 3 of the 1972 Act and exceeding the
speed limit contrary to s 78A of the Road Traffic Regulation Act 1967. The facts are set out in
the judgment.
authority.
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HIS HONOUR JUDGE EDGAR FAY QC read the following judgment. On Christmas Eve in
1975 at about 10.15 in the evening Mr John Dudley McCredie was driving along Hurst Road,
Walton-on-Thames, Surrey when he lost control of his motor car. It crashed through iron railings
bounding a reservoir and Mr McCredie (‘the deceased’) sustained injuries from which he died
almost immediately. The deceased was a diesel engineer employed by the plaintiffs as a project
director, and he had been chosen by them to set up a new production scheme at their works at
Chertsey. The plaintiffs had insured his life under a Lloyds personal accident insurance policy in
the sum of £15,000. It is not in question that they had an insurable interest. The underwriters
having refused to meet the claim made on them by the plaintiffs in respect of the death, the
plaintiffs in this acton sue Mr Nicholas Charles Hayden as the appropriate man at Lloyds to be
made defendant.
The defence is threefold. Firstly it is said that the death was not caused by accidental
bodily injury within the meaning of the policy. Secondly, it is said that the death was caused by
the deceased’s deliberate exposure to exceptional danger within the meaning of an exception to
the policy. And thirdly, it is said that the death was caused by the deceased’s own criminal act as
mentioned in another exception to the policy. Five criminal acts are alleged. They are: (1)
driving while under the influence of drink contrary to s 5 of the Road Traffic Act 1972; (2)
driving with excess alcohol contrary to s 6 of that Act; (3) driving at a speed and/or in a manner
which was dangerous to the public contrary to s 2 of the 1972 Act; (4) driving without due care
and attention contrary to s 3 of that Act; and finally (5) exceeding the speed limit contrary to
s 78A of the Road Traffic Regulation Act 1967.
This case raises important questions in insurance law which have not hitherto been
directly decided in this country, although there have been decisions in not dissimilar situations
here and in other common law jurisdictions. I am obliged to counsel for the plaintiffs and the
defendant for their research into the overseas cases. But first I must find the facts.
I have heard viva voce evidence as to what happened from Mr T Braarup who was a
passenger in Mr McCredie’s car and from Mr R Van Boesschoten and Miss Ann Willeringhaus,
authority.
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the driver and passenger in a car coming the other way, also from Professor Mant who performed
the post mortem on the body of the deceased. Under the Civil Evidence Act 1968 there were put
in evidence the coroner’s depositions, the police report and certain witness statements. Certain
meteorological data were also put in evidence by agreement.
Mr Braarup was an acquaintance of the deceased. They met because they were both
regulars at The Anglers public house at Walton. He had known him for about two years, he said.
They usually met on Sundays at the public house but occasionally during the
Page 114 of [1978] 3 All ER 111
week. The witness said the deceased appeared a quite sober man. He did not recall having
seen him the worse for drink. He could hold his drink, he said. On this particular evening they
had met by chance at The Anglers at about 5.30 pm. They stayed there for an hour or an hour and
a half. They had two or three drinks together. The deceased’s drink was rum and Coca Cola. On
leaving this house Mr Braarup at first said that they drove to The Jenny Lind public house at
Hampton Hill, some six or seven miles away. But in cross-examination he was reminded that he
had stated to the police that they had gone from The Anglers with the licencee of that house and
his wife to a party at a house in Walton. He then remembered this part of the history. The party
he said was at a private house. The deceased had there a couple of rum and Coca Colas. There
were about 30 people at the party, and it was from there that they went to The Jenny Lind. The
journeys were made in the deceased’s British Leyland 1300 motor car with the deceased driving.
They were, he continued, at The Jenny Lind for about 1 1/2 hours and the deceased had about
three more rum and Coca Colas. They then decided to return to The Anglers in order to meet the
witness’s wife and go home. It was on this journey that the fatal crash took place.
Mr Braarup said that on setting out from The Jenny Lind the deceased appeared to be all
right. He was not in the witness’s opinion the worse for drink and he, the witness, had no
hesitation in driving with him. He drove perfectly well, he said, and there was no indication that
he was not fully in control of the car. Hurst Road is subject to a 40 mile an hour speed limit. It is
a two-lane classified road, and at the material stretch, which seems to have been over three miles
from the start of the journey at Hampton Hill, there were two bends, moderate bends well able to
authority.
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be safely taken at 50 miles an hour in the opinion of Mr Braarup. That was the speed at which he
estimated the car was travelling. They were left-hand bends for the deceased. At the first of
them, said Mr Braarup, the deceased ‘lost the car’. The rear wheels started to slide to the right.
The driver twice corrected this skid, but it slid again across the road and according to the witness
it hit the kerb, went through the air, and crashed through the railings on the right hand or offside
of the road. Mr Braarup thought it possible that the skid was caused by wet or ice on the road. It
was very cold, he said. He thought the deceased had acted properly to correct the skid. He said, ‘I
thought his reactions extremely good. It was possible that he might have tried to brake.’
Mr Van Boesschoten was driving the other way. He saw the deceased’s dipped headlights
as the car came round the bend. As it came out of the bend, he said, it started to go out of control.
It started to cross to its offside. It was going very fast, 60 to 70 mile per hour he estimated. The
witness slowed, and he then pulled his nearside wheels over the kerb and on to the verge. By this
time the deceased’s 1300 was on him. It was broadside across the road with its rear towards him
and would have hit his car had he not managed to get it largely off the carriageway. Immediately
he heard the crash. He ran back and found the car had gone through the railing on the deceased’s
left or nearside. His passenger, Miss Willeringhaus, also saw the approach of the car. It was very
fast she said, 60 to 70 miles per hour. As it hurtled broadside past them she saw sparks coming
from it. She believed that it rolled over before going through the railing.
Now first I have to determine whether the immediate cause of the crash was the way the
deceased was driving or was some other factor. The police officers who investigated shortly
afterwards stated in their report that there were no marks on the road surface and that that surface
was dry. The weather was, they said, fine and dry. Miss Willeringhaus said the weather was dry.
Mr Van Boesschoten said the road surface was damp. As I have said, Mr Braarup suggested that
the initial skid may have been caused by wet or ice. No one found any ice. The statements from
the meteorological office shows that at Heathrow Airport about five miles away the air
temperature was +2·3°C at 10 pm. The minimum did not fall during the night below +1·2°C
although the grass minimum temperature did fall to—2·0°C. The weather at 9 pm was described
as fine and the state of the ground as moist. At 10 o’clock the weather was fair. At midnight the
ground was still moist. The meteorological office stated that on the basis of their records icy
authority.
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patches could have formed in some areas during the late evening, but whether or not they did
depended upon the nature of the road surface, and the exposure, etc of the actual site.
Page 115 of [1978] 3 All ER 111
I am quite satisfied by the observations of the witnesses that there was no ice on the
material part of this road, though it may have been moist as a great many roads are in this
country in the winter. In determining the circumstances of the crash I pay greater attention to the
evidence of Mr Van Boesschoten and Miss Willeringhaus than to that of Mr Braarup. I am sure
that Mr Braarup was giving the best of his recollection, but this I think was impaired both by
drink he had taken and by the shock he had sustained. As to the former he too had been drinking
since 5.30 pm. His beverages were beer and whisky. As to the shock, although he was most
fortunate in emerging with only minor injuries from the wrecked car, he must have been shocked
and shaken. Indeed to the police he said: ‘Don’t ask me any questions tonight. I did not think I
was going to get out alive.' And that, understandably enough, his recollection was unreliable was
demonstrated by his insisting that the car crashed through the railings on its offside of the road,
whereas the police and the other witnesses confirmed that the place was on its nearside as I find
it to have been.
Looking at the evidence as a whole and recalling that no allegations of any mechanical
defect in the car had been suggested, I am satisfied that the immediate cause of the disaster was
the deceased’s action in approaching the bend at too high a speed, considerably higher than Mr
Braarup’s estimate of 50 mph, and appreciating too late for safety that he had to steer to his left
not only to negotiate the bend but also to regain his side of the road to avoid the oncoming car
driven by Mr Van Boesschoten. He lost control, skidded broadside and crashed. In the language
of the running down action the accident was caused by the negligence of the deceased. Such
moisture as there may have been on the road surface can have played no part.
Next I must consider the part played by alcohol. Mr Braarup’s tally of the deceased’s
drinks amounted at most to eight rum and Coca Colas. Mr Braarup admitted that he was at times
talking to other people and was ‘not exactly able to notice’ the precise quantity his friend
consumed. As the evening progressed I would judge that he was the less able to do so. At all
authority.
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events I am satisfied that unless the drinks were doubles eight is an underestimate, because
Professor Mant’s post mortem examination produced a finding that the deceased’s blood alcohol
content was 261 milligrams per 100 millilitres. This compares with the 80 milligrams permitted
under s 6 of the Road Traffic Act 1972, and indicates a minimum consumption given as the
equivalent of 14 tots of spirits. Professor Mant took this equivalent on the assumption of a body
weight of 11 stone. The deceased he thought was heavier than that. If he had weighed 14 stone
the equivalent would have been 17 tots. Professor Mant gave it as his opinion based on his
extensive pathological experience that a driver having over 150 milligrams per 100 millilitres in
his blood is almost certainly incapable of dealing with an emergency. Over 200 milligrams he
thought that a driver would be unlikely to be able to propel a car with any degree of certainty. He
agreed that those used to drink acquire a tolerance, but he said that 261 milligrams was ‘right at
the top of the probability level’. He said that the depressive effect of alcohol on the higher
centres of the brain might permit a man with this level, if habituated to drink, to perform
ordinary driving functions but would deprive him of judgment and the ability to cope with an
emergency. One of the difficulties encountered by an alcoholic driver was his inability to judge
the speed at which he was driving.
Having considered this evidence I have no doubt that the deceased’s consumption of
alcohol played a causative part in the catastrophe. The deceased’s strange loss of control of his
car when it was proceeding in ordinary conditions on an ordinary road becomes readily
explicable in the light of his blood alcohol content. His excessive speed and his inability to
correct the situation into which it led him are in my view clearly associated with the loss of
judgment induced by alcohol. If the immediate cause of the crash was the deceased’s negligence,
its predisposing cause was the drink he had taken. In the light of these findings of fact I turn to
the legal issues.
The first is whether what happened was an accident. The compensation granted by the
policy is payable if ‘the insured person [shall sustain] accidental bodily injury which shall solely
and independently of any other cause … result in his death … ' Counsel for the
Page 116 of [1978] 3 All ER 111
authority.
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defendant argues that the essence of an accident is that it is fortuitous and that a death is
not accidental if it is a naturally and reasonably foreseeable result of the deceased’s voluntary
course of conduct. He poses the question: was the bodily injury something fortuitous, untoward
and not reasonably to be expected, or was it the reasonably foreseeable consequence of
something done by the assured by his own volition? He argues that the drinking was a voluntary
act and that the decision to drive after drinking was a voluntary act and that a reasonably
foreseeable consequence of those voluntary acts was the loss of control and the ensuing injury
causing death. Hence, he urges, the death is not an accident.
In dealing with this argument I think it is important to keep distinct the two causative
elements, namely the immediate cause which is the deceased’s manner of driving and the
predisposing cause which is his drinking. If the first alone is regarded the crash was accidental. It
has long been established and was accepted by counsel that the assured’s negligence does not
deprive a happening of the character of accidental. But ought I to regard it in isolation? Here I
must pay attention to the case of Gray v Barr. This case is in point in that it dealt with the
questions whether a death was accidental within the meaning of an insurance policy, and
although the facts were very different from those before me the question of the regard to be had
to the immediate and the predisposing causes respectively did fall to be considered. In Gray v
Barr a jealous husband went armed with a shotgun to the house of his wife’s lover in search of
his wife. He intended to threaten the lover with the gun. He in fact fired a shot into the ceiling to
frighten him and to secure that he could search for his wife unhindered. But the man grappled
with him. In the struggle the second barrel of the gun was unintentionally discharged and the
lover was killed. His widow brought an action under the Fatal Accidents Acts, and the
defendant’s husband took third party proceedings against his insurers under a policy
indemnifying him against damages in respect of bodily injury caused by accident. In those third
party proceedings the insurance company claimed, inter alia, that the death was not accidental.
Geoffrey Lane J held that it was accidental and the insurers appealed. It is a measure of the
difficulty of cases turning on causation that the three judges of the Court of Appeal each found a
different reason for their finding in favour of the insurers. Lord Denning MR looked for the
dominant or effective cause as explained in the marine insurance cases of Leyland Shipping Co
authority.
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Ltd v Norwich Union Fire Insurance Society Ltd, Canada Rice Mills Ltd v Union Marine &
General Insurance Co Ltd ([1940] 4 All ER 169 at 178, [1941] AC 55 at 71), and P Samuel & Co
Ltd v Dumas ([1923] 1 KB 592 at 619; on appeal [1924] AC 431 at 459, [1924] All ER Rep 66
at 82). This dominant cause he found in the deliberate act of taking the loaded gun to the house.
He said ([1971] 2 All ER 949 at 955, [1971] 2 QB 554 at 567):
‘I am of opinion that the dominant and effective cause of the death was Mr Barr’s
deliberate act in going up the stairs with a loaded gun determined to see into the bedroom. The
whole tragic sequence flows inexorably from that act. [Further on he said:] Yet his conduct in
walking up the stairs with the loaded gun was no accident. It was deliberate. He was determined
to get into the bedroom to see if his wife was there. It was the dominant cause of the death. It is
not covered by the wording of the policy of insurance.’
Salmon LJ took a different view. He made the point that the word ‘accident’ covered
negligent acts, referring to Tinline v White Cross Insurance Association Ltd. He accepted that
the marine insurance cases showed that the cause last in time is not necessarily the effective
cause or causa proxima. He said ([1971] 2 All ER 949 at 963, [1971] 2 QB 554 at 580):
Page 117 of [1978] 3 All ER 111
‘This does not mean, however, that the last cause necessarily can never be the real cause
of any loss or injury. [He went on:] Since Mr Barr is conceded to have had no intention of
shooting or injuring Mr Gray, I find it equally difficult to hold that the shot which went off
unintentionally was fired or caused Mr Gray’s injuries and death otherwise than by accident. I
am afraid that I cannot agree that the judge approached this case on the old-fashioned basis that
the last of many causes leading up to the accident was necessarily the real cause of the accident
… I think that he decided (rightly in my view) that the accident of Mr Barr falling on the gun and
thereby firing the second barrel was in substance and in common sense the real cause of Mr
Gray’s injuries resulting in his death. For these reasons I agree with the learned judge’s finding
that the injuries to Mr Gray were caused by accident.’
authority.
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However, he reached the same practical result as Lord Denning MR by finding an

implied term in the policy that it was not intended to cover accidents such as this.
Phillimore LJ refused to dissect the incident into the immediate and the predisposing
causes ([1971] 2 All ER 949 at 968, [1971] 2 QB 554 at 585): ‘In my judgment the incident
should be regarded as a whole.' So regarded he thought that people would not describe the thing
as an accident. Barr’s action in threatening and firing at the ceiling was a wilful and culpable
assault. He went on to say ([1971] 2 All ER 949 at 969, [1971] 2 QB 554 at 586, 587):
‘No doubt the word “accident” involves something fortuitous or unexpected, but the mere
fact that a wilful and culpable act—which is both reckless and unlawful—has a result which the
actor did not intend surely does not, if that result was one which he ought reasonably to have
anticipated, entitle him to say that it was an accident. After all, an unlawful and reckless act may
result in death albeit the actor did not in end to cause that death—if he had it would, of course,
have been murder. If he did not is it automatically an accident? If anyone who saw him doing it
could foresee that it was dangerous and reckless and might result in harm to another and in the
event it did so and thus caused a death which the law terms manslaughter, does the ordinary
citizen term it an accident? I think not.’
Given these three different analyses I do not find any one of them binding on me. Fr my
part I prefer the reasoning of Salmon LJ. His was also the approach of the trial judge, Geoffrey
Lane J, who said ([1970] 2 All ER 702 at 709, [1970] 2 QB 626 at 539):
‘Was the injury, the shot in the chest, accidental in the sense of not intended? The answer
on the facts proved is, in my judgment, “Yes”, however deliberate the actions which led up to it
may have been. It was the second shot which caused death and the second shot was neither
intentionally aimed nor was it intentionally fired.’
It seems to me important that in a document such as an insurance policy which ought to

be understandable by laymen, not to depart if possible from the ordinary meaning of English
words. This was also the view of Phillimore LJ ([1971] 2 All ER 949 at 968, [1971] 2 QB 554 at
authority.
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585) when he cited the workmen’s compensation case of Trim Joint District School Board of
Management v Kelly and said:
‘All their Lordships agreed that the word “accident” must be given its ordinary meaning
in the context—they differed four to three as to what that ordinary meaning was.’
I may be risking misinterpreting the ordinary meaning of ‘accident’, but I am firmly of

the view that the word covers the happening with which I am dealing. In drafting the narrative
part of this judgment I have avoided pre-empting the decision by using the word ‘accident’, but I
have been conscious that wherever I have used the neutral term ‘crash’ or ‘what happened’ or
‘catastrophe’ it would have been better English usage to call it an
Page 118 of [1978] 3 All ER 111
accident. I am convinced that the man in the street would say that the deceased died in a
motor accident. A further reason for adopting this view is that had some other person been killed
by the deceased’s driving this would have been an accident within the meaning of his own motor
policy (see Tinline v White Cross Insurance Association Ltd. If the same offence killed both a
driver and a bystander, it is the kind of decision that brings the law into disrepute, to call one an
accident and the other not an accident.
There are three Canadian cases which touch on this matter. The first is Candler v London
and Lancashire Guarantee and Accident Co of Canada. In that case the deceased, in order to
demonstrate to a friend that he had not lost his nerve, balanced himself on the coping of a hotel
patio 13 floors above the street and fell to his death. Held, not an accident. Grant J said (40 DLR
(2d) 408 at 422):
‘There can be no doubt that Candler was quite aware of the danger of falling, particularly
when he placed his body at right angles across the coping and with his hips and feet extending
out into space. The purpose of his action was to show his friend that he had sufficient nerve to
take the risk of falling that was obviously associated with his actions.’
Later he said (40 DLR (2d) 408 at 422):
authority.
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‘Once the deceased engaged in the dangerous exercises above described, from which one
of the natural and probable consequences might well be a fall to the ground below, even though
he felt he could accomplish the fact without falling, it must be taken that the mishap was not
accidental or caused by accidental means unless there was some other unusual or unexpected
occurrence in addition to the voluntary act of the deceased and which could not be reasonably
foreseen and which produced the fall, before it can be classed as accidental.’
So there the running of the danger was a conscious act of volition, and that I think
distinguishes it from the instant case where I do not suppose for a moment that the deceased was
aware of his danger, still less voluntarily entering on it.
The second case is Greenway v Saskatchewan Government Insurance Office. This was
not a fatal case. The plaintiff sued the government insurance officer under local legislation
entitling him to compensation for accidental loss or damage to his vehicle. The plaintiff’s car had
been wrecked when he attempted to negotiate a T junction at a very high speed because he was
being chased by the police. Moore DCJ held that the loss was not accidental or fortuitous
because the plaintiff deliberately took the risk with full knowledge of the facts. He said (59
WWR 673 at 681, 682):
‘… the plaintiff was fully aware of all the conditions which were present. He was aware
of the location and nature of the intersection in question; he was aware the turns could not be
negotiated at the speed he was travelling; yet, in his effort to elude the police, he drove at a very
high and excessive rate of speed. The plaintiff set the stage for his own mishap.’
The third case is Jones v Prudential Insurance Co of America. This was a decision of an
Ontario county court judge. The facts were bizarre. A man died of asphyxiation in a hotel room
with his head in a plastic bag in which he had placed a nail polish remover which contained a
depressant drug, namely toluene. The action was on an accidental death policy. The deceased’s
so-called thrill-seeking was highly hazardous. The judge found that
Page 119 of [1978] 3 All ER 111
authority.
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the death was not accidental because it was caused by foolhardy acts by the deceased and
that the deceased either knew or ought to have known that death might well ensue. This case
goes further than the other two Canadian cases in that it seems to apply an objective test of risk-
running. For myself I am not prepared to go that far. It seems to me that a clear distinction can be
drawn between cases where the predisposing cause is the deliberate taking of an appreciated risk
and the cases such as the present where the predisposing cause, although it leads to the taking of
risks, involves risk which was neither deliberately run nor actually appreciated. I find this death
to have been accidental.
The remaining questions arise under the exclusion clause which reads in part as follows:
‘The underwriters shall not be liable for death or disablement directly or indirectly
resulting from … deliberate exposure to exceptional danger (except in an attempt to save human
life) or the insured person’s own criminal act.’
As regards deliberate exposure to exceptional danger I was referred to a number of

authorities on exclusions in terms similar, although not identical. In Cornish v Accident
Insurance Co the phrase was ‘by exposure of the insured to obvious risk of injury’. A farmer
was killed by a train when crossing the line between two of his fields. The risk was obvious to
anyone who paid attention and the exception applied. This was distinguished by the New York
Court of Appeals in Lehman v Great Eastern Casualty and Indemnity Co of New York where the
words were ‘voluntary exposure to unnecessary danger’. The court here applied a subjective test.
See per Adam J (7 App Div NY 424 at 429): ‘… one cannot be said to be guilty of a voluntary
exposure to danger unless he intentionally and consciously assumes the risk of an obvious
danger.' In this case a man crossing a railroad track paused to let a train pass in one direction and
then stepped out without noticing a train coming the other way. He did not voluntarily expose
himself, although no doubt he was negligent. In the instant case counsel for the defendant argues
that the deceased deliberately exposed himself to exceptional danger when he drove his car well
knowing that he had consumed an excessive amount of alcohol. I do not think he did. The word
‘deliberately’ is stronger than the word ‘voluntarily’ in Lehman’s case and imports the subjective
test. In the absence of evidence I am not prepared to assume that the deceased thought about his
authority.
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condition or about the risk he was taking and deliberately chose to run the risk. It is not like
Candler’s case where there was evidence that the deceased’s friend implored him not to take the
risk he recklessly ran on the skyscraper parapet. The effect of alcohol is frequently to make the
victim careless, and I find that the deceased’s driving in the state in which he was, was negligent
but not deliberate. This exclusion does not apply.
There remains the exclusion of injury caused by the injured person’s own criminal act. Of
the five infractions of the criminal law alleged I need only deal with the two agreed to be the
most material, namely driving a motor vehicle while unfit to drive through drink contrary to
s 5(1) of the Road Traffic Act 1972, and driving a motor vehicle at a speed or in a manner which
was dangerous to the public contrary to s 2 of that Act. I pay regard to the burden of proof
needed to establish these grave allegations, and I find that on the facts which I have narrated the
deceased committed both of these offences and that both had a causal connection with the
accident sufficient to satisfy the phrase ‘directly or indirectly resulting from’ in the exclusion
clause in the policy. What I have next to decide is whether the offences fall within the expression
‘criminal act’. Counsel for the defendant shrank from arguing that any contravention of the law
which was subject to a penalty would suffice. He would except crimes of pure inadvertence.
Certainly it would run counter to common sense to say that any regulation breaking by a motorist
fell within this
Page 120 of [1978] 3 All ER 111
exemption. If business efficacy requires the importation into this definition of some
implied restriction on the apparent extent of the words, then he suggested that a degree of fault
might be appropriate. He pointed out that dangerous driving is now considered to involve the
concept of fault (see R v Gosney), and also that self-induced intoxication affords no defence (see
Director of Publc Prosecutions v Majewski).
Counsel for the plaintiffs argued that to avoid absurdity the exclusion must be restricted
to crimes involving moral culpability or moral turpitude. These offences were, he submitted,
created for the regulation of traffic and could be committed without any element of wickedness.
Some assistance in this area is again furnished by overseas cases. Of these some take a literal
authority.
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interpretation. For example Absalom v United Insurance Co Ltd. The exemption there to be
construed was ‘while performing any unlawful act’ and the offence was driving a buggy without
lights. Lowe J posed the question ([1932] VLR 494 at 500):
‘Does this include any breach of what may be called police provisions, or is it limited to
graver offences such as indictable offences? Does it include all unlawful acts, whether civil
merely or criminal in any degree, or is it limited to those which are manifestly unlawful? [And he
answered it by saying:] It is difficult as a matter of construction to deny this language its most
general meaning, and I feel that I should be on unsafe ground if I attempted to restrict it so as to
exclude cases like the present.’
He disliked having so to find, regarding the exclusion as a trap for the unwary. See too
Ingles v Sun Life Assurance Co, where the Ontario Court of Appeal held that exceeding the
speed limit was a violation of the law within the exception clause in a life policy. The United
States Federal case of Flanagan v Provident Life and Accident Insurance Co appears to have
taken the same strict line. But the offence there was the more serious one of driving while
intoxicated. On the other hand there are Canadian cases where the expression ‘violation of the
law’ has received a beneficial construction. In Crown Life Insurance Co v Milligan the Prince
Edward Island Supreme Court on appeal held that construing the exception contra proferentem it
embraced only ‘the wilful or intentional violation of a criminal law or of a well recognised law
of the land.' A similar view was taken in the Ontario High Court in Robinson v L’Union St
Joseph Du Canada. There the deceased was found to have been guilty of civil negligence and not
of any breach of the criminal law, and an exception when ‘the death results from the breach of
the law’ was held not to apply. In the course of his judgment Kelly J said that the exception must
be taken to require more than an inadvertent act on the part of the insured or a momentary lapse
from duty and imply some moral turpitude on the part of the insured. There are obiter dicta in
this case which seem to suggest confining breach of the law to cases of conscious wrong doing.
These cases are helpful but they are all of no more than persuasive authority, and none of
them deals with the expression ‘the insured person’s own criminal act’. I am disposed to think it
would be right to find an implied term limiting that phrase so as to exclude acts of inadvertence
authority.
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or negligence. But I can find no justification for confining it to cases where a subjective test of
conscious wrong doing is applied, as I have applied it to the phrase ‘deliberate exposure to
exceptional danger’. The fact that the word ‘deliberate’ qualifies the one exception but not the
other points to an element of deliberation not being a necessary ingredient of the criminal act. In
my judgment I am concerned with criminal acts other than those of inadvertence or negligence.
If I were wrong and the limitation on the criminal acts was that they be crimes of moral
culpability or turpitude I am satisfied that
Page 121 of [1978] 3 All ER 111
the offences of dangerous driving and driving while under the influence of drink are
sufficiently serious to qualify. In my judgment wherever the line is to be drawn these offences
are on the exemptive side of it. As counsel pointed out, the Court of Appeal has held that in a
breathalyser case where the alcohol count was 289 miligrammes per 100 millilitres a sentence of
imprisonment was ordinarily proper: R v Tupa. These are serious offences and cannot be
excluded from the insured person’s own criminal acts which afford the underwriters a defence to
the claim. I must accordingly and on this ground give judgment for the defendant.
Judgment for the defendant.
PHILADELPHIA NATIONAL BANK V PRICE [1938] 2 ALL ER 199
PORTER J. This action was brought by an American bank against a Lloyd’s underwriter upon
two policies of insurance, each of which is headed: “Lloyd’s (Special) Forged Securities Policy.”
I need not consider the two policies separately, or, indeed, refer to more than one, since both are
in similar terms, except in respect of the franchise taken by the assured, and both raise the same
point. Leaving out what is not essential for the determination of this case, the vital terms of the
first policy are as follows: The insurers hold the assured harmless and indemnified from and
against all losses to which the assured may be put by reason of its having made loans against
documents which may prove to have been invalid. Then it goes on:
authority.
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‘The occurrence of any loss or losses hereunder and the corresponding subsequent
payment of such loss or losses shall not reduce the amount of this policy as to any other loss or
losses hereunder, whether occurring before or after the loss or losses so paid; Provided, however,
that in no event shall the underwriters be liable on account of any one loss or series of losses
caused by the acts or omissions of any one person, or combination of persons, or caused by the
same casualty or event, for a greater sum than the amount of this policy.… Notwithstanding
anything to the contrary herein contained this insurance is only to pay claims for the excess of
$25,000 ultimate net loss, by each and every loss or occurrence.’
The second policy differs only in that it had a franchise of $200,000. The policy is a
general cover to the bank in respect of all losses coming within the ambit of its terms, but the
particular circumstances in which the claim is made are as follows. The genesis of the present
claim was an agreement made in March 1924, by one Robert Y Brown, and the predecessors of
the bank, which is the plaintiff in this case. When I say “predecessors,” that absolves me from
giving any steps by which the succession took place. Mr Brown was a coal merchant, carrying on
business in New York; the bank was in Philadelphia. Mr Brown was of good standing when the
agreement was made in March 1924. He was also the owner of all the shares, president, and in
complete control, of the Fairmont West Virginia Gas Coal Co. The agreement, which was made
in 1924, was to the effect that the bank should make advances to Brown to the extent of
$250,000; that is to say, at any one time he might draw up to $250,000. He was to give certain
security, and the security was to be a promissory note of his own, and, also, as he sold coal, he
was to send the invoices to the bank with the promissory note as further security. In each case the
security was not to be in respect of any particular invoices, or any particular amount of coal, or
any particular loan, but was to be general cover for the whole indebtedness. The reason for the
system adopted is this: In America a bank is not allowed to advance except against some written
document showing at least what the advance is. The way in which the business was carried
Page 393 of [1937] 3 All ER 391
out appears in para 10 of the statement of facts. It is put there as follows:
authority.
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‘(a) On most business days of the period during which the agreement was in operation i.e.
from Apr., 1924, to Nov., 1930, Brown would send an envelope containing two letters to the
bank. (b) One of these letters enclosed: (i) a number of duplicate invoices; and (ii) a promissory
note payable on demand for the aggregate amount of the said invoices. The note gave particulars
of the said invoices (described in the note as collateral security for the note) and contained inter
alia the following provision.’
I need not read the provision, which merely says that anything held by the bank shall be
collateral security for all indebtedness, and not for any particular indebtedness. Then it goes on:
‘This letter also included a request that the bank should credit Brown or the company, as
the case might be, with the proceeds of the enclosures.’
Now, as I say, there were duplicate invoices:
‘One of each set of duplicate invoices had upon it a statement signed by Brown or the
company in the following form: “For value received we hereby sell, assign, transfer and set over
this account to the Philadelphia National Bank, Philadelphia, Pennsylvania.”’
That, as I understand it, is what we should call an equitable assignment of the

indebtedness of the customer to Brown by way of security to the bank. The other invoice
contained the statement:
‘This account has been assigned to the Philadelphia National Bank, Philadelphia,
Pennsylvania, to whom remittance should be made. Payment to any other party will be at your
risk.’
In fact the second invoice was never acted upon, but it was a method of enabling the
bank, as we should say, if the law be the same in America as it is in this country, to give notice to
the customer that an assignment had been made, that the customer must pay the bank and not
Brown, the original creditor, and make the assignment, which had hitherto been an equitable
assignment, into a legal assignment. Then the other letter enclosed a number of cheques, and
authority.
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INSURANCE LAW CASES
directed the bank to apply them in payment of specified invoices held by the bank, but on one
day a week, on an average, this letter would be omitted. It goes on:
‘The cheques were mainly cheques given to Brown by his customers. The aggregate of
the cheques rarely coincided exactly with the aggregate amount of invoices directed to be paid
off, but was either slightly over or under. If the amount was over, Brown directed the excess to
be credited to his account. If it was under, he included a cheque of his own to balance. In many
cases the cheques included a cheque of Brown’s for a substantial amount, varying from several
hundred to several thousand dollars, and in a number of cases, more especially during the latter
part of the period, no customers’ cheques were enclosed, but simply a cheque of Brown’s for the
whole amount of the invoices directed to be paid.’
Then the statement goes on to deal with the records kept by the bank. As I have said, it
had a loan account, and it had a current account. Then, as I have not stated, it had a ledger
account, and in the ledger account it entered the amount of each of those invoices which had
been sent, and which had been equitably assigned to the bank by Brown. Then the statement goes
on to say that, when the bank received the documents “it debited to the loan account and credited
to the current
Page 394 of [1937] 3 All ER 391
account the amount of each fresh note received after the note had been initialled” by
some high official of the bank, which was necessary before the loan would be granted. The bank
collected the customers’ cheques, and credited the proceeds to the loan account. In cases where
the customers’ cheques exceeded the amount of the invoices directed to be paid off, it credited
the excess to the current account. It credited the amount of Brown’s own cheques forwarded as
before described to the loan account, and debited them to the current account. It crossed off, on
the customers’ ledger account, the invoices directed to be paid, and returned the invoices to
Brown. It released and returned to Brown such promissory notes as the aggregate amount of the
said cheques sufficed to pay off in full. The cheques were applied against notes in the order of
the date on which the notes had been received, and no regard was paid to whether or not the
invoices directed to be paid off had been received with the notes to which the payment was
authority.
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INSURANCE LAW CASES
applied. After paying off such notes in full, there was always a balance over. This balance was
credited to the next note in date, the amount being endorsed thereon. The bank thus always held
one partly-paid note and a large number of unpaid notes. Then it goes on to say that Brown’s
operations were checked by a clerk of the bank, to see that they were accurate. The statement
says that the loans granted during the previous week were entered in a board report, which was
placed before every director at a weekly meeting, with a certificate from the cashier. They show
the total amounts advanced to Brown during the week and the aggregate amount of the loans
outstanding. Actually, though the report would show the amount lent during the week, it would
sometimes appear in more than one document, because the officials of the bank, or the
employees of the bank, would start to make up the records before the final loan was made, and,
therefore, one would have one or two documents showing what the loan actually was. Then one
ought just to say this, that, at a period after the original agreement had been made in 1924 with
Mr Brown, in 1925 the Fairmont West Virginia Gas Coal Co was, so to speak, taken in, in this
sense, that separate transactions were made, and, in those circumstances, separate accounts were
kept, and separate loans made by the bank, yet the ultimate limit which was given upon the
loans, and the initial franchise in respect of the loans, was applied to both the company and
Brown. The maximum limit remained the same, and the maximum franchise remained the same
in respect of each of the two entities. Ultimately the maximum limit to be paid was raised to
$492,000. I have said that at this moment, because the statement of facts goes on to say that in
the case of the company exactly the same course of business was followed as was followed in the
case of Mr Brown. This further fact is material, that a considerable number of invoices was sent
in each day, and I think I can say that the average was 16, but the total day’s loan as secured by
the note and the invoices never amounted to $25,000, and never, of course, amounted to
$200,000.
Page 395 of [1937] 3 All ER 391
The invoices never amounted to $25,000; they would vary from $100 to even as much as
$6,000, but no more. One perhaps ought to say this, that the total amount of notes and invoices
from April 1924, to November 1930, amounted to some $10,000, and the payments in the same
authority.
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INSURANCE LAW CASES
period also amounted to a little over $10,000, but some $400,000 less than the payments made.
In the case of the company there was the same divergency, but a much smaller one.
Now, the way in which the case arose was this: Mr Brown ought to have sent, and had
agreed to send, genuine invoices, after proper weighing and so forth, of coal actually sent to his
customers. Almost from the start, instead of doing that, he began to defraud the bank by sending
fictitious invoices, invoices which in fact represented coal not yet shipped. In fact, of course, as
he had to cover his tracks, he knew that he was going to send coal to the particular people in
respect of whom he sent fraudulent invoices, but the fictitious invoices in fact were gradually
larger than the actual invoices, so, by a kind of snowball process, in the course of the years he
succeeded, by means of fictitious invoices, in getting the amount which he had on loan up to a
sum of $400,000 or thereabouts more than actually was owed him by his customers, in respect of
the two, the firm and the company. The result is that he defrauded the bank to the extent of
$400,000. I ought to say that the bank acted throughout entirely in good faith and in the ordinary
course of business, but Brown was unable to keep up the pretence for ever. Whether owing to the
slump or otherwise, by November 1930, he and the company were both insolvent; he was
adjudicated bankrupt on 18 April 1931. Some small dividend was received, about which I need
not worry; it is not really material. The company was struck off because it could not pay its
licence tax, and therefore ceased to have any existence. The bank, therefore, undoubtedly has lost
some sum greater than $400,000, and the question is whether, in those circumstances, it is
entitled to recover from the underwriter or not.
Now, to me the question appears to be one solely of construction. Mr Blinn, who gave
evidence on behalf of the bank, said that the cover was useless to it if it meant what the
defendant said it did. No doubt that is true of this particular transaction, more particularly in
regard to the second cover, where the franchise was $200,000, but it must be remembered that, as
Mr Blinn said, the bank had, in certain cases, advanced more than $200,000, even without cover,
and it is at least possible that, by some fraudulent device, more than $200,000 might be obtained
by one forgery or one fraudulent act, or, to put it more exactly, by one loss or occurrence other
than the loss or occurrence which is suggested to be the loss or occurrence in this case. To my
mind, matters of this kind are not material to the question I have to decide. The question is, what
authority.
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is the true construction of the policy when applied to the facts agreed? The two opposing views
are (i) that there is only one ultimate net loss by one loss or one occurrence; (ii) that there are
Page 396 of [1937] 3 All ER 391
daily occurrences, daily losses, and daily forged documents, that the loss is the sum of
many forged documents, and that each day’s loan and the note and invoices accompanying it are
a separate loss or occurrence, and, as no daily loan and no day’s invoices reached a franchise of
$25,000, no one loss or occurrence can amount to that sum. In determining which is the true
view, it must be remembered that, in order that the plaintiff bank may recover, the loss must
result from invalid documents. On which invalid document does it sue? On each invalid
document, says the plaintiff bank. In its argument, as I understand it, one should regard the loss
or occurrence as all one, and the true analogue is of a tank, from day to day regularly filled, and
partially emptied again, so that one can never say that any individual part of the contents is
gained or lost, but only that, when the filling and emptying process comes to an end, a loss or
gain is found to exist. The defendant says that each day’s loan is a separate one, and that the
losses are the amounts of each day’s loan which remain unpaid. In analysing which particular
loans remain unpaid, he says that each loan is paid off in its due turn, either because the note
which evidences it is handed back in the order of its date, or in accordance with the rule in
Clayton’s Case. The invoices, he says, are, it is true, security for the whole outstanding loan, and
not merely for the daily loan obtained by their presentation, but, nevertheless, they cannot be
security for a loan which has been repaid, and, in any case, by agreement between the parties, the
invoices were treated as ceasing to be effective as soon as Brown indicated which invoices had
been paid, and the bank accepted that indication, and struck off the amount of the invoices in the
customers’ ledger account. The result is that the invalid security causing the loss, he says, is the
bundle of invalid invoices outstanding in the bank’s hands when it discovered the fraud.
In my view, the defendant’s contention ought to prevail. Each day’s loan is, I think, a
separate loss or occurrence. One could, indeed, contend that each forged note was a separate loss
or occurrence, but I think this is too narrow a view. They may be separate forgeries, but I do not
think they are separate occurrences. It is true that the loans are in accordance with a pre-arranged
authority.
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scheme granted daily, and that the invoices are intended regularly to accompany them, but each
loan seems to me a separate event, the giving of each daily bundle of invoices a separate
occurrence, and the loss by their invalidity a separate loss. Indeed, the circumstances seem to me
to be described better as a series of losses or occurrences than as one loss, or one occurrence. If
this be so, one must remember that, whereas the underwriters limit their liability to $175,000 for
any one loss or series of losses, they promise to pay only for the excess of $25,000 ultimate net
loss by each and every loss or occurrence, not the excess of $25,000 by each and every series of
losses or occurrences. After all, if the plaintiff bank’s argument is right, it would nevertheless be
all one loss or one occurrence if Brown had at
Page 397 of [1937] 3 All ER 391
intervals of, say, one year, forged on one day a number of invoices, and then ceased to
forge again until another year had elapsed, and so on, until the loss was found out. Some
meaning must be given to “one loss or occurrence,” and I do not think that the mere repetition of
the forgery once a day, even if the invoices are by arrangement presented daily, and the forgeries
repeated daily for many years, makes the loss one loss, or the occurrence one occurrence.
The decision is a matter of outlook and impression rather than one for logical argument. I
can only say that, to my mind, the view presented by the defendant is more consistent with the
reasoning in the two cases quoted, namely, Pennsylvania Co for Insurances on Lives & Granting
Annuities v Mumford and Equitable Trust Co v Whittaker, than is the view presented by the
plaintiff bank, and that in any case it ought to prevail. This view makes it unnecessary for me to
determine whether the company and Mr Brown are separate entities, and whether the loans in
respect of them are separate matters. If I had to decide that, I should say that they were separate.
Judgment for the defendant with costs.
NASSER MOHAMED OMER V PRUDENTIAL ASSURANCE CO LTD [1966] 1 EA 79

(CAN)
authority.
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Judgment
Spry JA: The primary facts out of which these proceedings arose are not in dispute. The
appellant was the owner of an Opel motor car, registered under number L 2651. This vehicle was
usually driven by an employee of the appellant, one Mohsin Ali Saleh, and was being driven by
him in the course of his employment on the evening of December 3, 1962. At about 9.30 or 10
p.m., Mohsin drove the car off the road onto the sea shore. He changed gear to mount the kerb
and drove on the sand in low gear (either first or second). The sand was level at first, but then
sloped downwards. Mohsin failed to stop the car and drove straight into the sea. It appears that
the car was not recovered from the sea for three days, when it was regarded as a write-off.
The car was insured by the appellant with the respondent company and it appears that he
reported the loss on the following morning, soon after he himself learned of it. He completed a
claim form but eventually, after lengthy investigation, the company repudiated liability. The
appellant then sued the company in the Supreme Court of Aden claiming Shs. 11,000/- as the
estimated value of the car and Shs. 10,770/- as consequential loss. The basis of the claim was
that the car “accidentally went into the sea on 3.12.62 and was damaged and was a total loss.”
The defence was a denial that the car “accidentally went into the sea as alleged or at all”.
Two issues were agreed, the first whether it was proved that the car sustained damage by
“accidental collision” within the meaning of s. 1, para. 1(a) of the policy of insurance and the
second, if the answer to the first issue was in the affirmative, what sum the appellant was entitled
to recover.
Section 1, para. 1(a) of the policy reads as follows:
“1. The Company will indemnify the Insured against loss of or damage to the
Motor Vehicle and its accessories and spare parts whilst thereon
authority.
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(a) by accidental collision or overturning or collision or overturning

consequent upon mechanical breakdown or consequent upon wear and tear.”
Page 81 of [1966] 1 EA 79 (CAN)
The evidence called by the appellant included that of the driver and of a person who was
a passenger in the car at the time when it was lost and it was sought to prove that the loss of the
car was due to the failure of its brakes. The respondent company called evidence to show that the
brakes were examined after the car was recovered from the sea and that they were in reasonably
good working order. The cross-examination of the appellant’s witnesses was clearly aimed at
showing that the loss of the car was deliberately contrived.
The learned trial judge held that to succeed the appellant had to show in the first place
that the loss of or damage to the car had been caused by a collision or overturning. He pointed
out that there was no evidence to show that the car overturned. He doubted whether the car could
be said to have “collided” with the sea but held that it was immaterial as the loss or damage was
not the result of the “collision” but of immersion in salt water.
He went on to remark that an attempt had been made at a late stage to base a claim on
another sub-paragraph of the policy relating to damage caused “by malicious act” but rejected
this as being contrary to the claim in the plaint and to the whole conduct of the appellant’s case.
He went on to say that the appellant had failed to satisfy him that the loss or damage was
accidental. Having inspected the scene, the learned judge found it “extremely difficult to
envisage how the driver in first or second gear could have taken a straight path into the water
accidentally. When he released his accelerator his gear would have acted as a brake and he could
at least have taken some form of avoiding action even if his brakes failed.” He went on to say
that he saw no reason to believe that the brakes had failed, as he was satisfied that they were in
order immediately after the car was recovered from the sea.
Finally, he held that under the terms of the policy the company was not liable for
consequential loss. The memorandum of appeal included an appeal against this finding but it was
abandoned at the hearing.
authority.
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Counsel who appeared for the appellant, argued that there had been a collision, that it had
been accidental, and that the damage the car suffered from immersion in salt water was a direct
result of the collision and not so remote as to preclude the appellant from succeeding.
He began by dealing with the question whether what had occurred had been accidental.
He submitted, in the first place, that the learned judge’s remarks (there was no express finding)
indicated nothing more at the worst, than gross negligence on the part of the driver of the car.
Even, however, if they were to be construed as a finding of wilful misconduct on the part of the
driver, that, in counsel’s submission, would not prevent the loss being “accidental” in relation to
the owner, provided he had not been shown to be party or privy to the act. He relied particularly
on Midland Insurance Co. v. Smith (1), in support of this submission. It had never been part of
the company’s case that the appellant had been party or privy to any act of wilful misconduct. He
cited also Trim Joint District School Board of Management v. Kelly (2) as authority for saying
that an act done deliberately may still be an accident in relation to the person who suffers from it.
Counsel for the company took a different view. In his submission, the learned judge’s
observations could only mean that he believed the driver of the car deliberately drove it into the
sea. He argued that if the driver was acting deliberately, but not maliciously towards his
employer, he should be deemed to have been acting in the course of his employment in which
case his motive would be imputed to his employer.
In the alternative, counsel for the company argued that the word “accidental” has to be
read in its context in the policy and must be given a meaning. He stressed
Page 82 of [1966] 1 EA 79 (CAN)
that while the policy provided for loss by accidental collision or overturning, it provided
for loss by fire without any requirement that it be accidental. He pointed out also that under the
terms of the policy it is the collision and not the loss that must be accidental. He sought to
distinguish Midland Insurance Co. v. Smith (1), since the policy in that case was against loss by
fire, and did not require the fire to be accidental in origin. The Trim Joint District School case (2)
was a case under the Workmen’s Compensation Acts in which the operative expression was
authority.
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INSURANCE LAW CASES
“injury by accident”; the present policy deals with loss by accidental collision, not accidental
loss by collision, and Mr. Deverell argued that the distinction is sufficiently real to justify this
court following the minority judgments in the Trim Joint District School case (2).
For my own part, I entertain no doubt that the remarks of the learned judge amount to a
finding that the driver of the car deliberately drove it into the sea. In my opinion, there was
evidence on which he could properly come to that finding and I see no reason to interfere with it.
There was no finding, and no evidence on which a finding could have been based, as to the
reason for this action but certainly it was no part of the appellant’s case, nor was there any
suggestion in the evidence, that the driver was acting out of malice towards his employer.
Learned counsel were not able to refer us to any authority on the law of master and
servant in relation to a situation such as this, nor am I aware of any. It is therefore necessary to
go back to basic principles. It is the general rule that a master is liable to a third party for the
tortious act of his servant, if that act is done in the course of the servant’s employment, even
though the tortious act was done without the authority of the master and the master derived no
benefit from it. The general authority for this statement is Lloyd v. Grace, Smith & Co. (3),
which was recently followed by this court in Kisumu Trading Stores v. Shah (4).
Logically it would seem, by parity of reasoning, that a master ought not to be able to base
a claim against a third party on a tortious act of his servant, acting in the course of his
employment. It should be borne in mind that the liability of the master is not based on any
imputation of vicarious fraud but simply on the law of agency (Barwick v. English Joint Stock
Bank (5); Houldsworth v. City of Glasgow Bank (6); Lloyd v. Grace, Smith & Co. (3)). Here, it
seems to me, the act of the servant, if done in the course of his employment, must be regarded as
the act of the master. I have no doubt, and indeed it never seems to have been challenged, that
the driver, Mohsin, was acting in the course of his employment when he drove onto the sand. He
said himself that it was part of his duty to transport labourers coming ashore from dhows and that
when awaiting them he used to park the car at this spot. It cannot, in my view, possibly be argued
that in going a few yards further than he should and entering the water, he ceased to be acting in
the course of his employment. He had not gone off on any business or “frolic” of his own: up to
authority.
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INSURANCE LAW CASES
the very moment when the car entered the water he was engaged on his employer’s business. If
he drove deliberately into the water, that act must, in my view, be regarded as the act of the
appellant even though the appellant may have had no knowledge of it and as the act of the
appellant it would be a wrongful act, on which he could not rely, as against the company, and he
could not be heard to argue that the event was accidental.
It is, therefore, unnecessary for me to consider counsel for the respondent’s alternative
argument, but I may say that in my view, on the authorities, the happening might well have been
“accidental” as regards the appellant, had the relationship of master and servant not existed, even
though it might not have been fortuitous or undesigned.
Counsel for the appellant’s next submission was that there had been a collision. On this,
as I have said, the learned judge made no express finding but contented himself with expressing
a considerable doubt.
Page 83 of [1966] 1 EA 79 (CAN)
Counsel were in agreement that there is no authority defining the meaning of “collision”
in relation to motor insurance, and both referred to cases arising out of marine insurance.
Counsel for the appellant relied in particular on Union Marine Insurance Co. v. Borwick (7), in
which Mathew, J., used the expression “I cannot distinguish collision with from striking
against”, but, as Roche, J., said in Mancomidad del Vapor Frumiz v. Royal Exchange Assurance
(8), “those words must be read in strict regard to the clause he was considering”.
Counsel for the respondent company relied on The Normandy (9) in which Gorell
Barnes, J., said “I may here observe that the true meaning of collision is not a mere striking
against, but a striking together”. Counsel for the respondent asked us to apply that strict
interpretation. In the alternative, he submitted that in ordinary usage “collision” means more than
mere contact and that it is a matter of degree when a contact is sufficiently violent to warrant
describing it as a collision.
I am prepared to accept that, etymologically, a collision is the coming together into

impact of two objects and that that definition is followed in marine insurance cases, where the
authority.
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word is used in a policy without qualification or explanation, so as to limit its use to collisions
between ships, although enlarged to this extent, that it applies where the one vessel is moving
and the other, although capable of navigation, is at anchor or temporarily immobilised (Chandler
v. Blogg (10); The Normandy (9)).
I do not, however, propose to deal with the marine cases in any detail, because I do not
consider that they should be followed in motor insurance cases, because marine insurance is a
highly specialised subject and because the law of marine insurance took shape long before motor
cars came into general use. It may, however, be noted that while the word is strictly interpreted
where it is used without qualification in a marine policy, it is in practice frequently given a wider
application in marine policies by references to collision with piers and similar objects.
In the absence of any authority or evidence to the contrary, the words used in any
contract must be given their ordinary, current, meaning. In my view, the word “collision” has
acquired, in ordinary usage, a meaning wider than the strict etymological sense and I see no
reason to suppose that the parties to a contract of motor insurance would have intended to import
principles of marine insurance. I do not propose to attempt any exhaustive definition of a
collision. A collision is undoubtedly an impact and in my view it imports at least some degree of
violence. I think one might, in modern motoring parlance, refer to colliding with a tree. I think a
motor car might, in certain circumstances, be said to collide with a body of water. But where the
substance encountered is of a yielding nature, the degree of violence necessary to establish a
“collision” can only come from the speed of the vehicle. So, where a motor car is driven slowly
into the sea, and I think it is clear in the present case that the car was moving very slowly indeed,
it would, to my mind, be an abuse of language to describe the contact as a collision.
In my opinion, therefore, what happened was neither accidental nor a collision.
Counsel for the appellant’s final submission was that the learned judge erred when he
said:
“I doubt very much, however, whether the contact of the vehicle with the sea amounts to
a ‘collision’ but in any case it cannot be said that the loss or damage arose by (reason of) such
authority.
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contact. It was the fact that it remained in the salt water after the contact that caused the loss or
damage.”
Counsel for the appellant submitted that if there was a collision and if it had been
accidental, the damage caused by the sea water was not too remote to be
Page 84 of [1966] 1 EA 79 (CAN)
recoverable. He cited in support of his argument Reischer v. Borwick (11) and Heskell v.
Continental Express Ltd. (12).
Counsel for the company contended that there was no evidence that the impact with the
water had caused any damage; he argued that the slow action of salt water could not be damage
caused “by” the collision, assuming there had been a collision. He was prepared to concede, if I
understood him correctly, that if the car had been immobilized by damage sustained in the
“collision”, any ensuing damage before the car could reasonably be removed would be within the
policy but he argued that if the immobility of the car was only the result of being in water, as for
example by the shorting of its electrical supply, then there would be no direct chain of causation
between the impact and the eventual damage.
This was not in my opinion a case of any fresh intervening occurrence, when it may be
necessary to distinguish between the causa sine qua non and the causa causans (as in Jupiter
General Insurance Co. Ltd. v. Rajabali Hasham and Sons (13)). The immersion in water followed
directly and inevitably from the entry into the water.
In the case of Re Etherington and The Lancashire and Yorkshire Accident Insurance Co.
(13), a fatal injury case, Vaughan Williams, L.J., said, ([1909] 1 K.B., at p. 599):
“Courts have in particular cases dealt with the question whether the peril insured against,
whether peril of the sea or accident or fire, or whatever it might be, was the proximate cause of
the loss or injury so as to bring the case within the operation of the policy. In my opinion, it is
impossible to limit that which may be regarded as the proximate cause to one part of the
accident. The truth is that the accident itself is ordinarily followed by certain results according to
authority.
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INSURANCE LAW CASES
its nature, and, if the final step in the consequences so produced is death, it seems to me that the
whole previous train of events must be regarded as the proximate cause of the death which
results.”
I would respectfully adopt that reasoning. Applying it to the present case, I think the
damage caused by the sea water was a result which would ordinarily follow from the nature of
the event on which the claim was based, that was, the entry of the car into the sea.
I have in this judgment dealt with the grounds of appeal in the order followed by counsel
for the appellant. In summing up, it may be convenient to reverse that order. I think, with respect,
that the learned judge was wrong when he held that the damage was too remote. Having so
found, he did not think it necessary expressly to decide whether there had been a collision,
although he clearly inclined to the view that there had not. For my part, I am quite satisfied that
there was no collision. Finally, as I read the judgment, the learned judge held that the loss or
damage had not been proved to be accidental. With that I agree, although basing my opinion on
the existence of a relationship of master and servant.
I consider, therefore, that the decision of the learned judge was correct although I arrive
at that result for different reasons, and I would dismiss the appeal with costs.
Newbold P: This appeal raises two short but extremely difficult points of law under a
motor vehicle insurance policy. In their briefest form, the facts which give rise to these two
points of law are that the servant of the appellant deliberately drove the appellant’s car slowly
into the sea where it remained for some days, and by reason of the action of the sea on the car,
but not by reason of any impact damage, the appellant suffered loss. The appellant was insured
against damage to his motor vehicle arising “by accidental collision”.
Page 85 of [1966] 1 EA 79 (CAN)
The first point of law is whether in the circumstances set out any collision was accidental;
and the second is whether the entry of the car into the sea was a collision.
authority.
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INSURANCE LAW CASES
The full facts in relation to this appeal are set out in the judgment of Spry, J.A., and I find
it unnecessary to repeat them. The trial judge held that the appellant was not entitled to recover
from the respondent, an insurance company, the amount of the damage as the loss did not flow
from any collision; and he also held that if there had been a collision, which the trial judge
doubted, it had not been accidental. From that judgment the appellant appealed.
Dealing with the first point, the word accident has different meanings in different
contexts. The context in which it falls for consideration in this appeal is where an insurance
company has agreed to indemnify an insured person against damage to a motor vehicle arising
“by accidental collision”. In that context after careful consideration I am satisfied that an
accident is an occurrence which, in relation to the insured, is neither intended nor expected nor
so probable a result of a deliberate act that the result must have been foreseen as a probable,
consequence of the act. Thus any damage which is deliberately caused by, or with the privity of,
the insured cannot be said to be damage arising by accident, as the insured, either by himself or
by another person acting with his knowledge, specifically intended to cause the damage and it
could never have been the intention of the parties that the insurance company would give an
indemnity against damage so caused. On the other hand, if a third person, for whose actions an
insured is not in law responsible, deliberately causes damage to the motor vehicle, then that
damage is, in relation to the insured, damage arising from an accident. Between these two
positions there is yet an intermediate one, that is, where the damage arises from the deliberate act
of the servant of the insured but the act was not done with the knowledge of the insured.
Broadly stated, a master is liable in contract for the acts of his servant done within the
apparent scope of his authority and in tort for the acts of his servant done in the course of his
employment. As far as liability in tort is concerned, there has been no doubt for a very long time
that the master is liable for the negligent act of his servant committed in the course of his
employment; but his liability for the criminal act of his servant has been one in which there have
been conflicting decisions. As far as East Africa is concerned, these conflicts have been resolved
by the case of Kisumu Trading Stores v. Shah (4) in which this Court decided that the master
was liable for the criminal act of his servant committed within the course of his employment. As
the master is liable for the negligent and the criminal act of his servant committed in the course
authority.
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INSURANCE LAW CASES
of his employment, I can see no logical reason why he is not also liable for the deliberate act of
his servant committed in the course of his employment, even if that deliberate act is neither
negligent nor criminal. When I speak of the master being liable for the deliberate act of his
servant, I use the phrase in the sense that the act of the servant is treated for all purposes of the
legal relationship of the master with a third person as if it were the act of the master himself. As
the master is so liable, the result which follows is that if his servant, in the course of his
employment, deliberately causes damage to his master’s car and the master is insured against
damage arising from accident, then the master will not be able to recover the loss arising from
the servant’s deliberate act as that act, in relation to the insurance company, is treated as the
master’s act. I would wish, however, to make it clear that damage caused by the deliberate act of
a servant is only to be treated as damage caused by the deliberate act of the master if the act of
the servant is committed within the course of his employment. This, of course, will be a question
of fact. There may be many circumstances in which the nature of the act which gives rise to the
damage would itself immediately result in the act being outside the course of the employment,
with the result that the damage would not arise
Page 86 of [1966] 1 EA 79 (CAN)
from an act done by the servant in the course of his employment. For example if the
servant, whose duties are to maintain and drive his employers’ car, were deliberately to set fire to
the car with a view to harming his employer or were deliberately to drive the car into a wall with
the object of causing loss to his employer, then in each of such cases the acts of the servant
preparatory to setting fire to the car or driving the car into the wall would automatically be
outside the course of employment. The result would be that the damage, though deliberately
caused by the servant, would nevertheless be damage arising by accident within the terms of a
policy of insurance as far as the master was concerned. In other words, the act of the servant in
these circumstances stands in precisely the same position as deliberate acts of a person for whom
the insured is not in law responsible.
With those principles in mind what are the facts to which they are to be applied? It was
urged that the trial judge had not made a finding that the appellant’s servant deliberately drove
authority.
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INSURANCE LAW CASES
the car into the sea. In my view such a finding is a necessary inference from the way in which the
trial judge set out his judgment and, indeed, there was an abundance of evidence to support it.
The surrounding circumstances in which this deliberate act was done lead clearly to the inference
that the act was done in the course of the servant’s employment. This being so the act of the
servant in deliberately driving the car into the sea is the act of the appellant unless the appellant
can show circumstances from which it should be inferred that the course of employment was
terminated before the car was driven into the sea. This he has neither done nor sought to do.
Accordingly I have come to the conclusion that even if the entry of the car into the sea was a
collision it was not an accidental collision and therefore the appellant is not entitled to succeed.
As I have decided the first point of law against the appellant I do not propose express a
view on the second point. I find it a matter of considerable difficulty to determine whether the
coming of a car into contact with water in circumstances in which the contact does not itself
cause damage can be said to be a collision within the meaning of such a word used in a motor
vehicle insurance policy. There are arguments each way which are very potent. As it is
unnecessary to decide the point of this appeal I would rather reserve it for consideration when
such a point is necessary for the determination of an appeal. I would wish, however, to say that if
it were a collision then I consider that the damage caused to the car in this case arose from the
collision and not subsequently thereto as the trial judge has found.
For these reasons I agree with Spry, J.A., that the appeal fails and there will be an order
in the terms proposed by him.
Duffus LJ: The appellant owned a motor car insured with the respondent company. The
appellant avers that his car accidentally ran into the sea and became a total loss and he claims the
value under his insurance policy. The respondent company denied liability. Pleadings were filed
and issues agreed on and the main issue between the parties was:
“Does the plaintiff prove that the motor car sustained damage by ‘accidental collision’
within the meaning of s. 1(a) of the policy.”
Section 1, para. (1) of the policy reads:
authority.
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INSURANCE LAW CASES
“Section 1 – Loss or Damage
1. The Company will indemnify the Insured against loss of or damage to the
Motor Vehicle and its accessories and spare parts whilst thereon
(a) by accidental collision or overturning or collision or overturning
Page 87 of [1966] 1 EA 79 (CAN)
consequent upon mechanical breakdown or consequent upon wear and

tear;
(b) by fire external explosion self-ignition or lightning or burglary

housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the processes of loading and unloading

incidental to such transit) by road rail inland waterway lift or elevator.”
I have had the advantage of reading the judgments of Newbold, P., and Spry, J.A. The
relevant facts are set out in the judgment of Spry, J.A.
There were three points for decision under the agreed issue and these were had the
plaintiff established:
(a) that the incident of driving the car into the sea was a “collision” within the
meaning of s. 1(1) of the policy.
(b) that this was accidental within the meaning of an “accidental collision” as
set out in the policy, and
(c) that the car sustained damage as a result.
The learned trial judge found that the damage to the car was not as a result of the
collision, in the sense of the collision being the immediate impact with the sea, but resulted
because the car remained in the salt water after the impact. On this finding he dismissed the
authority.
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INSURANCE LAW CASES
plaintiff’s claim but he also went on to say that in his opinion the fact that the vehicle went into
the sea would not amount to a collision, and he also found that the plaintiff had not proved that
the entry into the sea had been accidental.
The words “accidental collision” must be given their ordinary and natural meaning
having regard to the whole insurance policy and in particular to para. 1 which I have already set
out. I would first consider the meaning of collision and as to whether a motor car can collide
with the sea. The word has been defined and considered in a number of maritime cases but
apparently not in cases dealing with motor vehicle insurances. The ordinary meaning of collision
as used with reference to a vehicle would, in my view, mean an impact between the vehicle and
some other object. There has to be some movement but this could be movement either by the
vehicle itself or by the object that it comes into contact with. Thus it is a collision if the motor
car skids and hits a bank or a tree and similarly it would be a collision between both vehicles if
one vehicle ran into a stationary vehicle. I think that collision as used here does not necessarily
mean a violent collision provided, however, that the collision causes loss or damage to the motor
vehicle. If it is agreed, as it must be, that a collision can occur with a stationary object such as a
bank or a tree I can see no reason to distinguish between a solid object and a liquid body such as
the sea or a lake. Each object is capable of total destruction of the car and indeed a collision with
a fluid body may be much more disastrous to the occupants of the vehicle and the vehicle itself.
Thus in the present case the car ran into the sea and became totally submerged and as a result
was a total loss; if a collision could only be with a solid substance then the insured is not
indemnified for his loss, but he would be indemnified if instead of falling into the sea the car had
fallen onto a reef in the sea and suffered damage. It is interesting to note that the counsel for the
appellant owner was, at one stage of the trial, led into the artifice of suggesting, that the vehicle
collided with stones on the way to the sea. I am therefore of the view that a car can collide with a
liquid substance whether it be the sea, a quagmire or a similar object, and this collision would be
covered by the indemnity in the policy provided that damage is caused to the vehicle, and that it
was accidental.
Page 88 of [1966] 1 EA 79 (CAN)
authority.
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INSURANCE LAW CASES
I have had much more difficulty in arriving at a decision on the question as to whether
this incident could be described as accidental. The defence alleged that the driver, an employee
of the appellant, deliberately drove the car into the sea. The defence did not, however, allege that
the appellant was privy to this act. The learned judge has made no direct finding as to whether
the driver’s act was negligent or deliberate but he found that the appellant had not satisfied him
that the act was accidental, and it does appear that his judgment amounts to a finding that the
driver deliberately and intentionally drove the car into the sea.
Counsel for the appellant submitted that the act, even if deliberately done by the
appellant’s driver, would still be accidental to the owner unless he was privy to this act. He relied
largely on the majority decision of the House of Lords in the case of Trim Joint District School
Board of Management v. Kelly (2), where the House of Lords were considering the meaning to
be placed on the word “accident” in the sentence “a personal injury by accident” in a claim under
the Workmens Compensation Act and where the majority of the court held that a designed or
intentional act could be an injury by accident provided that the act was not one designed by the
injured person. The court in effect adopted the definition of “accident” given by Lord
Macnaghten in the case of Fenton v. Thorley (15) ([1903] A.C. at p. 676), that “accidental” as
used in the Act meant:
“in the popular and ordinary sense of the word as denoting an unlooked-for mishap or an
untoward event which is not expected or designed.”
but added the proviso that the event was not one expected or designed by the person
injured.
The meaning to be given to the word “accidental” can vary according to its use. I would
in this respect refer to the following passage from the judgment of Viscount Haldane, L.C., in the
Trim case (2) when he stated ([1914] A.C. at p. 674):
“It seems to me important to bear in mind that ‘accident’ is a word the meaning of which
may vary according as the context varies. In criminal jurisprudence crime and accident are
sharply divided by the presence or absence of mens rea. But in contracts such as those of marine
authority.
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INSURANCE LAW CASES
insurance and of carriage by sea this is not so. In such cases the maxim ‘In jure non remota causa
sed proxima spectatur is applied.
It is therefore necessary, in endeavouring to arrive at what is meant by ‘accident,’ to

consider the context in which the word is introduced. The scope and purpose of that context may
make the whole difference.”
The basic rule in interpreting the policy is to ascertain what was the intention of the
parties from the document itself. Section 1 of the policy provides for loss or damage to the
vehicle, and para. 1, which I have already set out in full, sets out the occasions on which the
Insurance Company will indemnify the insurer against the loss or damage to his car. The
indemnity takes effect when the loss or damage is caused by any of the incidents set out under
the four sub-heads. Each of these sub-heads deals with different causes of the loss or damage;
thus:
(a) deals with an accidental collision or overturning,
(b) with a fire, explosion, or theft, etc.
(c) by a malicious act, and
(d) whilst a vehicle is in transit.
I think that the draftsman of the policy intended that each sub-head should cover damage
caused in different ways. We are particularly concerned here with the meaning of “accidental
collision” under (a) and “by malicious act” under (c).
Page 89 of [1966] 1 EA 79 (CAN)
Malicious act here must mean a deliberate and unlawful act intended to cause damage to
the vehicle. It would appear that the word “accidental” as used under sub-head (a) must have
been used in the popular meaning of something that happens by chance, an unintended or
undesigned act. I would here quote a short passage from the judgment of Lord Dunedin, one of
authority.
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INSURANCE LAW CASES
the minority judgments in the Trim case (2) ([1914] A.C. at p. 686) which aptly explains the
meaning which I believe was intended for “accidental” in the context of this policy:
“It must be conceded that the injury here was caused by design. That is to say, there was
an intention to inflict an injury. To my thinking, the word ‘accident’ in popular language is the
very antithesis of design. I brush aside at once all argument as to acts which can only be
described as acts by design inasmuch as they are acts of conscious volition. The design of which
I speak must be design to inflict the injury, not design to do the act which may, as it turns out, be
the cause of the injury.”
In the Trim case (2) the court were considering an interpretation to be made under an
entirely different context to that contained in this insurance policy. It appears to me that in the
present case the author of the document used the word “accidental” as governing collision in its
popular meaning of something not done intentionally, that is, collision that happens without
intention or design, and then went on to provide by sub-head (c) for those acts which were
intentional or designed to cause damage to the vehicle.
I am therefore of the view that “accidental collision” does not include a collision which
happens as a result of an act intentionally designed to cause a collision for the purpose of
damaging the vehicle. In this case the learned judge has found that the plaintiff has not satisfied
him that this was an accident and as I have said, his judgment in my view, amounts to a finding
that this was a deliberate and designed act on the part of the driver and it must also mean that the
driver intentionally drove into the sea in order to damage the vehicle. There was, in my view,
ample evidence to support this finding.
This would not, therefore, be an accidental collision within the meaning of s. 1 para. 1(a)
of the policy as the appellant claimed, but it would be a case where damage has been caused to
the vehicle by a malicious act under para. 1(c). The appellant, however, specifically brought his
claim under para. 1(a) relying on the fact that the entry into the sea was accidental. It is difficult
to understand why he did not also claim in the alternative under sub-head (c) for damage by a
malicious act but he has not done so and even at the hearing of this appeal he specifically
authority.
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INSURANCE LAW CASES
abandoned a ground of appeal on this point, and only argued on his claim that this was an
accidental collision.
It may be, of course, that he did not claim that it was a malicious act as he was afraid that
the respondent company might then have pleaded and proved that he was a privy to this
malicious act. In any event the appellant has not claimed for any damage under sub-head (c), and
it is now too late to make this claim. I agree with the learned judge that the onus is on the
plaintiff to prove that this was an accidental collision and that the plaintiff has, on the facts that
he has found, failed to do so and for this reason I agree that the claim was correctly dismissed.
I have not therefore found it necessary to consider the further point as to whether the
appellant could have based the claim against the insurance company on the tortious or criminal
act of a servant acting in the course of his employment. In my view, this question does not arise
here, and in any event, the policy would under para. 1(c) indemnify the insured for a malicious
act done by his servant, even if done in the course of his employment, provided that the insurer
was not a privy to this act. However, as I have said, the appellant has not made any claim under
this head.
Page 90 of [1966] 1 EA 79 (CAN)
I agree entirely with my brother Spry’s judgment on the question of the damage caused
by the sea water. In my view the damage caused by the sea water followed as an ordinary
consequence of the entry of the car into the sea. I agree therefore that this case was correctly
dismissed by the judge although my reasons for this decision are different from the judge’s and
also different from those of the learned President and Spry, J.A. I agree that the appeal be
dismissed with costs.
Appeal dismissed.
BERESFORD V ROYAL INSURANCE CO LTD [1937] 2 ALL ER 243
authority.
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SWIFT°J. By a number of policies of insurance issued by the defendant company to Charles

William St John Rowlandson in the year 1925, he became insured for £81,000, the event on the
happening of which the sum assured was to become payable being the death of the life assured. It
was stated in the insurance policies which formed the contract that:
‘unless it is otherwise provided in the schedule this policy is free from all restrictions as
to residence travel and occupation and subject to endorsed conditions is indisputable.’
The only condition to which my attention was called as being relevant was No 4, which
provides that:
‘If the life or any one of the lives assured shall die by his own hand, whether sane or
insane, within one year from the commencement of the assurance, the policy shall be void as
against any person claiming the amount hereby assured or any part thereof, except that it shall
remain in force to the extent to which a bona fide interest for pecuniary consideration, or as a
security for money, possessed or acquired by a third party before the date of such death, shall be
established to the satisfaction of the directors.’
From 1925 to 1932 Major Rowlandson paid the premiums on those policies with
regularity, though not always with punctuality, but in 1932 he found it impossible to continue
paying premiums on £81,000, and, by agreement between him and the company, the policies
were reduced to £50,000. The conditions remained the same, the policies were still stated to be
“indisputable,” and condition 4 was not altered. In August 1934, Major Rowlandson was
financially hopelessly involved: he owed some £68,000; he had no money coming in. He could
not pay the premiums which had become due on the policies in June, the date for payment of
which had been extended (by days of grace) until 16 July, and had then been extended (by
arrangement with the company) until 31 July, and then 3 August. On 3 August the policies
lapsed at 3 pm unless Major Rowlandson could find some £400, the amount of premium then
due. He could not find the money. At three minutes to 3 he shot himself in a taxi-cab in St James
Street. After a long and careful inquiry a special jury has found as facts that at the time he shot
himself he was not labouring under such a defect of reason from disease of mind as not to know
the nature and quality of the act he was doing, or if he did know it that he did not know that he
authority.
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INSURANCE LAW CASES
was doing what was wrong; and they have also found that when he shot himself he possessed
that degree of physical intellectual and moral control over his
Page 1053 of [1936] 2 All ER 1052
actions which a normal man would posses. In other words, in the opinion of the jury,
Major Rowlandson, judged by every standard either party or the court could suggest, was
perfectly sane at the time that he committed suicide.
This action is brought by his administratrix against the insurance company really for the
benefit of his creditors. At the time he died he owed £68,000, and, as far as I know, had not an
asset in the world except such interest as he might still retain in the insurance policies. An
administration order was made, and the action has since proceeded under the directions of the
Chancery Division of this court. The plaintiff claims payment under the policies. The defending
insurance company allege that the assured died by his own hand, whereby the said policies
became void. By her reply the plaintiff admits that the deceased died by his own hand, but
alleges in para 3 of the reply that he was at the time insane and of unsound mind and not
responsible for his actions. The plea raised in para 3 of the reply completely disappears on the
findings of the jury. I do not think that the plea raised in para 4 of the defence, that the policies
became void by the fact that the assured died by his own hand, is a good one. There is nothing in
the terms of the contract contained in the policies to provide that they should be avoided on such
an event, and I cannot find any justification in law for so holding. The defendants made no
application to amend their pleading—had they done so I should have granted it—but throughout
the trial they contended that if the deceased feloniously died by his own hand they were not
liable, and after the verdict of the jury they contended before me that, as it was established that in
fact the assured feloniously died by his own hand, public policy prevented them paying the
assurance money to his estate and prevented his representative from recovering it, and the case
has really been fought upon this plea, as though properly raised.
Now the court has to determine what is the position under a policy such as this,
containing terms and conditions such as these, which has been in existence as long as this, where
those who are to benefit are creditors of the deceased who died by his own felonious act. The
authority.
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INSURANCE LAW CASES
defendant company say: “He died by his own hand when he was quite sane. It was a felonious
act, therefore nobody claiming through him is entitled to benefit under the contract and it would
be contrary to public policy that we should pay under our contract and the court ought not to
compel us to pay.” The plaintiff says: “Here is a contract legally made, which has been carried
out by the assured for many years. It was a contract under which you undertook not to dispute
your liability except upon one of the conditions in the schedule. None of the conditions in the
schedule have been fulfilled, and it would be contrary to public policy to allow you to repudiate
your contract.” Both parties
Page 1054 of [1936] 2 All ER 1052
are appealing to public policy, the defendants alleging that public policy forbids them
honouring their contract, the plaintiffs alleging that public policy forbids the defendants
repudiating their contract.
It seems to me that the first thing to be determined is what is the public policy to which
both sides appeal and which the court should apply. The term “public policy” does not admit of
any precise definition and is not easily explained. In Egerton v Earl Brownlow Cresswell J said
at p 87:
‘I apprehend that when in our law-books or reports we find the expression, it is used
somewhat inaccurately instead of “the policy of the law.” ’
A good description of it is to be found in Wharton’s Law Lexicon (13th Edn, p 699),

where it is said to be
‘the principles under which the freedom of contract or private dealings is restricted by
law for the good of the community.’
At this time there are certain contracts and dealings which have long been regarded as
contrary to public policy, and of course the courts recognise it as part of the law of the land and
will refuse to enforce such contracts or countenance such dealings. But the doctrine has to be
applied with very great care.
authority.
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INSURANCE LAW CASES
In Richardson v Mellish, at p 252, Burrough J said:
‘I, for one, protest, as my Lord has done, against arguing too strongly upon public policy;
it is a very unruly horse, and when once you get astride it you never know where it will carry
you. It may lead you from the sound law. It is never argued at all but when other points fail.’
And in Egerton v Earl Brownlow Crompton°J said at p 68:
‘It seems to me extremely dangerous to limit the power of disposition on any general
notion of impolicy, without some definite rule or principle being shown to apply to the case. The
principle that no disposition could be allowed which might hold out a temptation to commit
crime is clearly much too general to be supported. It would embrace almost every disposition and
contract where a party is to expect a benefit from the death of another, nor can it be the true test
whether impure or corrupt means may possibly be used.’
The case of James v British General Insurance Co was a case where:
‘A policy of insurance provided that the insurance company would indemnify the assured
against all sums which he might be legally liable to pay for damages or compensation to any
person for accidental bodily injury or accidental damage to property where such injury or
damage was caused by the driving of the insured’s motor car, including law costs when incurred
with the consent of the company. While the insured was driving his motor car a collision took
place between it and a motor cycle, the result being that the driver of the latter vehicle was
injured, a passenger thereon was killed, and both vehicles were damaged. At the time of the
collision the insured was drunk through his own unpremeditated folly. The insured
Page 1055 of [1936] 2 All ER 1052
was convicted of the manslaughter of the deceased passenger. The injured driver brought
an action for personal injuries against the insured, in which he was awarded damages and costs,
and the insured incurred costs. The insured also incurred costs in repairing the vehicles, in
attending an inquest on the deceased, and in defending himself in the police court proceedings
before his trial. In an action by the insured against the company for indemnity against these
authority.
Page | 371
INSURANCE LAW CASES
damages and costs:—Held, that the policy covered liabilities of the insured for accidental bodily
injury to any person or accidental damage to property caused by his negligence, even though
gross and attended by criminal consequences, that the policy by covering these liabilities was not
void as against public policy, and that the insured was entitled to the indemnity which he
claimed.’
Roche°J said on pp 320 and 321:
‘It remains to deal with the defence of public policy. That, I think, raises a question of
general importance, because if the contention of the present defendants is right it cuts at the root
of a very large number of these motor insurances. I see no ground for asserting a principle of
public policy which operates only against persons who drive when they are drunk. As I have
suggested to counsel for the defendants during the course of his argument, the principle, if it is
applicable at all, seems to be applicable to all persons who drive to the public danger. Moreover
the principle affects many other cases besides those of motor insurance. It affects a very large
number of workmen’s compensation insurances where workmen are injured by acts or defaults,
even though inadvertent on the part of the employers, which amount to breaches of the Factory
Acts, such as neglect in the fencing of machinery and things of that sort. If the principle be right,
that the mere fact that the assured has offended against the criminal law, however inadvertently,
precludes him from recovering under a policy of indemnity, then indeed the results are very far
reaching. Fortunately for myself the application of the principle in cases of this particular
description has been the subject of express decision by a judge of great experience in matters of
insurance law: Bailhache,°J., in Tinline v. White Cross Insurance Association, to which I will
refer again presently. In cases such as this, in which considerations of public policy arise, the
rights and duties of judges are clear. They have to attend to matters of public policy. Any dispute
about that, and there was apparently some dispute about it as late as 1853, was set at rest by the
well known case of Egerton v. Earl Brownlow, where it was established that it is the duty and the
right of the courts to refuse to enforce contracts or dispositions of property which are offensive
and obnoxious to public policy. It is also true that long before the decision in that case that
principle had been applied to matters of insurance.’
authority.
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Roche°J then deals with another case to which I shall refer later, and he then goes on to
say, at p 322:
‘It may further be stated that the circumstances in which public policy is applicable are of
course subject to variation. The principles of public policy, which I suppose are only a branch of
the principles of ethics, are themselves unchanging, but their applications may be infinitely
various from time to time and from place to place. That, I think, was what Bailhache,°J., was
properly referring to when in Tinline’s case, he said [at p. 331]: “Lord Halisbury said that the
law is not always logical, and every one concerned with the administration of the law knows this.
If the law is not logical, public policy is even less logical.” I prefer, however to say that the
applications of public policy may be variable from time to
Page 1056 of [1936] 2 All ER 1052
time and from place to place. Nevertheless if it is found at any time that the courts have
adopted a settled rule for the application of public policy in any sphere, then I think it is the duty
of the judges loyally to follow that rule.’
It seems clear, then, that the doctrine of public policy is to be carefully watched and only
to be enforced in cases in which the law regards a contract or its fulfilment as injurious to the
community.
In Richardson v Mellish, to which I have referred above, Best CJ at pp 242 and 243 said:
‘We have heard much of this being a contravention of public policy, and that, on that
ground, it cannot be supported. I am not much disposed to yield to arguments of public policy: I
think the courts of Westminster Hall (speaking with deference as an humble individual like
myself ought to speak of the judgments of those who have gone before me) have gone much
further than they were warranted in going in questions of policy: they have taken on themselves,
sometimes, to decide doubtful questions of policy; and they are always in danger of so doing,
because courts of law look only at the particular case, and have not the means of bringing before
them all those considerations which ought to enter into the judgment of those who decide on
questions of policy. I therefore say, it is not a doubtful matter of policy that will decide this, or
authority.
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that will prevent the party from recovering:—if once you bring it to that, the plaintiff is entitled
to recover; and let that doubtful question of policy be settled by that high tribunal, namely, the
legislature, which has the means of bringing before it all the considerations that bear on the
question, and can settle it on its true and broad principles. I admit, that if it be clearly put upon
the contravention of public policy, the plaintiff cannot succeed:—but it must be unquestionable
—there must be no doubt: looking at all the facts of this case, I can see no unquestioned principle
of policy that stands in the way of the plaintiff to hinder him recovering in this action.’
With these observations upon public policy, which might be considerably extended, I turn
to consider the doctrine as now advanced. The defendants having made a contract and having
had the full benefit of it and being liable to pay upon it, because the fact upon which they agreed
to pay has occurred, now say: “It would be contrary to public policy for us to pay, because the
creditors of a criminal would get the money, and so we shall keep the money ourselves.” Here I
have a contract quite clear and definite in its terms which is to be undisputed save for certain
exceptions in the schedule. Those exceptions have not arisen. The contract was legally made. It
was properly performed by the assured. For many years he paid his premiums under it, and when
the contract ends by the happening of the event upon which the insurance company become
liable, namely, the death of the deceased, the only thing which remains to be done is for the
insurance company to pay the money they had contracted to pay. The insurance company might
have inserted in their policy a condition that they would not be liable in case of insane or
felonious suicide whenever committed. They did not do so.
These policies are often used for commercial purposes; people assured
Page 1057 of [1936] 2 All ER 1052
borrow money on their policies, or deposit their policies as security, and the negotiable
value of an assurance policy is obviously much less if it relieves the assurers from liability in
case of suicide. It is to meet some such objection that clause 4 was invented. It tells whoever the
policy may be offered to commercially, or whoever relies upon it as a provision for their future
when the assured has gone, that the company will not pay in the case of suicide within 12
months, but it does not go on to hint in any form or shape that if the assured commits suicide
authority.
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after the 12 months the company cannot pay because it would be contrary to public policy for
them to honour their contract. But when the policy falls due the company seek to raise the
defence that the assured died by his own hand; he was sane; it was a felonious act; it would be
contrary to public policy to pay the money which, if he had died a natural death, would have
been due.
In the case of Cleaver v Mutual Reserve Fund Life Association, Lord Esher MR, at p
151, said:
‘In this case the executors of the will of James Maybrick in that capacity sue the
defendants upon a policy of life insurance granted by them to the testator. James Maybrick is
dead, and the defendants admit that during his lifetime they granted him the policy; but they
insist that they are not liable to pay the sum insured to his executors, because they would hold it
in trust for the wife of James Maybrick, and his death was occasioned by the criminal act of his
wife, that is to say, she murdered him. They say that it would be contrary to public policy that
under such circumstances they should be compelled to pay this money to the plaintiffs, and
therefore that public policy excuses them from that which would otherwise be the due fulfilment
of their contract. No doubt there is a rule that, if a contract be made contrary to public policy, or
if the performance of a contract would be contrary to public policy, performance cannot be
enforced either at law or in equity; but when people vouch that rule to excuse themselves from
the performance of a contract, in respect of which they have received the full consideration, and
when all that remains to be done under the contract is for them to pay money, the application of
the rule ought to be narrowly watched and ought not to be carried a step further than the
protection of the public requires.’
I do not think the defendants’ contention should prevail. Whilst I entirely agree that the
law will not enforce a contract which is entered into in contemplation of a man committing a
felonious act, I cannot see why, when a perfectly legal contract has been entered into and has
been observed by the parties for many years, one party to it should escape the liability which
falls upon him by alleging that the other has terminated it in an illegal manner, when he has
stipulated as the consideration for the bargain being made that he will not dispute it except for
authority.
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INSURANCE LAW CASES
particular reasons none of which have occurred. The question here is not whether or no it is
contrary to public policy for a person to commit suicide, or to make a disposition or to enter into
a contract which tempts or encourages to commission of suicide. Were such questions raised
very different considerations might have to be applied;
Page 1058 of [1936] 2 All ER 1052
but here the only question is whether where a perfectly valid contract has been made it is
contrary to public policy for the insurance company to discharge their liability under it because
the assured has years after the making of the contract feloniously committed suicide.
In Printing and Numerical Registering Co v Sampson Sir George Jessel MR said on p

465:
‘Now, it was said on the part of the defendant, that such a contract as that which I have
mentioned, a contract by which an inventor agrees to sell what he may invent, or acquire a patent
for before he has invented it, is against public policy, and it was said to be against public policy,
because it would discourage inventions; that if a man knows that he cannot obtain any pecuniary
benefit from his invention, having already received the price for it, he will not invent, or if he
does invent will keep it secret, and will not take out a patent. It must not be forgotten that you are
not to extend arbitrarily those rules which say that a given contract is void as being against
public policy, because if there is one thing which more than another public policy requires it is
that men of full age and competent understanding shall have the utmost liberty of contracting,
and that their contracts when entered into freely and voluntarily shall be held sacred and shall be
enforced by courts of justice. Therefore, you have this paramount public policy to consider—that
you are not lightly to interfere with this freedom of contract. Now, there is no doubt public
policy may say that a contract to commit a crime, or a contract to give a reward to another to
commit a crime, is necessarily void. The decisions have gone further, and contracts to commit an
immoral offence, or to give money or reward to another to commit an immoral offence, or to
induce another to do something against the general rules of morality, though far more indefinite
than the previous class, have always been held to be void. I should be sorry to extend the
authority.
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INSURANCE LAW CASES
doctrine much further. I do not say there are no other cases to which it does apply; but I should
be sorry to extend it much further.’
Mr Roland Oliver, for the defendants, boldly relied upon the proposition that nobody
could claim under a contract of insurance which had been terminated by the criminal act of the
assured. In support of this contention he cited to me the case of Fauntleroy (Amicable Society v
Bolland.) I am far from saying that that case, and of course I cannot say it, for it was a decision
of the House of Lords, did not correctly express the view of the law as to public policy in 1830.
But ideas as to what is good or bad for the community have altered considerably since those
days. It is no longer public policy to hang a forger. Why should it be public policy now to
prevent the innocent representatives of a criminal receiving the benefit of a legal contract which
he has made and fully performed. How far Fauntleroy’s case really goes—or went in 1830—is I
think questionable. In 1861 WoodV-C held in Horn v Anglo-Australian & Universal Family Life
Assurance Co, that there is no principle of public policy upon which a life assurance is void by
the suicide of the assured while in a state of insanity. In the course of his judgment he said with
reference to Fauntleroy’s case:
Page 1059 of [1936] 2 All ER 1052
‘So the argument might be pursued—although I do not know that any case has so decided
—to the same extent in the case of a person committing suicide while in a sane state of mind,
thus committing a felony, and losing his life thereby.’
I certainly do not read this as meaning that Wood V-C, if he had had to decide such a
case would necessarily have decided it as the defendants here contend for. Nobody disputes the
proposition that a man cannot take advantage of his own wrong, but it seems to me that in these
cases the question is not so much what has the deceased done, but what having regard to the
legal contract he made in his life, which is not avoided by any of its terms by the manner of his
death, are the liabilities and excuses from liability of the other party to that contract. Speaking
with the greatest possible respect of the decision in Fauntleroy’s case, I would ask what possible
benefit can it be to the community that the representatives of a man hanged for murder should
not be paid the money due under a policy which he had legitimately entered into and which apart
authority.
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INSURANCE LAW CASES
from the doctrine of public policy the insurance company would be bound to pay. Is it to be said
in 1936 that if a man who has entered into a contract of insurance and paid under it for years
commits a murder and is hanged, it is to the benefit of the community that his dependants should
receive nothing under that contract, and that, therefore, public policy prevents the insurance
company from paying? It seems to me that in this respect the highest principle of public policy is
that which regards the sanctity of contract. The dire threats as to the consequence of the number
of assured persons who will commit suicide if this case goes against the assurance company
leave me quite unmoved. The remedy is in the insurance companies’ hands; they can always
contract out of any liability for such an event, but if, for their own advantage, they do not so
contract, they cannot in my opinion crave in aid the refuge of public policy.
In the course of this judgment I have used more than once the phrase “in my opinion.” In
using this language I shelter myself behind Sir George Jessel MR, who, in Besant v Wood, said,
on p 620:
‘The suit raises points of the very greatest importance as regards the general law, upon
which I can give my opinion—and I say my opinion advisedly, because I am free to confess that
the law is not so clearly settled on the point that the judge can lay down the law; he can only give
his opinion of the law. Judicial opinion has varied a great deal, and must vary a great deal, when
you consider the ground upon which that judicial opinion or those judicial opinions have been
founded. This is a branch of law which depends upon what is commonly called “public policy.”
Now you cannot lay down any definition of the term “public policy,” or say it comprises such
and such a proposition, and does not comprise such and such another: that must be, to a great
extent, a matter of individual opinion, because what one man, or one judge, and perhaps I ought
to say one woman also in this case, might think against public policy, another might think
altogether excellent public policy. Consequently it is impossible to say what the opinion of a man
or a judge might be as to what public policy is.’
Page 1060 of [1936] 2 All ER 1052
authority.
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Having given this matter the best and most serious consideration I can, I am not satisfied
that it is contrary to public policy that the insurance company should pay, having regard to all the
circumstances on these particular policies. There will, therefore, be judgment for the plaintiff.
Shah (Nemch and Premchand) V. South British Insurance Company Limited 1965 1
EA 679 (CA)
Judgment
Sir Samuel Quashie-Idun P: This is an appeal against a decision of the High Court of
Kenya (Wicks, J. sitting at Mombasa) dismissing a claim of the appellants against the
respondents for the sum of Shs. 46,746/-. The appellants, who are dealers in wrist watches and
other goods, entered into a policy of insurance with the respondents whereby the respondents
agreed to insure the appellants against loss by theft of the appellant’s goods as a result of
housebreaking. The goods insured included property held by the appellants in trust or on
commission or for which the appellants might be held responsible while the goods were in their
custody. The case for the appellants is that on or about October 19, 1958, their shop was broken
into and goods to the total value of Shs. 46,746/- stolen for which the respondents declined to
accept liability.
The material evidence adduced by the plaintiffs in support of their claim came from the
first plaintiff, Nemchand Premchand Shah. His evidence was
Page 680 of [1965] 1 EA 679 (CAN)
that on Saturday, October 18, 1958, he locked the shop at about 6.20 p.m. On Monday,
October 20, he went to the shop at 7.40 a.m. and opened the front door. He then noticed that
goods had been stolen from the shop. He could not remember if he inspected the shop at the
time. He made a report to the police. At 8.45 a.m. he called at the respondents’ office and made a
report of the theft. Two askaris and other officers of the respondents inspected the premises.
Later three European police officers arrived and also inspected the shop. Witness also inspected
authority.
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the premises and noticed that the steel straps of the back door had been removed and that the
staple and padlock were missing. There were two windows at the back of the shop, one above the
other. The lower window had a wooden frame with iron bars. The upper window was made of
steel and had weldmesh on the inside. Witness noticed that the weldmesh had been cut on three
sides and bent upwards. Witness stated that without using the keys of the doors of the premises it
would not be possible to steal the goods in the store without breaking in and that it would also
not be possible without using the keys to take and carry the goods away without breaking out.
Witness stated under cross-examination that the thieves got into the shop by breaking the
window, the weldmesh of which was found to have been cut. Witness admitted that there was
glass outside the window through which the alleged thief or thieves gained entrance into the
shop, that the glass was not broken and that he could not say how it was possible for anyone to
open the window from the outside without breaking the glass. Witness also admitted that the
window had not been cleaned at all and could not explain how a person could climb through that
window without disturbing the dust on the window sill or injuring himself while trying to get
through the window with the cut weldmesh. There were cobwebs between the window sill and
the floor. These were not disturbed, and the witness could not explain how any person could get
through the window without disturbing the cobwebs.
The defendants called John Desmond Irwin, a Senior Superintendent of Police, who gave
evidence that it was highly improbable that a man could climb up a height of nine feet and
through the gap in the weldmesh without disturbing the dust on the windowsill. This witness
stated that he found cobwebs on the wall which had not been disturbed.
On the evidence led the learned trial judge came to the following conclusion:
“Considering the evidence as a whole, I am not satisfied that the damage to the window
resulted from a housebreaking, or had any connection with a housebreaking. I am not satisfied
that there was any housebreaking, or that the plaintiffs’ stock was lost as a result of a
housebreaking.
...
authority.
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The plaintiffs having failed to satisfy the court that the loss alleged results from a
housebreaking the action must be dismissed.
The action is dismissed with costs, together with costs of the former trial.”
The following grounds of appeal were argued on behalf of the appellants:
“1. The learned trial judge failed to appreciate–
(i) sufficient unrebutted direct and circumstantial evidence, entitling the

appellants to succeed, existed of–
(a) theft of stocks and other insured goods;
(b) breaking out on its own sufficient to have constituted ‘house-

breaking’ in law and under the policy;
(c) ‘actual visible damage to the premises or part thereof’ resulting on

such breaking out.
Page 681 of [1965] 1 EA 679 (CAN)
(ii) it was unnecessary further in order to have succeeded to have shown that
(as was assumed) the breaking out had been preceded by a ‘breaking in’ and that such breaking
in had been effected by damaging the premises, and not without.”
In respect of the first ground argued, counsel for the appellants submitted that there was
no burden on the appellants to prove how their shop was broken into beyond the evidence that
theft of their goods from their shop had taken place, either by an unlawful entry into the shop or
breaking out of the shop. It was further submitted that on the evidence led by the plaintiffs, the
burden of proving that no theft of the goods had taken place was shifted on to the defendants and
that although the defendants were not bound to plead fraud on the part of the plaintiffs, it was
their duty to destroy the plaintiffs’ case before they could succeed.
The plaintiffs’ case was that theft of the goods in the shop was committed by
housebreaking and the burden of proving this was on the plaintiffs. The mere fact that the goods
authority.
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INSURANCE LAW CASES
had disappeared from the shop was not sufficient to satisfy the court that theft of the goods was a
result of breaking in or breaking out. Learned counsel for the appellants has submitted that
although the learned trial judge was right in holding that there was no evidence of breaking in,
the court erred in rejecting the contention that there had been a breaking out. If all the onus to be
discharged in such cases is that the property of an assured has disappeared and that there is no
burden on him to prove that the disappearance was caused by theft, either by housebreaking or
other unlawful means covered by the policy, then there would be no defence whatsoever
available to an insurer to resist any claim against him. In the present case, the learned trial judge
stated that he was not satisfied that either a breaking in or a breaking out had taken place and
therefore was not satisfied that theft of the goods was caused by housebreaking.
I agree that the onus of proof which lies on an assured does not go beyond the proof that
loss was caused by some event covered by the policy, but, I think that if his case is that the loss
was occasioned by a breaking in or breaking out then the evidence he adduces must prove that
fact.
Thus, in the case of British and Foreign Marine Insurance Co. v. Gaunt (1) ([1921] A.C.
at p. 47), the House of Lords stated as follows:
“We are, of course, to give effect to the rule that the plaintiff must establish his case, that
he must show that the loss comes within the terms of his policies; but where all risks are covered
by the policy and not merely risks of a specified class or classes, the plaintiff discharges his
special onus when he has proved that the loss was caused by some event covered by the general
expression and he is not bound to go further and prove the exact nature of the accident or
casualty which, in fact, occasioned his loss.”
It is clear from the judgment cited that it is not sufficient for an assured person to say he
has lost goods, but that he must prove that the loss was occasioned by theft in the manner
covered by his policy. Although he is not bound to go further and prove how the theft was
committed, his evidence should show that such theft has occasioned the loss. Similarly, in the
present case if there was evidence that the shop was broken into by somebody or that, having
authority.
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INSURANCE LAW CASES
gained entry into the shop, larceny of the goods was effected and then a breaking out took place,
the plaintiffs would have discharged the burden which lay on them. This was not the case.
The case of Greaves v. Drysdale (2), was referred to by both counsel in this court. The
decision in that case was that the assured having proved that there was a loss within the general
language of the policy, the onus was on the defendant
Page 682 of [1965] 1 EA 679 (CAN)
underwriter to establish his defence that the loss was occasioned by members of the
assured’s staff or household or inmates of the premises and that upon the facts the defendant had
discharged that onus.
In that case it was contended on behalf of the defendant that it seemed a great hardship
upon an underwriter who could not, by the very nature of the case, get all the details, to have to
make an overwhelming case that the theft was concerned with one of the inmates. It was
contended that although the onus might have been originally on the defendant, evidence called
had shifted the onus back to the plaintiff to show that the claim was not within the exceptions
clause. In reply, counsel for the plaintiff in that case submitted that once the plaintiff proved that
there was a loss the burden was on the defendant to show not what might have happened, but
what did happen. Branson, J., in considering the evidence led by the plaintiff, stated in his
judgment as follows:
“What is said by the defendant is that, when one looks in detail at the facts which are
established in relation to this robbery, it becomes clear that it must have been done by some
inmate of the house.”
The learned judge then considered the possibility that somebody slipped in and
committed the theft. Finally he held that two men, who were members of the plaintiffs’ staff and
who had given evidence, had not told him the truth. He concluded:
“. . . unless they, or one of them, the other perhaps shielding him, were responsible for
this theft . . .
authority.
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INSURANCE LAW CASES
. . . I have found myself, much against my will, satisfied that this theft was, within the
words of the policy, ‘occasioned by members of the assured’s staff’.”
It is not clear in Greaves v. Drysdale (2) whether or not the defendant gave evidence, but,
it is clear from the judgment that the evidence led by the plaintiff was that which destroyed his
case and I find it difficult to come to the conclusion that in the present case the learned trial
judge erred in rejecting the case of the plaintiffs, having regard to the evidence led by them and
the evidence given by Senior Superintendent Irwin for the defendants.
The defendants did not allege fraud against the plaintiffs and the Court did not make a
finding of fraud against them. The learned trial judge’s decision was based on facts before him,
and he, no doubt, considered the credibility of the witnesses, whom he saw and heard. I think
that the evidence before the learned trial judge supports his findings. The first ground argued
therefore fails.
[The president then dealt with another ground of appeal and concluded:]
I would dismiss this appeal with costs, and grant a certificate for two counsel. As the
other members of this Court agree, I order accordingly.
Sir Clement De Lestang JA: The facts out of which this appeal arises, the grounds of the
appeal and the arguments of counsel appear sufficiently from the judgment of the learned
President, which I had the advantage of reading in advance and it is unnecessary for me to repeat
them.
The burden of proving that the loss fell within the risk insured against was on the
plaintiffs. To discharge that burden they had to prove that the theft resulted from housebreaking
“causing actual visible damage to the premises or part thereof”. As I understand the judgment of
the court below, the learned judge dismissed the plaintiffs’ claim because they had failed to
satisfy him that there had been a housebreaking. It was contended for the plaintiffs at the hearing
of the appeal that the learned judge rightly held that there was no evidence
Page 683 of [1965] 1 EA 679 (CAN)
authority.
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of breaking in but erred in rejecting the plaintiffs’ contention that a theft and breaking out
would come within the policy. In my view, the learned judge did not reject that proposition as
being bad in law. This is what he said:
“Mr. Khanna submits that even though the court finds that there was no breaking in
through the casement windows, there was a breaking out as evidenced by the damage to the back
doors and the yard doors, that a breaking out is sufficient to establish the offence of
housebreaking and satisfied the condition in the Contract of Insurance requiring that ‘actual
visible damage to the premises or part thereof’ be caused. I do not agree with Mr. Khanna. The
keys of the shop were accounted for, it is not disputed, indeed it was the plaintiffs’ evidence, that
it was not possible for anyone to steal the stock-in-trade without breaking in. I have found that I
am not satisfied that there was a breaking-in in the course of a housebreaking, and it has not been
suggested that there was any other wrongful entry, or that thieves entered the shop in any way
which was not a breaking-in. Appearances are not enough. From the windows being found open,
the weldmesh to the casement being found cut and pushed up, from the damage found to the
back doors and the yard doors, from the findings of the earrings and the watch, there appeared to
have been a housebreaking, but from the condition of the dust on the window sills and the
cobwebs on the wall under the window, those appearances are not brought to the conclusion that
a housebreaking occurred. In my view it is not the law, as Mr. Khanna seems to suggest, that
facts must be looked at in isolation, that in establishing a housebreaking ‘causing actual visible
damage to the premises or part thereof’, the criminal law being that breaking out constituting a
housebreaking, all that is necessary to establish that a housebreaking occurred is to produce
evidence of damage to doors which, looked at alone, appear to have been caused by thieves
breaking out.
The plaintiffs having failed to satisfy the court that the loss alleged results from a
housebreaking the action must be dismissed.”
The first part of the passage, in particular the words “I do not agree with Mr. Khanna”,
appears at first blush to support the plaintiffs’ contention but the passage must be read as a whole
and when this is done it seems to me clear that the learned judge realized that although there was
authority.
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INSURANCE LAW CASES
the appearance of a breaking out, he was not satisfied on the evidence as a whole that it was a
genuine breaking out. In short, he was not satisfied that there was a housebreaking by either a
breaking in or a breaking out. That being the case, the sole question in this appeal is whether the
evidence reasonably supports his decision. In deciding this question it must be borne in mind that
much depends upon the credibility of the witnesses and that the learned judge had the advantage,
which this court has not, of seeing and hearing them give their evidence. I am aware that he did
not comment on credibility in his judgment but it seems to me that the disbelief of the plaintiffs’
evidence is inherent in his findings.
In my view, there was evidence to support his findings. Entry by the back window and
through the cut weldmesh being discounted, there was no evidence whatever of a forcible
breaking in. From the nature of the damage, it is evident that both the back door of the premises
and the door of the compound were broken from inside the premises. It is also fair to infer that
the weldmesh was cut and the back window opened from inside the premises. Consequently, if
there was an entry at all, it was through the front door by means of a key or skeleton key or the
thief must have secreted himself inside the premises before they were locked up. There were two
keys to the front door and both were accounted for. There was nothing else in the evidence to
suggest that a duplicate or a skeleton key was used. The description of the premises does not
support
Page 684 of [1965] 1 EA 679 (CAN)
the suggestion that the thief could have secreted himself inside. Indeed, such theories
were never canvassed at the trial. In these circumstances I do not think it was unreasonable for
the learned judge not to be satisfied that there was a housebreaking and I would not be prepared
to disturb his finding.
Although such a finding tends to suggest fraud on the part of the plaintiffs, I do not think
that it necessarily does so. Fraud not being pleaded, the defence merely being that no loss
covered by the policy occurred, the learned judge was careful to avoid any mention of fraud in
his judgment. He contented himself with saying that he was not satisfied that the plaintiffs
established a housebreaking, leaving undecided the question whether the apparent house-
authority.
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INSURANCE LAW CASES
breaking was genuine or not. In my view he was entitled to do that in the circumstances of this
case. I therefore agree with the order proposed by the learned President.
Law JA: I have had the advantage of reading the draft judgments prepared by the
President and de Lestang, J.A., I agree with them, and concur in the order proposed.
Appeal dismissed.
GRAY V BARR (PRUDENTIAL ASSURANCE CO LTD, THIRD PARTY)

[1971] 2 ALL ER 949, CA
LORD DENNING MR. Mr and Mrs Barr have a prosperous business at Tooting in ladies’
blouses, which they run together. In 1965 they bought a country home at Warlingham. About a
quarter of a mile away there was a farmer and his wife, Mr and Mrs James Gray, of Farleigh
Court Farm. The Barrs had three boys. The Grays had a boy and a girl. On Guy Fawkes day the
Barrs had a bonfire party for the children and the Grays brought their children to it. The families
became friends. But the results were disastrous. Mr Gray and Mrs Barr fell in love with one
another. By May 1966 Mr Gray had become so infatuated with Mrs Barr that he wanted to make
his life with her. He left the farm and his wife and children—all without a word—and went out
to New Zealand. He gave Mrs Barr £240 to buy her ticket out to join him. But, before she went
out there, Mr Gray’s father told him that he must come back for the sake of the farm. So in
October 1966 he returned to England and ran the farm. But he still kept seeing Mrs Barr. So
much so that Mrs Gray
Page 953 of [1971] 2 All ER 949
could not stand it any longer. She separated from him. He bought her a house at
Edenbridge, 15 miles away. She had the children there with her. Mr Gray entered into a deed of
maintenance providing for her and the children. He stayed on alone in the farmhouse, running
the farm, but no doubt still seeing Mrs Barr. In May 1967 he took Mrs Barr to Scotland for a
authority.
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week’s holiday. When they came back Mrs Barr went to her mother’s for three days and then
returned home to her husband. At first she told him that she wanted to stay with him, but also
that she still loved Mr Gray. But on Tuesday evening Mr and Mrs Barr went out to dinner at the
country club and then she told him to his great delight that she did not love Mr Gray any more
and was coming back to live with him, Mr Barr. They went back to their home hand in hand.
Now comes a tragic sequence of events. Mr Barr went into the kitchen of his house to
make up the boiler, and afterwards to the lavatory. His wife, he thought, had gone upstairs. But
when he went up to join her, she was gone. He looked everywhere for her, but could not find her.
He thought that she must have gone back to Mr Gray. He got out the car and drove first towards
her mother’s and then back to Mr Gray’s farm. He drove in the gates, but turned round and went
back again to his own house. He asked his cousin who was there: ‘Have you found Ethel?’ She
said, ‘No’. Mr Barr by this time was in a terrible state. He was crying and praying at the same
time. He thought his wife must have gone to Mr Gray at the farm. He went to the dining-room
and picked up his shotgun. (He had bought it from Mr Gray six months earlier.) His cousin said
to him: ‘You don’t need that, Bill.' He said nothing. He took up a handful of cartridges and
loaded two of them. He asked his cousin to come with him. She would not. He went out with the
loaded gun. He drove up to the farm. He got out of the car, leaving the engine running. He
opened the front door. There at the head of the stairs he saw Mr Gray. Mr Gray said ‘Come in,
Bill’. He called out: ‘Is Ethel here, Jim?’ Mr Gray said: ‘No, she is not.' Mr Barr said: ‘I want to
see for myself’. He went up the stairs, holding the gun at the port. He was determined to see into
the bedroom. But Mr Gray stood in the way. He said: ‘Put that bloody thing down and get out.'
Exactly what happened next is not clear. Two shots went off. The first went up through the
ceiling. The second killed Mr Gray.
It was all a mistake. Mrs Barr was not in the bedroom. She was not even in the
farmhouse. She was lying in the woods 100 yards from her home, unconscious, having taken an
overdose of sleeping tablets. She had attempted to commit suicide. She was found early next
morning, taken to hospital, and recovered in three weeks. She and her husband are now together
again, with their family and their business.
authority.
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Three months later—on 21st and 22 September 1967—Mr Barr was tried at the Central
Criminal Court for the murder of Mr Gray. His defence was that the fatal shot was an accident.
The judge directed the jury that if they thought that it might have been an accident, they should
acquit him. They did so. They found him ‘Not Guilty of Murder’. Also ‘Not Guilty of
Manslaughter’. He was thereupon discharged.
Now Mrs Gray, the widow of Mr Gray, has brought this action against Mr Barr under the
Fatal Accidents Acts 1846–1959. She claims that Mr Barr wrongfully killed her husband and is
liable to pay her and her children the pecuniary loss they have suffered by his death. Mr Barr
admits that he is liable to compensate her, but he says that he is entitled to be indemnified by the
Prudential Assurance Co Ltd Mrs Barr had taken out a ‘hearth and home’ policy under which
the company agreed to indemnify the insured and any member of her household against all sums
which such person ‘shall become legally liable to pay as damages in respect of … bodily injury
to any person … caused by accidents’. On this claim against the Prudential two points arise: (1)
was the death of Mr Gray ‘caused by accident’? (2) is the claim of Mrs Gray barred by public
policy? The judge has held that Mr Gray’s death was caused by accident, but that the claim is
barred by public policy.
Page 954 of [1971] 2 All ER 949
1. Was the death of Mr Gray caused by accident?
Although the jury in the criminal trial found Mr Barr not guilty (presumably because they
thought it might have been an accident) nevertheless it is, I think open to the insurance company
to go behind that verdict and prove that the shooting of Mr Gray was not an accident, but a
deliberate act on the part of Mr Barr. This is what the insurance company proved. The first shot
(which went up through the ceiling) was deliberate. It was shot, said Mr Barr, with the object of
frightening Mr Gray. The second shot was, however, not deliberate, and this is accepted by the
insurance company. After the first shot, the men grappled in a struggle, Mr Barr fell backwards
down the stairs and in his fall the gun went off. The judge’s finding was as follows ([1970] 2 All
ER at 708, [1970] 2 QB at 637):
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‘The strong probability is that after the defendant had intentionally fired the first shot into
the ceiling, [Mr Gray], to protect himself as he no doubt thought from death, grappled with the
defendant, the defendant fell down the stairs, scraping the muzzle of the gun against the
woodwork and the stucco, breaking the stock of the gun as he fell, and involuntarily firing the
second barrel at the same time.’
But the judge went on to say ([1970] 2 All ER at 708, [1970] 2 QB at 638):
‘… carrying a loaded shotgun into the house in his distracted and emotional state, and
approaching [Mr Gray] with it as he did, was obviously courting the very type of disaster which
in fact occurred.’
Was this bodily injury caused by accident? That is the question.
The facts of this case are so unusual that there is very little guidance to be got from the
authorities. The word ‘accidents’ in this policy clearly includes injury which is caused by the
negligence or fault of Mrs Barr or her husband or some member of her household; for it is only
for such accidents that there is any ‘legal’ liability. It is to cover ‘legal’ liabilities that the
insurance is given. But the word ‘accidents’ does not include injury which is caused deliberately
or intentionally. If a man shoots another in self-defence, or under gross provocation, the death is
not caused by accident. It is caused by a deliberate act, no matter how justifiable or excusable it
may be. But, if a man shoots another whilst out shooting pheasants, without intention, being
grossly negligent, the death is caused by accident, even though it be manslaughter.
In the present case we have two acts to consider, the one deliberate, the other accidental.
(1) There was first this deliberate act by Mr Barr. He went into the farmhouse with a loaded
shotgun, intending to frighten Mr Gray by firing it. That was no accident. He went upstairs with
the loaded gun. He fired the first shot through the ceiling. That was no accident. (2) Then there
was this second act. The two men grappled together, and, in the course of it, Mr Barr fell. The
gun went off and killed Mr Gray. That was an accident in this sense, that it was not deliberate.
But which of these acts was the cause of the death? Was it the deliberate act of Mr Barr
approaching Mr Gray with a loaded gun? Or was it the fall and subsequent discharge of the gun?
authority.
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The immediate cause was the second act when the gun was accidentally discharged: but the
dominant cause was the first act when Mr Barr went up the stairs with a loaded gun determined
to see into the bedroom. Which of these causes is the relevant cause for the purpose of the
policy? The judge held that it was the second act. He said ([1970] 2 All ER at 709, [1970] 2 QB
at 639):
‘Was the injury, the shot in the chest, accidental in the sense of not intended? The answer
on the facts proved is, in my judgment, ‘Yes’ however deliberate the actions which led up to it
may have been. It was the second shot which
Page 955 of [1971] 2 All ER 949
caused death and the second shot was neither intentionally aimed nor was it intentionally
fired.’
In that passage the judge used the word ‘caused’. It was, he said, the second shot which
‘caused’ death. In so doing, he was approaching the question of causation in the way it was done
100 years ago. Such as was done in the case of Ionides v Universal Marine Insurance Co ((1863)
14 CBNS 259 at 289), when Willes J said:
‘… the ordinary rule of insurance law [is] that, in ascertaining the relative rights of the
parties, you are not to trouble yourself with distant causes, or to go into a metaphysical
distinction between causes efficient and material and causes final; but you are to look exclusively
to the proximate and immediate cause of the loss.’
But that rule has been discarded for over 60 years now. The present rule was well stated
by Lord Shaw of Dunfermline in Leyland Shipping Co v Norwich Union Fire Insurance Society
([1918] AC 350 at 369, [1918–19] All ER Rep 443 at 453) in words which are completely
opposed to those of Willes J. Taking the maxim causa proxima non remota spectatur, he said:
‘What does “proximate” here mean? To treat proximate as if it was the cause which is
proximate in time is … out of the question. The cause which is truly proximate is that which is
proximate in efficiency. That efficiency may have been preserved although other causes may
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meantime have sprung up which have yet not destroyed it, or truly impaired it, and it may
culminate in a result of which it still remains the real efficient cause to which the event can be
ascribed.’
Ever since that case in 1918 it has been settled in insurance law that the ‘cause’ is that
which is the effective or dominant cause of the occurrence, or, as it is sometimes put, what is in
substance the cause, even though it is more remote in point of time, such cause to be determined
by common sense: see also Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd
([1940] 4 All ER 169 at 178, [1941] AC 55 at 71) per Lord Wright. Thus, when a ship was
torpedoed and sea water entered, but afterwards a gale sprang up and she was lost, it was held
that the loss was due to the torpedoing and not to perils of the sea: see Leyland Shipping Co v
Norwich Union Fire Insurance Society. And when a ship was scuttled by the crew so that sea
water entered and she sank, it was held that the loss was due to the scuttling, and not to perils of
the sea: see P Samuel & Co Ltd v Dumas ([1923] 1 KB 592 at 619, [1924] AC 431 at 459,
[1924] All ER Rep 66 at 82) per Scrutton LJ and per Viscount Finlay. Applying this principle, I
am of opinion that the dominant and effective cause of the death was Mr Barr’s deliberate act in
going up the stairs with a loaded gun determined to see into the bedroom. The whole tragic
sequence flows inexorably from that act. It was because of that loaded approach that Mr Gray
grappled with Mr Barr. It was because of the grappling that Mr Barr fell and the gun went off.
There was no new intervening cause at all.
Each one of us would readily forgive Mr Barr. He was distraught, fearful, anxious,
provoked beyond endurance, quite beside himself with the thought that his wife had gone back to
this man once again. Yet his conduct walking up the stairs with the loaded gun was no accident.
It was deliberate. He was determined to get into the bedroom to see if his wife was there. It was
the dominant cause of the death. It is not covered by the wording of the policy of insurance.
2. Is the claim barred by public policy?
In case I am wrong about this, I turn to the next question. Is it against public policy to
allow Mr Barr to recover on the insurance?
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Page 956 of [1971] 2 All ER 949
There is no doubt, to my mind, that Mr Barr was guilty of manslaughter. I know that at
the criminal trial he was acquitted altogether. But that was a merciful verdict: and in this civil
action we must, when called upon, give the true decision according to law. During the argument
we had much discussion on the issue of manslaughter, such as ‘motor manslaughter’s when a
high degree of negligence is said to suffice: see Andrews v Director of Public Prosecutions; and
‘weapon manslaughter’ when an unlawful and dangerous act has been said to be enough: see R v
Larkin. But I do not think it necessary to go into the matter at length. I would only say this: in
manslaughter of every kind there must be a guilty mind. Without it, the accused must be
acquitted: see R v Lamb. In the category of manslaughter relating to an unlawful act, the accused
must do a dangerous act with the intention of frightening or harming someone, or with the
realisation that it is likely to frighten or harm someone, and nevertheless he goes on and does it,
regardless of the consequences. If his act does thereafter, in unbroken sequence, cause the death
of another, he is guilty of manslaughter. Thus a seaman Larkin brandished an open razor so as to
frighten his woman’s lover, but in the ensuing dialogue he cut the woman’s throat. According to
him it was an accident because she swayed against him when the razor was in his hand. The
judge directed the jury that, even accepting his own evidence, it was mansaughter; and they
could not in law find him not guilty. The Court of Criminal Appeal upheld this direction: see R v
Larkin. Next, Sapper Cashmore took a rifle from the armoury, loaded it with live rounds, and
went about with it, holding people up, intending to rob them. His officer tried to get him to put
the rifle down. In the course of it all, the rifle went off and the officer fell dead. According to
Cashmore it was an accident. The Court of Criminal Appeal held that, even if the gun did go off
accidentally, ‘he is still guilty of manslaughter and there is no escape from it … no court-martial
properly directed could reach any conclusion but that this was manslaughter at the very least’.
The case is not reported, but I append the judgment of Hilbery J (See p 970, post) (28 July 1959).
The present case is exactly in line with those two. Mr Barr took this loaded gun intending to
frighten Mr Gray. Mr Gray told him to put it down. He did not do so but advanced with it,
determined to get into the bedroom to see if his wife was there. According to Mr Barr, the fatal
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shot was an accident, but it flowed in unbroken sequence from his initial dangerous act, and is
beyond doubt manslaughter.
Does this manslaughter mean that, as matter of public policy, Mr Barr is not to be
allowed to recover on the policy? In the category of manslaughter which is called ‘motor
manslaughter’, it is settled beyond question that the insured is entitled to recover: see Tinline v
White Cross Insurance Association Ltd; James v British General Insurance Co Ltd. But, in the
category which is here in question, it is different. If his conduct is wilful and culpable, he is not
entitled to recover: see Hardy v Motor Insurers’ Bureau. I agree with the judge when he said
([1970] 2 All ER at 710, [1970] 2 QB at 640):
‘The logical test, in my judgment, is whether the person seeking the indemnity was guilty
of deliberate, intentional and unlawful violence or threats of violence. If he was, and death
resulted therefrom, then, however unintended the final death of the victim may have been, the
court should not entertain a claim for indemnity.’
Page 957 of [1971] 2 All ER 949
The judge cited for this proposition In the Estate of Hall, Hall v Knight and Baxter. He
did not have the precise facts of the case, but I append a note of them herewitha. Applying this
proposition, the judge held that Mr Barr was not entitled to indemnity from the Prudential
Assurance Co Ltd. I agree with him.
In my opinion, therefore, Mr Barr cannot recover on the policy. It was not an ‘accident’,
and also he is defeated by ‘public policy’. It will be noticed by the observant that the two
questions raise one and the same point of ‘causation’. If the death of Mr Gray was caused by the
deliberate act of Mr Barr in going up the stairs with a loaded gun, it was no accident, and it
would, in any case, be against public policy to allow him to recover indemnity for the
consequences of it.
3. Compensation
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At one time in our law no action would have lain for the death of Mr Gray; but, by the
Fatal Accidents Act 1846, it was enacted that, if Mr Gray had lived (i e only been injured and not
died) and living would have been entitled to maintain an action and recover damages, then his
widow and children can do so. They stand in his shoes in regard to liability, but not as to
damages.
The first question, therefore, is whether Mr Gray, had he lived, would have had a cause of
action? The answer is: yes, he would; but it would have been an action for assault, not for
negligence. Whenever two men have a fight and one is injured, the action is for assault, not for
negligence. If both are injured, there are cross-actions for assault. The idea of negligence—and
contributory negligence—is quite foreign to men grappling in a struggle. In an action for assault,
in awarding damages, the judge or jury can take into account, not only circumstances which go
to aggravate damages, but also those which go to mitigate them. They could take into account in
this case the provocation to Mr Barr and his distraught and anxious state. They could take into
account the conduct of Mr Gray in barring the way to the bedroom instead of saying, as he
might: ‘Come and see for yourself. She is not here.' They could take into account the fact that Mr
Barr was not insured. They might not wish to award a sum against him which would ruin him.
All things considered, if Mr Gray had lived and not died, if he had only been wounded and
recovered, he would have been entitled to maintain an action for assault and recover damages.
But I do not think a jury would give him very much. Perhaps £50 or £100. But that is enough to
give the widow and children a claim under the Fatal Accidents Acts. They are not limited to the
£50 or £100. They are entitled to recover the pecuniary loss occasioned to them by his death. In
their claim, all questions of the provocation to Mr Barr and the conduct of Mr Gray are
irrelevant.
In all the cases I have known hitherto under the Fatal Accidents Acts, the parties were
happily married and there has been no suggestion of separation or divorce. The damages have
been assessed on the basis that the husband would have supported his dependants for the rest of
his working life. So the courts take the dependency and multiply it by so many years’ purchase.
This is the first case of separation that has come before us. The cardinal fact, to my mind, is that
Mr Gray had made no will. He died intestate. So his estate goes to his widow and children. He
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left an estate which the judge estimated at £16,500, which goes to them. (They also get insurance
moneys of £4,000 or £5,000, which also go to them, but do not come into account for present
purposes.) They would not have got that £16,500 if he had not died. If he had lived, they might
not have got it for years, if at all, for he might have spent it or lost it, or willed it away from
them. The £16,500 is, therefore, an immediate financial benefit accruing to them from his death.
The question is: if he had lived, would they have got more money from him than this
£16,500 which they get now? There are so many imponderables that it is very difficult to say
whether they would or would not. Take these possibilities:
Page 958 of [1971] 2 All ER 949
(i) Mr Gray might have thrown over Mrs Barr, and become reconciled to his wife and
children, and run the farm successfully. In that event he might have made £4,000 per annum net
after tax. The widow and children might benefit by two-thirds of this, namely, £2,666 per annum.
Taking 15 years’ purchase, this meant a financial loss of £40,000. But this figure assumes
everything in favour of the dependants; whereas the probabilities were very different. The judge
said that a reconciliation was unlikely, and even if it had taken place, he did not think that Mr
Gray would have continued farming at Farleigh Court, or even if he had, farming it successfully
and profitably. The judge thought that the dependants had no more than a 50 per cent expectation
of getting the £40,000. So he divided it by two and made it £20,000.
(ii) There might never have been a reconciliation, in which case Mr and Mrs Gray would
have remained separate and after two or three years Mrs Gray (as she said) might have sought a
divorce. In that case, if Mr Gray had run the farm successfully, he would have made the
payments under the maintenance deed until the divorce, and afterwards similar payments unless
she re-married when they might have been reduced. The figures given to the judge for the net
provision under the deed were: for the 12 years whilst the children were still on hand: £1,322;
£1,440; £1,518; £1,590; £2,094; £2,034; £2,034; £2,409; £2,259; £1,791; £1,791; £1,791; and for
the subsequent years when the children were off hand: £1,065 a year for the wife’s life. The
parties ‘grossed-up’ those figures thinking that such was required by Taylor v O’Connor, but that
was clearly a mistake. The task is simply to see what capital sum would give those figures, with
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interest on it taxed, but all used up at the end. We were not given the figure, but I do not think
the capital sum would exceed £25,000 or £30,000.
But this all depends on the hypothesis that Mr Gray would have been able to run the farm
successfully so as to make those payments. The judge was very doubtful about this. This is how
he put it:
‘There would have been, to my mind, more than a possibility that [Mr] Gray would have
felt unable to carry on farming at Farleigh Court. The proximity to the Barr family, and the
unhappy associations of the place, might very well have forced him to leave. Even if he had been
able to stay, one is left with the feeling, having heard as much about him as one has over these
past days, that both his enthusiasm and his energy and industry would have been gravely
impaired. If that had been the case, if the heart had gone out of him as a farmer, then the results
on the profits of the farm would have been as disastrous as were the events in 1967 when the
affair was at its height, and when he was travelling to and fro from New Zealand. If [Mr] Gray
had felt impelled to move, even assuming that he wanted to obtain, and could have obtained, the
tenancy of another farm, there would certainly have been a very sharp drop in his means. Finally,
one cannot overlook the possibility that he might have gone back to New Zealand, this time to
stay.’
In view of that gloomy forecast, it would seem right to give the widow and children only
a 50 per cent expectation of the £25,000 or £30,000. That makes it only £12,500 or £15,000:
which is less than the £16,500 they received at once on his death.
After all this long discussion, I am left with the impression that all these estimates of
pecuniary loss are sheer guesswork. It is impossible for anyone to say what were the chances of
reconciliation, or what were the chances of Mr Gray staying on the farm and running it
successfully. He had made a complete mess of his life by his association with Mrs Barr. He had
broken up his home. His wife had left him. He had deserted his farm and only recently returned
to it. Goodness alone knows what the future held for him and his family. I am left with the strong
feeling that, looking at it solely from
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Page 959 of [1971] 2 All ER 949
the financial point of view, as we must, his widow and children may be better off with
him dead—and £16,500 coming to them from his estate—than they would have been if he had
lived. At any rate, the chances of them receiving more over the years than the £16,500 in hand
are so uncertain and speculative that, left to myself, I should not have thought it right that they
should receive anything more. But the judge thought that they should receive £6,000, and my
breathren take the same view. It all depends on an assessment of what the future would have held
for them had Mr Gray lived. Seeing that the judge’s assessment is supported by my brethren, I
am not prepared to differ from it. The widow and children ask us to increase it. I would certainly
not do this. I would leave it at £6,000. I would dismiss the appeal and the cross-appealb.
SALMON LJ. This appeal raises three questions of law: 1. Were the injuries which
resulted in the death of the late James Gray caused by accident? 2. If so, was this an accident of a
kind which fell within the terms of a policy of insurance dated 12 October 1966 covering the
assured against ‘… all … sums which [the defendant] shall become legally liable to pay as
damages in respect of … bodily injury to any person … caused by accidents … ’? 3. If the
answer to both these questions is Yes, is George Barr (admitted to be the assured) prevented by
principles of public policy from enforcing the contract of insurance?
The facts which are relevant to the solution of these three questions are indeed tragic. I
will briefly refer to them. James Gray lived with his wife in the farmhouse at Farleigh Court
Farm and farmed upwards of 500 acres. They had been married in 1957 when she was 23 and he
was 21 years old. They had two young children to whom they were both devoted and the
marriage was a happy one. In 1965 they met George Barr and his wife who lived about a quarter
of a mile away. They had three young sons to whom they were both devoted and the marriage
was reasonably happy. They also jointly ran a successful business. The two families become
friendly and saw much of each other. Unfortunately Mr Gray became infatuated with Mrs Barr
and she fell in love with him. They made no real attempt to disguise their feelings for each other.
This naturally caused great distress to Mrs Gray and to Mr Barr and, it would seem, put a terrible
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strain on Mrs Barr who was torn between her devotion and sense of duty towards her children
and husband on the one hand, and her deep love for Mr Gray on the other.
Early in 1966 Mr Gray suddenly went off to New Zealand without telling anyone except
Mrs Barr. She apparently had promised to join him there, for he left her with a single air ticket to
New Zealand and it seems a substantial sum of money besides. Mr Barr’s feelings can be
imagined when he discovered, as he did, that his wife was proposing to desert him and their three
children in order to live with Mr Gray at the other end of the world. Mrs Barr, however,
remained at home. In October 1966, either because Mrs Barr had not followed him or because of
his father’s persuasion, or both, Mr Gray returned to the farm. He did not, however, break off his
association with Mrs Barr. This was too much for Mrs Gray and she and the children left him in
January 1967. Mr Gray set her up in a house which he had bought for that purpose and, under a
deed of separation, provided substantial maintenance for her and their children.
In the meantime Mrs Barr had told her husband that she intended to leave him and their
children in order to go and live with Mr Gray at his farm. Mr Barr did his best to dissuade her. In
May or June 1967 Mr Gray and Mrs Barr spent a week’s holiday together in Scotland. When
they returned Mrs Barr did not take up residence at the farm. She went to stay with her mother
who lived about three or four miles from the Barr household. Mr Barr was doing all he could to
persuade his wife to come back to him and the children and to give up the idea of going to live
with Mr Gray.
Page 960 of [1971] 2 All ER 949
Mr Gray on the other hand was doing his best to persuade Mrs Barr (or so Mr Barr
thought) to come and live with him.
On 13 June Mr Barr took his wife to dine with him at their local country club. He
persuaded her to come home. She was distraught. At first she refused to return, saying that she
was still in love with Mr Gray. The evening, however, appeared to have a happy ending, for Mrs
Barr promised to give up Mr Gray and the Barrs went home together walking hand in hand from
the car to their front door. But alas the evening was not over. When Mr Barr had put the car
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away, he found that his wife had disappeared. First he thought that she was walking back to her
mother. He set out in his car to overtake her, but he did not find her on the road to her mother’s
house. On his way home he passed the farm. All was in darkness. He was then convinced that his
wife had gone to spend the night with Mr Gray. It is not difficult to imagine what his feelings
must then have been. He returned home, took up his 12-bore shotgun, loaded both barrels and
put a handful of cartridges in his pockets. He set off for the farm in a highly emotional state and
hardly in control of himself. He says that he took the loaded gun with him merely to frighten Mr
Gray should Mr Gray try to prevent him from seeing his wife. When he arrived at the farm, he
jumped out of the car, leaving the engine running. He entered the house carrying his gun in what
he described as the high port position. There are only two people who have ever known what
happened then. And one of them is dead. Mr Gray was killed by a shot fired from the gun which
Mr Barr had been carrying.
Mr Barr was tried for murder at the Old Bailey. He was acquitted both of murder and
manslaughter and walked from the court a free man. In the witness box he had testified to many
of the facts recited above. Describing what occurred at the farm, he said that Mr Gray was
standing on the small landing at the top of the stairs, barring the way to the bedroom in which Mr
Barr was convinced that he would find his wife. He was threatening Mr Gray with the gun in
order to induce him to step aside. Mr Gray must have seen that Mr Barr was beside himself. He
knew that he had grievously wronged Mr Barr and can hardly have thought that Mr Barr had
brought the gun round merely to show it to him. Mr Gray said, ‘Put that bloody thing down and
get out’. If only he had stepped out of the way and let Mr Barr into the bedroom, he would
probably be alive today. He paid a terrible price for his mistake. In fact Mrs Barr was not at the
farm. She had gone off to a wood where, in her misery, she had made a determined attempt to
commit suicide by taking an overdose of sleeping pills. She was found later in a critical
condition and recovered only after three weeks in hospital.
Mr Barr’s evidence at the Old Bailey was that when he was close to the top of the stairs,
he caught the muzzle of the gun against the left hand wall; the butt fractured; this caused one
barrel to discharge a shot into the ceiling and the other barrel almost simultaneously fire the fatal
shot into Mr Gray’s chest. At no time did Mr Barr pull the trigger. He threw the gun to the
authority.
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ground and telephoned for the police. The gun was found with the butt fractured into two pieces
which were held together only by the trigger guard.
It seems plain that if the jury had completely rejected Mr Barr’s evidence and found him
guilty of murder, there would have been little chance of an appeal succeeding. It is equally plain
that if the jury substantially accepted Mr Barr’s evidence, even on his own story, there was a
very strong case of manslaughter against him. To threaten a man with a gun intending to frighten
and actually frightening him is an assault: see R v St George. An assault is, of course, an
unlawful act.
‘Where the act which a person is engaged in performing is unlawful, then, if at the same
time it is a dangerous act, that is, an act which is likely to injure
Page 961 of [1971] 2 All ER 949
another person, and quite inadvertently he causes the death of that other person by that
act, then he is guilty of manslaughter.’
R v Larkin ([1943] 1 All ER 217 at 219) per Humphreys J.
To do a lawful act which is dangerous with a reckless disregard whether or not it injures
another is also manslaughter: see R v Larkin ([1943] 1 All ER at 219). For anyone, especially a
man as unused to shotguns as was Mr Barr, to walk up a narrow staircase carrying a loaded gun,
with the safety catch off, and using it to threaten Mr Gray who was standing at the top of the
stairs was obviously dangerous. It was also strong evidence of recklessness on Mr Barr’s part; he
did not care whether or not he injured Mr Gray. It was, of course, for the jury to decide whether
the evidence showed beyond a reasonable doubt, that Mr Barr shot Mr Gray intending to do so; if
not whether he was threatening Mr Gray with the gun, whether what he was doing was
dangerous and whether he was reckless as to Mr Gray’s safety. It may be that the jury felt so
much natural sympathy for Mr Barr that, whatever form the summing-up had taken, they would
have found it possible to square their consciences with deciding all the relevant issues in his
favour. The summing-up is remarkable for failing to draw the jury’s attention to the formidable
evidence against Mr Barr. I am bound to say that it reads to me like a clear invitation to the jury
authority.
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to acquit not only of murder but also of manslaughter—an invitation which the jury accepted, no
doubt gladly.
The plaintiffs, who are the administrators of Mr Gray’s estate, brought this action against
Mr Barr claiming damages against him for unlawfully and negligently causing Mr Gray’s death.
By his defence he denied these allegations and alleged contributory negligence against Mr Gray
in that, amongst other things, Mr Gray ‘attacked and/or struggled with the defendant well
knowing that the defendant had a loaded gun in his hand’. Mr Barr also brought in the Prudential
Assurance Co Ltd as third party claiming an indemnity against them under the policy of
insurance referred to at the beginning of this judgment. The Prudential in their defence to the
third party proceedings admitted that Mr Barr shot and killed Mr Gray without intending to kill
him or to cause him grievous bodily harm, but alleged that the injury from which Mr Gray died
was not caused by an accident ‘within the intendment of the policy’, alternatively that Mr Barr
was precluded on grounds of public policy from recovering under the policy.
At the trial before Geoffrey Lane J ([1970] 2 All ER 702, [1970] 2 QB 626) Mr Barr did
not seriously set up any defence to the claim. In particular, far from relying on contributory
negligence, he expressly denied that Mr Gray had grappled with him or indeed come within
several feet of him. Nor had he suggested at his criminal trial that Mr Gray had grappled with
him. The only issue fought between the plaintiffs and Mr Barr related to the quantum of
damages. The only real fight on liability was between Mr Barr and the Prudential.
The learned judge entered judgment for the plaintiffs against Mr Barr for £6,000 and for
the Prudential in the third party proceedings. The plaintiffs appeal against this assessment of
damages on the ground that it is too low and Mr Barr cross-appeals on the ground that the
damages are too high. Mr Barr also appeals against the judgment in favour of the Prudential. I
will first deal with the latter appeal which raises the three questions set out at the beginning of
this judgment.
1. Were the injuries resulting in James Gray’s death caused by accident?
authority.
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In my view Mr Barr’s acquittal at the Old Bailey both of murder and manslaughter
cannot affect his rights against the Prudential or their liability to him under the insurance policy.
Notwithstanding the acquittal, the Prudential could have alleged as part of their defence that the
killing was intentional and therefore outside the policy. Very properly they elected not to do so.
They admitted that Mr Barr did not intend
Page 962 of [1971] 2 All ER 949
to kill Mr Gray or to do him grievous bodily harm; nor did they allege that Mr Barr
intended to injure Mr Gray. They did, however, allege that the killing amounted to manslaughter.
I do not understand how, in the circumstances, such an allegation can march hand-in-hand with a
contention that the killing was not caused by accident. Whether it was the kind of accident
covered by the policy is another matter, with which I shall presently deal.
Except in cases in which murder is reduced to manslaughter on the ground of provocation

or diminished responsibility, manslaughter is necessarily an accidental killing. Otherwise it
would be murder. The injury leading to death by manslaughter may, however, be no accident;
sometimes it may be intentionally caused, eg where a man punches another and fells him to the
ground so that he fractures his skull and dies, or a man intentionally sticks a pin into someone
who happens to be a haemophiliac, and he bleeds to death. Similarly, in murder, a killing may
sometimes, in a sense, be accidental; eg when a man inflicts serious injuries with intent only to
do grievous bodily harm and death ensues. In such a case the injuries are caused, intentionally
and not by accident. Only the consequences of the injuries are accidental. Accordingly in neither
of the types of manslaughter or murder postulated would the offender be covered by this policy
of insurance since it applies only to liability for injuries caused by accident.
Mr Barr’s evidence at the trial of this action was much the same as it had been at the Old
Bailey. The learned judge ([1970] 2 All ER at 707, [1970] 2 QB at 636), however, decided that
the defendant intentionally fired the first shot into the ceiling in order to frighten Mr Gray. There
was overwhelming evidence to support this finding. Mr Gray must have been terrified by this
shot being fired so close to him by a man who was obviously distraught and in a dangerous
mood. But he did not have time to be frightened for long since the next shot went off almost at
authority.
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once and soon afterwards he died. The learned judge ([1970] 2 All ER at 708, [1970] 2 QB at
637) concluded that, after the first shot, Mr Gray grappled with Mr Barr and that Mr Barr fell
back and somehow dropped the gun on the stairs, fell on it accidentally, and fell on it so hard that
the blow to the gun fractured the butt and thereby fired the second shot. I am doubtful about the
grappling. I should have thought that if this had taken place the muzzle of the gun was hardly
likely to have been five to nine feet from Mr Gray’s chest when the fatal shot was fired—as the
expert witnesses testified. Nor can I understand how a shot fired from the gun whilst it was lying
on the stairs could have hit Mr Gray in the chest. The case for the Prudential however was
conduced on the basis that this is what happened. And the learned judge considered, as he was
perfectly entitled to do, that this version was, at any rate, less unlikely than the defendant’s story.
Much of the case remains wrapped in mystery.
‘Accident’—and, for that matter, ‘caused’—is an imprecise word and its meaning
sometimes is susceptible to much metaphysical discussion. I agree however with the learned
judge that injury caused by accident can, qua the man causing the injury, only mean injury
caused without negligence or without intention to injure.
If one thing in this case is clear it seems to me to be that the word ‘accident’, as used in
the policy of insurance, cannot possibly mean an act done without negligence. An assured cannot
be legally liable for any injury caused by accident unless he has inflicted the injury by
negligence. That obviously is the very risk against which he intends to insure. Accordingly if
‘accident’ does not include an act done negligently, the policy of insurance would make no
sense. It is only fair to say that, as I understood the argument, counsel for the Prudential did not
contend for such a restricted meaning of the word. And I am not at all surprised. Were we to hold
that ‘accident’ did not apply to negligent acts, I imagine that the lucrative class of insurance
business covered by the hearth and home’ policy would disappear overnight. Such policies are
taken
Page 963 of [1971] 2 All ER 949
out only by people who wish for protection against liability for injuries caused by
accidents due to their own negligence or that of members of their family.
authority.
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I cannot agree that the learned judge looked at the second shot ‘in vacuo’. In my view he
rightly considered it in the light of all that led up to it. He contrasted it with the first shot which
was intentionally fired—albeit to frighten but not to injure.
I agree with the learned judge that ‘accident’ connotes ‘without intending to injure’. I
also agree that however negligent or reckless Mr Barr may have been and however deliberate
and dangerous his actions leading up to the shooting, still on the assumption (which is conceded)
that he did not intent to shoot or injure Gray, the injuries from which Gray died were caused by
accident. Prior to the Road Traffic Act 1930 which compelled a driver to be insured against
liability for all third party risks—even for intentionally running down a pedestrain—it had never
been suggested that a motorist who injured a person whilst driving had not caused the injury by
accident because he was deliberately driving at a speed he realised to be dangerous and in a way
which might well kill or injure members of the public—not even if he was drunk and knew it:
see, for example, Tinline v White Cross Insurance Association Ltd and James v British General
Insurance Co Ltd. These cases were decided on the basis that the injuries had been caused by
accident which rendered the insurers liable under the terms of the policy and the only point
discussed was whether, on grounds of public policy, the assured was precluded from enforcing
his contractual rights.
I recognise that:
‘… it is now established … that causa proxima in insurance law does not necessarily
mean the cause last in time, but what is ‘in substance” the cause … or the cause “to be
determined by commonsense principles“.’
Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd ([1940] 4 All ER
169 at 178, [1941] AC 55 at 71) per Lord Wright. For example, the loss of a ship which is
torpedoed or scuttled and subsequently becomes a total loss by taking in sea water is in truth
caused by the ship being torpedoed or scuttled and not by perils of the sea: see Leyland Shipping
Co v Norwich Union fire Insurance Society and P Samuel & Co Ltd v Dumas. This does not
mean, however, that the last cause necessarily can never be the real cause of any loss or injury. I
authority.
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should think that it would be difficult to hold, at any rate on principles of common sense, that a
ship which sank after being torpedoed or scuttled with the intention of sending her to the bottom
of the sea, had been lost fortuitously. The cause of the loss in such a case was obviously no
accident and cannot be attributed to perils of the sea.
Since Mr Barr is conceded to have had no intention of shooting or injuring Mr Gray, I

find it equally difficult to hold that the shot which went off unintentionally was fired or caused
Mr Gray’s injuries and death otherwise than by accident. I am afraid that I cannot agree that the
learned judge approached this case on the old-fashioned basis that the last of many causes
leading up to the accident was necessarily the real cause of the accident: see Ionides v Universal
Marine Insurance Co ((1863) 14 CBNS 259 at 289). I think that he decided (rightly in my view)
that the accident of Mr Barr falling on the gun and thereby firing the second barrel was in
substance and in common sense the real cause of Mr Gray’s injuries resulting in his death. For
these reasons I agree with the learned judge’s finding that the injuries to Mr Gray were caused by
accident.
2. Was this accident an accident of a kind intended to be covered by the policy of

insurance?
This is a difficult question. I incline to the view that, although the accident in
Page 964 of [1971] 2 All ER 949
question was of the genus ‘accident’ referred to in the policy, it was not a species of that
genus which the policy was intended to cover. No doubt, the language of the policy is wide
enough to cover any kind of accident. I think, however, that it should be read as subject to an
implied exception. The exception being that the policy does not apply to injuries caused by an
accident occurring in the course of threatening unlawful violence with a loaded gun. It is, of
course, well settled that no term can be implied into a contract unless necessary to give it
ordinary business efficacy. I doubt whether from the point of view of ordinary business the
parties can be taken to have intended to cover such a risk as this unless at any rate they had stated
such an intention in express words. Put in another way, if the officious bystander had asked the
authority.
Page | 406
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parties when the policy was written, ‘Do you intend to cover such an accident as this?’ they
would have both unhesitatingly have answered ‘No’. If I am right in this view, no question of
public policy can arise. If, however, I am wrong and the contract does cover accidents of this
kind, then the following question arises.
3. Is the defendant precluded on grounds of public policy from enforcing the contract of
insurance?
It is well settled that if a man commits murder or committed felo de se in the days when
suicide was still a crime, neither he nor, his personal representatives could be entitled to reap any
financial benefit from such an act: In the Estate of Crippen and Beresford v royal Insurance Co
Ltd. This was because the law recognised that, in the public interest, such acts should be deterred
and moreover that it would shock the public conscience if a man could use the courts to enforce a
money claim either under a contract or a will by reason of his having committed such acts.
Crimes of violence, particularly when committed with loaded guns, are amongst the
worst curses of this age. It is very much in the public interest that they should be deterred. A
man, covered by a hearth and home policy such as the present, walks into a bank with a loaded
gun. He intends only to frighten and not to shoot the cashier. He slips and accidentally shoots a
customer standing by the counter. It would be strange indeed if he could enforce the policy in
respect of his liability to that customer. Once you threaten violence with a loaded gun and it goes
off it is so easy to plead accident. Evidently it is very difficult for the prosecution to prove the
contrary. Although public policy is rightly regarded as an unruly steed which should be
cautiously ridden, I am confident that public policy undoubtedly requires that no one who
threatens unlawful violence with a loaded gun should be allowed to enforce a claim for
indemnity against any liability he may incur as a result of having so acted. I do not intend to lay
down any wider proposition. In particular, I am not deciding that a man who has committed
manslaughter would, in any circumstances, be prevented from enforcing a contract of indemnity
in respect of any liability he may have incurred for causing death or from inheriting under a will
or on the intestacy of anyone whom he has killed. Manslaughter is a crime which varies
infinitely in its seriousness. It may come very near to murder or amount to little more than
authority.
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inadvertence, although in the latter class of case the jury only rarely convicts. In the Estate of
Hall, Hall v Knight and Baxter may seem to be an authority for the proposition that anyone who
has committed manslaughter, in any circumstances, is necessarily under the same disability as if
he had committed murder. The facts however are not stated in the report and they are of vital
importance in order to understand the decision. They have now been ascertained from the record.
A man named Julian Hall kept a woman named Jeannie Baxter and had made a will in her
favour. They had had many quarrels. He had promised to marry her but had not done so. On 13
April 1913 she took his revolver and whilst he was in bed, shot him
Page 965 of [1971] 2 All ER 949
dead with four or five shots. She was acquitted of murder but convicted of manslaughter.
It is small wonder that the court held that, on grounds of public policy, she could not take under
Hall’s will. The only surprising thing about the case is that she was acquitted of murder,
apparently for no reason, except, perhaps, that she was defended by Mr Marshall Hall.
The cases of Tinline and James, in which it was held that persons convicted of
manslaughter for reckless and drunken driving could nevertheless recover indemnity from their
insurers, were doubted in Haseldine v Hosken but approved by this court in Marles v Philip
Trant & Sons Ltd (No 2). It seems now to be settled law that a motorist can rely on his policy of
insurance to indemnify him in respect of his liability for any injuries which he has caused
otherwise than on purpose: Hardy v Motor Insurers’ Bureau. These road traffic cases may be sui
generis. In any event, although motor cars have sometimes been called lethal weapons, these
cases are not in my view akin to the cases in which injuries are caused in the course of
unlawfully threatening a man with a loaded gun. Public policy is not static. Even if the crime of
suicide had not been abolished by statute, it may be that today Beresford’s case would have been
differently decided. In any event, threatening violence with a loaded gun would, I am sure, now
be generally regarded as much more shocking and necessary to be deterred than what the
unfortunate Major Rowlandson did in Beresford’s case. I am confident that in any civilised
society, public policy requires that anyone who inflicts injuries in the course of such an act shall
authority.
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not be allowed to use the courts of justice for the purpose of enforcing any contract of indemnity
in respect of his liability in damages for causing injury by accident.
Damages
Everyone must have the greatest sympathy with the defendant. He was pushed almost
beyond the limits of human endurance. This explains and mitigates what he did, but cannot
excuse it. It certainly cannot diminish the compensation to which the widow and children are in
law entitled. I think that the learned judge made a fair ‘assessment’ of this compensation. I
cannot agree that it is open to the criticism as being over generous. Naturally this assessment
depended as such assessments always do on many imponderables. Mr Gray might have given up
farming. He might have become penurious. He might have gone to New Zealand and evaded his
financial responsibilities for his wife and children. On the other hand, he was an excellent farmer
with farming in his blood. Had he continued to farm Farleigh Court his net income after tax, as
the learned judge found on ample evidence, would have been £4,000 a year. The fringe benefits
of farming such as tax free heat, light, telephone, rates, car, garden, etc could not have been
worth much less than another £1,000 a year net. It seems to me that to assess the dependency at
£3,000 a year in these circumstances was extremely conservative. No doubt the chances of
reconciliation could not be rated very high and the prospect of his continuing to farm at Farleigh
Court depended largely on the reconciliation. The marriage, however, had been very happy until
Mrs Barr came along. There had been no difficulties previously. Mr Gray’s infatuation is not an
uncommon phenomenon. But the madness often passes, and the marriage is mended. Mrs Gray
was certainly anxious for a reconciliation. When it came to the crunch Mrs Barr was not
prepared to leave her family for Mr Gray. Had she vanished from the scene, the chances of
reconciliation although not by any means certain, would have been real. If Mrs Barr had gone to
live with Mr Gray as his wife, which seems unlikely, he might well have successfully carried on
Page 966 of [1971] 2 All ER 949
at the farm. He might, of course, have fallen between the two of them and gone to pieces
or to New Zealand. If this had been a stable marriage the learned judge would have awarded
£40,000. This, in my view, would have been a modest sum for the widow and children of a man
authority.
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of 32 years of age earning the equivalent of nearly £5,000 a year net. The learned judge fairly
considered all the chances and concluded that, after deducting one-half from what he would have
awarded had this been indeed a stable marriage, £20,000 was the appropriate award but for the
estate of £16,500 left by Mr Gray who died intestate. The learned judge discounted this by
£2,500 and therefore deducted £14,000 plus the £20,000 and gave judgment for the plaintiffs for
£6,000. I do not consider that this was over generous nor do I think that it was mean but about
right in all the circumstances. It is said by the plaintiffs that the learned judge deducted too much
from the £20,000. The family, however, benefited on Mr Gray’s death from his estate to the sum
of £16,500. They might have had to wait 40 years or more before inheriting had Mr Gray lived
his full time. It is true he might have added to his capital, but he might have spent it. I do not
consider that this court ought to interfere with the award. I would certainly not diminish it.
Indeed, counsel for the defendant who argued the case with his usual ability, did not really press
the cross-appeal. He wisely concentrated on defeating the attempt to increase the award beyond
£6,000.
For these reasons I would dismiss the appeals and leave the judgment undisturbed.
PHILLIMORE LJ. This is a strange case. In 1965 Mrs Gray who is the plaintiff was
living with her husband, a farmer, and their two children at Farleigh Court Farm in Surrey. They
met the defendant, Mr Barr, and his wife who lived nearby and who had a business in designing,
manufacturing and selling ladies’ blouses for which purpose they travelled to their factory at
Tooting every day.
Mr Gray and Mrs Barr were strongly attracted to each other and in May 1966 Mr Gray
left his farm without word to his family and went to New Zealand. He had, as he thought,
arranged with Mrs Barr that she should fly out to join him; but in fact she did not do so. She
remained with her husband and their three sons. Mr Gray returned to England in October 1966,
and went back to live at Farleigh Court Farm; but his wife realised that he was still in love with
Mrs Barr and consulted solicitors. He signed a deed to provide maintenance for her and their two
children and Mrs Gray moved into a separate house at Edenbridge with the children on 21 April
1967. Not long after this Mrs Barr left her husband and went to Scotland with Mr Gray; after
authority.
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about a week they returned and she then went to her mother, and then, on 13 June 1967, affairs
reached a climax. Mr and Mrs Barr spent the evening together and he believed that they had
agreed on a reconciliation. However, after they had returned home from the club where they had
dined she disappeared. Later that night she was found sleeping in a copse not far away from her
home. She had taken a quantity of tablets in an attempt to commit suicide and she was in hospital
for three weeks before she was allowed to return home.
Meanwhile Mr Barr thought that she must have gone back to Mr Gray at Farleigh Court
Farm. He drove up there and then returned to his home where he picked up a double-barrelled
12-bore shotgun and cartridges. He loaded both barrels and left despite the advice of a relative—
Miss Milburn—who also acted as his secretary and who tried to stop him from taking the gun. (It
is, perhaps, a little ironical that Mr Gray had sold him the gun before he left for New Zealand.)
Mr Barr drove to Farleigh Court Farm and what followed illustrates the state of emotion and
tension from which he was suffering. He leaped out of his car and rushed into the house leaving
the engine of his car running.
He was welcomed by Mr Gray who shouted down a friendly greeting to him from the top
of the stairs. It is clear that Mr Barr was certain his wife was there in Mr Gray’s bedroom. He
was quite beside himself. He began to mount the stairs carrying the loaded gun. He disregarded
Mr Gray’s denial that Mrs Barr was there
Page 967 of [1971] 2 All ER 949
and his advice not be a bloody fool and to put the gun down. When he got close to the top
of the stairs he fired the right barrel into the ceiling. His case was that he did this to frighten Mr
Gray so that he might not attempt to prevent him from going past him and into the bedroom
where he thought his wife was.
What happened afterwards is largely conjecture. It appears that the two men may have
grappled and that at some stage thereafter a second shot was fired from somewhere further down
the staircase and that this shot hit Mr Gray in the middle of the chest—a shot from which he died
soon after. At some time, and Mr Barr’s case was that it was at the same time, the stock of the
authority.
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gun broke at its narrowest part below the trigger guard and the suggestion was that the defendant
had fallen or been propelled down the stairs falling on his gun with the fatal results I have
indicated. Mr Barr was tried at the Central Criminal Court by Melford Stevenson J and a jury.
After a summing-up which was in several respects inadequate but in the course of which the jury
were plainly invited to acquit both of murder and manslaughter, they duly did so. It is to be
assumed that their verdict was intended to mean that the death was an accident.
This action was brought by Mrs Gray against Mr Barr, alleging that he was liable to her
under the Fatal Accidents Acts 1846–1959 for casing the death of her husband by negligence. He
does not dispute liability, but has joined the Prudential Assurance Co Ltd on the ground that they
are liable to indemnify him. Apparently Mrs Barr had over a number of years taken out on behalf
of the family a ‘hearth and home’ policy which admittedly covered her husband as one of the
insured (I omit words which are not material): ‘… against all … sums which such insured shall
become legally liable to pay as damages in respect of … bodily injury to any person … caused
by accidents happening during the period of insurance within Great Britain.' In their defence the
third party, namely the Prudential, admitted that the defendant Mr Barr was an insured within
‘the intendment’ of the policy and that, having entered the house of the deceased Mr Gray armed
with a loaded shotgun, he then shot and killed him ‘without intending to kill him or to cause him
grievous bodily harm’. In short they did not seek to allege that the killing amounted to murder.
They proceeded to deny that the facts disclosed ‘bodily injury … caused by accident within the
intendment of the policy,’ and alleged that Mr Barr was guilty of manslaughter and accordingly
was not entitled to indemnity. In alleging manslaughter it was pleaded that Mr Gray’s death was
due both to an unlawful and dangerous course of conduct and also to recklessness on the part of
Mr Barr.
There was evidence before Geoffrey Lane J which was not before the jury at the Central
Criminal Court. Having heard the case at length and having directed himself in accordance with
the judgment of Humphreys J in R v Larkin ([1943] 1 All ER 217 at 219), he found that the
defendant had been guilty of manslaughter on both grounds. He put the matter in a passage
([1970] 2 All ER 702 at 708, [1970] 2 QB 626 at 637) which has been read by Lord
Denning MR. He proceeded to consider a Canadian decision, namely, Candler v London &
authority.
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Lancashire Guarantee & Accident Co of Canada and then turned to Trim Joint District School
Board of Management v Kelly, and in particular to Earl Loreburn’s speech ([1914] AC at 681)
where—dealing with the word ‘accident’—he concluded that there was no single rigid meaning
in common use of the word, and ended:
‘In short, the common meaning of this word is ruled neither by logic nor by etymology,
but by custom, and no formula will precisely express its usage for all cases.’
Page 968 of [1971] 2 All ER 949
The learned trial judge then concluded ([1970] 2 All ER at 709, [1970] 2 QB at 638) that
the word ‘accident’ in the policy must connote something done without intention as opposed to
something done without negligence. Since the second shot was not intentionally aimed or fired
he found that the death of Mr Gray was an accident however deliberate the actions which led up
to it. Thereafter he proceeded to find that the defendant could not recover on grounds of public
policy.
It is said that the learned judge’s comment that, unless the policy covered something done
without intention, it would be of little value since it would afford no protection in the event, for
example, of a negligent shot when out shooting game, was wrong. It is said that since the jury at
the Central Criminal Court found this killing was an accident and since the third party admits
that it was unintentional and the learned judge has so found, it must be an accident within the
policy. I have even heard the question asked, ‘When is an accidental death not an accident?’ I
confess that I find these arguments too specious and too clever. I do not think that one can isolate
the second shot from all that went before. In my judgment the incident should be regarded as a
whole. The decision in Trim Joint District School Board of Management v Kelly like other cases
under the Workmen’s Compensation Acts, is only of moderate assistance in that in such cases
the incident is to be described from the point of view of the victim. All their Lordships agreed
that the word ‘accident’ must be given its ordinary meaning in the context—they differed four to
three as to what they ordinary meaning was.
authority.
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In my judgment Geoffrey Lane J was right in saying ([1970] 2 All ER at 709, [1970] 2
QB at 638) that the incident must be described from the point of view of the claimant on the
policy, namely Mr Barr, who held, or at least brought to the scene, the loaded gun, the shot from
which killed Mr Gray? I think that the true question is whether people would commonly agree
with Mr Barr if after describing all the circumstances as they occurred he went on to say, ‘It was
an accident’. I confess that I would not.
Let me recount the evidence as stated by the learned judge ([1970] 2 All ER at 705,
[1970] 2 QB at 634). Mr Barr was beside himself—he was in a very emotional state. He drove to
Farleigh Court Farm and according to him there were no lights on. He drove back home and he
picked up his 12-bore shotgun and loaded both barrels putting further cartridges into his pocket.
He drove back to the farm and leaped from his car leaving the engine running. He rushed into the
farmhouse carrying the gun. Apparently Mr Gray was at the top of the stairs and called a friendly
greeting and in answer to Mr Barr’s enquiry whether his wife was there said that she was not. Mr
Barr started to walk up the stairs carrying his gun to the left at the high port. Mr Gray told him to
put it down but he came on. He kept on climbing the stairs until he was very close to Mr Gray
who was on the landing at the top. Mr Barr then deliberately fired the right-hand barrel into the
ceiling—his case was that he did this to frighten Mr Gray and to ensure that he was not
prevented from entering the bedroom to see if his wife was there. If Mr Barr’s story to the police
was true he then swung the gun back in one hand making a threatening gesture at Mr Gray so as
to ensure that he got out of his way.
In my judgment Mr Barr by this conduct was guilty of wilful and culpable assault against
Mr Gray. This was an unlawful act of violence against the person performed by a man wielding a
loaded shotgun. It must have been a terrifying experience for Mr Gray. I should have thought it
obvious that in such circumstances Mr Gray must either step aside or grapple with Mr Barr. If
Mr Barr thought it necessary to fire the gun when so close to Mr Gray, it rather looks as if he
may not have thought him easily frightened. What happened? To use the words of the learned
judge ([1970] 2 All ER at 708, [1970] 2 QB at 637) Mr Gray—
Page 969 of [1971] 2 All ER 949
authority.
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‘… to protect himself as he no doubt thought from death, grappled with the defendant,
the defendant fell down the stairs … breaking the stock of the gun as he fell, and involuntarily
firing the second barrel at the same time.’
True it was strange that the shot should have hit Mr Gray with such accuracy in a vital
spot; but who dare say that it was strange in all the circumstances that the second barrel was
fired. If a man with a loaded shotgun grapples with another or provokes another to grapple with
him, how can it be said that the fact that the gun is fired is something which it is not reasonable
to foresee. If this is right, then it is wrong to dissect the incident as the learned judge did and give
judgment on the basis that the second shot is in some way an isolated event. Who in the
circumstances could possibly say that the fact that the second shot was fired was a pure accident
or just an accident?
Was the fact that the shot so fired actually killed Mr Gray an accident in the true sense?
Could Mr Barr have said it was an accident if it had merely wounded Mr Gray or if it had killed
somebody else who happened to be nearby? No doubt the word ‘accident’ involves something
fortuitous or unexpected, but the mere fact that a wilful and culpable act—which is both reckless
and unlawful—has a result which the actor did not intend surely does not, if that result was one
which he ought reasonably to have anticipated, entitle him to say that it was an accident. After
all, an unlawful and reckless act may result in death albeit the actor did not intend to cause that
death—if he had it would, of course, have been murder. If he did not is it automatically an
accident? If anyone who saw him doing it could foresee that it was dangerous and reckless and
might result in harm to another and in the event it did so and thus caused a death which the law
terms manslaughter, does the ordinary citizen term it an accident? I think not.
I am conscious of cases where the unlawful act was so technical or the recklessness so
unlikely to cause death that if death resulted an ordinary citizen might say, ‘Well, the lawyers
can call it manslaughter but I call it an accident.' This case is not in that sort of class. This was a
grave case of violence to the person—an unlawful act in that it was an assault in circumstances
calculated to cause terror—it was reckless in that it was carried out with a loaded gun which if it
authority.
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was discharged as it might well be in the course of the violent episode created by the actor might
well cause death.
I find some support for this view in MacGillivray on Insurance Lawc:
‘Where the happening which caused the death or injury was the foreseeable result of an
intended action of the insured, the death or injury is not caused by accident.’
He then goes on to quote instances. I would also refer to Lord Atkin’s speech in
Beresford v Royal Insurance Co Ltd ([1938] 2 All ER 602 at 604, [1938] AC 586 at 595):
‘On ordinary principles of insurance law, an assured cannot by his own deliberate act
cause the event upon which the insurance money is payable. The insurers have not agreed to pay
on that happening. The fire assured cannot recover if he intentionally burns down his house, nor
the marine assured if he scuttles his ship, nor the life assured if he deliberately ends his own life.
This is not the result of public policy, but of the correct construction of the contract.’
22 Halsbury’s Laws (3rd Edn) p 297, para 591 is to the same effect as Lord Atkin’s
speech.
Who can suppose that either party if told the facts of this case when entering into the
contract would have agreed that the death of Mr Gray could be regarded as an ‘accident’ covered
by the policy. In my judgment then this was not an accident and accordingly the policy cannot
avail Mr Barr in his defence.
Page 970 of [1971] 2 All ER 949
In any case, however, I am satisfied that on the facts of this case the learned judge was
right in finding that the defendant Mr Barr was precluded by public policy from recouping
himself from the Prudential Assurance Co Ltd against the claim of the plaintiff.
As Lord Denning MR and Salmon LJ have said manslaughter varies from conduct which
is almost murder to conduct which is only criminal in the technical sense. It would be foolish to
attempt to lay down any general rule. It is wiser I think to confine my decision to the facts in this
authority.
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INSURANCE LAW CASES
case. In an age of violence—an age where the use of firearms is all to frequent—it would I think
be very odd if a man who had had in his hands a loaded shotgun from which a shot had been
fired and had killed another at a time when he had just assaulted that other with the gun could
recover on an insurance policy which protected him from liability if he was negligent in the use
of the shotgun. This was in fact a grave case of manslaughter and in my judgment the learned
judge was right in saying that the defendant could not recover against the Prudential Assurance
Co Ltd on the grounds of public policy.
As to damages, I find myself in complete agreement with the views of Salmon LJ that we
should not disturb the order of the learned judge. I do not think it right to make any reduction in
the damages awarded by the learned judge.
I would dismiss both appeals.
Appeal and cross-appeal on damages dismissed. Appeal by defendant against judgment in

favour of third party dismissed. Leave to appeal to the House of Lords.
Solicitors: Kenneth Brown, Baker, Baker (for the plaintiffs); Kingsley, Napley & Co (for
the defendant); C A Rutland (for the third party).
NOTES APPENDED O THE JUDGMENT OF LORD DENNING MR
R v BAXTERd
Jeannie Baxter tried before Rowlatt J on 3 June 1913 on charge of murder. Plea not
guilty. Found not guilty of murder, but guilty of manslaughter and sentenced to three years penal
servitude. For prosecution, Cecil Whiteley. For defence, Marshall Hall KC and J P Valetta.
Appeal dismissed on 23 June 1913.
A man named Julian Hall kept a woman named Jeannie Baxter and had made wills in her
favour. They had many quarrels. He had promised to marry her and had not done so. On 13 April
1913 she took his revolver and, whilst he was in bed, shot him dead with four or five shots from
the revolver. People in next rooms heard the shots. She came out and said: ‘I have shot him. He
authority.
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INSURANCE LAW CASES
dared me to do it.' She told the policeman: ‘I did it. I shot him four times. We had arranged to do
it.' She told the inspector: ‘he has aggravated me to do this. My God! Have I really murdered
him. Is he dead?’
R v CASHMORE
Courts-Martial Appeal Court, Hilbery, Havers and Thesiger JJ
Judgment delivered 28 July 1959
Stanley Rees QC and R J A Batt for the accused.
E Garth Moore for the Crown.
HILBERY J. This is an appeal under the Courts-Martial (Appeals) Act 1951 from a
finding of manslaughter which was substituted by the confirming officer in the exercise of his
powers under s 110 of the Army Act 1955, the confirming officer
Page 971 of [1971] 2 All ER 949
substituting for a finding of murder one of manslaughter. Against that finding the accused
appeals to this court, and counsel for the accused has conceded that on the facts of this case the
question which this court really has to decide is whether it is a case in which the court should
apply the proviso to s 5(1) of the Courts-Martial (Appeals) Act 1951, or not. Counsel has said,
therefore, that the question which this court has to decide in this case is: must this court say that
this is so clear a case of manslaughter that no court-martial properly directed could reach any
conclusion which was less than that the accused was guilty of manslaughter? Let me say at once,
having regard to the facts of this case that this court is clearly of the opinion that this is precisely
the kind of case to which that proviso was intended to apply and in which it is right to apply the
power given to the court by that proviso.
The facts, insofar as they are material, can be quite shortly stated. The accused was a
sapper serving in Germany with his unit. He had been under canvas at Kiel for a period from 5 to
9 August and there he had been guilty of insubordination and apparently rudeness and conduct
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INSURANCE LAW CASES
contrary to good discipline. He had been told by Lt Renwick, the dead man in this case, that on
their return to Nienberg he would be proceeded against in respect of that insubordination and
misconduct; he was told that he would be charged. On the return of the accused to Nienberg on
the day of this fatal occurrence which is the subject of this case, the accused first of all went and
stole 30 rounds of ammunition from an office where it was kept. He then went to the armoury,
got into the armoury and took a rifle. He threatened the corporal who was in charge of the
armoury with the rifle, which he apparently loaded, and then locked up the corporal who was in
charge of the armoury. He then, after threatening the corporal in that way and locking him up,
went down the stairs. The evidence was that he fired a shot while he was going down the stairs,
and he said he accidentally fired the rifle while he was going down the stairs. He had his packed
suitcase with him. He then came down to the chief clerk’s office, where there was the chief clerk,
Cpl Hughes. He immediately threatened Cpl Hughes with the loaded rifle, demanding that Cpl
Hughes should telephone for Lt Renwick to come round to the office. Under the threat of the
rifle pointed at him, Cpl Hughes telephoned to the officers’ quarters and got in touch with Lt
Renwick and invited him to come round as he said that the accused was there wishing to see him
and speak to him. Lt Renwick came from the officers’ quarters and from the corridor outside he
entered the chief clerk’s office, and the moment he entered he saw the accused pointing the rifle
at him. Lt Rinwick drew back behind the door and then, looking round it, spoke to the accused,
and there was no doubt a conversation in which he sought to make the accused act sensibly and
put down the rifle. The accused threatened Lt Renwick, not only pointing the rifle in his direction
but saying that if he did not come back into the room he, the accused, would shoot Cpl Hughes,
and Lt Renwick partly came back into the room so that at any rate his head and shoulder and his
lift side were round the door. The accused was then sometimes pointing the rifle at Lt Renwick
and sometimes pointing it at Cpl Hughes, when there came into the room Sapper Milne. He
entered the room and saw the accused wave the rifle in his direction, apparently at him, and
Sapper Milne retreated; the expression was used that he scampered out of the room. But Lt
Renwick, a brave man, continued to stand with the left part of his body exposed round the door,
and something further was said; it is said that Lt Renwick said to the accused that he had not
anyhow the guts to fire the rifle. The accused raised the rifle to a position which has been
variously described, and it is said differently described, by Cpl Hughes on occasions, but he
authority.
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certainly used the rifle and fired a shot which passed between where Lt Renwick was party in the
room and where Cpl Hughes was standing. It struck a notice board. Then he fired it again and hit
a flower pot which was standing on a filing
Page 972 of [1971] 2 All ER 949
cabinet. Cpl Hughes said that he then moved back towards the opening to the clerk’s
office. There was a doorway between the chief clerk’s office where these episodes were taking
place and the clerks’ office next door. He moved towards that position until Cpl Hughes could
see the position of the rifle but could not see the position of the accused’s body because of the
door to the clerks’ office, which was then open. Cpl Hughes said that though he could not see the
position of the accused’s body, the position of the rifle was the same as when he fired and hit the
board and the flower pot. The evidence was that the accused advanced a pace or two from the
position by the door in the clerks’ office into the room, the chief clerk’s office, and therefore
nearer to Lt Renwick. The rifle was again fired, and this time it struck the unfortunate Lt
Renwick in the stomach, and it was from that wound that he died. It passed through his body and
finally it struck the wall 4 feet 9 3/4 inches above the ground. It had struck the edge of the door
which was partly apparently covering Lt Renwick 4 feet 8 inches from the floor, and so, one
would suppose, must have hit Lt Renwick fairly high up in the stomach.
Those are the facts, except for this, that immediately afterwards the accused got through
the window, still carrying the rifle. People attempted to stop him. He fired in their direction, and
he went on certainly with three or four more shots until he was spoken to by the colonel. He
pointed the rifle at the colonel, and when the colonel said to him: ‘You know what will happen to
you if you kill me’. He said: ’Yes, I shall hang.' The colonel, again obviously a very brave man,
notwithstanding that, went on speaking with him, and finally arrested him.
Those were the facts, and it was on those facts that the charge of murder was brought
before the court-martial. The court-martial officers were directed by the assistant judge advocate
in a summing-up which certainly was in many respects defective. I need not go through the
summing-up with criticisms of it because the criticisms of it which are set out in the grounds of
appeal would be largely appropriate if one was considering the finding of murder; but what we
authority.
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have to consider is whether this was a case in which, as I have already quoted counsel for the
accused as saying, the court ought to exercise the powers given to it by the proviso, that is, be
prepared to say that it is so clear a case of manslaughter that no court-martial properly directed
could have reached any conclusion other than that he was guilty of manslaughter. Really, it
comes to this, that counsel for the accused has to persuade us and has to urge that the unlawful
and dangerous course of conduct on which the accused set out when he stole the rifle and began
for the purpose, as he said himself, of holding people up and robbing them, this conduct of
threatening people with this loaded rifle, stopped for an instant when he came a pace or two back
into the room where Lt Renwick was, and then accidentally fired the shot. He has to say that
because, of course, so far as manslaughter is concerned, if in the course of conduct which was
unlawful and dangerous he did accidentally fire the rifle, which is what he said happened, and
somebody was killed as a result, he is nonetheless as a matter of law guilty of manslaughter.
That was stated in express terms in this court in the judgment of the court in R v Larkin
([1943] 1 All ER at 219), where Humphreys J, giving the judgment of the court, said:
‘Where the act which a person is engaged in performing is unlawful, then, if at the same
time it is a dangerous act, that is, an act which is likely to injure another person, and quite
inadvertently he causes the death of that other person by that act, then he is guilty of
manslaugher.’
Then he drew the distinction between that and what will make it murder, and went on: ‘If,
in doing that dangerous and unlawful act, he is doing an act which amounts to a felony, he is
guilty of murder.’
Page 973 of [1971] 2 All ER 949
In our view, it is quite impossible to look at the facts of this case and to come to any other
conclusion than that there was a continuous series of unlawful and dangerous acts being done by
the accused without interruption, going from one unlawful and dangerous act and pointing this
rifle, to another of the same class. If it be that it accidentally went off while he was engaged in
the course of those unlawful acts, and was doing one of those unlawful and dangerous acts at the
authority.
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time when the rifle went off accidentally, he is still guilty of manslaughter, and there is no escape
from it.
In those circumstances, the answer to counsel for the accused’s question must be, it
seems to us, that no court-martial properly directed could reach any conclusion but that this was
manslaughter at the very least. In the exercise of our discretion under the proviso we have no
hesitation whatever in saying that our opinion is that no court-martial properly directed could
reach any conclusion in this case except that it was manslaughter, and there is certainly no
miscarriage of justice in what has been done by the confirming officer in the exercise of his
discretion under s 110. In the circumstances, this appeal is dismissed.
MARK ROWLANDS LTD V BERNI INNS LTD [1985] 3 ALL ER 473
Appeal
By a writ issued on 25 January 1982 the plaintiffs, Mark Rowlands Ltd, claimed against the
defendants, Berni Inns Ltd, damages for negligence and/or nuisance which resulted in a fire on
27 January 1980 at the plaintiffs’ premises at 10–12 Lands Lane and 6–12 Albion Place, Leeds.
By a counterclaim the defendants claimed against the plaintiffs damages for breach of the terms
of a lease made between the defendants and the plaintiffs, and as against Legal and General
Assurance Society Ltd (the insurers) a declaration that the insurers were liable to indemnify the
defendants in respect of the cost of rebuilding and reinstating the premises. On 25 November
1983 Stephen Brown LJ sitting as a judge of the High Court ordered that judgment be entered for
the defendants. The plaintiffs appealed. The facts are set out in the judgment of Kerr LJ.
Michael Turner QC and Jonathan Harvey for the plaintiffs.
Michael Harvey QC and Roger Ter Haar for the defendants.
Cur adv vult
authority.
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31 July 1985. The following judgments were delivered.
KERR LJ. This is an appeal from a judgment delivered by Stephen Brown LJ on 25 November
1983 sitting as a judge of the Queen’s Bench Division. It raises an issue of far-reaching
importance in relation to fire insurance. In brief, this is whether a landlord’s fire insurers can
recover damages by subrogation from a tenant by whose negligence the insured building has
been destroyed or damaged by fire when the lease provided that (i) the landlord should insure the
whole building against, inter alia, fire (ii) the tenant was to contribute to the cost of the
insurance, (iii) the tenant was to be relieved from his repairing obligations in the event of
damage to the building by fire, and (iv) the landlord would lay out the insurance moneys to
rebuild the demised premises. It was common ground that similar provisions are frequently to be
found in leases for commercial and residential premises and that this issue had not previously
arisen for decision in our courts, although it has been extensively litigated in Canada and the
United States. Since the insurers’ right of subrogation depends on the rights of the landlord, the
issue can also be stated as being whether under a lease in such terms a landlord who has been
fully indemnified by his insurers under an ordinary policy covering the risk of fire, whether
Page 476 of [1985] 3 All ER 473
caused by accident or negligence, can nevertheless recover damages from the tenant on the
ground that the fire had been caused by his negligence. Stephen Brown LJ decided this issue in
favour of the tenant, and the landlord’s insurers, suing in the name of the landlord by virtue of
their right of subrogation, are now appealing against this decision. We were told that in the
present case the effective defendants are the tenant’s liability insurers, but the issue would of
course be precisely the same in proceedings brought against tenants who have no such insurance.
In the early hours of 27 January 1980 a serious fire broke out in a building known as 10–12
Lambs Lane and 6–12 Albion Place in Leeds and effectively destroyed the whole building. The
plaintiffs were the freeholders but did not occupy any part of the building. The fire originated in
what is described as the ceiling void of the basement part of the premises in which a quantity of
flammable material had been stored or deposited. The basement and part of the ground floor
were occupied by the defendants and used as a restaurant under a lease from the plaintiffs dated
authority.
Page | 423
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28 July 1970. The remainder of the building was occupied by another tenant of the plaintiffs,
originally John Peters (Furnishing Stores) Ltd, and subsequently Waring & Gillow Ltd, and were
used for the storage and sale of furniture. The immediate cause of the fire was electrical and the
plaintiffs had originally joined the electrical contractors as additional defendants. However, they
were subsequently dismissed from the action and this has proceeded on the basis that the
defendants’ negligence was the effective cause of the fire. The quantum of the plaintiffs’ claim
for damages has been agreed in the sum of £1,429,166. This is effectively the cost of reinstating
the whole building, as happened, with the moneys which the plaintiffs received from their
insurers, Legal and General Assurance Society Ltd, and it is also common ground that the
plaintiffs themselves have suffered no additional loss which they can claim in the action. The
pleadings went through many stages, but the only remaining issue, which was raised by a late
amendment, is whether in these circumstances the plaintiffs can maintain an action for
negligence against the defendants.
The terms of the lease, and to a lesser extent of the insurance policy, are of crucial importance to
this issue, and I must accordingly begin by setting out their provisions in so far as these are
material.
The lease between the plaintiffs as landlord and the defendants as tenant was for a term of 30
years from 1 January 1970. It defined ‘the landlord’s premises’ as the whole building and ‘the
demised premises’ as the basement and part of the ground floor to which I have already referred.
I must set out the tenant’s covenants under cl 3(3) and (4). Clause 3(3) provides:
‘To pay to the Landlord a sum or sums of money equal to the amount or amounts (whether
increased by any Act or omission of the Tenant or not) which the Landlord shall from time to
time expend in effecting or maintaining the insurance of the demised premises and being a fair
proportion as certified by the Landlords Surveyor (whose Certificate shall be final and binding in
all respects on the parties hereto) acting as an expert of premiums paid in respect of insuring the
Landlords premises in their full re-building value for the time being including three years rack
rent of the demised premises and the Architects and Surveyors and other fees and incidental
expenses consequent upon rebuilding and reinstating against loss or damage by fire storm
authority.
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tempest lightning explosion aircraft and such other risks as the Landlord shall from time to time
during the said term reasonably deem necessary (all which perils are hereinafter referred to as
“the insured risks”) and such sum or sums made payable by this Sub-Clause shall be paid to the
Landlord on demand on the rent day in each year next following the expenditure thereof by the
Landlord and if not so paid shall be recoverable as rent in arrear.’
This provision was conveniently referred to as requiring the tenant to pay an ‘insurance rent’.
The amount paid by the defendants was at first 5/17ths and later about 25% of the annual
premiums paid by the plaintiffs.
Clause 3(4) provides:
Page 477 of [1985] 3 All ER 473
‘At all times during the said term well and substantially to repair cleanse and keep in good and
substantial repair and condition all parts of the interior of the demised premises and all additions
thereto including all glass in the windows and doors and all internal walls drains sewers
watercourses and all sash cords and door furniture and all Landlords fixtures and fittings and
appurtenances thereto belonging and to replace all missing locks and keys (damage by or in
consequence of any of the insured risks excepted save where the insurance effected by the
Landlord shall be vitiated in whole or in part by any act or omission by the Tenant or by any
person acting for or under the Tenant).’
The tenant’s covenants under cl 3(5) and (6) dealt with his obligation to paint and decorate the
demised premises every seven years and to yield up the premises in a proper state of repair on
termination of the lease. It is unnecessary to set out these provisions save to say that in both
cases there was a similar exemption from these obligations in cases of damage by or in
consequence of the insured risks, as in the brackets at the end of cl 3(4). The tenant’s covenant
under cl 3(11) was in the following terms, so far as material:
‘To insure and keep insured with such Insurance Office as the Landlord shall nominate and in the
joint names of the Landlord and the tenant—(a) the Third Party and Property Owners Liability
Risks of the demised premises … ’
authority.
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This provision is of no direct relevance for present purposes, but counsel for the plaintiffs placed
some reliance on the express requirement for the tenant to insure in joint names, which does not
appear in the corresponding insurance covenants by the landlord. These and the landlord’s
repairing covenants are contained in cl 4 as follows:
‘… (2) To keep the Landlords premises including the demised premises insured against loss or
damage by the insured risks and to lay out any monies received under such insurance in
rebuilding and reinstating as quickly as possible the demised premises or such parts thereof as
shall be destroyed or damaged.
(3) To keep the main walls main timbers boundary walls and main services of the demised
premises in good and tenantable repair and condition.’
Finally I must set out cl 6(4) as follows:
‘If the demised premises or any part or parts of the Landlords premises are so damaged or
destroyed by any of the insured risks as to make the demised premises unfit for occupation or use
and insurance in respect thereof has not become vitiated by any wilful or reckless act or omission
of the Tenant or any person acting under the Tenant then the rent hereby reserved or a proper
proportion thereof according to the extent of the damage sustained shall from the date of such
damage or destruction and until the demised premises shall have been reinstated or made fit for
occupation or use (as the case may be) or for a period not exceeding three years whichever
period is the shorter cease to be payable … ’
I then turn to the insurance policy which the plaintiffs took out pursuant to cl 4(2) of the lease.
The first peril insured against was ‘Fire (whether resulting from explosion or otherwise)’, with
immaterial qualifications, and there was also cover against lightning and explosion which is
irrelevant for present purposes. The subject matter of the insurance was the entire building, an
agreed sum for loss of rent (cf cl 6(4) of the lease) and architects’ and surveyors’ fees. The
insurers agreed that in the event of any part of the building being damaged or destroyed by fire
they would—
authority.
Page | 426
INSURANCE LAW CASES
‘pay to the Insured the value of the property at the time of the happening of its destruction or the
amount of such damage or at its option reinstate or replace such property or any part thereof.’
The persons insured under the policy were described as the plaintiffs as mortgagor and the
insurers themselves as mortgagees, without any reference to the defendants. There
Page 478 of [1985] 3 All ER 473
was a special condition that the insurance did not cover ‘consequential loss or damage of any
kind or description other than loss of rent when such loss is insured by the policy’. In the present
case this is of no relevance, since the plaintiffs sustained no other consequential loss. In the
printed conditions the insurers’ rights of subrogation against ‘other parties’ were expressly
preserved, but it was common ground that this provision did not add anything to the ordinary
rights of insurers at common law. Finally, there was an indorsement mentioning that John Peters
(Furnishing Stores) Ltd ‘have an interest in the insurance by this policy as tenants’. As
mentioned hereafter, the defendants requested that there should be a similar indorsement with
reference to them; this did not happen, but evidently only as the result of an oversight and not
because there would have been any objection to it. It was common ground that the purpose of
such indorsements is merely to record that the persons referred to in them, such as mortgagees or
tenants, have an interest in the proceeds of the insurance in the event of loss or damage to the
subject matter by an insured peril, but in the present case nothing turns on this. As already
mentioned, when the building was destroyed the plaintiffs’ insurers paid in full for its
reconstruction and reinstatement, and there was no dispute between the plaintiffs and the
defendants in this regard: it was common ground that the insurance effected by the plaintiffs and
their use of the insurance moneys complied in all respects with the terms of the lease.
When counsel opened the appeal on behalf of the plaintiffs, his first submission was that the
defendants were not co-insured with the plaintiffs under the terms of this policy. He made this
submission because the judge had placed some reliance on the decision of Lloyd J in Petrofina
(UK) Ltd v Magnaload Ltd [1983] 3 All ER 35, [1984] QB 127, to which I return again later.
However, when counsel addressed us on behalf of the defendants, he immediately conceded,
inevitably in my view, that the defendants could not maintain that they were co-insured with the
authority.
Page | 427
INSURANCE LAW CASES
plaintiffs under this policy. The plaintiffs’ insurers’ claim by subrogation can therefore not be
resisted by the defendants on the ground that they were co-insured parties to the contract of
insurance. A secondary issue was whether the insurance had been effected by the plaintiffs for
the defendants’ benefit as well as for their own benefit. The judge upheld this contention in
favour of the defendants. He relied partly on the terms of the lease and partly on correspondence
passing between the plaintiffs’ insurance brokers and the defendants between 1972 and 1977,
before the occurrence of the fire in 1980. While counsel rightly did not accept that this
correspondence was admissible for the purpose of interpreting the lease, he raised no objection,
presumably on instructions, to its admissibility for the purpose of determining whether the
parties’ common intention was that the insurance should enure for the benefit of the defendants
as well as of the plaintiffs. I do not think that it is necessary to refer to this correspondence in
detail, since I would have reached the conclusion, for the reasons explained hereafter, that the
insurance was intended for the benefit of the defendants as well as of the plaintiffs by reference
to the terms of the lease alone. The effect of the correspondence was to show that the defendants
were at all times concerned that the total sum insured should be sufficient to cover their interest
under the lease as tenants of part of the building, and that it should be increased as necessary
from time to time to keep pace with increases in property values and the costs of reconstruction
and repair. In addition, as already mentioned, they requested at one stage that their name should
be indorsed on the fire policy to record their interest in the insurance as tenants, but this matter
was not pursued and is now of no relevance. The defendants never saw the insurance policy, but
there is no complaint about any of its terms.
After reviewing the facts and referring to certain authorities which I mention later, the judge
concluded his judgment as follows:
‘In my judgment, the true inference to be drawn from the covenants in the lease and from the
facts disclosed in the correspondence passing between the defendants and the plaintiffs’
insurance brokers, to which I have referred, is that the plaintiffs are to be regarded as having
insured the entire premises for the joint benefit of themselves and of the defendants their tenant.
The plaintiffs have been indemnified
authority.
Page | 428
INSURANCE LAW CASES
Page 479 of [1985] 3 All ER 473
and have suffered no loss. In the light of my findings I do not consider that there is any scope for
subrogation. Accordingly, the plaintiffs’ claim must fail.’
The first issue argued on this appeal was whether the judge was right in concluding that the
plaintiffs were to be regarded ‘as having insured the entire premises for the joint benefit of
themselves and of the defendants their tenant’. For the reasons mentioned below I do not think
that this is the decisive issue, but in my view the judge was correct in reaching this conclusion,
both on the terms of the lease and the relevant authorities.
Turning first to the lease, I think that the defendants’ interest in the insurance to be effected by
the plaintiffs under cl 4(2) is plain, as is the fact that it must have been the mutual intention of
both parties that the insurance should enure for the benefit of the defendants as well as the
plaintiffs. The defendants were required to contribute to the cost of the insurance by the payment
of the ‘insurance rent’ under cl 3(3). In the event of damage by fire (we are not concerned with
any other insured peril) the defendants were to be correspondingly relieved from their repairing
and other obligations under cl 3(4), (5) and (6), provided that the insurance was not vitiated by
any act or omission on their part, viz ‘by any wilful or reckless act or omission of the Tenant or
any person acting under the Tenant’ as mentioned in cl 6(4). In the present case we are only
concerned with a fire resulting from the tenant’s negligence, and it must of course be borne in
mind throughout that for the purposes of insurance against the risk of fire it is irrelevant whether
the cause of the fire is accidental or due to negligence on the part of anyone. The effect of cl 6(4)
was to relieve the tenant from the obligation to pay rent to the extent there provided ‘If the
demised premises or any part or parts of the Landlords premises [ie comprising the whole
building] are so damaged or destroyed by any of the insured risks as to make the demised
premises unfit for occupation or use’. For their part, under cl 4(2), the plaintiffs were required to
insure the entire building against fire and to apply the insurance moneys in rebuilding and
reinstating the defendants’ premises as quickly as possible in the event of damage by fire. The
fact that the latter obligation did not extend to the entire building does not in my view militate
against the conclusion that the mutual intention of the parties was that the insurance should be
authority.
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INSURANCE LAW CASES
for the benefit of the tenant as well as the landlord. The lease relating to the remainder of the
building was not in evidence since it is of no direct relevance, but it may well have contained a
similar provision. As pointed out by counsel for defendants, the commercial reason for confining
the reinstatement obligation to the tenant’s premises alone may well be that any alterations which
the landlord might seek to make on reconstruction could then be negotiated with individual
tenants in relation to their own premises without having to involve other tenants.
I therefore turn to the question whether there is anything in law which precludes the conclusion
that the insurance effected by the plaintiffs in this case was also intended to enure for the benefit
of the defendants. In my view the answer is No. Provided that a person with a limited interest has
an insurable interest in the subject matter of the insurance, an issue to which I turn in a moment
in relation to the circumstances of the present case, there is no principle of law which precludes
him from asserting that an insurance effected by another person was intended to enure for his
benefit to the extent of his interest in the subject matter, whether the insurable interest of the
person effecting the insurance be on the whole of the subject matter or only to the extent of a
limited interest in it. Illustrations of relationships which may give rise to this consequence are
those of bailee and bailor and mortgagee and mortgagor. I do not see why the relationship
between landlord and tenant should not be capable of giving rise to the same consequence, and
the decision of Harman LJ (sitting as judge of the Chancery Division) in Mumford Hotels Ltd v
Wheler [1963] 3 All ER 250, [1964] Ch 117 directly supports this conclusion.
In that case the tenant was required to pay ‘a yearly insurance rent equal to the premium for
keeping the property insured against comprehensive risks’ and the landlord covenanted to insure
the entire building on this basis. There was no covenant to reinstate, but the lease contained other
provisions comparable to those in the present case indicating that the tenant had an interest in the
property being adequately insured. As in the
Page 480 of [1985] 3 All ER 473
present case, the insurance was in the name of the landlord alone. On the destruction of the
property by fire and the landlord’s refusal to use the insurance moneys for its reinstatement, the
authority.
Page | 430
INSURANCE LAW CASES
tenant claimed that the landlord was obliged to do so and succeeded. Harman LJ said ([1963] 3
All ER 250 at 256, [1964] Ch 117 at 125):
‘In my judgment, the true question is not whether a covenant to reinstate should be implied, but
whether the true inference is that the lessor is to be treated as insuring for her own benefit or for
the joint benefit of herself and her lessees.’
He then reviewed a number of authorities and concluded as follows ([1963] 3 All ER 250 at 257,
[1964] Ch 117 at 126–127):
‘In my judgment, the true implication is that the landlord’s obligation to insure, done as it was at
the tenants’ expense, was an obligation intended to enure for the benefit of both, and that the
landlord cannot simply put the money in her pocket and disregard the tenants’ claim. She must,
therefore, if called on by the tenants so to do, use the money as far as it will go towards
reinstatement of the property.’
In the context of cases where an insured, A, will be treated as having effected the insurance
partly for his own benefit and partly for the benefit of B, counsel for the defendants rightly
pointed out that the issue whether or not this was the intention of the parties in the circumstances
of any particular case must not be confused with two overriding principles of the law of
insurance. First, he conceded that such an intention cannot be inferred if B had no insurable
interest in the subject matter of the insurance. Second, in cases of indemnity insurance such as
the present, it is axiomatic that no one with an interest in the insurance can recover more than an
indemnity for the loss which he has in fact sustained. In that regard an insurable interest and a
merely limited interest in the subject matter of the insurance are separate concepts which must
not be confused. This distinction does not arise directly in the present case, but it is illustrated in
the context of bailee and bailor by the decision of the House of Lords in Hepburn v A Tomlinson
(Hauliers) Ltd [1966] 1 All ER 418, [1966] AC 451 and in relation to tenant and landlord by the
decision of the High Court of Australia in British Traders’ Insurance Co Ltd v Monson (1964)
111 CLR 86.
authority.
Page | 431
INSURANCE LAW CASES
The submissions of counsel for the plaintiffs against the conclusion that the insurance in the
present case should be treated as having been effected for the benefit of the defendants as well as
of the plaintiffs were based on two grounds. First, he submitted, albeit faintly, and
understandably without enthusiasm, that this conclusion would infringe s 2 of the Life Assurance
Act 1774. This provides that:
‘… it shall not be lawful to make any policy or policies on the life or lives of any person or
persons, or other event or events, without inserting in such policy or policies the person or
persons name or names interested therein, or for whose use, benefit, or on whose account such
policy is to made or underwrote.’
Although obviously directed primarily to life insurance, the words ‘or other event or events’
admittedly widen its scope. A literal application of the language of s 2 would create havoc in
much of our modern insurance law, and Mumford v Wheler would have been decided wrongly or
per incuriam in ignorance of this statutory provision. In my view counsel for the defendants was
right in his submission that this ancient statute was not intended to apply, and does not apply, to
indemnity insurance, but only to insurances which provide for the payment of a specified sum on
the happening of an insured event. I think that this is supported by the long title of the Act, and in
17 Halsbury’s Statutes (3rd edn) 827 it is pointed out that this Act is also known as the Gambling
Act 1774. In Dalby v India and London Life-Assurance Co (1854) 15 CB 365 at 387, [1843–60]
All ER Rep 1040 at 1042 the judgment of the court delivered by Parke B appears to distinguish
insurances covered by this Act from indemnity insurance, and in Tattersall v Drysdale [1935] 2
KB 174 at 181, [1935] All ER Rep 112 at 116 Goddard J appears to have taken the same view.
Page 481 of [1985] 3 All ER 473
The second and more substantial submission of counsel for the plaintiffs in this connection was
that the defendants had no insurable interest in the building as such, including, as I understood
him to say, the parts of it which they themselves occupied as tenants. He pointed out that under
the provisions of the lease the tenants were relieved from all their covenanted obligations in the
event of its destruction by, inter alia, fire, as well as from their obligation to pay rent (though
only for a maximum period of three years) under cl 6(4), and he relied on the plaintiffs’
authority.
Page | 432
INSURANCE LAW CASES
obligation of reinstatement under cl 4(2). In the latter connection he distinguished Mumford

Hotels Ltd v Wheler [1963] 3 All ER 250, [1964] Ch 117, where there was no similar obligation,
and submitted that there was no scope for any further insurable interest in the preservation of the
building. Again, I cannot accept this submission.
To conclude that by virtue of the provisions of the lease the defendants had no interest in the
continued existence of the building in which they were carrying on their business is in my view
untenable, and, if one were dealing with the tenant of a flat in the upper stories of an apartment
block with a similar lease, such a submission would be virtually unarguable. In order to refute it
one only has to quote part of the classic definition of insurable interest given by Lawrence J in
Lucena v Craufurd (1806) 2 Bos & PNR 269 at 302, 127 ER 630 at 643:
‘A man is interested in a thing to whom advantage may arise or prejudice happen from the
circumstances which may attend it … And whom it importeth, that its condition as to safety or
other quality should continue … To be interested in the preservation of a thing, is to be so
circumstanced with respect to it as to have benefit from its existence, prejudice from its
destruction … ’
In my view, without the need for further elaboration, the provisions of the lease cannot have the
effect that the defendants were thereby deprived of any insurable interest in the continuing
existence of the building or ceased to be exposed to any prejudice if it were destroyed.
I therefore conclude, in agreement with the judge, that the defendants are right in their
submission that the insurance effected by the plaintiffs enured for their benefit as well as for that
of the plaintiffs themselves. All the Canadian and American decisions to which I refer later
proceeded on this basis.
However, in my view this does not decide the real issue between the parties. This is whether the
terms of the lease, and the full indemnification of the plaintiffs by their receipt of the insurance
moneys, preclude them from recovering damages in negligence from the defendants, or whether
the plaintiffs’ right to recover such damages remains unaffected. In the former case the plaintiffs’
insurers would obviously be equally precluded from bringing the present action in the name of
authority.
Page | 433
INSURANCE LAW CASES
the plaintiffs by virtue of their rights of subrogation. This is the issue which has been much
litigated in Canada and the United States. The judge was not referred to any of these decisions,
which all went in favour of the tenants, but in most cases only by a majority, and their citation on
this appeal resulted from the researches made by senior counsel for the defendants, who had not
appeared below. The only English authority cited to the judge in this connection was the decision
of Lloyd J in Petrofina (UK) Ltd v Magnaload Ltd [1983] 3 All ER 35, [1984] QB 127. That
decision is of considerable importance to insurances in the field of the construction industry, but
for present purposes it is at most only of indirect relevance and distinguishable on its facts. In
that case Lloyd J followed with approval a decision of the Supreme Court of Canada in
Commonwealth Construction Co Ltd v Imperial Oil Ltd 69 DLR (3d) 558, which he regarded as
indistinguishable. The feature which distinguishes those cases from the present case and from the
Canadian and American cases mentioned below is that the defendants were co-insured with the
plaintiffs under the same policy. They were accordingly not restricted to the contention that the
insurance had been effected in part for their benefit, as the defendants are in the present case.
Being co-insured with the plaintiffs under the same policy, it necessarily followed that the
plaintiffs’ insurers in these two cases were unable to assert any right of subrogation.
Page 482 of [1985] 3 All ER 473
The position in the Petrofina case was briefly as follows. The main contractors for the
construction of an extension at an oil refinery took out a contractors’ all risks insurance policy
indemnifying the insured against loss and damage to the property in question. The definition of
the persons insured included the plaintiffs, the main contractor and the sub-contractors, and the
defendants were one of the sub-contractors on the site. Due to alleged negligence on the part of
the defendants, a gantry became displaced and fell so as to cause considerable damage to the
plaintiffs’ work in progress. They claimed against the insurers under the policy, who duly paid
the plaintiffs’ claim. The insurers thereupon brought an action in the name of the plaintiffs
against the defendants, claiming damages for negligence. The preliminary issue which came on
for trial was whether the insurers had the necessary right of subrogation to sue in the name of the
plaintiffs. It was held that since the defendants were co-insured with the plaintiffs, and since the
main contractor had been entitled to effect the insurance on the whole of the property in the
authority.
Page | 434
INSURANCE LAW CASES
name or on behalf of all the insured, including the defendants, the insurers had no right of
subrogation to bring the action in the name of the plaintiffs. In summarising the judgment in this
brief fashion I am conscious that I am not doing justice to all the issues with which it dealt. I
have already briefly touched on some of them in the earlier parts of this judgment. But they are
not directly material for present purposes, and subject to one immaterial point which it was
unnecessary to explore ([1983] 3 All ER 35 at 42, [1984] QB 127 at 136), neither counsel
suggested that this judgment was open to any criticism. However, both were also agreed that it is
distinguishable from the present case, since the defendants in the present case cannot claim to
have been co-insured with the plaintiffs. In addition, the plaintiffs and defendants in the present
case are contractually bound by the lease between them, and there is accordingly the further issue
whether the terms of the lease preclude the plaintiffs from recovering damages from the
defendants on the ground that the fire covered by the plaintiffs’ insurance had been caused by the
negligence of the defendants.
This was the issue which was hotly contested between landlords’ insurers and tenants or their
insurers in similar circumstances in the Canadian and American cases. In these cases the tenants
were also not co-insured with the landlords under the insurance effected by the latter, so that the
position in that regard was the same as in Mumford Hotels Ltd v Wheler [1963] 3 All ER 250,
[1964] Ch 117, although no issue as to subrogation arose in the latter case. The issues raised by a
trilogy of cases which reached the Supreme Court of Canada can broadly be summarised as
follows. First, no one appears to have questioned the right of the tenants to contend that the
landlords had insured the premises for the benefit of the tenants as well as of the landlords. All
the judgments are therefore in line with the ratio of the decision in Mumford Hotels Ltd v
Wheler. However, what divided the members of the Supreme Court on each occasion was the
question whether this fact, together with other provisions in the leases similar to those in the
present case, was sufficient to entitle the court to conclude that the tenant was also exonerated
from liability in negligence. The terms of the leases in these three cases differed, but none was
more favourable to the tenants in any relevant respect than the lease in the present case, and
markedly less so in the second and third cases. The majority of the Supreme Court, led by
Laskin CJC in each of these cases, decided the issue in favour of the tenant. The minority, in
authority.
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each case led by Grandpré J, held in favour of the landlords by applying the principles
concerning exemption clauses to the leases, in particular the decision of the Privy Council in
Canada Steamship Lines Ltd v R [1952] 1 All ER 305, [1952] AC 192. The minority view, in
effect, was that sufficient content could be given to the landlords’ covenant to insure the
premises against fire by concluding that the purpose of the covenant was to assure the tenants
that funds for the reinstatement of the premises would be available, and that in these
circumstances the provisions of the lease did not go far enough to exclude the tenants’ liability in
negligence, since there was no provision to this effect.
I do not propose to lengthen this judgment by examining each of these three Supreme Court
decisions in detail, since the provisions of the leases differed to some extent in each case and the
judgments also had to take account of an earlier decision of the Supreme
Page 483 of [1985] 3 All ER 473
Court and other decisions below. The three cases in question were Agnew-Surpass Shoe Stores
Ltd v Cummer-Yonge Investments Ltd (1975) 55 DLR (3d) 676, Ross Southward Tire Ltd v
Pyrotech Products Ltd (1975) 57 DLR (3d) 248 and T Eaton Co Ltd v Smith (1977) 92 DLR (3d)
425. The provisions of the lease in the first of these were most closely in line with those in the
present case; the tenant’s repairing covenant excluded the obligation to repair damage caused by
fire as here, but the tenant’s obligation to contribute to the cost of the insurance only arose in the
event of any increase in premiums due to structural changes or alterations made by the tenant. In
the subsequent cases the tenant’s position under the terms of the lease was still less favourable in
comparison with the present case, but the majority nevertheless decided in his favour. In each of
the cases the minority concluded that the absence of any provision expressly or impliedly
exonerating the tenant from negligence was fatal, but the majority view was that there was no
need for any such provision, since it was sufficiently clear from the terms of the leases and the
landlords’ covenant to insure against fire, including fire caused by the tenants’ negligence, that
the landlord could not maintain an action for negligence against the tenants, and that the
landlords’ insurers’ right of subrogation could therefore equally not be enforced. In order to
summarise the position under the law of Canada for present purposes I think that it is sufficient
authority.
Page | 436
INSURANCE LAW CASES
to refer to the decision of the Supreme Court, Appeal Division, of Nova Scotia in Greenwood
Shopping Plaza Ltd v Neil J Buchanan Ltd (1979) 99 DLR (3d) 289. In that case the landlord’s
insurers sought to overcome the effect of these decisions in favour of the tenant by including
among the defendants the employees of the tenant who had been responsible for the fire. It was
held that the employees were entitled to the same protection as their employer, the tenant, but for
present purposes the tenant’s own position is all that matters. The judgment of the court began by
summarising the general position under the law of Canada as the result of these three cases. In
this connection MacKeigan CJNS summarised the reasons for concluding that in the light of the
decisions of the Supreme Court the tenant’s employees were not liable in the following way (at
291):
‘The essential reason can be put quite simply: cl. 14 of the lease is a covenant with and for the
benefit of the tenant Buchanan that the landlord Greenwood will keep the building insured
against loss by fire, including fire caused by anyone’s negligence. The tenant can rely on the
landlord’s covenant to insure and can refrain from insuring against any liability to the landlord
for its own negligence. The landlord then must look only to its own insurance if it suffers loss
and cannot sue the tenant for loss that it had promised to insure. The landlord’s insurer has, by
subrogation, no greater right than has its insured and thus it also cannot sue the tenant for any
insured loss.’
He went on to say that the issue had been put beyond doubt by the third of the Supreme Court
decisions, T Eaton & Co Ltd v Smith (1977) 92 DLR (3d) 425, and quoted a number of passages
from the judgment of Laskin CJC (at 428–430) as follows:
‘It is settled law that the exception of fire in a repairing covenant does not exculpate a tenant
from liability for a fire caused by its negligence or that of a person for whose negligence it is
vicariously liable. If it can escape this liability in the present case, it can only be on the basis that
the landlord’s covenant to insure is a covenant that runs to the benefit of the tenant, lifting from
it the risk of liability for fire arising from its negligence and bringing that risk under insurance
coverage. Had the landlord insured without giving a covenant to that effect in the lease, the
tenant’s risk of liability for fire resulting from negligence would be unquestionable; and if the
authority.
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INSURANCE LAW CASES
landlord collected from his insurer, the latter would have an equally unquestionable right of
recovery from the tenant in a subrogated action … where the covenant to insure is not at large
but is, as in this case, a covenant with the lessee the landlord will keep the buildings on the
premises insured against loss by fire, it must be given effect against liability for fires arising
from the tenant’s negligence because otherwise, as a covenant expressly running to the benefit of
the tenant, it
Page 484 of [1985] 3 All ER 473
would have no subject-matter … This is not a case where one has to consider whether there is
some provision exonerating one contracting party from liability to the other for the former’s
negligence. Rather it is a case where a supervening covenant has been given and taken to cover
by an insurance policy the risk of loss from a fire caused by negligence. An insurer could not
refuse to pay a claim for loss by fire merely because the fire arose from the insured’s negligence.
I can see no reason why its position can be any better against a tenant, whose negligence caused
loss by fire, if the lease with the landlord makes it clear that a policy was to be taken out by the
landlord to cover such fires, and a policy is written which does so. In short, the insurer can claim
only by subrogation under the lease.’ (Laskin CJC’s emphasis.)
This is the position in Canada, and the same view has prevailed in the United States. In the
Corpus Juris Secundum title Landlord and Tenant § 376 the position is summarised as follows
under the heading ‘Insurance by Lessor’:
‘Where the covenant requires the lessor to maintain insurance to provide against loss by fire or
storm it has been construed as protecting both parties, especially where it further provides that
the lessor is to use as much of the proceeds as is necessary for reconstruction in the event of fire
or storm, and the lessee can rely on the covenant even if the fire is caused by his negligence, or
the negligence of his employees … ’
The leading authority to which we were referred in support of this citation was General Mills Inc
v Goldman (Indiana Lumbermens Mutual Insurance Co of Indianapolis, intervener) (1950) 184 F
2d 359, a decision of the US Court of Appeals, Eighth Circuit, and certiorari was denied by the
authority.
Page | 438
INSURANCE LAW CASES
Supreme Court. Other decisions cited to us were Fred A Chapin Lumber Co v Lumber Bargains
Inc (1961) 189 Cal App 2d 613, General Accident Fire and Life Assurance Corp v Traders
Furniture Co (1965) 1 Ariz App 203 and New Hampshire Insurance Co v Fox Midwest Theatres
Inc (1969) 203 Kan 720.
I would respectfully follow and adopt the reasoning which has prevailed in this impressive series
of North American authorities. The argument of counsel for the plaintiffs that we should not do
so followed the minority line of Grandpré J in the Canadian Supreme Court that the purpose and
subject matter of the landlord’s covenant to insure and reinstate the demised premises out of the
policy moneys were to relieve the tenant of his corresponding repairing obligations and to ensure
that the necessary funds for reinstatement would be available. Accordingly, applying general
principles of exemption from liability as illustrated in Canada Steamship Lines Ltd v R [1952] 1
All ER 305, [1952] AC 192, an exemption from liability for a fire caused by negligence could
not be regarded as also inherent in the lease, since it would require an express exemption to have
this effect.
I would not accept this line of argument. An essential feature of insurance against fire is that it
covers fires caused by accident as well as by negligence. This was what the plaintiffs agreed to
provide in consideration of, inter alia, the insurance rent paid by the defendants. The intention of
the parties, sensibly construed, must therefore have been that in the event of damage by fire,
whether due to accident or negligence, the landlords’ loss was to be recouped from the insurance
moneys and that in that event they were to have no further claim against the tenants for damages
in negligence. Another way of reaching the same conclusion, on which counsel for the
defendants also relied, is that in situations such as the present the tenant is entitled to say that the
landlord has been fully indemnified in the manner envisaged by the provisions of the lease and
that he cannot therefore recover damages from the tenant in addition, so as to provide himself
with what would in effect be a double indemnity. Although the receipt of insurance moneys by
an innocent party is of course normally no defence to a wrongdoer (see Bradburn v Great
Western Rly Co (1874) LR 10 Exch 1, [1874–80] All ER Rep 195), counsel for the defendants
relied on a number of passages in Parry v Cleaver [1969] 1 All ER 555, [1970] AC 1 to show
that considerations of ‘justice, reasonableness and public policy’ may
authority.
Page | 439
INSURANCE LAW CASES
Page 485 of [1985] 3 All ER 473
require exceptions to this general principle (see [1969] 1 All ER 555 at 557, [1970] AC 1 at 13
per Lord Reid). I do not think it necessary to elaborate on this line of argument in the present
case save to say that I accept it and regard it as complementary to the conclusion which is to be
derived from the construction and effect of the terms of the lease itself, as indicated above. I
should also add, for the sake of completeness, that I cannot accept the reliance of counsel for the
plaintiffs on another decision of Lloyd J in The Yasin [1979] 2 Lloyd’s Rep 45. That decision is
clearly distinguishable from the position under the present lease because (a) the persons
interested in the cargo were to have the sole benefit of the insurance in question, (b) this was to
be taken out by the shipowners in the event of the vessel used under the charter being more than
15 years old and was thus unconnected with any possible cause of action against the owners
under the charterparty and (c) the charter expressly provided that the provision of this policy was
not to constitute a waiver of the owners’ obligation to provide a vessel complying with the terms
of the charter (see cl 41 thereof, set out at [1979] 2 Lloyd’s Rep 47). It can therefore be seen at
once that the position was essentially and expressly different from the position in the present
case.
My conclusion is accordingly that the plaintiffs have no right to recover damages in negligence
from the defendants for the destruction of the building by fire, with the result that their insurers
have no relevant right of subrogation. I would therefore dismiss this appeal.
CROOM-JOHNSON LJ. I have had the advantage of reading in advance the judgments delivered
by Kerr and Glidewell LJJ. I agree with them both and have nothing further to add.
GLIDEWELL LJ. I agree for the reasons set out in the judgment of Kerr LJ that this appeal
should be dismissed.
I wish only to comment on an argument advanced by counsel for the plaintiffs which he based on
a short passage in the speech of Lord Reid in Parry v Cleaver [1969] 1 All ER 555 at 559, [1970]
AC 1 at 15. Lord Reid said:
authority.
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INSURANCE LAW CASES
‘It is rational to make the extent of the defendant’s liability depend on remoteness from his point
of view—on what he knew or could or should have foreseen. But it is, to my mind, an irrational
technicality to make that depend on the remoteness or closeness of relationship between the
plaintiff’s source of loss and source of gain. Surely the distinction between receipts which must
be brought into account and those which must not must depend not on their source but on their
intrinsic nature.’
In The Yasin [1979] 2 Lloyd’s Rep 45 Lloyd J quoted this amongst a number of passages from
the speeches in Parry v Cleaver, leading to his conclusion that the proceeds of the insurance
policy were different in kind from the loss which the plaintiffs had suffered by reason of the
defendants’ breach of contract in providing an unseaworthy vessel. Counsel for the plaintiffs
argues that in this case also the insurance money was different in kind from the plaintiffs’ loss.
In an earlier passage in his speech in Parry v Cleaver [1969] 1 All ER 555 at 558, [1970] AC 1 at
14 Lord Reid said:
‘As regards moneys coming to the plaintiff under a contract of insurance, I think that the real and
substantial reason for disregarding them is that the plaintiff has bought them and that it would be
unjust and unreasonable to hold that the money which he prudently spent on premiums and the
benefit from it should enure to the benefit of the tortfeasor.’
Lord Pearce said ([1969] 1 All ER 555 at 577, [1970] AC 1 at 37):
‘It seems to me possible that on those grounds there might be some difference of approach where
it is the employer himself who is the defendant tortfeasor, and the
Page 486 of [1985] 3 All ER 473
pension rights in question come from an insurance arrangement which he himself has made with
the plaintiff as his employee.’
In the present case it was the defendants who paid an appropriate part of the insurance premium
on a policy which the plaintiffs took out under a contractual obligation to the defendants, and the
authority.
Page | 441
INSURANCE LAW CASES
defendants were therefore entitled to the benefit of that policy. Thus the reason advanced by
Lord Reid for disregarding the insurance moneys in Parry v Cleaver does not apply.
As Kerr LJ has said, it is of the essence of fire insurance that it covers damage from fires caused
by negligence as well as by accident. Where a building is tenanted, such negligence may often be
that of the tenant or his servants. Thus in this case the risk which led to payment of the insurance
moneys was one of the risks envisaged in the agreement between the parties that the plaintiffs
should take out the insurance. Both receipts and loss were of the same nature. This argument
therefore fails, and the appeal should be dismissed.
Appeal dismissed. Leave to appeal to the House of Lords refused.
LONSDALE & THOMPSON LTD V BLACK ARROW GROUP PLC AND ANOTHER
[1993] 3 ALL ER 648
JONATHAN SUMPTION QC. This is a summons under RSC Ord 14A to determine a question
which is rather more difficult than at first sight appears. If a lessor insures, in his own name, the
entire interest in the property the subject of the lease, what is the measure of the insurer’s
obligation? Is it limited to the injury done to the value of the lessor’s reversion? Or may he
recover the whole damage to the property, including that suffered by the tenant’s interest,
accounting to him for the balance? The point is of some wider interest, because the problem is
certainly not confined to the insurance of real property by lessors. It is quite common for people
to insure in their own name the property or liabilities of others with whom they have some
business or other connection.
Page 650 of [1993] 3 All ER 648
This gives rise to no difficulty if the assured can be treated as contracting on their behalf. But
what if he cannot?
authority.
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The facts of this case are relatively straightforward and, in the respects which matter, undisputed.
Black Arrow plc, the first defendant, was the freehold owner of a warehouse in Liverpool. By a
lease dated 21 February 1980, they let it to the plaintiffs for 25 years with effect from 4
December 1978. By cl 3(2) of the lease the landlord covenanted that he would cause the
premises to be insured in a sum not less than the full reinstatement value against specified risks
including fire. Clauses 1 and 2(2) provided that the tenant should pay by way of additional rent a
sum corresponding to the premium.
Several clauses dealt with the reinstatement of the premises if they were damaged. Clause 2(4)
was a general provision requiring the tenant to ‘repair, maintain, and keep and where necessary
rebuild and replace the demised premises’. But the lease also provided, by cl 3(2), that it should
be the duty of the landlord—
‘in case of destruction or damage to the demised premises by any insured risk … to ensure …
that all moneys payable under or by virtue of any such policy of insurance as aforesaid (except
for insurance moneys received in respect of loss of rent) shall with all convenient speed … be
laid out and applied in rebuilding, repairing or otherwise reinstating the demised premises.’
By cl 2(14)(d), if the premises were damaged or destroyed by an insured peril and the insurance
moneys were irrecoverable on account of an act or default of the tenant, then the tenant should be
required to pay the landlord the full costs of rebuilding and reinstatement.
It necessarily follows from the scheme of the lease that although the tenant has the general
obligation to reinstate, he cannot be required to do so if the damage requiring reinstatement has
arisen from an insured peril and the landlord has recovered the reinstatement cost from the
insurer. This is implicit in (i) cl 2(14)(d) of the lease, which makes little sense on any other basis,
(ii) the fact that the landlord is required (not only entitled) to insure and to lay out loss payments
in reinstatement, and (iii) the obligation of the tenant indirectly to pay the premium (see Mark
Rowlands Ltd v Berni Inns Ltd [1985] 3 All ER 473, [1986] QB 211). The landlord insured with
the second defendants, American International Underwriters (UK) Ltd. The insurance covered all
risks of physical loss or damage to the premises, subject to irrelevant exclusions. Clause 13 of
section A provided:
authority.
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‘It is hereby agreed that in the event of the property insured being destroyed or damaged the
basis upon which the amount payable under … the policy is to be calculated shall be the
reinstatement of the property destroyed or damaged …’
There were provisions which envisaged that the premises were, or at least might be let. But it is
common ground, and in any event plain, that the landlord and its associated and subsidiary
companies were the only assureds. The tenant was not a co-assured.
On 21 December 1989 the landlord contracted to sell the freehold, subject to the lease in favour
of the tenant. Completion occurred on 22 March 1990. Between these two dates, on 8 February
1990, the warehouse was destroyed by fire. However, completion proceeded and the price of the
freehold was paid in accordance with the terms of the contract without regard to the fire damage.
Page 651 of [1993] 3 All ER 648
Under s 83 of the Fire Prevention Metropolis Act 1774 the lessee was entitled to require the
insurers to discharge such liability as they might have to their assured under the policy by
reinstating the premises. A notice has been duly served on the insurers under the 1774 Act, but
the insurers have declined to comply with it, on the ground that they do not have any contractual
liability to their assured and cannot therefore have any statutory liability to the lessee. They say
that they are not obliged to do more than indemnify the assured in respect of injury to his
freehold interest, because it is only in respect of that interest that he can have suffered any loss.
The result of the contract of sale was that at the time of the fire the assured had parted with his
entire beneficial interest in the property, retaining no other interest than his vendor’s lien for the
price. When, upon completion, the assured received the price in full without any abatement on
account of the fire, he was completely indemnified for his loss. As for the assured’s liability to
lay out the insurance proceeds in reinstatement, that arises only if and when they are received. It
follows, the insurers say, that nothing is payable by them. The question on this application is
whether they are right. In my judgment they are not.
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The foundation of the insurer’s case is the decision of the Court of Appeal in Castellain v Preston
(1883) 11 QBD 380, [1881–5] All ER Rep 493. That case had some points in common with the
present one. A vendor contracted to sell property, but the buildings on it were destroyed by fire
between contract and completion. The vendor was insured and the insurers paid him the full
amount of the damage before completion. The vendor then received, upon completion, the full
purchase price. It had been held in previous litigation between the vendor and the purchaser that
the vendor was not accountable to the purchaser for the insurance proceeds, there being no
provision to that effect in the contract of sale: Rayner v Preston (1881) 18 Ch D 1. In these
circumstances the insurers sued the vendor as their assured for a sum corresponding to what they
had paid him on account of the loss. The ground of their claim was not that they had never been
liable under the policy. It was that the subsequent recovery of an undiminished purchase price
had made good the assured’s loss. The question at issue was whether the insurers were
subrogated to the right of the assured to receive an undiminished price under the contract of sale.
The Court of Appeal held that they were, overruling Chitty J who had held that the claims to
which the insurers were subrogated were confined to those connected with the circumstances of
the loss. The ground of the Court of Appeal’s decision was that because property insurance was
prima facie a contract of indemnity, the insurer’s right of subrogation must be extensive enough
to ensure that no more than an indemnity was recovered. The insurer was therefore subrogated to
every right of the assured whose exercise would diminish his loss. That included the right to
receive the proceeds of his contract of sale without abatement for fire damage.
Brett LJ delivering the leading judgment said ((1883) 11 QBD 380 at 390, [1881–5] All ER Rep
493 at 496):
‘… there was a right in the defendants to have the contract of sale fulfilled by the purchasers
notwithstanding the loss, and it was fulfilled. The assured have had the advantage therefore of
that right, and by that right, not by a gift which the purchasers could have declined to make, the
assured have recovered, notwithstanding the loss, from the purchasers, the very sum of money
which they were to obtain whether this building was burnt or not. In that sense I cannot conceive
that a right, by virtue of which the assured has his loss diminished, is not a right which, as has
been said, affects the loss.
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Page 652 of [1993] 3 All ER 648
This right … affects the loss by enabling the assured, the vendors, to get the same money which
they would have got if the loss had not happened.’
Cotton LJ said (11 QBD 380 at 396, [1881–5] All ER Rep 493 at 499):
‘Here the purchasers have paid the money in full, and as the property was valued between the
vendors and the purchasers at £3,100, the vendors got that sum in respect of that which had been
burned, but which had not been burned at the time when the contract was entered into. They had
fixed that to be the value, and then any money which they get from the purchasers, and which
together with £330, the sum paid by the office, exceeds the value of the property as fixed by
them under the contract to sell, must diminish, and in fact entirely extinguishes the loss
occasioned to the vendors of the property by the fire. Therefore, though it cannot, to my mind, be
said that the insurers are entitled, because the purchase is completed, to get back the money
which they have paid, yet they are entitled to take into account the money subsequently received
under a contract for the sale of the property existing at the time of the loss, in order to see what
the ultimate loss was against which they gave their contract of indemnity.’
Bowen LJ said (11 QBD 380 at 401–402, [1881–5] All ER Rep 493 at 500):
‘What is really the interest of the vendors, the assured? … Their interest … is that at law they are
the legal owners, but their beneficial interest is that of vendors with a lien for the unpaid
purchase-money; they would get ultimately all the purchase-money provided the matter did not
go off owing to defective title. Such persons in the first instance can obviously recover from the
insurance company the entire amount of the purchase-money. That was decided in the case of
Collingridge v. Royal Exchange Assurance Corp (1877) 3 QBD 173; but can they keep the
whole, having lost only half? Surely it would be monstrous to say that they could keep the
whole, having lost only half … They would be getting a windfall by the fire, their contract of
insurance would not be a contract against loss, it would be a speculation for gain. Then what is
the principle which must be applied? It is a corollary of the great law of indemnity, and is to the
following effect:—That a person who wishes to recover for and is paid by the insurers as for a
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total loss, cannot take with both hands. If he has a means of diminishing the loss, the result of the
use of those means belongs to the underwriters. If he does diminish the loss, he must account for
the diminution to the underwriters.’
The problem about the submission which Mr Hart, on behalf of the insurers, seeks to base on this
decision is that it elides two distinct questions. The first is whether the vendor’s recovery from
the insurer is confined to the loss which he has suffered in respect of his own limited interest in
the property at the time of the fire. This question is directed to determining what the vendor’s
initial loss is and what, therefore, would be payable to the vendor if the claim were adjusted and
settled immediately after the fire and before completion. The second question is the one with
which Castellain v Preston was concerned, namely whether the subsequent receipt by the vendor
of the full purchase price agreed before the fire goes to diminish that loss.
The starting point in considering the first question is that the landlord unquestionably had an
insurable interest in the premises up to the full reinstatement cost. I am inclined to think that it
would be enough to give him that interest that he was liable to lay out the insurance proceeds on
reinstatement, even though that liability would arise only after he had received
Page 653 of [1993] 3 All ER 648
them. The whole law as to what amounts to an insurable interest and when it is required, is
derived from the statutory avoidance of wagering contracts, and it is hard to see how an assured
who was obliged to spend the proceeds on reinstatement could be said to wager on the
occurrence of a fire. But this is a difficult issue which I do not need to decide. The landlord owed
an obligation under the lease to insure for the full reinstatement value. He therefore had an
insurable interest up to that value because if he did not insure and the premises were damaged, he
would be liable to the tenant. The full reinstatement value of the premises, which ought on that
footing to have been recoverable from the insurer, would be the measure of his liability (see
Maurice v Goldsborough Mort & Co Ltd [1939] 3 All ER 63 at 68–69, [1939] AC 452 at 462).
The question whether the measure of the insurer’s liability is limited to the injury done to the
landlord’s reversion therefore depends, not on any overriding principle of law but on the terms of
authority.
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the policy. Insurances on property are prima facie to be construed as contracts of indemnity.
Subject to the express terms of the policy the measure of the indemnity is the diminution in the
value of the thing insured as a result of the operation of the insured peril. The parties may agree
that the damage suffered by the thing insured will be assessed on some agreed basis. There may,
for example, be an agreed undamaged value. There may be a provision (such as the one found in
this case) that the cost of reinstatement, which would otherwise be no more than evidence of the
diminution in value of the property, shall be the measure of the insurer’s liability. But provisions
such as these do not prevent the contract from being one of indemnity. They merely require the
value of the indemnity to be calculated on conventional facts. It remains necessary to look at the
particular position of the assured to see whether in the circumstances he would, by recovering the
contractual measure, obtain more than an indemnity.
If the assured has only a limited interest in the property, being, for example, a tenant or
reversioner, a trustee, a mortgagee or a bailee, the value of his own interest may have diminished
by much less than the value of the property or the cost of its reinstatement. But it does not
necessarily follow that if the assured recovers the whole diminution in the value of the property
or the whole cost of reinstatement he will be getting more than an indemnity. That must depend
on what his legal obligations are as to the use of the insurance proceeds when he has got them. If
he is accountable for the proceeds to the owners of the other interests, then he will not be
receiving more than an indemnity if the insurer pays the full amount for which the property was
insured. This will be so, whether the assured is accountable to the owners of the other interests as
a trustee of the proceeds of the insurance or simply on the basis that he owes them a contractual
obligation to pay those proceeds over to them or to employ them in reinstatement. None of this
means that a party with a limited interest who insures the entire interest in the property is
insuring on behalf of the others as well as for himself. All that it means is that his obligations as
to the use of the insurance moneys once they have been paid are relevant in determining whether
he will recover more than an indemnity by getting the measure of loss provided for in that policy.
The clearest illustration of the operation of these principles is the case of a trustee. There has
never been any doubt that a trustee may insure the whole beneficial interest in property of which
he holds only the legal estate, and that he may recover from the insurers the entire diminution of
authority.
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its value notwithstanding that the beneficial owners were not co-assureds. The reason is not that
a trustee is personally liable to beneficiaries for damage done by insurable risks
Page 654 of [1993] 3 All ER 648
irrespective of whether he has received the insurance proceeds, for he will usually not be. The
reason must be that he is accountable to the beneficiaries for such insurance proceeds as he may
receive. Being accountable to them on that basis, the payment to him of those proceeds cannot
give him more than an indemnity even though they exceed the value of his personal interest.
That this is the correct analysis of the position is demonstrated by a series of decisions about
insurances effected by bailees on property belonging to their bailors. The leading case is Waters
v Monarch Fire and Life Assurance Co (1856) 5 E & B 870, [1843–60] All ER Rep 654.
In that case it was held that a bailee who insured the entire interest in goods in his custody could
recover their entire value, notwithstanding that he has himself suffered no loss. Lord Campbell
CJ said (5 E & B 870 at 881, [1843–60] All ER Rep 654 at 655–656):
‘The last point that arises is, to what extent does the policy protect those goods. The defendants
say that it was only the plaintiffs’ personal interest. But the policies are in terms contracts to
make good “all such damage and loss as may happen by fire to the property hereinbefore
mentioned.” That is a valid contract; and, as the property is wholly destroyed, the value of the
whole must be made good, not merely the particular interest of the plaintiffs. They will be
entitled to apply so much to cover their own interest, and will be trustees for the owners as to the
rest. The authorities are clear that an assurance made without orders may be ratified by the
owners of the property, and then the assurers become trustees for them.’
Wightman J said (5 E & B 870 at 882, [1843–60] All ER Rep 654 at 656):
‘Can the plaintiffs recover their value? It seems to me that they may, unless there be something
making it illegal to insure more than the plaintiffs’ own interest. Mr. Lush does not contend that
any statute applies. It has been decided that, if no statute applies, a person insured may recover
authority.
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the amount contracted for: and, that being so, I think the plaintiffs entitled to recover the whole
value.’
Crompton J delivered a concurring judgment.
The effect of this famous decision was summarised by Crompton J (who had sat in it) in London
and North West Rly Co v Glyn (1859) 1 E & E 652 at 663, 120 ER 1054 at 1059 as follows:
‘Mr. Lloyd said that the questions were, Who are the assured? and What is their loss? I answer,
first, the assured are the plaintiffs, both as trustees and as carriers; secondly, the loss is the loss of
the property as trust property, that is to say as property in which the plaintiffs are beneficially
interested to the extent of their lien, and as to the residue of which they are trustees for the true
owners.’
These decisions were approved by the House of Lords in Hepburn v A Tomlinson (Hauliers) Ltd
[1966] 1 All ER 418, [1966] AC 451. There is a succinct statement of the principle in the speech
of Lord Reid ([1966] 1 All ER 418 at 421–422, [1966] AC 451 at 467–468):
‘A bailee can if he chooses merely insure to cover his own loss or personal liability to the owner
of the goods either at common law or under contract, and if he does that he can recover no more
under the policy than sufficient to make good his own personal loss or liability. Equally he can,
if he chooses, insure up to his full insurable interest—up to the full value of the goods
Page 655 of [1993] 3 All ER 648
entrusted to him; and if he does that he can recover the value of the goods, though he has
suffered no personal loss at all. In that case, however, the law will require him to account to the
owner of the goods who has suffered the loss or, as LORD CAMPBELL said, he will be trustee
for the owners. I need not consider whether this is a trust in the strict sense or precisely on what
ground the owner can sue the bailee for the money which he has recovered from the insurer …
The fact that a bailee has an insurable interest beyond his own personal loss if the goods are
destroyed has never been regarded as in any way inconsistent with the overriding principle that
insurance of goods is a contract of indemnity.’
authority.
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It is true that a bailee has a rather special status in English law, having in many respects the
rights of an owner as against third parties. But the decisions in Waters v Monarch Fire and Life
Assurance Co, London and North West Rly Co v Glyn and Hepburn v A Tomlinson (Hauliers)
Ltd do not turn on any principle peculiar to the law of bailment. Similar principles apply to
insurances in quite different fields. I have already given trustees as one example. Another is the
case of a trade union which insures the property of its members against burglary. It may recover
the value of the stolen property, accounting for it to its members: Prudential Staff Union v Hall
[1947] KB 685. A third is the case of the shipowner who sells his ship but undertakes to keep the
insurance on foot and assigns the benefit of it to the purchaser. The law might have been that if a
loss subsequently occurs, the insurer is not liable because his assured has not suffered any and
the assignee can have no better right than he had. But there is good authority that the insurer
must pay: Powles v Innes (1843) 11 M & W 10, 152 ER 695 per Parke B and Arnould’s Law of
Marine Insurance and Average (16th edn, 1981) vol 1, p 173. It is implicit in Rayner v Preston
(1881) 18 Ch D 1 that the same would be true if real property were sold on those terms, even
apart from s 47 of the Law of Property Act 1925 (see, in particular, Brett LJ (at 12)).
The authors of these judgments regarded them as turning on two critical factors. The first was
that in each case the subject matter of the insurance was the whole interest in the property
insured and not simply the assured’s interest. That was treated as a question of construction: see,
in particular, Lord Reid in Hepburn v A Tomlinson (Hauliers) Ltd [1966] 1 All ER 418 at 422–
423, [1966] AC 451 at 469. It is usually enough that when construed on ordinary principles the
policy covers the whole value of the subject matter and not only the value of some partial interest
in it. The second factor was that so far as the assured was thereby enabled to recover in excess of
the value of his own interest, it had to be shown that he would be accountable for that excess,
either by virtue of his own distinct legal obligations to the holders of the other interests or by
virtue of a trust which the courts were (at least in some cases) prepared to construct for the
occasion.
Both of these are features of the present case. By virtue of section A, cl 13, the subject matter of
the insurance is damage to the premises up to their full reinstatement value, and not simply that
proportion of it which may relate to the assured’s reversion. Although the assured has no general
authority.
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obligation under the lease to reinstate the premises after a fire irrespective of receipt of the
insurance proceeds, it is expressly provided that upon receipt of insurance proceeds he has an
obligation to lay them out in reinstatement, for the benefit of the tenant.
Once that point is reached, it can be seen that the decision of the Court of Appeal in Castellain v
Preston (1883) 11 QBD 380, [1881–5] All ER Rep 493 is irrelevant. In Castellain v Preston the
only other person, apart from the assured, who had any interest in the property was the
purchaser, and it had already been held that the assured was not accountable to him. It followed
that the assured
Page 656 of [1993] 3 All ER 648
would be receiving more than an indemnity if he were allowed to keep the insurance proceeds
without accounting to the insurer. In the present case the assured is certainly no more
accountable to the purchaser than Mr Preston was, but there is a lessee and the assured is
accountable to him. Moreover the assured continues to owe that obligation to the lessee for it
cannot be affected either by the lessor’s contract to sell the freehold to a third party or by its
conveyance to the purchaser in due course.
Suppose that on the day after the fire the insurer had been required to meet his obligations to the
assured. Even if there had been no lease, it would have been no defence for the insurer at that
stage to say that in due course the assured would be entitled to receive an undiminished purchase
price on completion. Without express agreement to that effect, a person who has contracted to
indemnify another can never refuse on the ground that an indemnity can be obtained from
someone else: Collingridge v Royal Exchange Assurance Corp (1877) 3 QBD 173. If then the
insurers duly paid the reinstatement cost to the assured before completion, as was done in
Castellain v Preston, would they have been entitled by virtue of their subrogation rights to
recover an equivalent amount out of the purchase price once it was paid six weeks later? Of
course not. The reason is that the assured, having received the insurance moneys, would have
become liable to the tenant to lay them out in reinstatement of the premises. The subsequent
receipt of the purchase price would not, in these circumstances, in the least diminish the loss.
authority.
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The summons asks me three questions:
‘1. Whether any sum is payable under or by virtue of the insurance policy in respect of such
damage as the demised premises may have suffered as a result of the fire which occurred at the
demised premises on 8th February 1990.
2. Whether, if the Answer to 1, above is yes, that sum is (a) the sum necessary fully to reinstate
the demised premises in respect of such damage as may have been suffered and/or (b) some other
sum and, if so, what sum.
3. If the answer to 1 or 2(a) is no, whether the First Defendant is in breach of its obligation
contained in Clause 3(2) of the lease namely to insure the demised premises in the full
reinstatement value thereof.’
The answers to questions (1) and (2)(a) are Yes in each case. It follows that questions (2)(b) and
(3) do not arise.
Order accordingly.
LIVIO CARLI AND OTHERS V SALEM AND MOHAMED BASHANFER AND

OTHERS [1959] 1 EA 701 (SCA)
Judgment
Campbell CJ: The plaintiffs, who are a Yugoslavian Cement Company, and an Italian merchant
who is their agent in Aden, agreed to sell 200 tons of cement to the first defendants Messrs.
Salem and Mohamed Bashanfer. The second defendants are the insurance company with whom
the first defendants insured the shipment.
It was a “c. & f.” contract with payment by irrevocable letter of credit. The first defendants took
out a policy of insurance to the value of £1,910 paying a premium of E.A.S.2785.95.
authority.
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Under the contract the cement was to be
“Dalmation Portland Cement B.S.S./12/1947 of Yugoslavian origin. Two Lions brand”.
This was the description set out in the application to the Eastern Bank Ltd. for the letter of credit
by the defendants.
In fact the plaintiffs sent 200 tons of “Salona Towers” brand cement. The first defendants refused
to accept it. It was badly damaged by rain while lying on the wharf and it is in respect of this
damage that the suit is brought. The plaintiffs ask that either the first defendants, the buyers, or
the second defendants, the insurers, pay them for the cement.
The plaintiffs say that the first defendants agreed to the change in brand. They also say that in
any case they were entitled to supply what in fact they sent since the defendants agreed to a
change in the description from “Two Lions” brand to “Standard Portland Dalmatian Cement”.
The defendants are stated to have done this by their letter to the Eastern Bank Ltd. dated March
3, 1957, exhibit 25, of which the material part reads as follows:
“With further reference to the above letter of credit we shall be obliged if you would extend the
expiry and shipment date up to April 30, 1957, and include the following:
“ ‘(1) Standard Portland Dalmation Cement.’
“ ‘(2) The Price is based on a Freight Rate of Shs. 62/- via Suez, per Metric Ton, which
freight does not include any surcharge due to the Suez crisis. Any increase to be for our account
and amount of l/c to be increased accordingly.’
“Kindly convey the above instructions to your agents in Split/Yugoslavia, by air mail and
oblige.”
I am satisfied on the evidence that the first defendants never agreed to any change. They were
pressed energetically by the plaintiffs’ Aden agent to change and a letter was drafted for their
signature to this effect dated April 14, 1957, exhibit 6. But they did not sign it. I see no reason to
accept the verbal evidence given on behalf of the plaintiffs that there was a verbal agreement to
authority.
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accept the change. I do not think it can be said that the probabilities are in the plaintiffs’ favour.
All the evidence given was to the effect that “Two Lions” brand was known in Aden and “Salona
Towers” brand unknown and that the former would have a better sale. The plaintiffs’ case would
be strengthened if they could show that the first defendants only objected after the cement was
damaged and had kept silent till then. But this was not the case. They wrote to the manager of the
Eastern Bank Ltd. on April 26, 1957, saying that they refused payment since the documents, that
is to say the invoice and bill of lading, were not in accordance with the letter of credit.
Nor do I agree that the defendants had agreed to a change of brand by reason of their letter dated
March 4, 1957, exhibit 25. This change (although the first defendants use the word “include”
which is vague in this context) can only be taken to mean a substitution of the words “Dalmation
Portland
Page 703 of [1959] 1 EA 701 (SCA)
Cement B.S.S./12/1947” by the words “Standard Portland Dalmation Cement”. If the plaintiffs
were satisfied that the change on March 4 in the terms of the letter of credit excused them from
supplying “Two Lions” brand they would not have displayed such anxiety to get the defendants
to agree in writing to a change in brand on April 14, 1957.
I hold that there was a failure by the plaintiffs to tender to the defendants cement according to the
agreed description and that as this was a sale by description the first defendants were entitled to
refuse to accept. The suit against them is dismissed with costs.
I now turn to the claim against the insurance company, who refuse to pay under the policy saying
that since the first defendants had refused to accept the cement it never became their property
and that it always remained the cement of the plaintiffs with whom they had no agreement. They
contend that as the first defendants had disclaimed any interest in the policy they themselves
could not have claimed and, in consequence, their assignment of the policy to the plaintiffs,
which was done admittedly after the loss, was of no effect. They also plead that they did not
receive notice of the loss under the policy. Lastly they plead that the first defendants, Messrs.
Bashanfer, did not “clear and take delivery” of the goods in question.
authority.
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The policy is between the New India Assurance Co. on the one part and “The Eastern Bank Ltd.
a/c Messrs. Salem and Mohamed Bashanfer Aden” on the other. It is in respect of 200 tons of
cement to be carried in the “s.s. Abbazia” and no brand names are mentioned. It bears
endorsements by the Eastern Bank Ltd., and then by Messrs. Bashanfer, the first defendants, who
endorsed it to the second plaintiffs in August, 1957, on being paid the cost of the premium.
The law to be applied is that set out in the English Marine Insurance Act, 1906. It is true that this
Act, not being one of general application, has never been in force in this Colony and it was not
until 1958, (and after the events in this case), that the Aden Maritime Insurance Ordinance
(which is almost identical with the English Act) was enacted. But s. 41 of the Interpretation and
General Clauses Ordinance provides that in cases such as this we are to be guided by the English
common law. The Marine Insurance Act, 1906, states in its preamble that it is an “Act to codify
the Law relating to Marine Insurance”. It sets out what was the common law in England and thus
the Act, subject to any local customs or usages, has force here.
The relevant sections of the Marine Insurance Act, 1906, are as follows:
Section 5 (1). Subject to the provisions of this act every person has an insurable interest who is
interested in a marine adventure.
Section 6 (1). The assured must be interested in the subject-matter insured at the time of the loss
though he need not be interested when the insurance is. effected.
(2) Where the assured has no interest at the time of the loss, he cannot acquire interest by any act
or election after he is aware of the loss.
Section 7 (1). A defeasible interest is insurable, as also is a contingent interest
(2) In particular, where the buyer of goods has insured them, he has an insurable interest,
notwithstanding that he might, at his election, have rejected the goods or have treated them as at
the seller’s risk, by reason of the latter’s delay in making delivery or otherwise.
Section 51. Where the assured has parted with or lost his interest in the subject-matter insured,
and has not, before or at the time of so doing, expressly or impliedly agreed to assign the policy,
authority.
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any subsequent assignment of the policy is inoperative: Provided that nothing in this section
affects the assignment of the policy after loss.
These sections make it clear that unless the buyer in this case had an insurable interest in the
goods at the time of the loss he had nothing to assign
Page 704 of [1959] 1 EA 701 (SCA)
(since it cannot be disputed that he had not prior thereto agreed to assign the policy) and that the
policy became inoperative on the cessation of his insurable interest. But for s. 7 (2) it is doubtful
whether the buyer ever had an insurable interest. Under the provision of the Sale of Goods
Ordinance where there is a contract for the sale of unascertained goods, as here, and goods of
that description are unconditionally appropriated to the contract either by the seller with the
assent of the buyer or by the buyer with the assent of the seller, the property in the goods
thereupon passes to the buyer. Here no goods of the description contracted for were ever
appropriated to the contract, and the goods which were in fact appropriated were certainly not
appropriated with any assent on the part of the buyer. The only object of s. 7 (2) is to provide for
the case where the goods are not of the description contracted for but the buyer has not yet
rejected. When, however, the buyer has rejected, there is no place for the hypothesis that he
might have rejected. The fact has arisen. Here, on rejection, the buyer ceased to have any interest
in the cement, and there was nothing to assign. Nor is this affected by the proviso to s. 51 which
permits assignment after loss. This merely allows an assured to assign the benefit of the policy
after the loss if he had an insurable interest at the time of loss.
I think that this view is confirmed by the decision in North of England Oil Cake Company v.
Archangel Insurance Co. (1) (1875), 10 Q.B. 249. In that case a cargo of linseed was insured
with the defendant company from Constantinople to London, including the risk of lighterage.
Whilst the vessel was on her voyage the original assured sold the cargo to the plaintiffs, the
terms of sale being payment in fourteen days from being ready for delivery. The cargo was
landed in London in public lighters employed by the plaintiffs, one of which sank. After the loss
authority.
Page | 457
INSURANCE LAW CASES
the original assured, Vagliano Brothers, assigned the policy to the plaintiffs, and the latter
thereupon sought to recover the loss from the defendants. It was held that the plaintiffs could not
recover. The policy was not expressly agreed to be assigned to plaintiffs by the sold-note; and no
such intention could be inferred from the terms of the note, inasmuch as it was necessary that
Vagliano Brothers should keep the policy for their own protection until right delivery of the
cargo. When the seed was put on board the lighter employed by plaintiffs, the seed was delivered
to plaintiffs, and Vagliano Brothers’ interest ceased and the policy lapsed; and the subsequent
assignment by Vagliano Brothers to plaintiffs was, therefore, of no avail under 31 and 32 Vict. c.
86, s. 1.
Further confirmation is provided by a passage in Chalmers “Marine Insurance Act” (5th Edn.) at
p. 15. Here the learned author, who was also the draftsman of the Act, says
“Goods which are inferior to sample are shipped and then partially sea damaged on the voyage:
If A. rejects the goods, presumably he could not claim on the policy, but could he assign the
policy to the seller and then reject the goods? Presumably not, but various complications may be
suggested which still await decision.”
Here it will be seen that the author is doubting whether in such a case an assignment would
confer any rights if made before rejection. It is not suggested that there is much doubt if the
rejection comes first.
It has been suggested on behalf of the plaintiffs that there is an “implied” assignment or an
“equitable” assignment of the policy which arises from the nature of the transaction and is valid.
It is urged that since it was agreed that the price was to be paid and delivery made through a bank
under a letter of credit and against documents, there is an implication that the policy is taken out
for the benefit of both buyer and seller, either of whom can benefit from it at choice.
Page 705 of [1959] 1 EA 701 (SCA)
Cockburn CJ: in his judgment in North of England Oil Cake Company v. Archangel Insurance
Co. (1) says:
authority.
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INSURANCE LAW CASES
“We are agreed on one point, which entitles the defendants to judgment, viz. that, the policy not
having been assigned until after the interest of the assignors had ceased, an effective assignment
was impossible. If there had been a stipulation in the contract of sale that the policy should be
assigned for the benefit of the plaintiffs, the vendees, it might have been otherwise; but not only
is there no express stipulation to that effect, but the implication from the nature of the contract is
the other way. This is not like the common case of the sale of a floating cargo, where the seller
parts with and the buyer takes at once the property, and all risks. In such a case, the policy,
according to the established practice, passes as part of the shipping documents, and on
assignment the vendee can sue upon it in case of loss. And there is no hardship in this on the
insurers, because they insured the safety of the cargo to the end of the voyage, and it is
immaterial to them in whom the interest vests at the time of the loss; and there is great
convenience in the practice, as it obviates the necessity of the vendee getting a fresh policy and
facilitates the sale of cargoes at sea.”
I do not think this passage is appropriate. I find no proof that by custom or otherwise in contracts
of this description there is an implication that the seller, who has not insured the goods, is
deemed to be a party to the policy from the outset. It does not help that it is said
“the policy, according to the established practice, passes as part of the shipping documents”
since the passage continues
“and on assignment the vendee (in this case it would be the vendor) can sue upon it in case of
loss.”
What impedes the plaintiffs here is that a valid assignment has not been possible.
The defence of the insurance company is not one which is ordinarily taken in this court. The
damage arose within the broad terms of the policy and, although the goods may have remained
upon the wharf a few days longer than if there had been no argument as to who should take
delivery, this is one of the risks which is foreseen and paid for. Nevertheless it succeeds; and the
claim against the second defendants, the insurance company, must be dismissed with costs
together with the claim against the first defendants.
authority.
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INSURANCE LAW CASES
Action dismissed.
BERESFORD V ROYAL INSURANCE CO LTD [1937] 2 ALL ER 243
LORD WRIGHT MR. This is an appeal from a judgment of Swift J, which held that the plaintiff
was entitled to recover on
Page 246 of [1937] 2 All ER 243
certain policies effected on his life by Major Charles William St John Rowlandson, the sums
insured amounting in all to £50,000. The plaintiff sues as administratrix, with the will annexed,
of Major Rowlandson.
The principal defence as pleaded was that Major Rowlandson died by his own hand, and that
thereby the policies became void. It is not necessary to criticise the sufficiency of this plea,
because, the jury having found by its verdict that the assured feloniously died by his own hand,
the contention on behalf of the appellant company before the judge, as he stated, was that public
policy prevented the company from paying the policy moneys to his estate, and prevented his
representative from recovering. The case was fought upon this plea as though properly raised.
This description by the judge of the conduct of the case before him equally applies to the conduct
of the argument before this court. No point of pleading was raised in this court. Indeed, as will
appear later, the facts are such that the court would, in our opinion, have been bound on its own
initiative to determine whether the policies were legally enforseable, even if the appellant
company had not raised the objection.
The undisputed facts are that the deceased had insured himself with the appellant company some
years before for sums amounting in all to £81,000, at annual premiums totalling about £3,000;
but he became financially embarrassed, and cancelled some of the policies, so that the insurances
were reduced to £50,000 in all at the time of his death, which was 3 August 1934. Until the last
premiums fell due, he had managed to find money to pay the premiums, partly by borrowing
authority.
Page | 460
INSURANCE LAW CASES
from the appellant company against the surrender value of the policies. A balance of £400
remained due for premiums on 16 July 1934. In order to help him as far as it possibly could, the
appellant company gave him gratuitous extensions of time. These ran out finally at 3 pm on 3
August 1934, when the policies would lapse if the premiums were not paid. He was unable to
find the premiums. He was in debt to the extent of more than £60,000. He had no assets, and was
at the end of his credit. At two or three minutes before 3 pm, he shot himself in a taxicab in St
James’s Street. He had left a letter with his solicitor, written that very morning, in which he said
in effect that, though what he was about to do would be technically defrauding the insurance
company, yet it would not notice a small matter like £50,000 less the loans, whereas, if the
policy moneys were not paid, it would be a serious matter for the people who had believed in
him and lent him these large sums of money. The jury, in answer to the questions put to it by the
judge, found that, according to the formula laid down in M’Naghten’s Case, he was not insane.
The jury also found that when he shot himself he was possessed of that degree of physical,
intellectual and moral control over his actions which a normal man would have. These findings
beyond question amounted to a finding that the case was one of felo de se,
Page 247 of [1937] 2 All ER 243
or felonious suicide. It is clear that the assured deliberately killed himself in order to enable his
estate to collect the insurance moneys. In two or three minutes, the policy would have
automatically expired, because he had no means of raising the premiums.
The respondent filed a cross-appeal, claiming that the verdict should be set aside on various
grounds of misdirection by the learned judge. That cross-appeal was, at the respondent’s request,
not proceeded with at this stage, but was reserved until this appeal has been decided, which,
accordingly, has proceeded on the basis that the verdict of the jury stands. On that basis, Swift J
decided in the respondent’s favour, on the ground, as it may be very summarily stated, that,
whatever considerations of public policy might be urged against a company paying on a life
policy where the assured has feloniously taken his own life, yet, where there was no idea of that
kind when the policy was effected, and where felonious suicide was not expressly excepted, but
authority.
Page | 461
INSURANCE LAW CASES
impliedly covered, the dominant public policy to be observed was that of the sanctity of contract.
Swift J held that the appellant company must fulfil its contract.
The policies expressed that the sums thereby assured were payable on the death of the life
assured to the executors, administrators or assigns of the assured, and contained a term that,
subject to the indorsed conditions, they were “indisputable.” Of the indorsed conditions, only
condition 4 is material. It runs:
‘If the life … shall die by his own hand, whether sane or insane, within one year from the
commencement of the insurance, the policy shall be void as against any person claiming the
amount hereby assured or any part thereof, except that it shall remain in force to the extent to
which a bona fide interest for pecuniary consideration, or as a security for money, possessed or
acquired by a third party before the date of such death, shall be established to the satisfaction of
the directors.’
No part of this condition applied. The action, it is true, was brought by the plaintiff on behalf of
the deceased’s creditors, since the estate was being administered in Chancery, and the right, if
any, under the policies constituted the sole asset of the estate available to pay the creditors, but
there was no assignment of any right under the policies to any creditor, nor were they held as
security. Several years had elapsed since the commencement of the assurances.
On behalf of the respondent, it was contended that the effect of condition 4 was that the appellant
company, by expressly providing that felonious suicide should discharge it if it occurred within
one year of the policy commencing impliedly undertook that, after that period, it should be no
defence, or, more precisely, the argument was that the policy, after the first year, became
indisputable unconditionally, even in the event of felonious suicide. No question of public policy
or illegality, it was said, was then open to the appellant company. It was contended that the
express limitation for the first year excluded any limita-
Page 248 of [1937] 2 All ER 243
authority.
Page | 462
INSURANCE LAW CASES
tion whatever for any subsequent year, attention being particularly directed in this regard to the
case of the assured committing suicide while sane, because condition 4 no longer applied. The
importance of this to third parties becoming assignees or chargees for value was emphasised.
If the only question were the construction of the policy on ordinary principles, there might be
much plausibility in the contention that it was implied that it was to be enforceable in all events,
including that of suicide by the assured while sane; but we do not think that the question is so
concluded. However absolute in terms the policy might be, the court will not enforce it if it is
illegal, or contrary to public policy, or if it is otherwise such an agreement as the court, in its
inherent jurisdiction, will refuse to enforce. To take an extreme instance, the court would not
enforce a promise to pay a sum of money in consideration of the plaintiff having, according to
contract, committed a murder, or if the assured, having an insurable interest in another’s life, had
murdered the life insured, and was seeking to collect the policy moneys. The same principle has
been applied to other types of illegality. Thus, in Anctil v Manufacturers’ Life Insurance Co, a
policy was expressed to be incontestable after one year during which premiums had been paid;
but it was held that it was not enforceable, because the assured had no insurable interest, and the
policy was, therefore, void under art 2,590 of the Civil Code of Lower Canada. Lord Watson said
at p 609:
‘The rule of the code appears to them [their Lordships] to be one which rests upon general
principles of public policy or expediency, and which cannot be defeated by the private
convention of the parties.’
It may here be convenient to deal with a contention made on behalf of the respondent, that she
does not merely stand in the shoes of the assured, but, as an administratrix appointed by the
court, has, as it were, an independent root of title, and is not affected by defences which would
have been available if the assured had been suing, or even if his assignees had been suing, as was
the case in Amicable Society v Bolland, where the suit by the assignees of the policy was
dismissed, on the ground that the assured had been guilty of forgery, and had been executed for
the felony. We do not think that this argument is well founded. We think the personal
representative of the assured, though appointed under the Administration of Estates Act 1925,
authority.
Page | 463
INSURANCE LAW CASES
has no better or other right to sue than the assured himself would have had. The promise is to pay
the personal representatives or assigns, but it is a promise to the assured only, and can be
enforced, if at all, by the personal representative as such, and not in her own right. The same is
true of assigns. This rule was in principle involved in the decision of Clauson J in Re Sigsworth,
Bedford v Bedford, following the opinion of Farwell J in Re Pitt, Cox v Kilsby.
Page 249 of [1937] 2 All ER 243
The question, therefore, is whether the felonious suicide of the assured is a bar to the present
action. If the assured had taken his life while insane, the fact would not have constituted a
defence. The act of an insane person is not in law his act: see Felstead v R, and such a death is a
death within the terms of the policy, unless there are special conditions excluding it; but suicide
when sane is, by English law, a felony. This has been so from very early times. The law is thus
succinctly stated in Stephen’s Digest of the Criminal Law, art. 319:
‘A person who kills himself in a manner which in the case of another person would amount to
murder is guilty of murder, and every person who aids and abets any person in so killing himself
is an accessory before the fact, or a principal in the second degree in such murder.’
Hence, where there has been what is called a suicide pact between two persons, and one
survives, the survivor is guilty of murder. The Forfeiture Act 1870, which abolished attainder,
corruption of blood, forfeitures, and escheats in the case of treason or felony or felo de se, has
not changed the law. Thus, in R v Mann, Lord Reading CJ said at p 108:
‘We are of opinion that an attempt to commit suicide is an attempt to commit a felony.’
It may be noted that the forfeiture in the case of felo de se did not extend to lands of inheritance,
nor was his blood corrupted, nor was his wife barred of her dower: Hawkins’ Pleas of the Crown,
Bk 1, ch 9, s 8. The law is discussed in Hale’s pleas of the Crown, ch 31, pp 411, 412, and other
writers.
This being the nature of felo de se by English law, and as the plaintiff, as personal representative,
stands in the shoes of the assured, who has committed, as it were, murder on himself, the present
authority.
Page | 464
INSURANCE LAW CASES
claim is equivalent technically to a claim brought by a murderer, or his representative or assigns,

on a policy effected by the murderer on the life of the murdered man. In that latter case, it is, we
think, clear that neither the murderer nor his estate nor his assigns could take a benefit under the
policy. In principle, this rule is involved in Cleaver v Mutual Reserve Fund Life Assocn, where
the murdered man had effected a policy on his life in favour of his wife. She murdered him. It
was held that her assigns could not recover on the policy. In that case, it is true, there was held to
be a resulting trust of the policy in favour of the deceased man’s estate, on the ground that the
deceased man, who was the assured, being innocent, and the wife’s interest being forfeited, the
policy rights vested in his estate. No such trust, however, can arise here. Similarly, a murderer
cannot benefit under the will of the murdered man: In the Estate of Crippen, or under an
intestacy: Re Sigsworth, Bedford v Bedford. The general principle was stated by Fry LJ, in
Cleaver’s case, at pp 156, 157:
‘It appears to me that no system of jurisprudence can with reason include amongst
Page 250 of [1937] 2 All ER 243
the rights which it enforces rights directly resulting to the person asserting them from the crime
of that person. If no action can arise from fraud, it seems impossible to suppose that it can arise
from felony or misdemeanour. It may be that there is no authority directly asserting the existence
of the principle; but the decision of the House of Lords in Fauntleroy’s case appears to proceed
on this principle, and to be a particular illustration of it. This principle of public policy, like all
such principles, must be applied to all cases to which it can be applied without reference to the
particular character of the right asserted or the form of its assertion. In Fauntleroy’s case it was
held to prevent the assignees of a forger from claiming the benefit of a policy on his death at the
hands of justice by reason of his forgery. It would equally apply, it appears to me, to the case of a
cestui que trust asserting a right as such by reason of the murder of the prior tenant for life or of
the assured in a policy; and it must be so far regarded in the construction of Acts of Parliament
that general words which might include cases obnoxious to this principle must be read and
construed as subject to it.’
authority.
Page | 465
INSURANCE LAW CASES
In Fauntleroy’s case (Amicable Society v Bolland), the judgment in the House of Lords was
delivered by Lord Lyndhurst LC who thus stated the position, at p 211:
‘The question under these circumstances is this: whether the assignees can recover against the
insurance company the amount of this insurance; that is to say, whether a party, effecting with an
insurance company, an insurance upon his life, and afterwards committing a capital felony, being
tried, convicted, and finally executed, whether, under such circumstances, the parties
representing him and claiming under him, can recover the sum insured in the policy so effected. I
attended to the argument at the bar, in conjunction with the noble Lord [Lord Radnor] now
present, and we have both come to the conclusion that the assignees cannot maintain this suit. It
appears to me that this resolves itself into a very plain and simple consideration. Suppose that in
the policy itself this risk had been insured against: that is, that the party insuring had agreed to
pay a sum of money year by year, upon condition, that in the event of his committing a capital
felony, and being tried, convicted, and executed for that felony, his assignees shall receive a
certain sum of money—is it possible that such a contract could be sustained? Is it not void upon
the plainest principles of public policy?’
This was a less obvious case than a case of suicide. The forger had no intention of being
executed; he presumably hoped to escape detection. The essential feature of the decision was that
the court would not allow a claim in contract to be based on the contracting party’s crime as a
necessary constituent of the cause of action, even though an interval of time and circumstance
separated the crime from the resulting death.
In a case like the present, the crime (for so it is regarded by English law) and the resulting death
are identified. The precise facts in Fauntleroy’s case could not come into question in these days,
and the case is cited only for the general principle.
It may seem curious that there is, so far as we know, no decided case precisely in point in
England. It may be explained by the notorious fact that juries will seldom find felo de se, but
generally bring in a verdict of suicide while insane. Fauntleroy’s case was discussed, but not
applied, by the Supreme Court of the Cape of Good Hope in Burger v South African Mutual Life
Insurance Society, where the assured, being a British subject, had been killed while in arms
authority.
Page | 466
INSURANCE LAW CASES
against the British government. De Villiers CJ refused to extend the principle of public policy to
such a case, and gave judgment for the executrix. It is not here necessary to express any view on
the soundness of that
Page 251 of [1937] 2 All ER 243
decision, but De Villiers CJ refers to the case of suicide. The policy contained a clause similar to
condition 4 of the policy now in question. De Villiers CJ thus expressed himself, at p 543:
‘The possibility of suicide was contemplated, and it was accordingly provided that if this should
be the mode of death within one year from the date of the contract the policy should become
void. If, instead of being killed in action, the deceased had committed suicide ten years after the
date of the contract, there would have been good ground for invoking the principle of public
feeling against the payment of the amount claimed, for there could have been some evidence that
the illegal act causing his death had been contemplated. In the present case there is no evidence
whatever that the deceased contemplated rebellion, or that he became a rebel with the object of
thus hastening his death, and securing the amount of the policy for his representatives. Having
regard to the principle that where a person seeks to excuse himself from the full consideration,
the rule as to public policy should not be carried further than the protection of the public
requires, I am of opinion that the defendant company is not protected by the rule.’
If De Villiers CJ is meaning to say that inability to recover in the case of the assured’s felonious
suicide depends on proof that such suicide was contemplated as a possibility when the policy
was effected, we cannot, with deference, agree with that view. It may be that in Burger’s case,
De Villiers CJ, might have been led to the conclusion that the policy was not enforceable, if he
regarded such a clause as he sets out as being some evidence that suicide was contemplated when
the policy was effected. It is not necessary to discuss here this way of looking at the matter.
Reference has also been made to a dictum to be found in Horn v Anglo-Australian & Universal
Family Life Assurance Co, where Wood V-C, after referring to Fauntleroy’s case, said at p 511:
‘So the argument might be pursued—although I do not know that any case has so decided—to
the same extent in the case of a person committing suicide while in a sane state of mind, thus
authority.
Page | 467
INSURANCE LAW CASES
committing a felony, and losing his life thereby; but I know of no rule of law that can justify me
in extending that to the case of a person committing suicide while in a state of insanity, and
therefore committing no legal offence.’
The finding there was that the assured committed suicide while insane, and his personal
representative recovered under the policy. A number of cases was cited, but in no one of these
was there a finding of felonious suicide. It was found in each case that the suicide had been
committed during a period of temporary insanity. In some of these cases, the questions arose
under a condition common for many years in policies of life insurance.
An illustration is furnished by Borradaile v Hunter. The general form of the condition was that, if
the assured should die by his own hand, or by the hands of justice, or in consequence of a duel,
the policy should be void. That condition was held to cover a case where the assured took his
own life, intending to do so, but at the time not capable of judging between right and wrong, and
in that sense was insane. In Clift v Schwabe, it was held that the word “suicide” in such a
Page 252 of [1937] 2 All ER 243
condition should be similarly construed, and not limited to felo de se. In other cases, the
condition was that the policy, though void in the event of suicide, in other respects should
operate to entitle the holder to recover to the extent of an assignment or bona fide interest. Such
cases were Dufaur v Professional Life Assurance Co and Rowett Leakey & Co Ltd v Scottish
Provident Institution, in which latter case the interests of onerous holders were protected. There
are in the books several such cases, but we do not think it necessary to discuss them further. No
such question falls to be decided here as was necessary to be considered in them. We do not
think they afford us any guidance.
Authorities were cited from the Supreme Court of the United States. Decisions of that court are
always considered with great respect in the courts of this country, and it has often been said that
it is desirable to have uniformity in the law of contracts as far as possible in our two countries.
The difficulty in the present connection is that these questions of public policy depend on the
state law which governs the contract, and that the law may differ in different states. In Ritter v
authority.
Page | 468
INSURANCE LAW CASES
Mutual Life Insurance Co, it was held by the Supreme Court that, where an assured, while sane,
had committed suicide, the policies on his life were not enforceable. The first ground on which
the judgment was put was that such a death was not within the policy, which contained no
express condition relevant to suicide. Harlan J said, at p 151:
‘But is it not an implied condition of such a policy that the assured will not purposely, when in
sound mind, take his own life, but will leave the event of his death to depend upon some cause
other than wilful, deliberate self-destruction? Looking at the nature and object of life insurance,
can it be supposed to be within the contemplation of either party to the contract that the company
shall be liable upon its promise to pay, where the assured, in sound mind, by destroying his own
life, intentionally precipitates the event upon the happening of which such liability was to arise?’
It may be that these observations were directed to the case where the policy was silent on this
matter. The second ground of the judgment was that to allow recovery would be against public
policy. Harlan J said, at p 154:
‘There is another consideration supporting the contention that death intentionally caused by the
act of the assured when in sound mind—the policy being silent as to suicide—is not to be
deemed to have been within the contemplation of the parties; that is, that a different view would
attribute to them a purpose to make a contract that could not be enforced without injury to the
public. A contract, the tendency of which is to endanger the public interests or injuriously affect
the public good, or which is subversive of sound morality, ought never to receive the sanction of
a court of justice or be made the foundation of its judgment. If, therefore, a policy—taken out by
the person whose life is insured, and in which the sum named is made payable to himself, his
executors, administrators or assigns—expressly provided for the payment of the sum stipulated
when or if the assured, in sound mind, took his own life, the contract, even if not prohibited by
statute would be held to be against public policy, in that it tempted or encouraged the assured to
commit suicide in order to make provision for those dependent upon him, or to whom he was
indebted. Is the case any different in principle if such a policy is silent as to suicide, and the
event insured against—the death of the assured—is brought about by his wilful, deliberate act
when in sound mind?’
authority.
Page | 469
INSURANCE LAW CASES
Page 253 of [1937] 2 All ER 243
The answer given by Harlan J, after an elaborate citation of authorities, was that such a risk
could not legally be covered by the policies. The court did not, it seems, consider the further
question whether a court should entertain an action in which the plaintiff or his representative
was seeking to recover the fruits of a crime.
Whitfield v Aetna Life Insurance Co, decided in 1907, throws no light on the general question,
and turns, it seems, on the effect of the state law. It decided that, where the statutes of the state in
which the policy was effected provided that suicide, unless contemplated when the policy was
applied for, should be no defence, the policy must be enforced in a Federal court,
notwithstanding that it contained express terms limiting the recovery, in the case of suicide, to
one-tenth of the sum insured. It does not appear that the assured took his life while of sane mind.
In Northwestern Mutual Life Insurance Co v McCue, decided in 1912, the assured had been
executed for murder. It was held that, by the law of Virginia, which was the relevant state law for
the policy in question, death by the hand of the law was not covered by the policy, which was
silent in regard to suicide. The court held that it was immaterial to consider or ascertain what was
the law of Wisconsin, where the insurance company had its head office.
In 1920, in the case of Northwestern Life Insurance v Johnson, and another case which was
reported at the same time, the Supreme Court again considered this type of question. The court
construed policies which contained clauses somewhat similar to condition 4 in the policies here
in question as implying that suicide of the assured, whether sane or insane, after a specified time,
should not be a defence. The headnote goes on thus to express the effect of the decision:
‘The validity of such agreements to pay life insurance, even when death is due to suicide, if it
occur after the lapse of a certain time, depends upon the state policy. Where it does not appear in
what state the contracts in question were made, the court upheld them, which, semble, is in
accord with the rule generally prevailing.’
In Johnson’s case, it did not appear that Johnson was insane when he killed himself. In the
second case, nothing is said on the question as to whether the assured was sane or insane. In the
authority.
Page | 470
INSURANCE LAW CASES
judgment delivered by that great judge, Holmes J, Whitfield’s case was cited as an authority that
public policy with regard to such contracts was a matter for the states to decide. Ritter’s case was
not disapproved. It was, on the contrary, said, at p 101, that:
‘all the circumstances gave more support to the construction of the policy adopted by the court in
accordance with the view that has prevailed in some jurisdictions as to the general rule.’
McCue’s case was not disapproved. The court seems to discuss public policy merely from the
standpoint that:
‘the mere evocation of a possible motive for self-slaughter is at least not more objectionable than
the creation of a possible motive for murder.’
Page 254 of [1937] 2 All ER 243
That is, where a policy on a man’s life is assigned to a third party. The court did not consider
what the position would be if the assured or assignee of the policy murdered the life insured. We
find it difficult to conceive that any court would, in that event, enforce payment for the benefit of
the murderer; but we do not think that the court was considering any such case. The discussion
seems to have been limited to the question whether the clause in reference to suicide, whether the
man was sane or insane, rendered the policy void. Whatever the position may be in the United
States, where each state, by legislative or judicial action of its own, can, it seems, determine the
legality of a policy which, expressly or by implication, provides for payment of the policy
moneys in whole or in part in the case of suicide, sane or insane, we cannot, we think,
consistently with the law of England, as we understand it, hold that the respondent can
successfully maintain her claim.
Opinions may differ as to whether the suicide of a man while sane should be deemed to be a
crime; but it is so regarded by our law. The old inquisition in the case of self-murder was
felonice et voluntarie seipsum interfecit et murderavit: Hale’s Pleas of the Crown, chap 31, p
411. It may be that both ecclesiastical and civil penalties have been mitigated or abolished, but
the criminal law still remains. Only the legislature in this country can change the law in this
matter, if it should so will. While the law remains unchanged, the court must, we think, apply the
authority.
Page | 471
INSURANCE LAW CASES
general principle that it will not allow a criminal or his representative to reap, by the judgment of
the court, the fruits of his crime. We have quoted the above authorities in support of that
principle which is of general import. The principle has been applied not only in the authorities
quoted above, but also in many decisions dealing with varied states of fact and applications of
the same or similar principle. These are all illustrations of the maxim ex turpi causa non oritur
actio. The maxim itself, notwithstanding the dignity of a learned language, is, like most maxims,
lacking in precise definition. In these days, there are many statutory offences which are the
subject of the criminal law, and in that sense are crimes, but which would, it seems, afford no
moral justification for a court to apply the maxim. There are, likewise, some crimes of
inadvertence which, it is true, involve mens rea in the legal sense, but are not deliberate, or, as
people would say, intentional. Thus, in Tinline v White Cross Insurance and James v British
General Insurance Co, both cases of motor car manslaughter, the judges held that policies against
third-party liability were enforceable. In these cases, something may turn upon the special
legislation on the matter. The cases have been questioned in Haseldine v Hosken, but need not
further be considered here.
The principle that a court will not generally enforce transactions tainted with fraudulent or
immoral purpose or objects has often been
Page 255 of [1937] 2 All ER 243
recognised, and was recently expounded in a decision of the Court of Appeal in Alexander v
Rayson. A recent Act was necessary to change the law that there could be no contribution
between tortfeasors. It is enough to say that we know of no case where a crime, such as our law
holds felo de se to be (that is, a deliberate felony akin to murder), has been allowed to support an
action by the criminal or his representative to recover the fruits of the crime. We think that what
Greer LJ said in Haseldine v Hosken, at p 837, applies without qualification to a suicide such as
that in question:
‘In this country, whatever may be the case in other countries, no person is allowed to insure
himself against the commission of a crime.’
authority.
Page | 472
INSURANCE LAW CASES
The overriding duty, or inherent power, of the court to refuse its aid to enforce a promise to pay,
in such circumstances, excludes its general duty to enforce performance of contracts.
There may seem a hardship in holding that the appellant company is in law not compellable to
pay, in the facts of this case, but we find it impossible to hold otherwise consistently with our
law, as we understand it. We accordingly, with all deference, feel constrained to allow the appeal
from what Swift J has decided.
Appeal allowed.
WELCH V ROYAL EXCHANGE ASSURANCE [1938] 4 ALL ER 289
BRANSON J. This is an appeal by way of a special case from the award of an arbitrator, Sir
Walter Monckton, made in respect of a claim by the claimant against the Royal Exchange
Assurance. The claim arises out of a fire which took place upon the insured’s premises on 26
November 1934. He claimed against the respondents on a policy which he had with them dated
19 June 1929. These questions arise: (i) whether certain conditions in that policy were conditions
precedent to the right of the plaintiff to make a claim, in the sense that non-fulfilment of those
conditions put an end once and for all to any right in him to claim under the policy in respect of
the fire which took place on 26 November 1934, (ii) or whether, in the events which have
happened, though, at the moment when the arbitration which took place between the parties
commenced, he had not fulfilled the condition in question, what took place at the arbitration
amounted to a fulfilment of it, and consequently removed the bar which, when the arbitration
commenced, would, on that construction of the policy, have prevented him from recovering. The
arbitrator in his case found the following facts, which are material to the point which has arisen
before me. The policy contained a number of conditions, and with regard to those conditions the
policy used the following language:
authority.
Page | 473
INSURANCE LAW CASES
‘The corporation agrees (subject to the conditions contained herein or indorsed hereon, or
otherwise expressed hereon which conditions shall, so far us the nature of them respectively will
permit be deemed to be conditions precedent to the right of the insured to recover hereunder) that
if after payment of the premium the property insured [is damaged, certain results shall follow].’
As I have said, there was a fire at the claimant’s premises, and the arbitrator, after setting
out the material conditions of the policy, to which I shall refer later, found the following facts:
‘(a) Information about all bank accounts used or controlled by the claimant
Page 453 of [1938] 1 All ER 451
for the purposes of his business was required by the respondents on several occasions
both before the arbitration proceedings began and before delivery of the unamended points of
defence. (b) One Mrs. Welch, the mother of the claimant, had two bank accounts, namely, a loan
account and a current account. Both those accounts were used and controlled by the claimant for
the purposes of his business. Large sums of money accruing to the claimant in his business were
paid to him into the said accounts [it must be “by him”] and large sums were drawn out of the
said accounts by him for the purpose of his business. (c) On being required by the respondents to
give information concerning the bank accounts used or controlled by him as aforesaid, the
claimant failed to give the respondents any information in respect of the two bank accounts of
the said Mrs. Welch.’
Then para 5 is:
‘During the hearing before me and in the course of the cross-examination of the claimant,
the claimant for the first time offered to give and did give full information as to the two banking
accounts of the said Mrs. Welch. Until the said accounts were produced as aforesaid, the
respondents were not in possession of sufficient information to enable them to allege the
claimant’s failure to give information in respect of the said accounts as a breach of Condition IV
of the said policy. In the course of the hearing and after the production of the said accounts, the
respondents applied for leave to amend their points of defence, and I allowed the amendment.’
authority.
Page | 474
INSURANCE LAW CASES
Then the arbitrator goes on, in para 6:
‘By their amended points of defence the respondents contended that the claimant’s failure
to give the information about the said accounts when required to do so constituted a breach of
Condition IV of the said policy, and that the said breach ought to preclude the claimant from
recovering any sum in respect of his claim under the said policy. The respondents further
contended that the claimant fraudulently concealed the said accounts from the respondents, and
that by reason thereof he ought to be precluded from recovering any sum in respect of his claim
under the said policy.’
Then, after setting out the contentions of the claimant, which I need not read at the
moment, he finds as a fact:
‘That the said information as to the said accounts was reasonably required by the
respondents, (b) that the claimant failed to give the respondents information as to the said
accounts when the said information was required by the respondents (c) that the claimant did not
fraudulently conceal the said information from the respondents; (d) that the said accounts when
disclosed did not contain any material which justified or tended to justify the respondents in
repudiating the claim under the said policy.’
Upon those facts, the arbitrator proceeded to hold:
‘that the claimant’s failure to give information as to the said accounts when required to
do so constituted a breach of Condition IV of the said policy, even though the said accounts
when disclosed did not contain any material which justified or tended to justify the repudiation
of the claim under the said policy.’
He then proceeded to hold:
‘that there had been a breach of Condition IV of the said policy at the time when the
arbitration proceedings began, that the said breach constituted a bar to the claimant’s right to
recover in respect of his claim, and that the said breach could be relied upon by the respondents
so soon as they were permitted to raise the point by amendment of their points of defence.’
authority.
Page | 475
INSURANCE LAW CASES
He then held:
‘that Condition IV is a condition precedent to the respondents’ liability in respect of a

claim under the said policy [and] that a breach of the said condition disentitles the claimant to
recover any sum in respect of his claim under the said policy, and that the fact that the
respondents were in possession of the required information at the time when they amended their
points of defence did not preclude them from relying upon the claimant’s failure to supply the
said information at any earlier date as a bar to his right to recover any sum in respect of his said
claim.’
Page 454 of [1938] 1 All ER 451
Having come to that conclusion, the arbitrator proceeded to give certain directions as to
what was to follow in consequence, the main one being that, though he found that, apart from
this point, the claimant could recover a large sum of money, in view of this point, he was not
entitled to recover anything at all. So, from the claimant’s point of view, this question raised
before me is one of very great importance.
The first matter for consideration is whether, upon the true construction of this policy, the
passage in cl 4 upon which the respondents rely constitutes a condition precedent to the right of
the claimant to recover anything at all in respect of the present claim under the policy. It is not
contended that the breach of Condition IV has destroyed the policy. In other words, it is not
contended that this condition was a condition precedent to the validity of the policy. What is
contended is that it is a condition precedent to the liability of the insurers, and that, therefore, the
condition not having been fulfilled at any time, this claim cannot succeed, and that the arbitrator
was right in coming to the conclusion that the claimant’s claim failed.
What is said on behalf of the claimant is, first of all, that, upon the true construction of
this policy, there is no condition precedent at all. In support of that contention, reliance is placed
upon the decision of the Court of Appeal in Re Bradley & Essex & Suffolk Accident Indemnity
Society. It is said that, upon the authority of that case, I could altogether ignore such expressions
in this policy as seem to say that the condition in question is a condition precedent, and that I
authority.
Page | 476
INSURANCE LAW CASES
could, as a matter of construction, hold that it was not anything of the kind. I do not know
whether I am overstating Mr Norman Birkett’s powerful argument, but I think that that is a fair
representation of it upon this point. I do not think that that case goes anything like far enough to
support that proposition. When one comes to look at it, it appears to me that what it actually
decides is that, if, upon a close consideration of the conditions of the policy, it appears that,
though there are general words showing that the conditions are to be conditions precedent to any
liability of the society under the policy, one will find over and over again that they cannot be;
and, therefore, it is not enough to say: “Here are a lot of conditions covered by that general
provision, and you must construe them all as conditions precedent.” For example, when Cozens-
Hardy MR was dealing with the matter, he used this language, at p 421:
‘Now it is perfectly clear that some of these so-called conditions are not and cannot be
conditions precedent, although some of them may be and are conditions precedent.’
Then he says that Nos 1 and 2 in the notice may be conditions precedent, but that:
‘No. 3, so far as any meaning can be attributed to it, seems to me not to be a condition
precedent.’
The condition with which they were really dealing was No 5, and
Page 455 of [1938] 1 All ER 451
Cozens-Hardy MR, in reading the first sentence and the third sentence, said that they
could not possibly be conditions precedent, and that, that being so, he was not going to hold that
the general words converted the middle sentence there into a condition precedent. Fletcher
Moulton LJ energetically dissented from the view expressed by the other two members of the
court. The third member of the court, Farwell LJ, devoted most of his judgment to a statement—
no doubt entitled to the utmost respect—that in his view clauses of this sort in a policy ought to
be most carefully watched, and ought not to be given effect to unless they were contained in the
proposal form also. No such point as that is raised before me now. The result is that I find it
difficult to draw any help from that case, particularly in view of the fact that it appears to me that
the covering clause, if I may so term the clause at the beginning of the policy which says that the
authority.
Page | 477
INSURANCE LAW CASES
conditions are to be deemed conditions precedent, appears to avoid the difficulty raised on the
language of the policy in Bradley’s case by using the words “so far as the nature of them
respectively will permit,” thus taking away the possibility from anybody who was trying to say
that the general clauses could not be construed to turn the conditions into conditions precedent,
because some of them were not capable of that transmogrification.
The case of Stoneham v Ocean Ry & General Accident Insurance Co appears to me to be

an authority stating in quite plain terms that, where one has language expressing the intention of
the parties that the conditions should be conditions precedent, the court will so construe it. It is
most clearly stated by Cave J at p 241:
‘It seems to me that the rational conclusion is that all these conditions mean what they
say, and that where there is a provision that the condition shall be a condition precedent it is so,
but where there is no such provision it is not.’
I think that it is my duty to look at the language used by the parties to this contract
(bearing in mind the point that Mr Norman Birkett takes, that it is the language of the insurance
company and not the language of the assured, and, therefore, that, if there is any real doubt in the
matter, that doubt should be resolved contra proferentem), and see what it really does mean. I
think that one has to read condition IV in the light of the fact that it occurs on the back of the
contract on the face of which there is the clause which I have already read, that the conditions
shall be deemed conditions precedent to the right of the insured to recover thereunder, also
bearing in mind that that is to be the case so far as the nature of these conditions respectively will
permit. I turn then to Condition IV. I do not think that it is necessary to read the beginning part,
except to point out that it begins with the words:
‘On the happening of any destruction or damage, the insured shall forthwith give notice
…’
The material words are:
‘The insured shall also give to the corporation all such proofs and information
authority.
Page | 478
INSURANCE LAW CASES
Page 456 of [1938] 1 All ER 451
with respect to the claim as may reasonably be required, together with (if demanded) a
statutory declaration of the truth of the claim and of any matters connected therewith. No claim
under this policy shall be payable unless the terms of this condition have been complied with.’
It seems to me, reading that, bearing in mind the fact that it is a condition in a policy
wherein the insurers are seeking for information to enable them to check the claim which is
being put forward by the insured, that the first question that arises upon it is whether there is any
obligation to give that information, and at any particular time. It is contended by Mr Norman
Birkett, on behalf of the claimant in this case, that there is no time limit, and that the real
meaning and intention of that clause are that the insurers are saying: “Mark you, until you give
me the information which I shall reasonably require, you may proceed to get an award, you may
proceed to get anything you like, but I will not pay you and I shall not come under any liability
to hand over to you any money unless these conditions have been complied with.” The result
would be, as it seems to me, that, if that is a correct interpretation, an insured might decline to
give information which was reasonably asked, and might proceed to arbitration claiming money
in spite of not having given that information, and, when defeated at that arbitration by reason of
this clause, he has only to give the information, and then start proceedings all over again. I
cannot believe that either party to this contract can have thought that that was to be the way in
which it could work out. It seems to me, there being no time mentioned, that the ordinary rule
would apply, and that the contract means that the proof and information which may reasonably
be required have to be given within a reasonable time. If any question arises as to whether the
reasonable time had been exceeded, that would be a matter for a judge of fact, to wit, an
arbitrator under the agreement. If that be the proper construction—and I see no reason why the
ordinary implication of a reasonable time should not have effect with regard to this clause in the
contract—what had to be done was that the claimant should give the information which was
demanded of him within a reasonable time. What was to be the result if that condition were not
fulfilled? The policy says the result will be “that no claim under this policy shall be payable,” not
“unless and until,” but “unless the terms of this condition have been complied with.” That means
this, as it seems to me. If the condition has not been complied with, no claim under the policy
authority.
Page | 479
INSURANCE LAW CASES
shall be paid. If that is the true construction, the result is that this claimant, having failed within a
reasonable time—for it must be a failure not to have done it before the arbitration commenced—
to comply with the condition, has lost his right to make his claim under this policy.
Mr Norman Birkett has argued strenuously that there must be some difference between
the meaning of the words “no claim shall be payable” and the right to recover. With all his
acumen, he has failed to indicate to me that there is any real difference between the two things. I
cannot see any difference between saying “no claim shall be payable” and
Page 457 of [1938] 1 All ER 451
saying “nothing shall be recoverable.” They seem to me to imply exactly the same thing,
and that is that the claimant shall not be allowed to succeed in enforcing his claim unless he shall
have fulfilled the condition. It is, as I construe it, a condition to give this information within a
reasonable time. That has not been fulfilled, and the claim, therefore, cannot be enforced.
One other case I should refer to is Weir v Northern Counties of England Insurance Co, a
case decided by the Common Pleas Division in Ireland in 1879. I need not deal with it in detail,
because I think that the difference between it and the case before me can be stated quite shortly.
In that case, there was a provision that notice should be given within fifteen days, and accounts,
vouchers, and so forth, such as might reasonably be required, should be given. Then the clause
goes on:
‘And in default thereof no claim in respect to such loss or damage shall be payable until
such notice, account, proof and explanations respectively are given and reduced.’
As the court points out there, if the clause had stopped after the word “payable” and
before the word “until,” it would have construed the provisions as conditions precedent, and a
man who had not delivered his account within fifteen days would have been held to be barred by
that condition from recovering. But the court points out that it does not stop there, but goes on
with the words “until such notice, account, and so forth shall be delivered,” showing clearly that
there was an extension of time contemplated within which the claimant might deliver his notice,
and might repair his fault and place himself in the position of being able to recover. This clause
authority.
Page | 480
INSURANCE LAW CASES
here does not, as I read it, mean anything of the kind. It does not say: “No claim shall be payable
until such proof shall be given.” It says: “No claim shall be payable unless the terms of the
condition have been complied with.” As I read it, it simply means exactly the same as if it had
said: “No claim shall be payable if the terms have not been complied with, or if default has been
made in complying with the terms.”
The result of it is that, in my view, the arbitrator was correct in refusing to give effect to
the contentions of the claimant, and correct in holding, as he did, in paras 11, 12, 13, that failure
to deliver the information required within a reasonable time of the requiring of it constituted a
fatal bar to the claimant’s right to recover in respect of this loss. What is to follow from that is
decided by the arbitrator in para 15 of his award. This means a dismissal of the appeal with costs.
Appeal dismissed with costs.
AJWANG V THE BRITISH INDIA GENERAL INSURANCE CO LTD [1968] 1 EA 436

(HCU)
Judgment
Phadke Ag J: The plaintiff has instituted this suit under s. 104, Traffic Act (Cap. 342) Laws of
Uganda (hereinafter referred to as “The Traffic Act”) to enforce against the defendant company
the judgment and decree obtained by her against Hassani Mabonga and Mohamadi Kasiko in
High Court Civil Suit No. 10 of 1967. The said decree, dated September 19, 1967 (annexture “B”
to the plaint) is for the sum of Shs. 53,995/- with interest thereon at 6 per cent. per annum from
that date, and agreed costs of Shs. 10,270/-. The plaintiff prays for a declaration that the
defendant company do pay to her the amount payable to her under the said decree and also the
costs of this suit.
authority.
Page | 481
INSURANCE LAW CASES
The undermentioned facts were either admitted in the pleadings or satisfactorily proved
by unchallenged evidence:
(1) The plaintiff is the widow of one Anthony Nambudie (hereinafter referred
to as “the deceased”) who died as the result of a motor accident on February 1, 1966;
(2) On February 1, 1966 the deceased, who was riding his bicycle in the
vicinity of mile 1 on Tororo/Jinja road, was in collision with a Peugeot motor vehicle numbered
USF. 343, owned by one Hassani Mabonga and driven at the time by one Mohamadi Kasiko.
The deceased was injured in the collision and died as the result of the injuries;
(3) In High Court Civil Suit No. 10 of 1967 the plaintiff claimed damages
against the said Hassani Mabonga and Mohamadi Kasiko for causing the death of the deceased,
and obtained against them the judgment and decree hereinbefore mentioned;
(4) The aforesaid Peugeot motor vehicle USF. 343 was registered as and
licensed for use as a private car (see evidence of Stanley Kayindu Sengendo);
(5) Pursuant to the proposal for insurance made by the said Hassani Mabonga
in respect of the said motor vehicle, the defendant company had insured it under its Private Car
Policy numbered U/EA/PM/8525/65 (Exhibit 1) for the period December 21, 1965 to December
20, 1966.
The Schedule (PM) in the said Private Car Policy contained the following “Limitations as
to Use”:
“Use only for social, domestic and pleasure purposes. The policy does not cover use for
hire or reward racing pacemaking reliability trial speed testing commercial travelling the carriage
of goods in connection
Page 438 of [1968] 1 EA 436 (HCU)
with any trade or business or use for any purpose in connection with the Motor Trade.”
authority.
Page | 482
INSURANCE LAW CASES
Under s. II – Liability to Third Parties, of the said private car policy, the defendant
company undertook to indemnify the insured in the event of accident caused by or arising out of
the use of the motor vehicle against all sums including claimant’s costs and expenses which the
insured should become legally liable to pay in respect of death of or bodily injury to any person.
Clause 1 (b) (i) under the heading “General Exceptions” stated that “the Company shall
not be liable in respect of any accident loss damage or liability caused sustained or incurred
whilst the motor vehicle is being used otherwise than in accordance with the Limitations as to
Use”;
(6) At the time of the collision between the deceased and the said motor
vehicle, the vehicle was being used as a private hire motor vehicle for the carriage of fare-paying
passengers, for which the said Mohamadi Kasiko (the driver) was prosecuted, convicted on his
own plea of guilty, and fined in Criminal Case No. MT/137/1966 in the magistrates’ court at
Tororo (see evidence of Ebwonu Esolo and Dev Raj Agnihotri). Mr. Nabudere, advocate for the
plaintiff, conceded that the vehicle was so used and that such user was unlawful;
(7) Before the commencement of the aforesaid High Court Civil Suit No. 10
of 1967 the plaintiff gave notice to the defendant company (as insurer of the said motor vehicle)
of the bringing of that suit.
The plaintiff gave evidence that she had not been able to recover the amount of the
aforesaid decree from Hassani Mabonga and Mohamadi Kasiko or either of them. Her claim
against the defendant company is that under s. 104, Traffic Act the defendant company is under a
legal liability to satisfy the said decree in her favour.
The defence is that the defendant company is not liable to satisfy the plaintiff’s claim on
the ground that at the time of the collision the insured vehicle was being used in breach of the
“Limitations as to Use” stipulated in the private car policy and therefore the policy was non-
operative and/or ineffective at the material time. Alternatively, the defendant company pleaded
that it is not liable on the ground that by reason of the breach the insured had become disentitled
to be indemnified.
authority.
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INSURANCE LAW CASES
At the outset it is desirable to set out, at some length, certain relevant provisions of the
Traffic Act under the heading “Part IX – Compulsory Insurance of Motor Vehicles”.
Section 98 (1) – “Subject to the provisions of this Act, it shall not be lawful for any
person to use, or to cause or permit any other person to use, a motor vehicle on a road unless
there is in force in relation to the user of that vehicle by that person or that other person, as the
case may be, such a policy of insurance or such security in respect of third party risks as
complies with the requirements of this Act”.
Section 99 prescribes the requirements to be complied with, and para. (b) provides that
the policy of insurance must be a policy which “insures such person, persons or classes of
persons as may be specified in the policy in respect of any liability which may be incurred by
him or them in respect of the death of or bodily injury to any person caused by or arising out of
the use of the vehicle on a road”.
Section 102 – “Any condition in a policy of insurance providing that no liability shall
arise under the policy, or that any liability so arising shall cease in the event of some specified
thing being done or omitted to be done after the happening of the event giving rise to a claim
under the policy, shall, as respects
Page 439 of [1968] 1 EA 436 (HCU)
such liabilities as are required to be covered by a policy under s. 99 of this Act, be of no

effect. Provided that nothing in this section shall be taken to render void any provision in a
policy requiring the person insured to repay to the insurer any sums which the latter may have
become liable to pay under the policy, and which have been applied to the satisfaction of the
claims of third parties”.
Section 104 (1) – “If, after a policy of insurance has been effected, judgment in respect of
any such liability as is required to be covered by a policy under para. (b) of s. 99 of this Act,
being a liability covered by the terms of the policy, is obtained against any person insured by the
policy, then notwithstanding that the insurer may be entitled to avoid or cancel, or may have
avoided or cancelled the policy, the insurer shall, subject to the provisions of this section, pay to
authority.
Page | 484
INSURANCE LAW CASES
the persons entitled to the benefit of the judgment any sum payable thereunder in respect of the
liability, including any amount payable in respect of costs and any sum payable in respect of
interest on that sum by virtue of any enactment relating to interest on judgments”.
The words “liability covered by the terms of the policy” which appear in the above
section are defined in sub-s. (6) as meaning “a liability which is covered by the policy but for the
fact the insurer is entitled to avoid or cancel, or has avoided or cancelled the policy”.
Section 110 states – “Where a certificate of insurance has been issued under s. 101 of this
Act to the person by whom a policy has been effected, so much of the policy as purports to
restrict the insurance of the persons insured thereby by reference to any of the following matters:
(a) the age or physical or mental conditions of persons driving the vehicle; or
(b) the condition of the vehicle; or
(c) the number of persons that the vehicle carries; or
(d) the weight or physical characteristics of the goods that the vehicle carries;
or
(e) the times at which or the areas within which the vehicle is used; or
(f) the horse power or value of the vehicle; or
(g) the carrying on the vehicle of any particular apparatus; or
(h) the carrying on the vehicle of any particular means of identification,
shall as respects such liabilities as are required to be covered under para. (b) of s. 99 of
this Act, be of no effect.”
The abovementioned provisions of the Traffic Act are identical with certain provisions of
the Insurance (Motor Vehicles Third Party Risks) Act enacted in Kenya (hereinafter referred to
as “the Kenya Act”) and they also closely follow the English legislation on the subject contained
authority.
Page | 485
INSURANCE LAW CASES
in the Road Traffic Act 1930, and the Road Traffic Act 1934. The table given below shows the
comparative position.
Traffic Act Kenya Act English Acts
Section 98 (1) Section 4 (1) Section 35 (1) – 1930 Act
Section 99 (b) Section 5 (b) Section 36 (1) – 1930 Act
Section 102 Section 8 Section 38 – 1930 Act
The provisions of the Kenya Act referred to above and those of the English Acts were
considered and compared in the decision of the Court of Appeal for
Page 440 of [1968] 1 EA 436 (HCU)
Eastern Africa in the New Great Insurance Co. of India Limited v. Cross and Another,
[1966] E.A. 90, to which I will have occasion to refer later in this judgment.
Mr. Nabudere, advocate for the plaintiff, relied upon the majority decision in the New
Great case and more particularly upon the judgment of Crabbe, J.A., and the decision of the
English Court of Appeal in Hardy v. Motor Insurance Bureau, [1964] 2 All E.R. 742, cited
therein. He submitted that under the Traffic Act any use of a vehicle was required to be covered
by a policy of insurance in respect of liability to a third party and that any limitation in the policy
in respect of the use was a condition which was of no effect by virtue of s. 102, Traffic Act.
There was a policy of insurance in force as required by law and liability to the plaintiff could not
be denied by the defendant company.
authority.
Page | 486
INSURANCE LAW CASES
Mr. M. A. Patel, advocate for the defendant company, submitted that the words “in force
in relation to the user of the vehicle” appearing in s. 98 (1) Traffic Act should be construed to
refer to the use permitted under the policy and not to any or every use whatsoever, and where a
term of the policy limits the use such term restricts the operation of the policy from its very
inception with the result that in the event of a breach the policy is non-operative and ineffective
during the continuance of the breach. In this case the permitted use of the vehicle under the
policy was for “only social, domestic and pleasure purposes” and use for hire or reward was
excluded. Since the vehicle, which was not only licensed but also insured for use as a private car,
was admittedly used as a private hire motor vehicle in breach of the relevant term as to user in
the policy, the policy had become ineffective and was not a policy which was “in force” at the
material time within the meaning of s. 98 (1), Traffic Act (s. 4 (1) Kenya Act and s. 35 (1)
English Act, 1930).
In support of his submission, Mr. Patel referred to two English decisions – McLeod (or
Houston) v. Buchanan, [1940] 2 All E. R. 179, and Bright v. Ashfold, [1932] 2 K.B. 153. In both
these cases the question for determination was whether a policy which insured against third party
risks (as required by s. 35 (1) English Act, 1930) but contained a term limiting the use of the
vehicle for a specified purpose could be construed as an effective policy in respect of such risks
when the vehicle was used in breach of the limitations as to use. In McLeod (or Houston) v.
Buchanan it was held that as the owner of the vehicle had permitted its use in breach of the
specified limitation he had failed in his statutory duty of insuring against third party risks which
might have been incurred at the time of the breach. In Bright v. Ashfold it was held that as the
insured motor cycle was used for carrying a passenger on a pillion without a side-car being
attached, contrary to a term of the policy, there was no policy of insurance in force in respect of
third party risks because the term limiting the user was not a condition which was of no effect as
respects liability to a third party under s. 38, English Act, 1930 (see s. 102, Traffic Act and s. 8,
Kenya Act).
Mr. Patel also referred to other English decisions, namely Gray v. Blackmore, [1934] 1
K.B. 95; Wyatt v. Guildhall Insurance Co. Ltd., [1937] 1 All E.R. 792, and Jones v. Welsh
Insurance Corpn., Ltd., [1937] 4 All E.R. 149, in all of which the insurer was held to be not
authority.
Page | 487
INSURANCE LAW CASES
liable to an injured third party on the ground that at the material time the insured vehicle was
being used in breach of the limitations as to use specified in the insurance policy.
The abovementioned English decisions appear to support Mr. Patel’s submission but that,
as I see it, is not the end of the matter. In the New Great case, [1966] E.A. 90, the Court of
Appeal for Eastern Africa whose judgment, if applicable, is binding upon me, had occasion to
consider the interpretation of s. 8, Kenya Act (s. 102, Traffic Act and s. 38, English Act, 1930).
In that case the insurer had denied liability to satisfy the judgment obtained by injured third
Page 441 of [1968] 1 EA 436 (HCU)
parties against the insured on the ground that at the material time the insured vehicle had
been driven by a person disqualified from holding a driving licence and that such driving was in
breach of a term of the policy which excluded driving by a person so disqualified under a proviso
in the Schedule in the policy pertaining to “authorised driver”. The High Court of Kenya had
entered judgment against the insurer in favour of the injured third parties and the insurer had
appealed against that judgment to the Court of Appeal. Newbold, V.-P. (as he then was), who
presided at the appeal, was of the opinion, for reasons which I will not here repeat or paraphrase,
that s. 8, Kenya Act, should be given a wider interpretation than that given to s. 38 of the English
Act, 1930, in the English decisions. He approved of the decision of the Supreme Court of Kenya
in R. v. Harnam Singh (1950), 24 K.L.R. 101, and held that the English decisions in Bright v.
Ashfold and Gray v. Blackmore (supra) are bad law and should not be followed in East Africa.
De Lestang, J.A. (as he then was) expressed a contrary opinion. He preferred a narrow
interpretation of s. 8, Kenya Act, similar to the interpretation given to s. 38, English Act, 1930 in
the English decisions. He referred with approval to Bright v. Ashfold, Gray v. Blackmore and
Wyatt v. Guildhall Insurance Co. Ltd. (supra). Crabbe, J.A., whilst he concurred with Newbold,
V.-P., in dismissing the appeal, did not specifically express any opinion on the interpretation of s.
8, Kenya Act. This difference of judicial opinion between Newbold, V.-P., and De Lestang, J.A.,
on the interpretation of s. 8, Kenya Act (which is identical with s. 102, Traffic Act) and the
absence of any specific pronouncement thereon by Crabbe, J.A., raises for me the difficult
question of deciding whether or not the opinion of Newbold, V.-P., is binding upon me by reason
authority.
Page | 488
INSURANCE LAW CASES
of the fact that his conclusion in dismissing the appeal was concurred in by Crabbe, J.A.
However, there is one observation in the judgment of Crabbe, J.A., which is helpful in guiding
me in the matter. He states ([1966] E.A. at p. 103):
“The restrictions which the insurers purported to put on the class of persons who should
drive the car could not, in my opinion, exclude the respondent’s independent rights under s. 10 to
recover.”
I am inclined to construe this general observation as an expression of agreement with the

opinion of Newbold, V.-P., upon the interpretation of s. 8, Kenya Act, and therefore I hold that I
am bound by this interpretation of the majority of the court. In the result, I hold against Mr.
Patel’s submission that the policy of insurance (exhibit 1) in this case was not in force and
therefore non-operative and ineffective at the material time.
The next question which I have to determine is whether or not the term in the policy as
regards the Limitations as to Use was a “condition” of the policy within the meaning of that
word in s. 102, Traffic Act. Mr. Patel submitted that the term was a definition and not a
condition. A similar argument was advanced in the New Great case where it was urged that the
proviso excluding from the “authorised driver” any disqualified person was not a condition but a
definition limiting the type of person who could be an authorised driver. Mr. Patel drew my
attention to an observation of Newbold, V.-P., in this connection where the learned Vice
President is reported as saying, (ibid., at p. 97):
“Whilst in other circumstances a proviso may have such an effect . . .”
In insurance law no distinction is made between a condition and a warranty as in most

branches of the law of contract. In Provincial Insurance Co. v. Morgan and Foxon, [1933] A.C.
240, Lord Wright observed that the words “warranty” and “condition” are used as equivalent in
insurance law. Therefore some difficulty is bound to arise in determining whether a particular
term in a policy of insurance is fundamental or not. As no particular form of words has any
special significance, reliance must be placed on the general principles of interpretation.
Page 442 of [1968] 1 EA 436 (HCU)
authority.
Page | 489
INSURANCE LAW CASES
In my opinion, the best test to apply in the circumstances of this case would be to
examine the policy of insurance as a whole in an attempt to ascertain the intention of the parties.
The statement in the Schedule regarding the limitations as to use has to be read in conjunction
with cl. 1 (b) (i) of the general exceptions (both of which are quoted in an earlier part of this
judgment), and although the statement in the Schedule gives at first glance the impression of
being a descriptive or collateral term, such impression is dispelled on looking at condition 10
under the heading “Conditions”. This condition states:
“The due observance and fulfilment of the terms of this policy in so far as they relate to
anything to be done or not to be done by the insured and the truth of the statements and answers
in the proposal shall be conditions precedent to any liability of the Company to make any
payment under this policy.”
A condition precedent is a term which goes to the root of the contract and therefore a
fundamental term thereof. For these reasons, I do not agree with Mr. Patel’s submission and I
hold that the term in question was a “condition” within the meaning of that word in s. 102,
Traffic Act.
Mr. Patel also referred to the words “being a liability covered by the terms of the policy”
appearing in s. 104, Traffic Act (s. 10, Kenya Act, and s. 10, English Act, 1934). He submitted
that the plaintiff, in order to succeed, must establish that not only was the liability required to be
covered but was also in fact covered by the policy. He referred to the observation by Newbold,
V.-P., in the New Great case ([1966] E.A. p. 99):
“I accept that this section applies where both the liability is required under s. 5 (b) to be
covered by a policy and the liability is in fact covered by the terms of the policy or would be so
covered were it not for the fact that according to the terms of the policy the insurer is entitled to
avoid it. A liability may be required under s. 5 (b) to be covered by a policy and yet the liability
may not in fact be covered by the particular policy. An example of this is where a policy is taken
out relating to the use of the vehicle by the insured only but in fact the vehicle is used by another
person.”
authority.
Page | 490
INSURANCE LAW CASES
The meaning of the words “liability covered by the terms of the policy” is given in s. 104
(6) as “liability which is covered by the policy or which would be so covered but for the fact that
the insurer is entitled to avoid or cancel or has avoided or cancelled the policy”. In this case, the
liability to the plaintiff was required to be covered under s. 99 (b), Traffic Act, and such liability
was in fact covered under the policy, and I have held above that the defendant company cannot
avoid the policy on the ground that there never was a contract of insurance in existence as the
policy was not in force at the material time. I hold, therefore, that the plaintiff has established her
claim against the defendant company under s. 104, Traffic Act.
To sum up, I hold as under:
(a) The policy of insurance was in force at the material time and the defendant
company was not entitled to avoid it;
(b) The term in the policy as regards the limitations as to use was a condition,
and not a definition;
(c) The condition was rendered ineffective by reason of s. 102, Traffic Act;
(d) The liability of the defendant company to the plaintiff was a liability
covered by the terms of the policy.
Page 443 of [1968] 1 EA 436 (HCU)
For the reasons given above, I enter judgment for the plaintiff, against the defendant
company for:
(i) Shs. 53,997/- being the principal amount of the decree obtained by her in
High Court Civil Suit No. 10 of 1967, together with interest thereon at six per cent. per annum
from September 19, 1967 to the date of payment, and Shs. 10,270/- being the costs of the said
civil suit; and
(ii) The taxed costs of this suit.
Judgment for the plaintiff.
authority.
Page | 491
INSURANCE LAW CASES
BANK OF NOVA SCOTIA V HELLENIC MUTUAL WAR RISKS ASSOCIATION

(BERMUDA) LTD THE GOOD LUCK [1991] 3 ALL ER 1
Appeal
The Bank of Nova Scotia appealed with leave of the Court of Appeal from the decision of that
court (May, Ralph Gibson and Bingham LJJ) ([1989] 3 All ER 628, [1990] 1 QB 818) on 22
March 1989 allowing an appeal by Hellenic Mutual War Risks Association (Bermuda) Ltd (the
club) from the decision of Hobhouse J ([1988] 1 Lloyd’s Rep 514) on 2 October 1987 whereby
he granted the bank a declaration in its claim for damages following the loss of the mortgaged
vessel Good Luck while trading uninsured in a prohibited zone in which it was alleged (i) that
the club was in breach of the express terms of a letter of undertaking given by the club to the
bank in failing to inform the bank, as assignee of the benefit of war risk insurances provided by
the club for a number of vessels owned by Good Faith Shipping Co SA, that the Good Faith
group’s vessels regularly traded in a prohibited war zone directly affected by the hostilities
between Iran and Iraq in breach of the promissory warranty in r 25 of the club rules, thereby
jeopardising their war risks insurance, (ii) further or alternatively, that the club was in breach of a
duty of utmost good faith in failing to inform the bank of all material facts
Page 4 of [1991] 3 All ER 1
known to the club which affected the operation and validity of the war risks insurance
and (iii) further or alternatively, that the club was in breach of duty and/or negligent in failing to
take all proper and reasonable care to ensure that certain information given by them to the bank
was accurate. The facts are set out in the opinion of Lord Goff.
At the conclusion of the argument on the issue of the letter of undertaking their Lordships
announced that they were of the opinion that the judge’s decision thereon should be restored, that
authority.
Page | 492
INSURANCE LAW CASES
they required to hear no argument on the other two issues and that they would give their reasons
later.
Jonathan Mance QC, Julian Flaux and Stephen Kenny for the bank.
Stewart Boyd QC, Jonathan Gilman QC and David Bailey for the club.
16 May 1991. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft
the speech of my noble and learned friend Lord Goff. I agree with it and for the reasons he gives
I would allow the appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given in the speech
prepared by my noble and learned friend Lord Goff, I would allow the appeal.
LORD OLIVER OF AYLMERTON. My Lords, I have had the opportunity of reading in

draft the speech prepared by my noble and learned friend Lord Goff. I agree with it, and for the
reasons which he has given I, too, would allow the appeal.
LORD GOFF OF CHIEVELEY. My Lords, the appeal before your Lordships’ House in
this case is concerned with claims by the appellant, the Bank of Nova Scotia (the bank), against
the Hellenic Mutual War Risks Association (Bermuda) Ltd (the club), arising out of the failure
by the club to notify the bank of certain events affecting the entry of a vessel, the Good Luck,
with the club, relevant to the bank’s interest as mortgagee of the Good Luck and other vessels
forming part of a group of vessels in the same beneficial ownership called the Good Faith group.
The bank claimed damages from the club (1) for breach of a letter of undertaking given by the
club to the bank, or (2) for breach of a duty of utmost good faith in failing to disclose to the bank
what they knew, or (3) in tort for breach of a duty to inform the bank of what they knew—which
in this case has been referred to as the duty to speak. Hobhouse J held the club liable in damages
for breach of the letter of undertaking (see [1988] 1 Lloyd’s Rep 514). He rejected the bank’s
argument based on a duty of utmost good faith; but he indicated that he would, if necessary, have
held the club liable for breach of their duty to speak. The Court of Appeal reversed the decision
authority.
Page | 493
INSURANCE LAW CASES
of Hobhouse J, both on the letter of undertaking and on the duty to speak, while upholding his
decision on the duty of utmost good faith (see [1989] 3 All ER 628, [1990] 1 QB 818). It
therefore allowed the appeal of the club. The bank now appeals to your Lordships’ House by
leave of the Court of Appeal, seeking to restore the decision of Hobhouse J on the letter of
undertaking, or alternatively on the duty to speak; in the further alternative it
has sought to pursue its argument on the duty of utmost good faith. Your Lordships heard
argument in the first instance on the issue arising on the letter of undertaking, and on certain
related issues (concerned with remoteness of damage and causation). At the conclusion of that
argument, your Lordships then formed the opinion that the judge’s decision on the letter of
undertaking should be restored, and so required no argument on the other two issues, on which
they have formed no view. It follows that I will, in this speech, limit myself to expressing the
reasons upon which, in my opinion, Hobhouse J’s judgment on the issue of breach of the letter of
undertaking should be restored and the bank’s appeal should, on that basis, be allowed.
The facts of the case are of considerable complexity. They are set out in lucid detail in the
judgment of the learned judge, for which I wish to express my admiration. The Court of Appeal
expressed a difference of opinion with the judge on two aspects of his findings of fact. These
differences of opinion are not, for present purposes, important. Even so, it was submitted to your
Lordships by Mr Mance QC, for the bank, that the Court of Appeal erred in departing from the
judge’s view on these matters; with that submission, I agree. I shall refer to those points in due
course. But it follows, in my opinion, that the learned judge’s account of the background to the
case, and his findings of fact on all matters in dispute, can be accepted in toto. For the purposes
of this appeal, I fear that I shall have to set out the facts of the case in some detail; for the rest,
reference can if necessary be made to the judgment of the judge.
The club is a shipowners’ mutual insurance association, which has as its purpose the
provision to Greek shipowning interests of protection against war risks. The club is based in
Bermuda, and its managers were at all material times Thomas R Miller & Son (Bermuda) Ltd,
which employed as their London agents, Thomas R Miller & Son Ltd (Millers). The principal
authority.
Page | 494
INSURANCE LAW CASES
person involved in London was Mr Michael Miller, who was de facto the chief executive of the
club, his principal assistant being a Mr Ballantyne. No distinction need be drawn for present
purposes between either of the Bermuda entities or Millers in London; and so reference need be
made only to the club and to Millers, the former being the insurers and the latter their agents and
managers.
The insurance provided by the club is defined and governed by the rules of the club. The
rules which are directly relevant to the present case are rr 20 and 25(in the 1982 edition). Rule 20
conferred on the directors of the club power to specify certain places or areas as additional
premium areas, the broad effect of which was that, if an entered ship proceeded to or remained in
such an area, the owner continued to be insured but was bound to pay to the club an additional
premium to be arranged. As the judge held, r 20 is essentially a ‘held covered’ provision. Rule 25
provided as follows:
‘A. The directors shall at all times have power to give any Member or Members such
orders, prohibitions, directions or recommendations as the Directors in their absolute discretion
may see fit as regards routes, ports, stoppages, convoys, cargoes, methods of loading or
discharge of cargoes, modes of management or of navigation of ships, manning or equipment,
including orders to go or depart from or remain at (or prohibitions from going to, departing from
or remaining at) any port, place, country, zone or area …
C. Every insurance given by the Association shall be deemed to contain and shall contain
a warranty by the Owner that all such orders, prohibitions, directions or recommendations as are
referred to in paragraphs A and B of
this Rule shall be acted upon and complied with by the insured ship irrespective of
whether they were made before or after the date of the entry of the insured ship. PROVIDED
ALWAYS that:—The breach of such warranty shall not operate to invalidate the insurance if the
Owner shall prove that such breach occurred without any personal fault or want of due diligence
authority.
Page | 495
INSURANCE LAW CASES
on the part of the Owner or Managers of the entered ship or was committed in order to avoid loss
by the risks insured by the policy.
D. Notwithstanding any order of prohibition made by the Directors a ship may be

specially insured on the terms that a specific order or prohibition shall not apply and that failure
to comply therewith shall not be deemed a breach of warranty. A ship may be specially so
insured on such terms as to additional premium or otherwise as the Managers think fit.
E. No ship shall be deemed to be insured on the special terms referred to in paragraph D

hereof unless the exemption from the particular order or prohibition is specified in writing by the
Managers … ’
Having set out the terms of r 25, the judge made this comment ([1988] 1 Lloyd’s Rep 514
at 519):
‘The scheme of r. 25 is also clear. It lays down an express warranty in the marine
insurance sense. Therefore, by s. 33(3) of the Marine Insurance Act 1906, the warranty ” … is a
condition which must be exactly complied with … (and) if it be not so complied with then … the
insurer is discharged from liability as from the date of the breach of warranty … ” It is, of
course, possible for the insurer to waive the breach of warranty but, unless and until the insurer
so chooses, the warranty has the effect of excluding cover from the date of breach.’
The meaning and effect of s 33(3) of the Marine Insurance Act 1906 gave rise to the
principal difference of opinion between the judge and the Court of Appeal on the issue of the
letter of undertaking. I shall have to consider this difference between them in some detail at a
later stage, but it is right to observe that the judge evidently thought that, in this brief passage
from his judgment, he was summarising what was no more than established law.
During the relevant period, the most important additional premium area was the Arabian
Gulf. Prohibited zones, the subject of r 25, were zones of such extreme danger that it was not
considered acceptable that vessels should be covered at all by the club while in such an area. If
an owner wanted to cover his vessel while in such an area, the insurance had to be arranged on a
facultative basis at a no doubt higher premium rate. In September 1980 the club declared as a
authority.
Page | 496
INSURANCE LAW CASES
prohibited zone the Shatt al-Arab and Khor Musa and the approaches to those places at the
northern end of the Gulf, which were areas directly affected by the hostilities between Iran and
Iraq.
Among the members of the club recruited in 1980 was the Good Faith group, run by a
Captain Frangos and a Mr Moundreas. In 1980 and 1981 their reputation was very good indeed.
Vessels in the group were registered in the usual way with one-ship companies. At the end of
1981 there were 38 vessels in the group. Money had been advanced to the group by various
banks in the usual way, against mortgages of individual or groups of vessels, with interlinking
repayment obligations and personal guarantees by the principals, Captain Frangos and Mr
Moundreas. Three banks were separately involved. The bank which made the largest advances
was the bank itself; its administrative head office was in Toronto, with a regional office for
Europe in London, and a branch office
specifically concerned with ship finance in Piraeus. The other banks concerned were
Bank of America SA and Banque Paribas.
In his judgment the judge set out the ship finance documentation securing the bank’s
advances to the Good Faith group, which he described as being typical of its kind. The primary
security consisted of mortgages on the vessels, under which the borrower was left in possession
of the vessels so long as he did not default. The borrower undertook at his own expense to insure
the vessels for appropriate values against stipulated risks, including war risks, the borrower
undertaking to maintain and not to prejudice the insurances, all of which were absolutely
assigned to the bank together with an absolute assignment of the vessel’s earnings. In addition
the bank, as is customary, took out a mortgagee’s interest insurance, to protect itself as lender
against any losses it might suffer as a result of the insurances taken out by the borrower proving
to be ineffective. The borrower having executed a specific assignment of the insurances on the
vessel, the bank then gave notice of the assignment to the insurers, and a loss payable clause was
indorsed on the relevant insurance document. Further, of particular relevance in the present case,
in respect of insurances such as those provided by the club, a letter of undertaking was given by
authority.
Page | 497
INSURANCE LAW CASES
the insurer (here the club) to the bank. It is that letter of undertaking which lies at the heart of the
present litigation.
With regard to the Good Luck (as with other vessels in the Good Faith group) the letter of
undertaking given by the club to the bank, which was dated 25 June 1981, was in the following
terms:
‘“GOOD LUCK“
On behalf of Thos. R. Miller & Son (Bermuda) we confirm that the above mentioned ship
is entered in this Association in accordance with the Rules for War Risk Insurance on the
following value:—
Hull, Machinery etc. U.S.$.6,500,000.
Pursuant to instructions received from Franicons Compania Naviera S.A., and in

consideration of your approval of effecting the insurances covered by this letter the Association
undertakes:—1. to hold the War Risks Time Policy and Certificate of Entry, when issued, and
any renewal of such Policy and the benefit of the insurances thereunder to your order in
accordance with the terms of the Loss Payable Clauses set out hereunder; and 2. to arrange for
the said Loss Payable Clauses to be included on the Policy when issued; and 3. to advise you
promptly if the Association ceases to insure as aforesaid.
The Policy and any renewals thereof will include the following Loss Payable Clause:
—“It is noted that by an Assignment in writing dated the 23rd March, 1979 the Shipowners
Franicons Compania Naviera S.A., have assigned absolutely to the Bank of Nova Scotia in their
capacity as First Preferred Mortgagees all the Shipowners interest in this Policy with all benefits
thereof including all claims of whatsoever nature hereunder … ”.
authority.
Page | 498
INSURANCE LAW CASES
The above undertaking is given subject to the Association’s lien on the Policy for
contributions and premiums and subject to the Association’s right of cancellation on default in
payment of any such contributions or premiums, but the Association undertakes not to exercise
such right without giving you fourteen days’ telegraphic or telex notice confirmed by letter and
an opportunity of paying within such time any balance of such contributions or premiums which
may be in default.
The Association also undertakes to advise you promptly if the ship ceases to be entered in
the Association.’
On 8 December 1981 Millers, on behalf of the club, wrote to the bank confirming that the
entry of 16 vessels (including the Good Luck) had been renewed for a further 12 months from
January 1982. On 15 December 1981 Millers sent to Good Faith a circular regarding the 1982
policy year which, among other things, referred to the Arabian Gulf additional premium area and
reminded members that, under r 25, no vessel entered in the club should enter or remain within
the areas of the Shatt al-Arab and Khor Musa and the approaches thereto.
Against this background, the judge summarised the facts which gave rise to the present
litigation as follows ([1988] 1 Lloyd’s Rep 514 at 523):
‘1. The Good Faith Group were in the practice of chartering vessels to Iranian charterers
and, under those charters, sending the vessels into the Gulf and to various Iranian ports including
Bandar Abbas, Bushire and Bandar Khomeini. These voyages took the vessels into the additional
premium area and, when they went to Bandar Khomeini, into the prohibited area.
2. Good Faith were doing this without notifying the club and without informing the bank.
3. Millers discovered what was going on in the autumn of 1981, and in November, 1981
discussed it with Captain Frangos. Millers’ representative, Mr. Ballantyne, rightly concluded that
Good Faith were doing this deliberately, aware that their vessels were not insured and,
authority.
Page | 499
INSURANCE LAW CASES
notwithstanding anything that Millers had said, would, so long as they considered it
advantageous, continue to do so.
4. After November, 1981, neither the club nor Millers took any step to procure that Good
Faith should cease this practice, or should make appropriate notifications to the club and pay
appropriate additional premiums; also, neither the club nor Millers took any step to inform the
bank (or any other mortgagee of Good Faith vessels) what it had discovered.
5. In April 1982, Good Faith started to renegotiate its loans with the bank, asking that
they be rescheduled and that increased facilities be provided by the bank. The bank were aware
that mortgaged vessels were trading into the Persian Gulf, but not aware that they were doing so
uninsured. They did not check on the position with the club or Millers.
6. On Apr. 7, 1982, Good Faith chartered Good Luck to Iranian charterers; the charterers
had the right to order the vessel to Iranian ports including Bandar Khomeini. The master of Good
Luck kept Good Faith informed of her progress and her intended itinerary, and she arrived at
Bandar Abbas on May 30. The next day she proceeded northwards, bound for Bandar Khomeini
and, on Sunday June 6 at 11 15 local time, she was hit by one or more Iraqi missiles while
proceeding up the Khor Musa channel to Bandar Khomeini. She was badly damaged and
ultimately declared a constructive total loss.
7. Good Faith made a fraudulent claim upon the club in respect of this loss, pretending
falsely that they had given an advance declaration of entry into the additional premium area and
that they were ignorant of prohibited areas.
8. Millers were, from the outset, aware of the probability of fraud and that, because the
vessel was in a prohibited zone, the club would not be legally liable to meet the claim.
9. Although the bank was still in the process of completing the negotiation of the
refinancing agreement with Good Faith, and was aware of the loss which had taken place, the
bank did no more than cursorily investigate with Millers what was the position about the war
risks cover on the vessel. Notwithstanding this state of affairs, they completed the refinancing
authority.
Page | 500
INSURANCE LAW CASES
agreements and permitted Good Faith to draw down, in the second half of July, an
additional U.S.$2,679,120.
10. On Aug. 4, the club rejected the claim of Good Faith for an indemnity in respect of
the constructive total loss of Good Luck on the grounds that, (i) she was in a prohibited area, and
(ii) she was in an additional premium area without prior notification.
11. At no time before Aug. 5, 1982 did Millers or the club disclose to the bank what they
knew about the defects in the claim made on the club or, indeed, any other aspect of the conduct
of Good Faith. This was so notwithstanding the fact that the club had, on more than one occasion
during this period, communicated with the bank, and that by June 14 Millers knew that another
Good Faith vessel mortgaged to the bank (Good Ocean) was also at Bandar Khomeini and
without war risks cover from the club.’
The judge heard evidence relating not only to events down to the end of August 1982, but
also to subsequent events. However, since discovery and the evidence prepared with regard to
those subsequent events was not complete, it was decided, with the agreement of both parties,
that the judge should at this stage decide (a) all issues as to liability and (b) all issues of
causation arising on the facts occurring down to 31 August 1982, including any apportionment of
blame arising from those facts, but that the judge should not decide any issue on quantum or
mitigation, or any further questions on causation or apportionment of blame which arose on facts
occurring after 31 August 1982. This decision was, of course, to affect the form of the order
which the judge made at the conclusion of the hearing before him.
In his judgment, the judge described the relevant events in some detail, making
appropriate findings of fact on specific issues. But these events were relevant rather to the issue
of the duty to speak than to the issue of breach of the letter of undertaking; and, for the most part,
it is unnecessary for me to refer to them. The judge described how, in November 1981, Mr
Ballantyne discovered that Good Faith were trading their vessels into the additional premium
area in the Arabian Gulf and, on occasion, into the prohibited zone at the head of the Gulf, and
authority.
Page | 501
INSURANCE LAW CASES
reported the matter to Millers, and how the reaction of Millers was, effectively, to do nothing.
This was the state of affairs when the Good Luck suffered her casualty in the prohibited zone on
6 June 1982. News of the casualty reached Mr Michael Miller and Mr Ballantyne on 7 June in
Piraeus, where they were attending a shipping conference. Mr Miller saw Captain Frangos that
afternoon. Of this meeting the judge said ([1988] 1 Lloyd’s Rep 514 at 530):
‘In his evidence before me, Mr. Miller, in vivid language, told me of the consternation
displayed by Captain Frangos at the possibility that Millers might report to the bank the state of
Good Faith’s cover with the club, and of the evident relief of Captain Frangos when Mr. Miller
told him that he would not at that stage be telling the bank anything except possibly in answer to
direct questions.’
The judge concluded that it was obvious to Mr Miller from that moment forward, and that
all subsequent events served to confirm this, that Captain Frangos was not telling, and would not
tell, the bank the true state of affairs, of which the bank was ignorant. The judge made this
further finding (at 530):
‘I consider that a reasonable person in the position of Mr. Michael Miller, and the other
employees of Millers, would have appreciated that it was highly probable that Captain Frangos
was, to a greater or lesser extent, going to actually deceive the bank.’
Page 10 of [1991] 3 All ER 1
The findings of the judge contained in the two paragraphs from his judgment which I
have quoted were both rejected by the Court of Appeal. As to the former, the Court of Appeal
would have limited the finding by restricting Captain Frangos’s consternation to his fear that the
club might report to the bank that it appeared that the Good Luck had been uninsured at the time
of the casualty and that payment was questionable. I myself consider that it was not open to the
Court of Appeal to interfere with the judge’s finding on a point of this kind; but anyway the point
does not appear to be material, since it is not in doubt that Mr Miller knew of Captain Frangos’s
anxiety for reassurance that the bank should not be informed. As to the second, it was not clear to
the Court of Appeal that Mr Miller was shown to have known that any official of the owners was
authority.
Page | 502
INSURANCE LAW CASES
intending to try to deceive the bank if specifically asked for information or documents; but the
finding of the judge was simply that a reasonable person in the position of Mr Michael Miller,
and the other employees of Millers, would have appreciated that it was highly probable that
Captain Frangos was, to a greater or lesser extent, going to actually deceive the bank. It was also
not clear to the Court of Appeal that Mr Michael Miller was shown to have expected that the
deception was likely to succeed. But this must depend to a great extent on the effectiveness of
the deception; and it was obvious on the evidence that Captain Frangos was wholly unscrupulous
and prepared to go to any length. In my opinion, the judge’s finding on this point was one which
it was peculiarly within his province to make, and the Court of Appeal was not justified in
interfering with it.
At all events, on 14 June the club learnt from the Salvage Association that another Good
Faith vessel, the Good Ocean, also entered with the club and also mortgaged to the bank, was at
Bandar Khomeini in the prohibited zone. Millers, on the instructions of Mr Michael Miller, then
telexed Good Faith drawing attention to that fact and stating that ‘Consequently she is not
insured by the Association’. The judge commented that this phrase was the language which any
ordinary commercial man would use to describe the situation (see [1988] 1 Lloyd’s Rep 514 at
531). Nevertheless, neither Millers nor the club made any communication to the bank about the
Good Ocean. As regards the Good Luck, Millers sent to the bank only the following telex:
‘We have received notice of a claim from the shipowners which we are currently
investigating in the usual way. At this stage we can only refer you to the shipowners for
information.’
The judge held that the bank’s criticism of this telex as misleading was fully justified.
The clear implication of the telex was that the claim was a routine one, which only required the
usual checking before being accepted and paid, whereas the truth, as Millers well knew, was very
different.
By 7 July the club’s solicitors had completed their investigations and reported to the club.
Millers, as the judge held, were beginning to appreciate that their position was untenable, and
were apparently receiving advice that they ought to inform mortgagees when vessels were
authority.
Page | 503
INSURANCE LAW CASES
trading into the Gulf without cover. Thus on 13 July Millers sent a telex to Banque Paribas, the
mortgagee of the Good Challenger, which recited various rules and set out facts relating to that
vessel, and then stated:
‘… Even though the port of Bandar Khomeini lies within an area which is expressly not
covered by the association, we still feel it prudent to put you on notice that as far as we can
determine the subject vessel is uninsured for this call.’
Page 11 of [1991] 3 All ER 1
The telex therefore again showed that the club treated a vessel as uninsured if in a
prohibited area. The judge also made the justifiable comment on the telex that ([1988] 1 Lloyd’s
Rep 514 at 532):
‘This telex demonstrates, if any demonstration were necessary, that there is no objection
in principle to a club sending such a communication to a bank, nor is there any practical or
business difficulty.’
Likewise, when Mr Michael Miller sent a telex to Captain Frangos on 23 July, referring
to a report of Mr Tatten of the club’s solicitors, he stated that, by reason of the casualty having
occurred in a prohibited zone, the vessel was not at the material time covered. He referred to the
fact that there had been a history of breaches of r 20, and concluded by saying that the terms of
the letter of undertaking now obliged the club to advise the bank of the current position, and that
they were accordingly sending the bank a copy of the telex to Good Faith. Captain Frangos
however succeeded in persuading Millers not to send a copy of the telex to the bank until after 4
August, when the next meeting of the board of directors of the club was to take place. Further
investigations carried out by the club revealed that, during the first half of 1982, 22 vessels in the
Good Faith group, of which 14 were mortgaged to the bank, had traded in breach of the
requirements of r 20, and that another vessel mortgaged to the bank, in addition to the Good
Luck and the Good Ocean, had visited Bandar Khomeini wholly uninsured by the club.
The meeting of the board of directors of the club took place on 4 August. It was decided
that the claim of Good Faith in respect of the constructive total loss of the Good Luck should be
authority.
Page | 504
INSURANCE LAW CASES
rejected. The directors also instructed Millers to consult with the club’s solicitors to give the
notice to the bank required by the terms of the letter of undertaking. On the following day,
Millers sent the Piraeus office of the bank a telex which informed it that, for the reasons stated,
‘the association cannot pay any claims arising out of the above incident’.
Against this background, the judge made the following specific findings of fact in
relation to the club ([1988] 1 Lloyd’s Rep 514 at 533–534):
‘I consider that, at all material times from November, 1981 onwards, Millers knew that
the bank was almost certainly ignorant of the fact that Good Faith vessels were trading to the
Gulf either wholly, or effectively, uninsured. The club knew in June, 1982 that, with regard to
Good Luck, the bank was unaware that she was trading uninsured at the time of the casualty. The
club also knew that the bank were very probably ignorant that Good Ocean was trading
uninsured. The club knew that, in all probability, the Good Faith Group were not keeping the
bank informed about the facts relating to their insurances in general, or those of Good Luck in
particular. The club either had in its contemplation, or ought to have contemplated, that the
ignorance of the bank would affect its financial dealings with the Good Faith Group and, in all
probability, cause the bank loss, either directly in the event of a casualty, or indirectly because in
some other way the bank were relying upon the security which they believed was given to them
by the entry of these vessels in the club, and the assignments which they had taken, and letters of
undertaking which they had received. A reasonable person in [the] position of Millers and the
club would have appreciated that their conduct was liable to cause financial loss to the bank.
Whether or not the club and Millers were in breach of any duty to the bank is a matter of law,
which I will discuss later. In the course of his evidence, Mr. Miller was
Page 12 of [1991] 3 All ER 1
cross-examined about his views, and various views were expressed in the defendants’
internal documents. These views merely indicated the difficulty of sustaining the defendants’
case of absence of duty, but are not decisive one way or the other. They do show that there is no
commercial objection to the defendants being under the duties which the plaintiffs allege, if
those duties should exist in law … I find that the state of mind of Mr. Miller (as of Mr.
authority.
Page | 505
INSURANCE LAW CASES
Ballantyne) was, at material times between June and August 1982, that this claim was not one
which was sustainable under the rules of the club.’
The judge was, therefore, very critical of the conduct of the club. But he was also critical
of the conduct of the bank, though those criticisms were of a different kind. They were to the
effect that there was a lack of professionalism, both at the Piraeus branch of the bank and at the
London regional office, which lay in their failure to carry out proper checks at the appropriate
times and in taking far too much on the say-so of those at Good Faith. In particular Mr Mantas,
the manager of the Piraeus branch, was prepared implicitly to accept assurances given to him by
Captain Frangos; and Mr Leftley, one of the senior staff in London who had previously been
manager of the Piraeus branch, shared the same uncritical and unprofessional trust of this
particular customer.
The bank was aware, at all material times, that Good Faith vessels, including those
mortgaged to the bank, were trading to the Arabian Gulf. However, Mr Mantas simply accepted
the assurance of Good Faith that the appropriate declarations were being made and that
additional premiums were being paid. Both Mr Mantas and Mr Leftley strongly supported Good
Faith’s proposal for refinancing, which began to be considered by head office in Toronto at the
end of March 1982. Head office, however, adopted a much more cautious approach, and on 14
May laid down a clear policy decision that the amount of indebtedness should not at any time be
allowed to exceed 67% of the value of the security. At the end of May, on the basis of that
decision, the Piraeus branch set out the security value of the vessels mortgaged by Good Faith to
the bank (including the Good Luck) as being $US50,225,000, of which 67% came to
$US33,650,750.
Mr Leftley attended the conference in Piraeus during the week after the casualty. The
judge concluded that neither he nor Mr Mantas learnt of the casualty until Wednesday, 9 June.
Both were assured by Captain Frangos that all the insurances were in order, and that the matter
was in hand; indeed Mr Leftley was assured that the claim had been accepted. Both Mr Leftley
and Mr Mantas relied implicitly upon what they were told by Captain Frangos; and it was plain,
as the judge held, that Mr Mantas placed no reliance on the actual contents of the club’s telex of
authority.
Page | 506
INSURANCE LAW CASES
14 June, and instead relied solely on what he was told by Good Faith. In the event, on the basis
that the war risks cover on the Good Luck was intact, it was decided that an assignment should
be taken of the insurance proceeds to support the new facility and that the full authorised amount
should be advanced against this assignment. On 17 June Mr Mantas gave Captain Frangos and
Mr Moundreas a letter by which the bank agreed to give Good Faith the renewed facility. On 9
July the loan agreement was signed, and four days later the remortgage of the Good Luck and the
assignment of the insurance claim in respect of her casualty was signed. On 14 July Good Faith
gave the bank notice of draw down, consisting of $US30,971,630 for repayment of the existing
loans and $US2,679,120 for working capital. These two sums produced the total of
$US33,650,750, the 67% figure derived from the security value of $US50,225,000. That figure
was based upon attributing a security value to the Good Luck and her insurance claim of
$US4·8m. The draw down was effectively completed by 28 July.
Page 13 of [1991] 3 All ER 1
Even after the bank received notification from Millers that the club could not pay any
claims arising from the incident, Mr Leftley on 19 August recommended to head office that the
bank should still continue with the facility to Good Faith at the present level, pending the
outcome of the dispute between Good Faith and the club. Head office however took a far more
realistic view, and on 25 August decided that the Good Faith group should be treated as in
default and should be informed accordingly.
Attention had already been focused upon the bank’s mortgagee’s interest insurance. A
fundamental problem had however been revealed. Under the insurance, the relevant mortgage
was that on the Good Luck which existed at the time of her casualty, and the relevant
indebtedness was the indebtedness then outstanding. Because of the new facility, the primary
draw down made under the new facility on 16 July discharged the liability under the previous
mortgage on the Good Luck and the indebtedness which had been the subject matter of the
bank’s mortgagee’s interest insurance. This was a consequence of the inclusion of the Good
Luck in the scheme which apparently had been wholly overlooked, and, quite apart from other
possible difficulties, presented a serious obstacle to recovery under the insurance. The bank
authority.
Page | 507
INSURANCE LAW CASES
nevertheless made a claim in due course on the mortgagee’s interest insurers, which was
subsequently settled in December 1986 for the sum of $US1·45m, which the judge held to be a
very satisfactory settlement from the point of view of the bank.
Against this background, the judge proceeded to make crucial findings on the question
whether the bank’s conduct would have been different if it had been told by Millers what they
knew in November 1981 and thereafter. The judge concluded, first, that in November 1981 and
again in April and May 1982 the bank would still have accepted what Good Faith told them, and
that neither Good Faith nor the bank would have adopted any different course of conduct. Even
after the casualty, telling the bank what the club knew would not have made a radical difference
in the attitude of the bank as regards Good Faith. But the judge then made this finding ([1988] 1
Lloyd’s Rep 514 at 540):
‘However, what I do consider would have happened is that if the bank had been told in
writing by Millers that, at the time of the casualty, the vessel was in a prohibited area and was,
accordingly, not covered for war risks, then the whole matter of including Good Luck in the
security together with the insurance claim against the club would have been handled differently.
The information about the lack of cover would have had to have been communicated both to the
London regional office and to the head office, and I do not consider that even the plaintiffs
would, under those circumstances, have been prepared at that stage to place any value on the
insurance claim for the purposes of the grant of a new facility. Furthermore, I consider that the
alternative that would have been adopted, either on the simple initiative of the Piraeus branch, or
the London regional office or, failing that, upon the insistence of the Toronto head office, would
have been the first alternative referred to in Mr. Mantas’s telex of 9 June 1982. Good Luck
would have been excluded, and the available security value would have been reduced to U.S.
$45.425m., and the permitted advances would have been reduced to U.S.$30,434,750. The
existing mortgage on Good Luck would not have been discharged, and the position under the
mortgagees’ interest insurance preserved.’
authority.
Page | 508
INSURANCE LAW CASES
The judge concluded that he was satisfied that the strong probability was that the whole
matter of the Good Luck, and any value to be attached to its hull or its insurances, would have
been put on one side until the situation had been clarified,
Page 14 of [1991] 3 All ER 1
and that that would have meant that no draw down in respect of working capital would
have been permitted in July and August 1982.
The judge then turned to the club’s liability under undertaking 3 of the letter of
undertaking. He considered that a wide and businesslike interpretation should be given to that
paragraph, the purpose of which was to assist in the protection of all rights of the bank against
the shipowners and to enable the bank fully to protect its rights and its security, including in
particular evaluating its security both for the past and for the future. No technical meaning
should be given to the word ‘ceases’ in the undertaking. If at any relevant time the club was not
insuring the vessel, the club had ceased to insure. From the point of view of the purpose of the
undertaking, it was as important to know that the vessel was not covered by the club if such
absence of cover was temporary as it was where it was permanent. The inclusion of the word
‘promptly’ recognised that the club might not immediately be aware of a fact which had given
rise to a situation where the club had ceased to insure the vessel. It was recognised by both
parties before the judge that the obligation of the club was to advise within as short a time as was
reasonable after it became aware of the fact by reason of which the club was ceasing to insure the
vessel.
On this basis, the judge held that entry into a prohibited zone, contrary to r 25, clearly did
require the club to notify the bank under undertaking 3. Once a vessel entered into a prohibited
zone, she was in ordinary business terminology, and in truth, uninsured, and so the club had
ceased to insure her within the meaning of undertaking 3. This was amply evidenced by a
number of communications sent by Mr Michael Miller, and in particular that relating to the Good
Ocean in June 1982. The proviso to r 25(C) did not alter this conclusion; in any event, it had no
application in the present case, and there never were any reasonable grounds for believing that it
might do so. To the club’s contention that the expression ‘ceases to insure’ should only apply to
authority.
Page | 509
INSURANCE LAW CASES
a situation of finality where the insurance had already come to an end, the judge referred to
s 33(3) of the 1906 Act and the provision that if a warranty be not complied with ‘… the insurer
is discharged from liability as from the date of the breach of warranty’. There could of course be
waiver of the breach. The judge was prepared to accept that there was such a waiver in
November and December 1981 in respect of certain vessels. But there was no such waiver in the
summer of 1982, in respect of either the Good Luck or the Good Ocean. Accordingly, the club
was in breach of the letters of undertaking in respect of those vessels.
The judge then referred to his previous finding on the question of what would have
happened if the club had complied with its obligation under the letter of undertaking. The upshot,
in financial terms, was that there would have been no draw down of working capital, and so the
bank had lost $US2,679,120 plus accrued interest.
The Court of Appeal reversed the judge’s conclusion on the issue arising under the letter
of undertaking. The central reason for this difference of opinion between the Court of Appeal
and the judge is to be found in the following passage in the judgment of the Court of Appeal
([1989] 3 All ER 628 at 648–649, [1990] 1 QB 818 at 873–874):
‘It is convenient to begin by considering the position on the assumption that there was no
proviso to r 25(C) and no claim for loss. We do not agree that the entry of a vessel into a
prohibited zone, even though a breach of warranty under r 25(C), has the effect automatically
and without more of bringing the contract of insurance to an end. It entitles the insurer to treat
the contract as at an end if he so chooses, but the matter is one for his
Page 15 of [1991] 3 All ER 1
choice … If [this conclusion] is right, we find it hard to think that the club has ceased to
insure the ship in accordance with the rules until it has decided whether it will treat the breach as
bringing the contract to an end or not. If the decision, when made, is to treat the breach as
bringing the contract to an end, then of course the decision must at once be communicated to the
bank, and we would readily imply a term in the club’s undertaking to the bank that it could not
postpone its duty to communicate by postponing a decision on the breach. On the facts here no
authority.
Page | 510
INSURANCE LAW CASES
question of unreasonable delay in making a decision arises. But if the decision, when made, is
not to treat the breach as bringing the contract to an end we do not think that undertaking 3, as
drafted, obliges the club then to tell the bank that it has ceased to insure the ship in accordance
with the rules.’
This reasoning it supported by an analysis of s 33 of the 1906 Act.
I have come to the conclusion that, with all respect to the Court of Appeal, its conclusion
expressed in the passage from its judgment which I have just quoted and its analysis of s 3 of the
Act are not correct. Indeed, in the course of argument before your Lordships, Mr Boyd QC for
the club did not feel able to support the reasoning of the Court of Appeal on this point. Since this
is a matter which is central to the Court of Appeal’s rejection of the judge’s conclusion, I shall
first of all set out the reasons why I consider that the Court of Appeal’s analysis cannot be
accepted, and I shall then return to the construction of the letter of undertaking and the subsidiary
questions of causation and remoteness of damage.
We are here concerned with the nature of warranties in contracts of marine insurance. We
have to distinguish between two forms of warranty, viz those warranties which simply denote the
scope of the cover (as in the familiar f c & s clause—‘warranted free of capture and seizure’) and
those which are promissory warranties, involving a promise by the assured that the warranty will
be fulfilled. It is with the latter type of warranty, which is the subject of ss 33 to 41 of the Marine
Insurance Act 1906, that we are concerned in the present case.
Since the 1906 Act is a codifying Act, which provides in s 33 for the nature of a
promissory warranty and in s 34 for the circumstances in which a breach of such a warranty may
be excused, it is appropriate to start our inquiry with those sections. Sections 33 and 34 provide
as follows:
‘33.—(1) A warranty, in the following sections relating to warranties, means a

promissory warranty, that is to say, a warranty by which the assured undertakes that some
particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he
affirms or negatives the existence of a particular state of facts.
authority.
Page | 511
INSURANCE LAW CASES
(2) A warranty may be express or implied.
(3) A warranty, as above defined, is a condition which must be exactly complied with,
whether it be material to the risk or not. If it be not so complied with, then, subject to any express
provision in the policy, the insurer is discharged from liability as from the date of the breach of
warranty, but without prejudice to any liability incurred by him before that date.
34.—(1) Non-compliance with a warranty is excused when, by reason of a change of

circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when
compliance with the warranty is rendered unlawful by any subsequent law.
(2) Where a warranty is broken, the assured cannot avail himself of the defence that the
breach has been remedied, and the warranty complied with, before loss.
(3) A breach of warranty may be waived by the insurer.’
Page 16 of [1991] 3 All ER 1
So it is laid down in s 33(3) that, subject to any express provision in the policy, the
insurer is discharged from liability as from the date of the breach of warranty. Those words are
clear. They show that discharge of the insurer from liability is automatic and is not dependent
upon any decision by the insurer to treat the contract or the insurance as at an end; though, under
s 34(3), the insurer may waive the breach of warranty.
Section 33(3) of the 1906 Act reflects what has been described, in successive editions of
Chalmers The Marine Insurance Act 1906, as the inveterate practice in marine insurance of using
the term ‘warranty’ as signifying a condition precedent. As Lord Blackburn said in Thomson v
Weems (1884) 9 App Cas 671 at 684:
‘In policies of marine insurance I think it is settled by authority that any statement of a
fact bearing upon the risk introduced into the written policy is, by whatever words and in
whatever place, to be construed as a warranty, and, prima facie, at least that the compliance with
that warranty is a condition precedent to the attaching of the risk.’
authority.
Page | 512
INSURANCE LAW CASES
Once this is appreciated, it becomes readily understandable that, if a promissory warranty

is not complied with, the insurer is discharged from liability as from the date of the breach of
warranty, for the simple reason that fulfilment of the warranty is a condition precedent to the
liability or further liability of the insurer. This moreover reflects the fact that the rationale of
warranties in insurance law is that the insurer only accepts the risk provided that the warranty is
fulfilled. This is entirely understandable; and it follows that the immediate effect of a breach of a
promissory warranty is to discharge the insurer from liability as from the date of the breach. In
the case of conditions precedent, the word ‘condition’ is being used in its classical sense in
English law, under which the coming into existence of (for example) an obligation, or the duty or
further duty to perform an obligation, is dependent upon the fulfilment of the specified condition.
Here, where we are concerned with a promissory warranty, ie a promissory condition precedent,
contained in an existing contract of insurance, non-fulfilment of the condition does not prevent
the contract from coming into existence. What it does (as s 33(3) makes plain) is to discharge the
insurer from liability as from the date of the breach. Certainly, it does not have the effect of
avoiding the contract ab initio. Nor, strictly speaking, does it have the effect of bringing the
contract to an end. It is possible that there may be obligations of the assured under the contract
which will survive the discharge of the insurer from liability, as for example a continuing
liability to pay a premium. Even if in the result no further obligations rest on either parties, it is
not correct to speak of the contract being avoided; and it is, strictly speaking, more accurate to
keep to the carefully chosen words in s 33(3) of the Act, rather than to speak of the contract
being brought to an end, though that may be the practical effect. When, as s 34(3) contemplates,
the insurer waives a breach of a promissory warranty, the effect is that, to the extent of the
waiver, the insurer cannot rely upon the breach as having discharged him from liability. This is a
very different thing from saying that discharge of the insurer from liability is dependent upon a
decision by the insurer. As Kerr LJ said in State Trading Corp of India Ltd v M Golodetz Ltd
[1989] 2 Lloyd’s Rep 277 at 287, after referring to the decision of the Court of Appeal in the
present case:
‘Thus, the correct analysis of a breach of warranty in an insurance contract may be that,
upon the true construction of the contract, the consequence of the breach is that the cover ceases
authority.
Page | 513
INSURANCE LAW CASES
to be applicable unless the insurer subsequently affirms the contract, rather than to treat the
occurrence as a
Page 17 of [1991] 3 All ER 1
breach of the contract by the insured which the insurer subsequently accepts as a
wrongful repudiation.’
It was no doubt because of the decision of the Court of Appeal in the present case that
Kerr LJ expressed himself in tentative terms. But I respectfully agree with his basic approach, as
I do with the approach of the judge, which is entirely consistent with the plain meaning of
s 33(3) of the 1906 Act.
I cannot help feeling that the Court of Appeal in the present case was to some extent led
astray by passages in certain books and other texts which refer to the insurer being entitled to
avoid the policy of insurance, or to repudiate, when the assured has committed a breach of a
promissory warranty. Such language is, I have to say with all respect, inappropriate in this
context. I imagine that it reflects the fact that, faced with such a breach, the insurer can decide, if
he wishes, to waive it. But, as I have said, the insurer does not avoid the policy. Moreover, it is
only in the sense of repudiating liability (and not of repudiating the policy) that it would be right
to describe him as being entitled to repudiate. In truth the insurer, as the Act provides, is simply
discharged from liability as from the date of the breach, with the effect that thereupon he has a
good defence to a claim by the assured.
The Court of Appeal referred to an earlier draft of what is now s 33(3), which contained
as its second sentence:
‘If it be not so complied with, the insurer may avoid the contract as from the date of the
breach of warranty, but without prejudice to any liability incurred by him before such date.’
(See [1989] 3 All ER 628 at 652–653, [1990] 1 QB 818 at 879.)
It also referred to a passage in Chalmers A Digest of the Law relating to Marine

Insurance (1st edn, 1901; 2nd edn, 1903; and so antedating the 1906 Act) and editions of his
authority.
Page | 514
INSURANCE LAW CASES
book The Marine Insurance Act 1906 edited by him. These, the Court of Appeal considered,
showed that Chalmers thought that a breach of an express promissory warranty would not of
itself bring the contract to an end and that the rule in marine insurance did not differ from that
pertaining in the law of contract generally. However, quite apart from the fact that the question is
not whether the contract is brought to an end, I do not consider that the passages in question lead
to the conclusion drawn from them by the Court of Appeal. On the contrary, the fact that s 33(3)
was changed to its present form rather indicates the contrary conclusion. In any event the
previous draft is (as the Court of Appeal recognised) inadmissible as an aid to the construction of
the Act, the meaning and effect of which are, in my opinion, clear.
It is for these reasons that I am unable to accept the construction of s 33(3) which found
favour with the Court of Appeal; and it is against the background of the construction of that
section which I prefer, as evidently did the judge, that I turn to the central question of the case,
which is concerned with the construction of undertaking 3 of the letter of undertaking.
I have already summarised the judge’s conclusion on the construction of undertaking 3. I

find myself to be in complete agreement with his reasoning and conclusion on this point. As he
said, once a vessel entered into a prohibited area she was, in ordinary business terminology, and
in truth, uninsured, and so the club had ceased to insure her within the meaning of undertaking 3.
Indeed, once the Court of Appeal’s construction of s 33 of the 1906 Act is rejected, I can see no
answer to the judge’s approach. Before your Lordships, Mr Boyd sought on behalf of the club to
argue that the effect of the word ‘promptly’ in undertaking 3 was to
Page 18 of [1991] 3 All ER 1
allow the club a reasonable time before giving notice under the clause; this should allow
the club time to make up its mind whether it should waive the shipowner’s breach of warranty,
bearing in mind that, in the present case, there were at the time doubts whether the Good Luck
was in the prohibited area, and whether a breach had occurred without want of diligence on the
part of the shipowners so as to enable them to rely on the proviso to r 25(C). Mr Boyd also
stressed that the giving of a notice under undertaking 3 was an explosive thing to do, because it
could trigger off premature action by mortgagees holding shipowners in default under their loan
authority.
Page | 515
INSURANCE LAW CASES
agreements; this supported his submission that the club should be allowed time to consider the
question of waiver before it was required to give notice to the bank under undertaking 3.
I am unable to accept these submissions of Mr Boyd. In my opinion, they impose too lax
a criterion for the operation of the obligation to give notice under the undertaking, inconsistent
with the use of the word ‘promptly’, and indeed inconsistent with the effect of that word agreed
before the judge. To postpone the time for giving notice, as suggested by Mr Boyd, could expose
the bank to a prolonged risk of the ship being uninsured without the bank’s knowledge of that
fact at a time when it could be of crucial importance to the bank to have that knowledge. I agree
with the judge that the notice given by the club to Banque Paribas on 13 July in respect of the
Good Challenger demonstrates that there was no practical or business difficulty in the way of the
club giving prompt notice under the undertaking. It was always possible for the club to give the
notice in sensible terms, drawing attention to the practical situation, from which the bank could
draw its own conclusions as to whether it was advisable immediately to treat the shipowner in
default under the loan agreement. Any argument in the present case founded on the proviso to
r 25(C) was precluded by the judge’s findings that it had no application in the present case and
that there were never any reasonable grounds for believing that it might do so. The simple fact
was that, on the judge’s findings, the vessel ceased to be insured when she entered the prohibited
zone, both in the sense used by ordinary businessmen (as was demonstrated by a number of
communications in evidence in the case) and under s 33(3) of the 1906 Act: Millers (and,
through them, the club) realised soon after the casualty that she was uninsured, and they never
had any reasonable grounds for believing that the shipowners had any basis for invoking the
proviso. The club should therefore have given notice to the bank when it became aware that the
Good Luck had been trading in a prohibited zone at the time of the casualty, long before it gave
notice after the directors’ meeting on 4 August.
It was further argued by Mr Boyd that the effect of the directors’ decision on 4 August
was not to regard the club as discharged from liability from the date of the breach of warranty,
but instead to dispute Good Faith’s claim on the basis that an insured peril occurring in the
prohibited zone was not covered by the policy. Hence, submitted Mr Boyd, the breach of
warranty was waived by the club. I am, however, unable to accept this analysis. On the
authority.
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INSURANCE LAW CASES
assumption that, despite the fact that the vessel was a constructive total loss, there was a waiver
by the club in respect of the future, there was in my opinion no waiver in respect of the period
when the vessel was in the prohibited zone; and accordingly during that period (which was, of
course, the relevant period) there was a cesser of insurance.
There remain the issues of causation and remoteness of damage. These matters were dealt
with very briefly in the courts below. The judge held that the bank’s loss was not too remote,
whether the cause of action arose in contract or in tort. He considered that the loss was
contributed to by the bank’s own want of care, but did not go so far as to accept the club’s
submission that its negligence was the
Page 19 of [1991] 3 All ER 1
sole cause of its loss. He apportioned blameworthiness in the proportions two-thirds to be

borne by the club and one-third to be borne by the bank but, since the claim under the letter of
undertaking was a claim under a contract, under which the club’s liability did not depend upon
negligence on its part, he held that the bank’s claim did not fall to be reduced on the ground of
contributory negligence. On the approach of the Court of Appeal, which held that there was no
liability on the club, none of those points arose for decision. However, it expressed agreement
with the conclusion of the judge that, if the club was in breach of the letter of undertaking, such
breach would have been at least a cause of the bank’s loss; and it further stated that it would be
clearly wrong in all the circumstances to hold that the bank’s action amounted to a novus actus
interveniens breaking the change of causation between the club’s breach and the bank’s loss. It
would also have agreed with him on the issue of contributory negligence.
Before your Lordships’ House, the question of apportionment on the basis of contributory
negligence was no longer pursued. However, submissions were advanced by the club on the
issues of causation and remoteness, which perhaps loomed rather larger on the appeal before
your Lordships than they appear to have done in the courts below. But I have to say at once that,
at least on the issue of causation, the concurrent findings by the judge and the Court of Appeal
present an insuperable obstacle to the club. I can myself see no ground for interfering with those
findings, which the courts below were fully justified in making. The club sought to draw a
authority.
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INSURANCE LAW CASES
distinction between the cause of the advance being made by the bank to Good Faith and the
cause of the bank’s inability to recover the additional loan when it eventually sought to realise its
securities. The latter, it was submitted, was the true proximate cause of any loss. With this
submission I am unable to agree. On the findings made by the judge, the failure by the club to
comply with its obligations led to the bank making an advance which was inadequately secured
and which it would not otherwise have made, and the bank’s loss was accordingly caused by the
breach of the club’s letter of undertaking. The club further submitted that what caused the
advance was the bank’s improvident decision to grant the further advance to Good Faith and/or
the false assurances given by Good Faith to the bank, each of which was a novus actus
interveniens. Again I do not agree with this submission, which is inconsistent with the concurrent
findings of the judge and the Court of Appeal—findings with which I find myself to be in
complete agreement.
The club’s next submission related to remoteness of damage rather than causation. It was
submitted that the damage suffered by the bank was too remote, because it was not within the
reasonable contemplation of the parties, at the date when the club provided the letter of
undertaking, as a serious possibility or a real danger, that Good Faith would lie to the bank about
its claim being accepted by the club, or that the bank would advance money on an unadmitted
claim without verification. What was contemplated, the submission ran, was that the bank might
fail to take action which it would have taken if it had been aware of the true facts at the time
when the notice should have been given by the club. It might, for example, have declared the
shipowners in default under their loan agreement with the bank, or it might have taken steps to
obtain other insurance cover. But it was not contemplated that the bank would advance money to
the shipowners on the security of a ship which had suffered a casualty and indeed was a
constructive total loss.
Again, I am unable to accept this submission. The purpose of the letter of undertaking, as
I understand the position, was to provide additional protection
Page 20 of [1991] 3 All ER 1
authority.
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for the bank in the sense described by the judge—viz to assist in the protection of all
rights of the bank against Good Faith and to enable the bank fully to protect its rights and its
security, including in particular evaluating its security both for the past and for the future. The
judge no doubt had this purpose in mind when he held that the loss suffered by the bank was not
too remote where the cause of action arose in contract. He no doubt also had it in mind that the
directors of the club were themselves shipowners, and that the managers of the club, Millers,
must have been fully aware of the nature of financial arrangements between banks and
shipowners, of which those between the bank and Good Faith provided, as the judge held, a
typical example. Millers were, on the findings of the judge, well aware that advances made by
banks to shipowners are subject to refinancing agreements from time to time, and must also have
been aware that for that purpose it is necessary for banks to evaluate their security. All these
simple and uncontroversial facts lead, in my opinion, to the inevitable conclusion that, if the
bank suffered loss by reason of failure in the course of refinancing arrangements to take
advantage of an opportunity to reduce or restrict its lending to the shipowners to take account of
the cesser of a particular vessel’s insurance cover of which the club, in breach of its letter of
undertaking, failed to inform the bank, such loss would be within the contemplation of the
parties at the time when the letter of undertaking was given as a serious possibility or real
danger. No special knowledge was needed by the club to bring this possible loss within the
contemplation of the parties; the possibility of such a loss was, in my opinion, well within the
contemplation of the club as a result of its general knowledge, derived from the ordinary
experience of its directors and managers, of the nature of ship financing. For present purposes it
is irrelevant, in my opinion, that in the event the owners lied to the bank or that the bank
improvidently failed to verify the validity of the owners’ insurance claim on the club. These
matters go to causation and raise the possibility of there being a novus actus interveniens
breaking the chain of causation between the club’s breach and the loss suffered by the bank—a
possibility which has however been negatived, in my opinion rightly, by both courts below.
What is relevant to the issue of remoteness is the nature of the loss suffered by the bank; in my
opinion that loss was plainly not too remote. I am not surprised that the judge dealt with it as
briefly as he did; for, once liability had been established (the issue which must have occupied by
far the greater part of the hearing before him) and the club’s submissions on causation had been
authority.
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INSURANCE LAW CASES
rejected, the conclusion of the judge that the damage suffered by the bank was not too remote
was, as it seems to me, really inevitable.
For these reasons I would allow the bank’s appeal, I would award the bank three-quarters
of its costs before your Lordships’ House and one-half of its costs in the Court of Appeal, and
restore the order of the learned judge.
LORD LOWRY. My Lords, I have had the opportunity of considering in draft the speech
delivered by my noble and learned friend Lord Goff. I agree with it, and for the reasons which he
has given I, too, would allow the appeal.
Appeal on issue arising on letter of undertaking allowed.
PETERS V GENERAL ACCIDENT & LIFE ASSURANCE CORPORATION LTD [1937]

4 ALL ER 628
GODDARD J. This is an action brought by Mr John Peters under the provisions of the Road
Traffic Act 1934, s 10. He alleges that, he being a person who had recovered judgment against
one Christopher Pope for the sum of £387 7s 8d in respect of personal injuries suffered by him
(he being injured by a motor car driven by Pope), and also £117 costs, he has a right to recover
his damages against the General Accident Fire and Life Assurance Corporation. He contends that
he is entitled to the benefit of a policy which had been issued by the company in respect of the
motor van which knocked him down, the van at the time being driven and owned by Christopher
Pope. The case raises a question which is, if the law is as I think it is, of vast importance to
insurance companies, because the law must be the same, whatever are the particular
circumstances with regard to the case. If it be the fact that a company can be made liable when a
car has been driven in the circumstances in which this car was being driven—that is to say, after
a sale to a person of whom they had never heard—it would be rather a serious thing for
companies, because one of the things that insurance companies, I understand, still take into
authority.
Page | 520
INSURANCE LAW CASES
account, or profess to take into account, is the history of the driver with regard to accidents, and
so forth. It is perfectly true, and, I daresay it is inevitable, that they also provide in their policies,
where once they insure A B, that they extend the insurance to any other person who may be
driving the insured car with the consent or by the permission of A B, and thereby, of course, they
are exposing themselves to the risk that A B may entrust his car to a very reckless person. I
suppose that in practice it works out all right, because the majority of motor car owners, I think,
have some pride in their cars, and do not want them smashed up, and so they will exercise
reasonable care as to deciding to whom they will lend their cars. But it is perfectly true that
motor insurers do give this wide extension clause, which puts it into the power of the insured
person to allow any person whatever to drive his car, provided he holds a licence, and if there is
an accident the insurance company will be liable, even though the person may have a very bad
driving record. It would be a still more serious thing if it could be said, as indeed it is said in this
case, that, by an assignment to take place between the owner of the car who is insured and
somebody to whom he is going to sell his car, the buyer of the car can be thrust upon the
insurance company as the assured, although they have no say in the matter whatever, and no
opportunity then to refuse to insure him, because, as I understand the argument, the way it has
been pressed on me—and, indeed, I think
Page 631 of [1937] 4 All ER 628
Mr Comyns Carr must go so far—is that this new assured would be put upon the insurance
company, although they had never heard of him and never heard of the transaction until after
some serious accident had taken place.
The facts of this case are these. The car in question is an Austin seven van, and it was the
property of a Mr Coomber. Mr Coomber was insured under a policy which is admitted to have
been in force on the day of the accident, which was 8 September 1935. The premium had been
paid up to 30 September 1935. In July 1935—that is to say, two months before the accident took
place—Mr Coomber sold his car to a Mr Pope, the person who was involved in the accident. The
terms upon which Mr Coomber sold his car were that he sold it to this man for £10, £5 down and
£5 to be paid at Mr Pope’s convenience. On receiving the £5, Mr Coomber handed over this
authority.
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valuable car to Mr Pope, who thereupon took it away, and afterwards drove it and used it as his
own. He paid the £5 balance after the accident had taken place. Now Mr Comyns Carr asks me to
hold that Mr Coomber still retained an interest in the car. The only interest that he retained, as far
as I can see, was an interest to be paid £5. It was not an interest in the car. He may have had, as
an unpaid vendor, an insurable interest for some purposes; I do not know, but he parted with the
car. The property in the car passed on the sale, and a clearer instance of property passing at the
time of sale of specific goods I confess I cannot well imagine. The car thereupon became Pope’s
property. Now, what became of the policy? What became of the piece of paper on which the
policy was written? The policy was handed over by Mr Coomber to Mr Pope, and together with
it was handed over an application form for a new policy, and the registration book. It looks to me
very much as though Mr Coomber was handing over the policy to Mr Pope and saying: “Here,
you have got to get a new policy made out.” Mr Coomber was making himself a party
apparently, and, I should think, consciously making himself a party, to Mr Pope driving his car
away from the premises uninsured. I have no doubt that they thought they could safely take that
risk, and, indeed, they were right, because no accident occurred on that occasion, but there is a
great deal of force in what Mr Samuels says, that that shows that there was no intention on Mr
Coomber’s part to assign his property, if he could assign it, to Mr Pope. I think that is quite right,
but, as a matter of fact, whether he had the intention or not, I do not think, for the reasons I shall
give in a moment, that he could assign it. However, he drove the car away, and then this accident
happened thereafter.
As to the question of what happened to the policy, I think the policy lapsed. I think that there was
thereafter no policy in existence upon this car, because the only person who was insured was Mr
Coomber, and Mr Coomber had parted with the car. I think that, unless I held that, I should be
going behind the principle in the case in the
Page 632 of [1937] 4 All ER 628
House of Lords known as Rogerson v Scottish Automobile & General Insurance Co Ltd, and I
should also be disregarding—which I could do a great deal more easily—my own decision in the
case of Tattersall v Drysdale. If I thought that that decision was wrong, I should not hesitate to
authority.
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say that I thought it was wrong, if I thought better opinions prevailed, but I do not see any reason
at present to doubt that my decision in that case correctly followed the decision in Rogerson’s
case. The two cases are not quite the same. They were both cases in which the owner of a car
who had insured it sold that car and bought another. In Rogerson’s case, the owner met with an
accident in his new car, and the question was whether or not he was using the car in substitution
for the insured car, because the extension clause in Rogerson’s case gave protection to a car
owner if he was temporarily buying another car in substitution for the insured car. The House of
Lords held that the subject of insurance was a motor car, and that, if the motor car was sold, the
insurance lapsed, and was at an end, and the extension clause went with the policy. In Tattersall
v Drysdale, the facts were really much the same, but the point arose in a different way. Mr
Tattersall had bought a car which he had insured with one company. He parted with his interest
in that car, and he got another car, insured with another company. The question was whether the
extension clause applied, because it applied only if there was no other policy in force as regards
the car. I held that the policy was not in force, because he had sold his car. I said in Tattersall v
Drysdale, at p 179:
‘The words of the extension clause in this policy are different from those used in Rogerson’s
case, and Mr. Croom-Johnson argues that the latter case really turned only on the construction
placed on the phrase “instead of the insured car,” which do not appear in the clause under
consideration. But in my judgment that view is too narrow. I think that both in the Court of
Appeal and the House of Lords the decisive factor was that the subject-matter of the insurance
was the specified car, and that as the assured had parted with it he no longer was interested in the
policy. The true view, in my judgment, is that the policy insures the assured in respect of the
ownership and user of a particular car, the premium being calculated, as was found in
Rogerson’s case, partly on value and partly on horsepower. It gives the assured by the extension
clause a privilege or further protection while using another car temporarily, but it is the
scheduled car which is always the subject of the insurance.’
I held that the extension clause went with the rest of the policy. In this case, the extension clause
is in these words:
authority.
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‘In terms of and subject to the limitations of and for the purposes of this section the corporation
will treat as though he were the policyholder any person who is driving such vehicle on the
policyholder’s order or with his permission provided (a) that such person is not entitled to
indemnity under any other policy …’
Then follow certain other matters, with which I need not deal. In order to bring himself within
the Road Traffic Act 1934, s 10, it is necessary for the plaintiff to show that he has got judgment
against an insured person, and, unless he has got judgment against an insured person, he cannot
use the provisions of the Road Traffic Act in enforcing his rights, or rather, the rights of the
assured, against the insurance company. But, owing to another provision of the section in the Act
of
Page 633 of [1937] 4 All ER 628
1930, I held, in Tattersall v Drysdale—and that has not been reversed, and indeed I thought I was
following expressions of opinion in the Court of Appeal in an earlier case—that, in view of the
words of the Road Traffic Act, people driving with the consent or permission of the assured were
persons insured under the policy, because it is a statutory provision which says that the insurers
are to indemnify the persons or class of persons mentioned in the policy. Can it be said here, by
any stretch of imagination, that Mr Pope was driving by the order or with the permission of Mr
Coomber? It seems to me that it is quite impossible to say that. He bought the car, it was his own
car, and he was driving his own car, not by Mr Coomber’s permission, and certainly not under
his order. He was driving it because it was his own car, and I think that, following Rogerson’s
case and Tattersall v Drysdale, I am bound to hold that, when Mr Coomber parted with his car,
his insurance qua that car lapsed, and that there was no insurance. Therefore I decide, first of all,
that there was no insurance at all in force on the car at this time. It is quite impossible to say that
a person who is driving his own car, which he has bought and the property in which is in him, is
driving it by the permission or on the order of the person who sells the car.
The last point that was taken by Mr Comyns Carr was that there was an assignment of the policy.
I have already said why I do not think that there was an assignment in fact. I do not think that
you can assign a policy of this nature at all. You can assign your right to receive money under it.
authority.
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If an accident has occurred, and you have a right to be indemnified by your insurers, or if your
car has been destroyed, so that you have a right to be paid by your insurers, you can assign your
right to anybody you choose, subject to the Road Traffic Act. In view of the statutory provisions,
I do not think that you can assign away your right so as to prevent the injured person from
recovering the money. At any rate, the insurance company would not pay it, because otherwise
they might be liable to pay twice over. In all contracts of insurance—I am not dealing with
marine insurance, because different considerations apply in marine insurance, nor am I dealing
with life insurance, which is not really insurance in the proper sense of the term at all; I am
dealing with burglary, fire, accident, and so forth—I do not think you can assign the policy so as
to make of what is a contract of personal indemnity to A a contract of personal indemnity to B. I
hope I have made that clear. You cannot thrust a new assured upon a company against its will. If
you do that, you must have a novation. You must have the release of the assured and the
acceptance of a new assured. It is not a question of assigning a chose in action, such as a debt, a
right to recover money. A little reflection, I think, will show what a serious state of affairs might
otherwise exist. The proposal form in this case, as in every case of motor insurance, asks
questions with regard to the previous driving history of the proposer. The company want to know
whether he is a man whose record is such that they can take him, and, if so, at what
Page 634 of [1937] 4 All ER 628
premium. His driving history or his driving experience must, I think, be a material fact. The
moral factor, as it has been called, enters into these matters very considerably, not only in motor
insurance, but also in most classes of insurance of this description. For instance, take the case of
a person who wishes to insure jewellery. There may be people whose character is such that no
insurance company would insure their jewellery for a single moment. There may be people who
have had such an unhappy record of fires, or such an unhappy record of losses of jewellery, that
only the most charitable could believe that those were fortuitous happenings. An insurance
company, in those circumstances, would probably be very shy—I mean, respectable insurance
companies; there are some insurance companies which, I have no doubt, as long as they can get a
premium, will take it, though whether they will pay out at the end is another matter. However, I
am considering respectable and proper insurance companies, and the moral factor is a factor
authority.
Page | 525
INSURANCE LAW CASES
which they take very much into account. In that class of insurance, nothing is more common in
an action, where the policy is disputed on the ground of non-disclosure, than to say: “You have
not disclosed a material fact here, namely, the accidents that you have had, or the fires that you
have had, or the losses of jewellery that you have had.” I have no doubt, therefore, that you
cannot assign a motor policy in the way that it is suggested it was done here. If you sell your car,
you cannot, merely by handing over your car and saying: “Take this policy and do what you can
with it; I assign it to you,” put the underwriters under an obligation to indemnify the purchaser,
when they have agreed only to indemnify the vendor. Consequently, on all grounds here the
action, in my opinion, fails. Sorry as I am for Mr Peters, he is thus left with an award of damages
and costs amounting to some £500, and only somebody who has not 500s to proceed against. In
this case, I cannot say that the person who injured him was insured. The fact was that he was
driving an uninsured car. Whether he knew it or not, I do not know. I should think he probably
did know it, inasmuch as his vendor gave him a form to fill in. However, that is not a matter with
which the defendants are concerned. They are quite entitled to say, and do say: “We know
nothing of Mr Pope. He is not on our books, and, so far as we are concerned, he is an uninsured
person.” Therefore there must be judgment for the defendants, with costs.
Judgment for the defendants with costs.
RE WATERHOUSE’S POLICY [1937] 2 ALL ER 91
FARWELL J. This is a summons taken out by the governor and company of the Bank of Ireland,
in which the Phœnix Assurance Co Ltd, and Mr Samuel Herbert Waterhouse are respondents,
asking for an order that the insurance company lodge in court a sum equivalent to interest at 4
per cent per annum, less tax on the sum of £963 lodged by the bank in court on 16 November
1936, from 13 August 1936 down to the date of the order to be made herein, after deduction from
such interest of any deposit interest earned by such sum since the payment thereof into court;
that, upon such payment into court being made, the funds in court be dealt with in accordance
authority.
Page | 526
INSURANCE LAW CASES
with the schedule to the summons; and that the costs of the applicant bank and of the respondent
Samuel Herbert Waterhouse may be taxed and paid by the insurance company. The application is
made under the Life Assurance Companies (Payment into Court) Act 1896, and RSC Ord 54c.
The facts are very short, and may be stated in a few words. On 27 February 1908, Mr
Waterhouse insured his life with the Law Life Assurance Society, which was taken over by the
Phœnix Assurance Co, and the policy was one under which the sum of £500 became payable
either on the death of Mr Waterhouse, or on his attaining the age of 60 years, whichever first
happened. Mr Waterhouse was a customer of the Bank of Ireland, with which he had an account,
and, on 25 February 1928, he assigned to the bank, among other securities, this policy to secure
his overdraft. The amount of the overdraft was over £500 both at the date of the mortgage and at
the date when the insurance money became payable. The mortgage was stamped with a stamp
sufficient to cover the sum of £500, and no more. On 13 August 1936, Mr Waterhouse attained
the age of 60, and thereupon the insurance moneys became payable, and the amount payable was
£963, £500 being the original amount of the insurance, and the balance being bonus amounting
to £463. Shortly before 13 August 1936, certain correspondence took place
Page 94 of [1937] 2 All ER 91
between the insurance company and the bank and Mr Waterhouse, and, by a letter dated 29 July
1936, the insurance company, by its manager, wrote to Mr Waterhouse as follows:
‘We have pleasure to inform you that this policy will mature for payment on the 13th proximo,
the date upon which you attain age 60, and, subject to title, the amount which will be payable
thereunder on or after that date will be as follows:
‘Sum assured £500
Bonus to Dec. 31, 1934 432
Intermediate bonus 31
authority.
Page | 527
INSURANCE LAW CASES
£963
‘We have received notice that by deeds of May 19, 1926, and Feb. 25, 1928, the policy was
assigned to the Bank of Ireland, and if you will kindly communicate with the bank and arrange
for these deeds to be produced to us, the matter shall have further attention.’
In answer to that letter, the Bank of Ireland wrote, on 4 August 1936, to the insurance company:
‘Enclosed I send you the original of the above-noted policy for £500, together with mortgage
dated Feb. 25, 1928, by the assured to this bank. The other act of which you have notice, of May
19, 1926, was a deposit of the policy with this bank without writing.
‘Would you kindly let me have the receipt for the claim value of the policy, to be exchanged
with you, when sealed by the bank, for its amount.’
The insurance company had no notice of any charges on this policy other than the ones of 19
May 1926 and 25 February 1928, and the only one which remained at this date was the one of 25
February 1928. In answer to the bank’s letter, the insurance company wrote to the bank on 5
August 1936:
‘We have received your letter of yesterday’s date, together with the above policy and the deed of
Feb. 25, 1928, and note what you say as to the transaction of May 19, 1926. Subject to our
receiving a certificate that the total amount advanced under the deed of Feb. 25, 1928, has not
exceeded £500, the amount for which it is stamped to cover, we are prepared to pay the sum
falling due on the 13th instant upon the receipt, under seal, of the Bank of Ireland as mortgagee.
We accordingly enclose the necessary form of discharge for sealing, and if you will present this
to us in due course on or after the 13th instant, the matter shall have further attention. On
settlement of the matter, we shall require to retain the deed of Feb. 25, 1928.’
In answer to that letter, the bank wrote:
authority.
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INSURANCE LAW CASES
‘I have received your letter of the 5th instant with its enclosure, and note what you say. The bank
is not in a position to give you the certificate asked for, as regards the stamp duty. I have had the
receipt sent me sealed by the bank and also signed by the assured, and return it herewith. I also
send you a letter from Mr. Waterhouse authorising payment to this bank. I presume this will be
satisfactory. If not, the bank is content that you should pay the balance over the amount of £500
to the assured.’
In answer to that, on 7 August 1936, the insurance company wrote:
‘We have received your letter of yesterday’s date, with its enclosures, and note what you say. We
regret, however, that we are unable to deal with the matter in the manner you suggest, as in view
of what you say it is obvious that the deed of Feb. 25, 1928, is insufficiently stamped to cover the
amount outstanding. In these circumstances we send you the deed herewith, and if you will
return this in due course the matter shall have further attention.’
Page 95 of [1937] 2 All ER 91
The last letter to which I need refer is a letter of 10 August 1936, from the bank, as follows:
‘I am in receipt of yours of the 7th inst. returning mortgage by the above to this bank, of the
above-noted policy, dated Feb. 25, 1928, which deed is stamped to cover £500, and I note what
you say. As no specified sum is mentioned in the deed, the bank is entitled to give you a good
receipt for the policy moneys to the extent of the amount of the stamp duty, i.e., £500. Kindly,
therefore, pay that sum to this bank on a receipt for the amount, under the bank’s seal. The
balance of the policy moneys over and above the £500 will then be payable by you direct to the
assured and the bank is satisfied that this should be done.
‘Kindly let me have the necessary form of receipt for completion by the bank, and exchange with
you for the £500.’
After that there followed a long correspondence, to which I need not refer, in which both sides
discussed and put forward their various contentions in the matter, which was finally concluded
on 16 November 1936, so far as the insurance company was concerned by its paying into court,
authority.
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INSURANCE LAW CASES
under RSC Ord 54c, the £963 payable under the policy. Under the Act itself, the insurance
company is entitled to pay the money into court where the board considers that no sufficient
discharge can otherwise be obtained, and this application is an application for payment out to the
bank and to the assured of the amount so paid into court. But the bank has made the insurance
company respondent to the summons because it is asking that the insurance company may be
made liable to pay interest on the amount paid in, and that it should pay the costs of this
summons.
Now, the whole controversy depends upon two sections of the Stamp Act 1891. S 88(1)
provides:
‘A security for the payment or repayment of money to be lent, advanced or paid or which may
become due upon an account current, either with or without money previously due, is to be
charged, where the total amount secured or to be ultimately recoverable is in any way limited,
with the same duty as a security for the amount so limited.’
So far, there does not appear to be any difficulty. Where the loan is for a definite fixed sum, and
any security is given for that sum, then there has to be a stamp duty which is sufficient to cover
the total amount to which the borrower is entitled. Then s 88(2) provides:
‘Where such total amount is unlimited, the security is to be available for such an amount only as
the ad valorem duty impressed thereon extends to cover, but where any advance or loan is made
in excess of the amount covered by that duty the security shall for the purpose of stamp duty be
deemed to be a new and separate instrument, bearing date on the day on which the advance or
loan is made.’
But before I deal with that subsection it is necessary to look at s 118. That section provides:
‘(1) No assignment of a policy of life insurance shall confer on the assignee therein named, his
executors, administrators, or assigns, any right to sue for the moneys assured or secured thereby,
or to give a valid discharge for the same, or any part thereof, unless the assignment is duly
stamped, and no payment shall be made to any person claiming under any such assignment
unless the same is duly stamped.’
authority.
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INSURANCE LAW CASES
Page 96 of [1937] 2 All ER 91
Then provision is made for a penalty if any payment is made in contravention of that section. It
follows that, in order that the insurance company may get a discharge for money due from it, it
must be satisfied that the assignment is sufficiently stamped, and it runs a risk of a penalty if it
pays over the money to an assignee on a security which is not sufficiently stamped. The
insurance company contends, in this case, that the security was a security stamped for a loan of
£500, and no more, that in fact the bank had advanced, or had permitted the assured to overdraw
his account at the bank to, a sum exceeding £500, and that, therefore, the policy technically
became a security for a sum larger than £500, and that it should have been stamped with an
additional stamp whenever the loan exceeded £500, or at any rate at the date when payment was
required by the bank from the insurance company for the amount which was then due on the
overdraft. In my judgment, that is not the true content of s 88(2), the effect of which is this.
Where, as in this case, the bank permits one of its customers to overdraw his account, and there
is no limit placed upon the amount of the overdraft, or, if there is a security, the security is to be
a security for a limited amount only, and any overdraft allowed beyond that is not covered by
that security, then there is no necessity to stamp the security for any amount greater than the
amount for which the bank looks to the security as a security for the loan. Thus, if the bank
chooses to take a security for an overdraft, and stamps that security with a stamp which is only
sufficient to cover a limited sum, say £500, then, as a result of sub-s (2), it is precluded from
claiming, either in any court of law or elsewhere, that the security which it has is a security for
any greater sum than that for which the stamp on it covers. That is to say, supposing, in this case,
there was a claim by the bank against the assured to recover the amount of the overdraft, the
bank would not be able to claim against him any sum greater than that principal sum which the
stamp covered, and the balance, so far as the insurance policy was concerned, would be
unsecured. If a bank or any other person lends money, with no limit on the amount which is lent,
and stamps the security which it takes with a limited stamp, and desires that security to be
increased so as to cover a larger sum, then, on every occasion when it is desired to increase the
security, it is necessary to stamp the security with a further duty, and for that purpose the security
shall be deemed to be a new and separate instrument, bearing date on the day on which the loan
authority.
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INSURANCE LAW CASES
is made. If no such step is taken, then the lender is precluded from claiming the security,
whatever the particular form of the security may be, as security for any amount over that which
the stamp on it will cover. Therefore, it follows, in my judgment, that the bank in this case was
entitled to claim against the insurers the sum of £500 only, because that alone was the sum which
was covered by the stamp on this security. But,
Page 97 of [1937] 2 All ER 91
having satisfied the insurance company that there was a security for £500, the insurance
company was bound to pay to the bank that sum of £500, and the balance, there being no notice
of any other security, would then be payable to the assured. That, in my judgment, is the true
construction of this section of the Act, but the insurance company, which acted in perfect good
faith, and which was no doubt fortified its view by the fact that some of the textbooks take a
view of this section different from that which I have taken here, was not prepared to take the risk
of paying the money over, and accordingly paid it into court, thereby obtaining a good discharge
for the amount due from it. It follows that the bank is entitled, out of the money in court, to
receive a sum of £500, and that the assured is entitled to receive £493, and any interest which
may have run in the meantime.
There remain the question whether, in the circumstances, the insurance company is liable to pay
interest on the sum of £963, and the question as to the costs of this summons. With regard to
interest, the position seems to be this. The insurance company has taken up a wrong attitude with
regard to this matter: it ought, on 13 August 1936, when the money became due, to have paid
over £500 to the bank, and the balance to the assured, because, prior to that date, by the letter of
10 August 1936, the bank had made it quite clear that it would be fully content that the money
should be so dealt with, and, therefore, as from that date, the insurance company was holding
money which it was not justified in so holding. But when it paid the money into court on 16
November 1936, there being a bona fide doubt in the minds of the directors whether it was safe
to pay the money over or not, it obtained a discharge for the amount due from it. Accordingly, as
from 13 August 1936, to the date of the payment into court, the insurance company is liable to
pay interest on the amount due, at the rate of 4 per cent per annum. After it had paid in the
authority.
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INSURANCE LAW CASES
money, it obtained a discharge, and as from that date it cannot be called upon to pay any interest.
But in the intervening period it had in its hands money which belonged either to the bank or to
the assured, and it was in law wrongfully holding it against those persons, and against those
persons it is to that extent liable to pay interest.
That leaves only the question of costs. In my judgment, the application for payment out could
have been made without making the insurance company a party. The insurance company had got
a discharge, and the bank was not bound to make it a party to the summons. On the other hand, it
was bound to make it a party to the summons if it desired to claim against it either interest or
costs. Now, it did desire, in this case, to claim interest and costs against the insurance company,
and I cannot say that it was not justified in making the insurance company a party to these
proceedings, having regard to the fact, as I have held, that the insurance company is liable to pay
interest for a limited period.
Page 98 of [1937] 2 All ER 91
On the other hand, the claim for interest which it has made by the summons was a much wider
claim than that to which I have found it is entitled, namely, a claim for interest from 13 August
1936, down to the date of the order to be made hereon, after deduction from such interest of any
deposit interest earned by such sum since the payment thereof into court. That it is not entitled
to. It is entitled, in my judgment, only to interest for the period down to 16 November 1936. It
has not wholly succeeded in the claim which it has put forward, and, in these circumstances, I
shall make no order as to costs. Order for payment out. Liberty to apply.
ORIENTAL INSURANCE BROKERS LTD V TRANSOCEAN (U) LTD [1999] 2 EA 260

(SCU)
Judgment
authority.
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INSURANCE LAW CASES
Oder JSC: The appellant sued the respondent in the High Court for recovery of the sum of
UShs46 126 635.
The facts giving rise to the suit are that the appellant, an insurance brokers’ company, contracted
by the respondent to procure insurance covers for the respondent in respect of fire, burglary and
customs bonds. The contract was in writing, the terms of which were contained in a letter dated
15 November 1988 from the respondent to the appellant (exhibit P1).
The respondent obtained the necessary insurance cover and customs bonds for the respondent for
a period of three years. Subsequently the respondent unilaterally terminated the contract by a
letter dated 17 June 1992 (Exhibit P2). The gist of the letter was that with the from 1 July 1992,
the respondent would not need the services of the appellant any more.
The time of the termination of the contract, the respondent owed National Insurance Corporation
UShs37 679 104 in respect of unpaid premiums for insurance cover and custom bonds arranged
by the appellant for the respondent. Although the respondent promised to pay the appellant the
outstanding insurance premiums at the time of the duration of the contract, it never did so.
The appellant had also brokered insurance covers from Messrs Universal Insurance Company
Limited for the respondent. For this the respondent owed the appellant the sum of UShs8 372
541 for unpaid premiums and UShs75 000 as stamp duty on customs bond arranged by the
appellant for the respondent. All these totaled to the sum of UShs46 126 635, for which the
appellant sued the respondent.
The respondent defended the suit, denying in its written statement of defence that it owed the
appellant the sums claimed in the suit.
At the commencement of the trial of the suit, two issues were apparently agreed to by the parties,
namely, whether the respondent owed any money to the appellant; and if so, how much. But in
the course of his judgment, the learned trial Judge came up with four issues:
1. Whether the respondent owed the appellant any money.
2. If so, in what form was the debt - was it commission, premiums or both?
3. Depending on the answer to the second issue, whether the appellant was entitled
to sue defendant as it did to recover what it was owed by the respondent.
4. If the answer obtained - from issue 3 above is in the affirmative, exactly how
much did the respondent owe the appellant?
authority.
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INSURANCE LAW CASES
The learned trial Judge answered the first issue in the positive finding that the respondent owed
appellant some money at the time of the termination of the contract. The second issue was
answered to the effect that what the respondent owed the appellant when the contract was
terminated was in the form of commission for insurance cover and customs bonds in favour of
the respondent.
The answer to the third issue was that the appellant was not entitled to sue the respondent for the
sums of money claimed in the suit. This was because, according to the Judge, evidence advanced
on behalf of the appellant showed
Page 263 of [1999] 2 EA 260 (SCU)
that after the insurance cover and customs bonds in favour of the respondent, it would deduct the
premiums what was due to it (the appellant) and would then pass on the to the insurers. There
was no evidence to prove that the practice or custom entitled the appellant to sue the respondent
for default in payment the third issue having been answered in the negative, as it was, the learned
trial Judge concluded that it was not necessary to answer the fourth issue, and dismissed the suit
hence this appeal.
Six grounds of appeal were set out in the memorandum of appeal complaining that
1. The learned Judge erred in law in deciding the appellant’s claim on issues other
than these the parties had agreed upon before the commencement and end of the trial,
2. The learned trial Judge having decided not to get bogged down by the two issues
agreed on by the parties, erred in law to have proceeded to determine the suit on his own issues
without first raising the said issues to the parties, afford an opportunity to the parties or any of
them, if it so wished, to adduce further evidence on the new issues and make such appropriate
legal submission before the end of the trial.
3 The learned Judge erred in law to have ruled that the appellant had no cause of
action to sue for premium when this particular issue had already been determined in the
appellant’s favour by another Judge who had earlier handled the case and the parties only able to
proceed with the case before the trial Judge because the plea by the respondent to the effect that
the appellant had no cause of action to sue for the premium been overruled.
4 The learned trial Judge having found that the appellant was an agent for the
insurers and by custom of the trade was entitled to receive the premium from the respondent
authority.
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INSURANCE LAW CASES
insured from which it would deduct its commission before passing the balance to the insurers
erred to have held that it could not sue for the recovery of the said premium the respondent.
5. Learned trial Judge erred in law to have held that the appellant as an agent could
not sue in its name for what it was supposed to receive as per custom of the trade from the
respondent on behalf of its principal unless expressly authorised to so by the principal.
6. learned trial Judge having held that the appellant was entitled to the commission
on policies and custom bond effected for the respondent erred not to have at least given judgment
in favour of the appellant to the effect that it was entitled to recover the commission from the
respondent.
The memorandum of appeal then prayed that the appeal be allowed with costs; the judgment of
the lower Court be set aside, and judgment be entered as prayed in the plaint of the suit in the
Court below.
Mr Ssekandi, learned counsel for the appellant, took grounds one and two together. He submitted
that the learned trial Judge erred by introducing new issues in addition to the two by the parties at
the commencement of the hearing of the suit, consequently, the appellant was prejudiced because
the new issues introduced new matters after the parties had already adduced evidence and
addressed the trial Court on the basis of the issues as originally agreed. Having introduced new
issues, as he did, it was contended, the learned Judge should have allowed the parties to address
him on them. Otherwise, the learned trial Judge should have stuck to the two original issues for
this submission, the learned counsel relied on Odd Jobs v Mubia [1970] EA 476, and Norman v
Overseas Motor Transport (Tanganyika) [1959] EA 131.
Page 264 of [1999] 2 EA 260 (SCU)
In his counter submission, Mr Kiapi, learned counsel for the respondent, said that under rule 1 of
the Civil Procedure Rules (CPR), a trial Court is entitled to frame issues even after evidence has
been adduced at the trial. The learned counsel also relied on the case of Odd Jobs (supra). In the
instant case, it was contended, the four issues framed by the trial Judge were covered by the
pleadings and evidence on record. In the stances, no prejudice was occasioned to the appellant.
Under the provisions of Order 13 of the CPR, a trial Court has the jurisdiction to frame, settle or
determine issues in a suit. The relevant rules of that Order provide:
authority.
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“1. (5) At the hearing of the suit the Court shall, after reading the pleadings, if
any, and after such examination of the parties or their advocates as may appear necessary;
ascertain upon what material propositions of law or fact the parties are at variance, and shall
thereupon proceed to frame and record the issues on which the right decision of the case appears
to depend.
3. The Court may frame issues from all or any of the following materials:
(a) Allegations made on oath by the parties; or by any person present on their behalf
or made by the advocates of such parties,
(b) Allegations made in the pleadings or in answers to interrogatories delivered in the
suit,
(c) The contents of the documents produced by either party.
5. (1) The Court may at any time before passing the decree amend the issues or
frame additional issues on such terms as it thinks fit, and all such amendments or additional
issues as may be necessary for determining the matters in controversy between the parties shall
be so made or framed.”
In my view at least two consequences appear to follow from the provisions of Order 13, rule
1(5), 5(1) of the CPR. Firstly a trial Court has wide discretion to frame or amend issues materials
before it, including pleadings, evidence of the parties and submissions from counsel. Secondly,
the Court may amend issues or frame additional issues at anytime, including during judgment. In
doing so, the Court may impose such terms as it thinks fit. In the case of Odd Jobs (supra) on
which the appellant in the instant case relied in canvassing the first and second grounds of
appeal, the facts, briefly were these:
The respondent sued the appellant in the High Court of Kenya for money had and received being
the proposed purchase price of a motor car in respect of which no completed contract had been
entered into.
No issues were framed in the High Court. In evidence, the respondent agreed that he had driven
the car away but it was a condition of the contract that the appellant should carry out repairs.
Although the advocates for the appellant objected to the evidence being given, he questioned his
witness about the alleged repairs and addressed the Judge thereon.
authority.
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INSURANCE LAW CASES
Judgment was given for the respondent on the ground that the appellant had failed to carry out an
essential term of the agreement of sale. The appellant appealed to the East African Court of
Appeal, contending that the Judge had no jurisdiction to decide the case on a ground which had
not been pleaded. It was held firstly, that a Court may base its decisions on an unpleaded issue if
it appears from the course followed at the trial that the issue has been left to the Court for
decision, and secondly, that on the facts the issue had been left for decision by the Court as the
advocate for the appellant led evidence and addressed the Court on it.
Page 265 of [1999] 2 EA 260 (SCU)
Commenting on the provisions of the Kenya Civil Procedure Rules, worded in identical terms as
our rules 1(5) and 5(1) of Order 13, Duffus P said what I agree with as good law. He said:
“It is therefore the duty of the Court to frame such issues as may be necessary for determining
the matters in controversy between the parties. Apart from those provisions, the Court has wide
powers of amendment and should exercise these powers in order to be able to arrive at a correct
decision in the case and to finally determine the controversy between the parties. In this respect a
trial Court may frame issues on a point that is not covered by the pleadings but arises from the
facts stated by the parties or their advocates on which a decision is necessary in order to
determine the dispute between the parties.”
The decision in the case of Odd Jobs (supra) obviously does not assist the appellant’s case. If
anything, its against the arguments put forward by its learned counsel. The effect of the decision
is that a trial Court may frame issues based on the evidence of the parties or statements made by
their counsel though the point has not been covered by pleadings.
In my view, the decision in the case of Norman v Overseas Motor Transport (Tanganyika)
(supra) is to the same effect. In the instant case, the third and fourth issues framed by the learned
trial Judge and which object of the appellant complaint in my view, were only amendments of
the two issues, and merely details of the two original issues. In the circumstances, the
amendment of the original issues were validly made by the learned trial Judge. Even if the issues
(which I think they were not) the learned trial Judge had a duty to frame were necessary for the
determination of the matters in controversy between the parties in accordance with the statutory
provisions and the decided cases I have referred to.
authority.
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INSURANCE LAW CASES
The issues as amended by the learned trial Judge were all matters in controversy in the suit
between the parties and required decision for the determination of the case as whole. With due
respect, I am unable to agree with the learned counsel for the appellant that the issues as
amended by the learned trial Judge were prejudicial to the appellant; and, still less, that what
learned trial Judge did amounted to a miscarriage of justice to the prejudice of the appellant. The
first and second grounds of appeal, therefore, fail.
Next, I will deal with the third, fourth, fifth and sixth grounds of appeal together. This is they all
concern the issue of whether the appellant had a valid claim against the respondent for payment
of the premiums due on the insurance cover arranged by the appellant. In this connection the
appellant’s counsel submitted, first, that the transaction between the appellant and the respondent
was governed by general law and insurance and usage. He then referred to evidence which
showed the respondent’s liability to appellant. Such evidence include the letter (annexure “B” to
the plaint) written on 14 October 1992 by National Insurance Corporation (NIC) to the
respondent. The letter listed 14 policies issued by NIC to the respondent through the appellant.
The total on the policies amounted to UShs37 679 104. The letter indicated that the respondent
had contracted to pay the premium to its insurers (NIC) through the appellant as their brokers.
Another evidence to the same effect was given by Boniface Makola (PW1) the appellant’s
managing director. This evidence, it is contended, was not controverted.
Page 266 of [1999] 2 EA 260 (SCU)
Secondly, the learned counsel submitted that the appellant’s claim for payment of the premium
for the insurance policies in question was upheld by the relevant finding of the learned trial
Judge in his judgment to the effect that the appellant had not agreed to work ex gratia that the
respondent had paid in part what it owed the appellant; and that the respondent owed the
appellant some money at the time of the termination of the appellant’s appointment as the
respondent’s insurance brokers.
Thirdly, on the relevant law, the appellant’s learned counsel referred to Ivany-General Principles
of Insurance Law (4 ed) at 599; Halsbury’s Laws of England (3 ed) Volume 22 paragraphs 68,
69, 71; Malgilliv and Parking on Insurance Law (16 ed); paragraph 493.
In his reply, Mr Kiapi learned counsel for the respondent submitted, firstly, that the third ground
of appeal is so general that it offends the provisions of rule 84 of the rules of the Court.
authority.
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INSURANCE LAW CASES
Secondly, that the learned trial Judge was justified in finding, as he did, that the appellant was
not entitled to sue for the premiums. The finding was based on evidence by both the parties. It
was contended that such finding was, rightly, different from the Court’s ruling following the
respondent’s preliminary objection at the trial that the plaint did not disclose any cause of action.
The ruling which rejected the preliminary objection was based on the pleadings and submissions
and not on evidence as the final finding was. Thirdly the custom referred to in the fourth ground
of appeal was not pleaded in the plaint consequently the appellant was not entitled to rely on
custom as a basis for its claim against the respondent. It was contended that where a party seeks
to rely on trade usage, the principle of fair play demands that the usage should be pleaded, and
proved. Proof of the usage, if it existed in the instant case, could have come from the evidence of
PW1, whose evidence, the respondent’s learned counsel conceded, was not controverted. As it is,
it was contended, evidence did not show that such usage or custom existed and that the appellant
relied on it in making its claim.
With respect, I am unable to accept the respondent’s complaint that the third ground of appeal
offended rule 84 of the Rules of this Court. I think that as framed, the ground contains sufficient
particularity to the extent which substantially complies with requirements that rule.
Still on the third ground, with respect, I find no merit in the appellant’s complaint in it that
because an interlocutory ruling by the trial Court had overruled the respondent’s objection the
plaint disclosed no cause of action, therefore the learned trial Judge should have found for the
appellant in the suit, namely that it was entitled to sue for the premiums. The interlocutory ruling
was based on pleadings and the parties’ respective submissions for and against the preliminary
objection. At that stage, the trial Court had not heard the parties’ respective evidence. Having
overruled the preliminary objection, as he did, the learned trial Judge, in my view was not bound,
ipso facto, to find for the appellant in his judgment. The judgment was based on the pleadings
and evidence received by the trial Court from the parties. At the end of the trial, the learned trial
Judge was under a duty to find for or against appellant. In the event, he found that the appellant
was not entitled to sue for the gross premiums. He then dismissed the suit. The third ground of
appeal therefore, fails.
Page 267 of [1999] 2 EA 260 (SCU)
authority.
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In the circumstances the main issue to consider in my view, is whether the learned Judge’s
decision just referred to was proper on the facts of the case and the law applicable. This, in my
view, is the substance of the fourth, fifth and sixth grounds of appeal.
The substance of the appellant’s claim was pleaded in paragraph 3 to 7, inclusive of the which
may be summarised as follows:
(a) The appellant was appointed by the respondent as its insurance brokers, for fire,
burglary and customs bond insurance cover. The appointment was by letter dated 15 November
1998.
(b) As such insurance brokers the appellant obtained a number of insurance covers
for the respondent for a period of three years from National Insurance Corporation (NIC) and
Universal Insurance Company Limited (UICL).
(c) The respondents did not pay the premiums for a number of insurance policies so
obtained by the appellant for the respondent although it promised to pay. Consequently, the
appellant was indebted in the sums of UShs37 679 104 and UShs8 372 549 in gross premiums to
NIC and UCIL respectively. UShs75 000 was also owed to UCIL as stamp duty on the
respondents customs bond.
(d) The appellant’s services were terminated in writing on 17 June 1992, when the
respondent was thus indebted to the appellant in the total sum of UShs46 126 653 for which the
appellant committed itself on the respondent’s behalf and was liable to pay to the insurers.
It is clear from the foregoing that the appellant made the claim in the suit as the respondent’s
insurance broker for gross premiums due from the respondent to the insurers, and as agent of the
two insurance companies.
The respondent defended the suit. The substance of its defence as pleaded in the alternative in
the WSD were that:
(a) The sum claimed by the appellant was due to NIC and UCIL and did not belong
to the appellant;
(b) The appellant had no authority to sue the respondent for money owed to third
party;
(c) The respondent had always been willing to effect payment of any indebtedness to
NIC and UICL either directly or through their authorised agents.
authority.
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INSURANCE LAW CASES
The evidence supporting the appellant’s claim consisted of verbal testimony and documentary
evidence. The respondent’s letter dated 15 November 1988 (exhibit P1) appointing the appellant
as its insurance brokers stated in part:
“Your firm has accordingly been allocated the following classes of insurance;
(a) Fire and allied risks;
(b) Burglary; and
(c) Motor.
In addition to the foregoing you will from time to time be called upon to arrange for execution of
customs bonds (BIF) with Customs and Excise Department. Our insurers are Messrs National
Insurance Corporation and you are advised to immediately contact them for the details of our
policies on the aforesaid classes of insurance so that appropriate steps can be taken to revise and
renew them.
By copy of this letter Messrs NIC are accordingly informed.”
In his evidence, Boniface Makola (PW1) explained that as the respondent’s insurance brokers the
appellant’s responsibility was to get the respondent’s instructions and use the broker’s
knowledge in insurance to ensure that the insured was covered properly; and frequently bill them
for the work done.
Page 268 of [1999] 2 EA 260 (SCU)
The appellant’s responsibility to the insurers was to pay them for the premium for policies
issued. The appellant as brokers also earned commissions on premiums paid to the insurers. The
rates of commissions were set out by the Commissioner of Insurance. Commission on was 25%,
burglary 20% and customs bonds 12.5% as specified in the letter dated 26 May 1994 (exhibit P4)
from the Commissioner of Insurance to the appellant.
He also testified that the appellant dealt with NIC, but when the respondent subsequently added
on UICL as its insurer the appellant was also the respondent’s broker for insurance procured
from UICL.
The appellant’s appointment was terminated by the respondent in a letter dated 17 June 1992 it
P2). The letter said in part:
“This is to it inform you that effective 1 July 1992 all our policies will be effected with NIC on a
direct basis.
authority.
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INSURANCE LAW CASES
As we advised you all payments due which have already been processed in your names on behalf
of the above company will be remitted for onward transmission to our insurers. We hereby
instruct you to liase with them regarding the final details of these payments and to establish
which policies whereby sums are due to your good selves. Please advise us of what transpires.
We wish to thank you for your dedicated services to us over the years and assure you of our
intention to eventually settle all outstanding premiums on our policies . . .”
At the time of termination premiums due from the respondent to NIC was UShs37 679 104 and
to UICL was UShs7 155 000. The sums due were for coverage which the appellant had obtained
for the respondent. In a letter dated 5 June 1992 (exhibit P3) the appellant demanded the
respondent payment of the sum due in respect of NIC. The letter listed the policies and the sums
due on each policy. The respondent never paid.
PW1 also tendered an evidence as exhibit P4 a letter dated 26 August 1994, from UICL,
informing the appellant what was due to UICL on covers provided for the respondent. The letter
is headed “Outstanding Premiums Client: Transocean (U) Limited,” in part reads:
“We wish to refer to your visit to our offices concerning the outstanding premiums which are,
due to us for the business you introduced to us from your clients Messrs Transocean (U) Limited.
We now confirm that the amount due to us is as follows:
Total UShs7 155 000.
We look forward to receiving the payment soon.”
PW1 said that the respondent also failed to pay what was due to UICL.
A letter dated 9 July 1991 (exhibit P7) from the respondent to the appellant appears to give same
explanation for the respondent’s failure to pay what it owed in premiums. The letter reads:
“Re: Fire and Burglary Policies
We have noted that these policies expire on 7 July 1991. We wish to review the same on the
current terms.
However we are experiencing some financial difficulties beyond our control and would therefore
request you to approach our insurers for a grace period of not more than two months. We shall
remit the total premium involved within this period.”
authority.
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In cross-examination, PW1 said that as a broker, the appellant could sue on behalf of the
insurers, claim money on their behalf and finally send the money to them; and that when
demands made to the respondent did not yield any
Page 269 of [1999] 2 EA 260 (SCU)
results, the appellant instructed its lawyers Messrs Ssekandi and Company Advocates, who wrote
to the respondent a demand letter (exhibit P6) Kenneth Kerere (DW1) testified for the
respondent. He agreed that the appellant was appointed in November 1988 as the respondent’s
insurance brokers. The appellant performed as expected and effected insurance covers for fire,
burglary and customs bond from NIC and UICL. The respondent made some payments for his
insurance covers but not for all of them. Subsequently the appellant’s appointment was
terminated in 1992. Thereafter NIC and UICL got in touch with the respondent with a view to
arranging payment of what was due to them. Both the insurers agreed to meet and negotiate.
DW1 then put in evidence a letter dated 7 September 1993 (exhibit D1) from NIC to the
respondent, indicating that the appellant had sued the respondent for outstanding payments on
premium, and asking the respondent for a meeting to sort out payment of the outstanding
premium.
Another letter dated 17 March 1994 (exhibit D2) was also written by UICL to the respondent.
The letter said:
“Payment of Outstanding Premiums
Please refer to our letter of 28 June 1993 ref UNICO/CIB/370 concerning the above subject.
However, we would like to inform you that your Brokers Messrs Oriental Insurance Brokers Ltd,
approached us sometime back with a view of cooperating with them to sue you but we refused
having been promised to be paid the outstanding amount in instalments until settlement in full. It
is regrettable therefore to note that until now no payment has been made. Please let us have at
least half of the total balance within seven days from the date of this letter otherwise we shall be
forced to take the same steps which Oriental took.”
It must be observed that the appellant’s suit against the respondent had already been commenced
‘when the insurers wrote the letters exhibit D1 and D3 to the respondent making arrangements
for payment of outstanding premiums by the respondent direct to the insurers.
authority.
Page | 544
INSURANCE LAW CASES
My search for previous decisions from our jurisdiction which may be relevant to the matter
under consideration did not yield any fruit. I am therefore grateful to both the learned counsel for
referring us to the works of some learned authors which were of great assistance on the matter at
hand.
In considering the law applicable I will start with our own Insurance Decree number 19 of 1978,
which was in force when the suit was filed in 1993, sections 43(3) and (4) provided;
“43 (3) Every premium collected by an insurance agent shall be paid to the insurer
not later than twenty-one days after reception thereof, and where payment is not feasible either
because of the remoteness of the agent from the insurer or otherwise howsoever, the agent shall
effect the transfer of the funds within the said period
(4) Any insurance agent who contravenes subsection (3) of this section, is guilty of
all offence, and shall on conviction;
(a) For the first offence, be liable to a fine to of five hundred shillings;
(b) For the second offence, be liable to a fine of one thousand shillings;
(c) For the third offence, be liable to a file of two thousand shillings, and in addition
his licence shall be cancelled and he shall be disqualified from being licensed again as an
insurance agent.”
Page 270 of [1999] 2 EA 260 (SCU)
In my view section 43(3) and (4) imposed a statutory duty on an insurance broker or agent
towards the insurer. That duty was to remit premiums collected to the insurer. Failure to do so
was a criminal offence punishable by fines.
A question which might well be asked was if a broker was under a duty to remit premiums the
insurer (the principal for whom he was agent) was he not under an implied duty to collect the
premiums due to the insurer and to compel payment by the insured to him (the broker) of the
outstanding premiums due to the insurer? My answer would be in the positive.
I think he (the broker) was under an implied obligation to do so, because the premiums which he
was under a statutory duty to remit to the insurer must be first be received by him. For the reason
alone, I think that an insurance broker was entitled to sue the insured for unpaid premiums in
respect of which insurance policies or covers had been procured for the insured.
authority.
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INSURANCE LAW CASES
The Decree defined “insurance agent”, in section 57 as a person licensed to solicit risks and
collect premiums on its behalf for which he receives or agrees to receive payment by way of
commission or other remuneration for the insurer.
It defined “insurance broker” as a person who, as an independent contractor and not as an agent
of an insurer, is carrying on the business of soliciting or negotiating insurance for a commission
or other remuneration on behalf of the insured or prospective insured, other than himself.
Decree 19 of 1978 was replaced by the Insurance Statute, 1996, which came into force on 4
April 1996. Provisions of the statute relevant to the matter under consideration appear to be
following:
(i) Section 34, which provides:
(1) An insurer shall not allow credit on the premium payable for more than thirty
days except for business emanating from a broker licensed under this statute.
(2) Where the insured fails to pay premiums within the period under subsection (1)
the policy shall be voidable and the insurer shall be entitled to record the expenses incurred.”
(ii) Sections 72 and 73 of the statute provide for, inter alia, insurance brokers and
agents.
(iii) Under section 2 of the statute, “insurance agent” is defined as a “person appointed
and authorised by an insurer to solicit applications for insurance or negotiate for insurance
coverage on behalf of the insurer, and to perform other functions, that may be assigned to him by
the insurer, and who in consideration for his services receives commission from the insurer.”
The same section defines “insurance broker” as a person:
“(a) not being an agent, and
(b) citing as an independent contractor for commission or other remuneration, who
solicits or negotiates insurance business on behalf of an insured or prospective insured other than
himself.”
In the course of his function as such, an insurance agent or broker collects premiums for policies
or covers issued through him. Such premiums are payable to the insurance company issuing the
policies or covers. As I understand it, the effect of the statutory provisions I have referred to
above is that the insurance agent or broker is under a duty to remit premiums received by him
from the insured or insurer. The insured is also under a duty to pay the premiums to
authority.
Page | 546
INSURANCE LAW CASES
Page 271 of [1999] 2 EA 260 (SCU)

the insurer through the insurance agent or broker for the policies or covers procured for him by
the agent or broker. In the circumstances, I think that an insurance agent or broker is entitled to
demand payment by the insured of premiums in respect of such insurance policies or cover. On
receipt of the premiums, the agent or broker would deduct his commission and pass on the
premiums to the insurer. On failure by the insured to pay the premiums through the agent or
broker, I think that he is entitled to sue for the premiums.
Halsbury’s Law of England (3 ed) Volume 32 section 3 discusses mostly the business of marine
insurance and the relevant British Laws and Statute (Marine Insurance Act of 1906 Edw 7C 41)
but I think that the principle discussed there apply equally to other forms of insurance business.
Paragraph 68 under “payment of premiums” on page 41 partly states:
“Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker,
the broker is directly responsible to the insurer for the premium, and the insurer is directly
responsible to the assured for the amount which may be payable in respect of returnable
premium. Where a marine policy is effected on behalf of the assured by a broker who
acknowledges receipt of the premium, such acknowledgment is, in the absence of fraud,
conclusive as between the insurer and the assured, but not as between the insurer and the broker.
It follows from the above provisions that as a general rule the assured is liable to the broker for
premiums as money paid on his behalf, whether or not they have been paid over by the broker to
the wider writer.”
In paragraph 71 on page 43, it is stated that the broker or agent has a lien upon the insurance
policy for the amount of the premium and his charges in respect of effecting the policy.
Ivamy-General Principles of Insurance Law (supra) at 598, the relationship between assured, the
broker ad the under writer is discussed. At 599 it is said:
“The underwriter looks to the broker for his premium, and through the broker, as a rule, upon the
happening of a loss, he receives notice of any claim. In ordinary course of business it is likely
that at any given moment there will be a considerable number of premiums due from the broker
to the underwriter on new insurance’s, and at the same time there may he claims payable by the
underwriter to the broker in respect of losses covered by the existing policies. To make or
receive separate payments in respect of each transaction as the payments fall due would lead to
authority.
Page | 547
INSURANCE LAW CASES
an unnecessary amount of trouble. It is not, therefore, the practice of the broker to pay the
premium upon each insurance to the underwriter at the time when the “slip” is initialed or the
policy signed. All premiums as they fall due, and all claims as they become payable, are debited
or credited as the case may be in the books of both. The balance is struck quarterly, and a
payment made of the sum shown to be due either to the broker or to the underwriter, as the case
may be. As regards any particular policy, however, the premium is treated by the broker and the
underwriter as having been paid on the completion of the contract, and the policy contains a
statement that the premium has been paid.
The assured is not, as a rule, liable for the premium to the underwriter, but only to the broker.”
(emphasis is supplied)
Referring to a number of decided English cases, footnote number 18 at 60 states:
“The broker can sue the assured for the premium, even though he has not paid the
underwriter . . . and if he has paid it, he has a lien upon the policy, unless otherwise agreed.”
Page 272 of [1999] 2 EA 260 (SCU)
In Malgilli and Parking on Insurance Law (supra) at 192, is discussed the role of agents in
insurance business. The learned author states that most insurance business in practice is
transacted through agents or brokers. Prima facie, a broker employed by the insured to effect an
insurance has no authority from the insurance company to collect the premium for it, so that
payment to him is not necessarily payment to the company. In any event the company may doubt
by inserting in the policy a condition that the broker or agent of the assured is deemed to be his
agent in paying the premium. But a broker may be held out by the company as having authority
to collect the premium, and a clause in the policy providing that any person procuring the
insurance shall be deemed the agent of the insured and not of the insurer has been held as
intended to prevent the insurer from being bound by the representations of a broker, and not to
counteract the effect of his being held out as agent to receive the premium. See Kelly v London
and Stafford Shire Five [1883] Cab and E 47.
Where the insurers employ a broker or insurance agency to collect premiums on their behalf, it is
prudent to include in the agency agreement a clause providing that premiums are to be held in
trust for them while in the agent’s control and are to form part of the agent’s personal estate.
authority.
Page | 548
INSURANCE LAW CASES
I take the discussions of the principles of insurance law as discussed by these learned authors to
be of great persuasive value.
I would summarise the legal principles governing the relationship between the insured, the
broker and the insurer as discussed by the learned authors in their respective textbooks I have
referred to as follows:
1. Unless otherwise agreed, where insurance policy is effected on behalf of the
insured by a broker, the broke is directly responsible to the insurer for the premium. The insurer
looks to the broker for his premium, and through the broker, as a rule, upon the happening of a
loss, the insurer receives notice of any claim.
2. As a general rule, the insured is liable to the broker for premiums as money paid
on his behalf whether or not they have been paid over by the broker to the insurer. As regards
any particular policy the premium is treated by the broker, and the insurer as having been paid
upon the completion of the contract.
3. The insured is not as a rule, liable for the premium to the insurer, but only to the
broker.
4. The broker can sue the insured for premiums even though he has not paid the
insurer, and if he has paid it, he has a lien upon the policy unless otherwise agreed.
5. Generally, the principles of the law of agency applies to the relationship between
the broker and the insurer on the one hand and between the broker and the insured on the other.
Where the insurer holds out the broker as his agent, the broker has ostensible authority to bind
the insurer as his principal.
In the instant case the findings of the learned trial Judge which gave rise to the complaints in the
grounds of appeal were to the effect that:
1. What the respondent owed the appellant at the time of termination of their
services was in the form of commission for insurance covers and customs bonds;
2. Concerning the third issue, the appellant led no evidence to show that it truly
incurred the amount of money claimed in the plaint;
3. Despite the fact that PW1’s evidence (which was not controverted) clearly
showed that the appellant would in this case receive the premium (after arranging insurance
authority.
Page | 549
INSURANCE LAW CASES
covers and customs bonds in favour of the respondent) and then deduct from the premiums its
dues before passing the premiums on to the
Page 273 of [1999] 2 EA 260 (SCU)
insurers, there was no evidence on record to prove that such practice or custom
entitled the appellant to sue the respondent for the premium if the respondent defaulted in paying
for it. In the circumstances the learned trial Judge was unable to find that the appellant was
entitled to sue the defendant like it did.
4. If the appellant had worked out its commission and clearly spelt it out in the plaint
in such a way as to show that it was suing the respondent for both its commission and insurer’s
premium, the learned Judge might have found a way of enabling the appellant o recover in
respect of that part of its claim against the respondent which was good (ie the part relating to the
commission).
With due respect, I am unable to agree with the learned trial Judge in his findings in question, for
the following reasons:
First, the findings were inconsistent with the evidence adduced by both the appellant and the
respondent. I have already referred to the evidence. So, I will mention here only some relevant
aspects of the evidence. These are that in accordance with the terms appointment contained in P1
the appellant procured insurance and customs bonds covers for the respondent for a period of
three years. According to PW1 evidence, which was not challenged, the procedure was that the
appellant obtained insurance covers for the respondent and billed the respondent for them.
The appellant also earned commission for the policies (or covers) so procured for the respondent;
the rates of commission were officially approved as per exhibit P5. To the insurers the appellant
paid premiums for the policies or cover issued. As brokers, the appellant claimed payments for
premium on behalf of the insurers and sent money to them. The appellant could also sue the
insured for unpaid premiums and pass on the money to the insurers. The appellant’s appointment
was terminated by the respondent on 17 June 1992. By then the sums claimed in the suit were
owing to NIC and UICL on policies procured from them. After the termination, the respondent
promised to settle what was owing. Demand for payments was put to the respondent in a letter
dated 5 June 1992 (exhibit P3) before the termination and subsequently, but no settlement was
forthcoming.
authority.
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INSURANCE LAW CASES
In the letter of termination, (P2) the respondent assured the appellant of its intention to
eventually settle all outstanding premiums on its policies. The evidence of the respondent’s
witness, DW1, agreed with that of PW1. Further, DW1 admitted that during the subsistence of
the appellant’s appointment, the respondent made some payments to cover some of the policies
but not all of them.
In the letter dated 9 July 1991 (P7) the respondent indicated to the appellant that they were
experiencing some financial difficulties and asked the appellant to approach NIC for a grace
period, undertaking to remit the total premium outstanding.
In my view, the appellant’s financial difficulties appear to have been the reason for not attending
to pay the premium claimed in the suit. This view is strengthened by the letter of 17 March 1994
(D2) from UICL to the respondent. By this letter UICL was apparently inducing respondent to
pay the premium owed by them by installments, which was an easier term facing a suit to pay all
at once.
Secondly, the findings in question of the learned trial Judge were contrary to the law applicable
to the case. I have already set out in detail in this judgment
Page 274 of [1999] 2 EA 260 (SCU)
our statutory provisions, and the principles of insurance law relevant to the facts of this case. It is
not, therefore, necessary to repeat them. In a nutshell they, in my view entitle an insurance
broker or agent in a case such as this one to sue the insured for premiums not paid to the broker,
and for commissions due from the insured in respect of insurance policies or covers cured by the
broker or agent. This is the only way by which the broker can recover his commission on
outstanding premiums, and pass on the premiums so recovered to the insurers.
In the instant case, I think that the appellant was entitled to sue the respondent for the unpaid
premiums. I am also satisfied that on the evidence in the case as a whole the appellant proved its
claims in the suit to the required standard.
The fourth, fifth and sixth grounds of appeal therefore succeed.
In the result I would substantially allow this appeal with three-quarters of the cost in this Court. I
would set aside the judgment and orders of the lower Court and substitute it with one allowing
the appellant’s suit with costs in the Court below. Since Tsekooko JSC and Karokora JSC agree,
there will be orders in the terms proposed by Oder JSC.
authority.
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INSURANCE LAW CASES
Karokora JSC: I have had the advantage of reading in draft the judgment of Oder JSC and I
agree that the appeal must be allowed with costs to the appellant. The facts of the case which are
not in dispute are set out in Oder JSC’s judgment and therefore, I do not need to repeat them
here. At the commencement of the trial, Mr Ssekandi, counsel for appellant who represented the
plaintiff submitted that the issue for determination by the Court was:
“We have agreed with learned counsel that issue for determination is whether defendant owes
any money to plaintiff and if so, how much.”
The trial proceeded on with the above issues in the minds of both parties. Evidence was adduced
by each party and counsel addressed the Court bearing in mind the issues which had been
presented to Court for determination.
However, when the learned Judge was writing his judgment, he stated on page 8 of his judgment
as follows:
“I will not get bogged down by the issues agreed upon herein by counsel.”
He proceeded to frame new issues at that stage, namely:
“1. Whether the defendant owed the plaintiff any money.
2. If so, in what form was the said debt (was it commission, premium or both)?
3. Depending on the answer obtained from two above, whether the plaintiff was
entitled to sue the defendant like it did in this suit in a bid to recover what it was entitled to from
the defendant.
4. If the answer obtained from issue three is in affirmative, exactly how much
money did the defendant owe the plaintiff?”
The learned trial Judge answered the first and fourth issue against the appellant and dismissed
the suit holding that the plaintiff had no right to sue. The appellant was not amused. He raised six
grounds of appeal. In the first and second grounds he complained against the framing of issues
by the trial Judge while he was writing judgment without affording opportunity to the parties to
know those issues and addressing the Court on them. The complaints were:
1. The learned Judge erred in law in deciding the appellants claim on issues other
that the ones the parties had agreed upon before the commencement and end of the trial.
Page 275 of [1999] 2 EA 260 (SCU)
authority.
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INSURANCE LAW CASES
2. The learned trial Judge having decided not to be bogged down by the two issues
agreed upon by the parties erred in law to have proceeded to determine the suit on his own issues
without first raising the said issues to the parties, afford an opportunity to the parties or any of
them, if also wished, to adduce further evidence on the new issues and to make such appropriate
legal submission before the end of the trial.
Before us, Mr Ssekandi for appellant contended that whereas the trial Judge had powers to end or
alter issues during, the course of the trial, in the instant case he contended that the learned Judge
should not have amended or introduced new issues without reference to the parties. However,
against the above submission, Mr Kiapi, counsel for respondent submitted that under Order 13,
rule 1(5) and (5) the Court had powers to amend issues during course of the trial. Probably
before I go into discussion of whether or not the Court had jurisdiction to amend issues or not, I
should quote Order 13, rule 1(5) and rule 5 of the Civil Procedure Rules. Order 13, rule 1(5)
states:
“At the hearing of the suit the Court shall, after reading the pleadings, if any, and after such
examination of the parties or their advocates as may appear necessary, ascertain upon what
materials propositions of law or fact the parties are at variance, and shall thereupon proceed to
frame and record the issues on which the right decision of, the case appears to depend.”
Order 13, rule 5(1) states as follows:
“The Court may at any time before passing the decree amend the issues or frame additional
issues or such terms as it thinks fit, and such amendments or additional issues as any be
necessary for determining the matters in controversy between the parties shall be so made or
framed.”
It is clear from the above provisions that it is the Judge who frames the issues. Equally there is
no doubt that a Court may at any time before passing a decree amend the issues or frame
additional issues.
However, it must be noted in the instant case that at the commencement of the trial, two issues
were agreed upon by counsel of both parties and the trial proceeded and ended with the two
issues in mind. However, during the course of writing the judgment, the trial Judge amended the
issues so that the issues which were two turned out to be four issues. Now those the parties had
agreed upon at the commencement of the trial without first bringing the new issues to the parties’
authority.
Page | 553
INSURANCE LAW CASES
attention and giving opportunity to the parties to adduce further evidence on the new issues and
make appropriate legal submission. From the close scrutiny of the evidence on record it is clear
that there was evidence on record dealing with issues of commission and premium, but these had
not been raised as issues in controversy. However, after full hearing, the case was adjourned for
writing a judgment. During the course of writing the judgment, the learned trial Judge amended
the issues raising the issue of whether the debt owed by defendant to the plaintiff was in form of
commission, premium or both.
Without going into the merits of how these issues were determined, since Oder JSC, had
disposed of these, the complaint is that the learned trial Judge ought not to have raised these
without referring them to the parties and without giving opportunity to the parties to address him
on them.
It was contended that the appellant was prejudiced by the procedure adopted by the trial when
the parties did not address him on them.
Page 276 of [1999] 2 EA 260 (SCU)
With respect, I think it is clearly spelt out under Order 13, rule 1(5), 3 and 5 of the Civil
Procedure Rules that the trial Judge/Court has after reading the pleadings, if any, and after
examining parties or their advocates, in order to determine areas where they are in controversy,
proceed to frame and record the issues on which the right decision of the case depend.
Admittedly, the practice in Uganda has been that the issues are framed by the Court after
consultation with the parties or their advocates at the beginning of the trial. This is implicitly
stated by Manyindo DCJ in Barugahare v Attorney-General Supreme Court civil appeal number
28 of 1993 (UR) where after quoting the holding of the trial Judge who had relied on Order 13,
rule 3 stated:
“It is clear from the above provisions that the issues are to be framed by the Court after
consultation with the parties or their advocates at the beginning of the trial. The trial Judge is not
bound by those issues. On the contrary, the Judge may amend the issues, strike out some of them
or even add new ones any time before passing the decree.”
We were referred to the case of Odd Job v Mubia [1970] EA 476, case from Kenya, where the
East African Court of Appeal held that it is the duty of Court to frame the issues and that the
Court has wide powers of amendment. There, the Court went further to state that a trial Court
authority.
Page | 554
INSURANCE LAW CASES
may frame issues on points not raised in the pleadings but arising from matters by the parties or
their advocates on which a decision is necessary in order to properly determine the dispute
before the Court.
However, although the Court is, Order 13, rule 5(1) empowered to amend the issues or frame
additional issues on such terms as it thinks fit for the purpose of determining the matter in
controversy between the parties, I think that where the Court amends the issues which parties had
agreed upon, it is necessary to give the parties the right to adduce further evidence or address the
Court on the amended issues. See Durvesh v Villaini and another [1957] EA 91 and I think the
need to give opportunity to adduce further evidence and address the Court on the amended issue
is greater especially where the amendment is done so late like in this case, where it was done at
the stage of writing judgment. See also Barugahare v Attorney-General (supra).
Therefore as no opportunity was given to appellant/parties to address the Court on the amended
issues, the complaints in first and second grounds of appeal were rightly raised, because they
must have been prejudiced when issues were raised belatedly without affording parties an
opportunity to express their opinions and call evidence or address the Court on the new issues.
At that stage the learned trial Judge ought to have directed summoning of counsel for both
parties and told them about the amendment of issues he had effected and requested them to either
call evidence if the need arose or to address him on the amended issues. This would obviously in
my view be necessary in the interest of justice, so that no one could say, that he/she was
condemned on any of the issues without being heard.
In view of the above, grounds one and two this appeal would succeed. And I am in total
agreement with Oder JSC on the rest of the grounds of this appeal, I would allow the appeal with
costs to appellant. I would set aside the judgment and order of the lower Court and would enter
judgment for the appellant in Court below.
Page 277 of [1999] 2 EA 260 (SCU)
Tsekooko JSC: I have had the advantage of reading in draft the judgment prepared by my
learned brother, Oder JSC and agree with his conclusions.
The appellant was at the time material to this case an insurance broker. On 15 November, by
letter of the same date (exhibit P1) the respondent appointed the appellant as the respondent’s
insurance broker. The letter allocated the appellant the following classes of insurance:
authority.
Page | 555
INSURANCE LAW CASES
(a) Fire and allied risks;

(b) Burglary; and
(c) Motor.
On 17 June 1992 the respondent terminated the services of the appellant by letter (exhibit P1).
By then the respondent owed the appellant a sum of UShs46 126 653 arising from the appellant’s
work for the respondent as insurance broker. In reality the money consisted of premiums from
which the appellant would earn his commission. Because the respondent failed to pay the said
money to the appellant, the latter brought an action in the Court below to recover the same.
In its written statement of defence the respondent denied liability and in the alternative pleaded
in paragraph 6 thereof that:
“6. The defendant shall aver that:
(a) The said claimed amount of UShs37 679 104 and UShs8 372 549 to National
Insurance Corporation Limited respectively does not belong to the plaintiff.
(b) The plaintiff has no authority, express implied, to sue the defendant for money
owed (if at all) to third parties.
(c) The defendant has always been willing to effect payments of any indebtedness it
may be owing to the said National Insurance Corporation Company and Universal Insurance
Corporation Company Limited either directly or vide their authorised agent.
(d) One of the alleged creditors National Insurance corporation, has already
expressed desire to directly meet the defendant with a view of working out a mode of payment of
its outstanding premium without any reference to the plaintiff.”
The effect of the averment in paragraph 6(d) above is that the respondent would avoid payment
of appellant’s commission which the appellant could have had to deduct if the premiums repaid
through the appellant.
At the beginning of the trial Mr Ssekandi who represented the appellant at the trial posed issues
in the following words:
“We have agreed with learned counsel that issue for determination is whether defendant owes
any money to plaintiff and if so how much?”
Evidence was led by both parties. The two counsel addressed the Judge, the course of writing his
judgment the learned Judge stated at 8, that:
authority.
Page | 556
INSURANCE LAW CASES
“I will not get bogged down by the issues agreed upon herein by counsel.”
The learned Judge then proceeded to reframe and expand the issues into four, namely:
“1. Whether the defendant owed the plaintiff any money.
2. If so, by what form was the said debt? (Was it commission, premium or both?)
Page 278 of [1999] 2 EA 260 (SCU)
3. Depending on the answer obtained front issue two above, whether the plaintiff
was entitled to sue the defendant like it did in this suit in a bid to recover what it was entitled to
from the defendant?
4. If the answer obtained from issue three above is in affirmative, exactly how much
money did the defendant owe the plaintiff?”
The first and the fourth issues are the issue or issues which were framed at the beginning of trial,
though they were combined as one issue.
The Judge answered the issues against the appellant. He then dismissed the suit holding that he
plaintiff had no right to sue. It is the framing of issues by the learned Judge while writing his
judgment and without reference to the parties which is the subject of complaints grounds one and
two of the memorandum of appeal. The complaints state:
“The learned trial Judge erred in law in deciding the appellant’s claim on issues other than the
ones the parties agreed upon before the commencement of the trial.
2. The learned trial Judge having decided not to get bogged down by the two issues
agreed upon the parties erred in law to have proceeded to determine the suit on his own issues
without first raising the said issues to the parties to afford an opportunity to the parties or any of
them if it so wished to, adduce further evidence on the new issues and to make such appropriate
legal submission before the end of the trial.”
Mr Ssekandi for the appellant quite correctly conceded that the trial Judge had powers to amend
or alter issues. But learned counsel contended that in this case the learned Judge should not have
amended or introduced new issues without reference to the parties. Mr Kiapi, counsel for the
respondent supported the course adopted by the learned trial Judge.
There is no doubt that it is the trial Judge, who frames the issues. Equally there is no doubt that
the Court may at any time before passing a decree amend the issues or frame additional issues.
authority.
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Order 13, rule 1(5) is the authority for the former proposition and for the latter position, Order
13, rule 5 is authority. Order 13, rule 1(5) reads as follows:
“At the hearing of the suit the Court shall, after reading the pleadings, if any, after such
examination of the parties or their advocates as may appear necessary, ascertain upon what
material proposition of law or fact the parties are at variance, and shall thereupon proceed to
frame and record the issues on which the right decision of the case appear to depend.”
Order 13, rule 5(1) reads:
“The Court may at any time before passing a decree amend the issues or frame additional issues
on such terms as it thinks and all such amendments or additional issues as may be necessary for
determining the matters in controversy shall be so made or framed.”
Order 13, rules 1(5) and rule 5 should be read together with the provisions of Order 18, rules 5.
These read as follows:
“Rule 4 judgment in defended suits shall contain a concise statement of the case, the points for
determination, the decision thereon, and the reasons or such decision.
Rule 5 in suits in which issues have been framed, the Court shall state its finding or decision with
the reasons therefor, upon each separate issue, unless the finding upon anyone or more issues
sufficient for the decision of the suit.”
Clearly Order 13, rule 1(5) envisages that the Court frames issues in consultation with the
parties. In Odd Jobs v Mubia [1970] EA 476, Law JA concluded his judgment at 479 about
framing issues thus:
Page 279 of [1999] 2 EA 260 (SCU)
“The prime responsibility to ensure that issues are framed lies on the Court; but in my view the
advocates also have a duty to see that this requirement is complied with by the Court.”
As far as I am aware the practice in many courts of trial in Uganda in suits where parties are
represented by counsel, is that a trial Judge would normally inquire from counsel if they agreed
on the issues. It is where counsel don’t agree or the issues agreed upon are at variance with the
pleadings that the trial Judge would normally proceed to frame the issues which he considers to
be appropriate. I think it is because of that practice that the learned Judge proceeded with the trial
after Mr Ssekandi, counsel for the plaintiff, had suggested the two issues with which Mr
authority.
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INSURANCE LAW CASES
Beyanda, the advocate who appeared for the respondent at the trial, agreed. Order 13, rule 5(1)
does not empower a trial Judge to amend or add issues arbitrarily.
A case is tried on issues. This explains why order 13, rule 1(5) is worded as it is namely:
“At the hearing of the suit the Court shall, after reading the pleadings if any, and after such
examination of the parties or their advocates as necessary, ascertain upon what material
propositions of law or fact the parties are at variance and shall, thereupon proceed to frame and
record the issues on which the right decision of the case appears to depend.” (emphasis added)
This subrule indicates that the trial proceeds on matters which are in dispute. Therefore, the
beginning of the trial the parties must know the issue which requires proof in that the parties
must know the issue which requires proof. In that way the parties are led to call evidence to
prove or disprove issues as framed at the beginning of the trial. Rukidi v Iguru and another
[1995-98] 2 EA 318 (SCU), Kayondo v Co-operative Bank Limited Supreme Court civil appeal
10 of 1991 (UR).
In my view and with due respect to the learned trial Judge the appellant was prejudiced by the
procedure adopted by the learned Judge.
I think that grounds one and two ought to succeed. I would allow this appeal with costs to the
appellant. I would set aside the judgment and order of the Court below. I would enter judgment
for the appellant as prayed in the plaint and I would award costs of this appeal and of the Court
below to the appellant.
O’CONNOR V B D B KIRBY & CO (A FIRM) AND ANOTHER [1971] 2 ALL ER 1415
Appeal
The first defendant, B D B Kirby & Co, a firm of insurance brokers, and the second defendant,
John Andrew Kirby, appealed against the judgment of his Honour Judge Forrest given at
Brentford County Court on 1 October 1970, whereby it was held that the plaintiff, Patrick
O’Connor, was entitled to recover £135 4s 4d, being two-thirds of the damage suffered by the
plaintiff as a result of the defendants’ negligence. The fact are set out in the judgment of
Davies LJ.
P H Norris for the defendants.
authority.
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J M G Roberts for the plaintiff.

2 March 1971. The following judgments were delivered.
DAVIES LJ. This is an appeal from a judgment of his Honour Judge Forrest given at Brentford
County Court on 1 October 1970 when, on a claim by the plaintiff (‘the insured’) against the
defendant, who was an insurance broker in a small way of business, he gave judgment for the
insured in the sum of £135 4s 4d, that being
Page 1417 of [1971] 2 All ER 1415
two-thirds of the total sum of damage claimed by him. The case arose in this way. In December
1966 the insured, Mr Patrick O’Connor, was acquiring a new Vauxhall motor car and he wanted
to have comprehensive insurance in respect of that car. The insured lives in West London, and he
went to see the defendant (‘the broker’) who carried on business in his wife’s name in Osterley,
Middlesex, as it then was. A proposal form for insurance was filled in on behalf of the insured by
the broker who obtained the necessary information from the insured to be sent to an insurance
company called Palladin. It is a fact that on that occasion, according to the insured’s own
evidence, the broker asked the insured where the car was normally kept; and, I am now reading
the insured’s evidence:
‘I said “parked on the street“. Have you a garage? “No“. He said it would be dearer if I parked on
street—could I get one in the near future. Don’t remember whether he said this before an
application form completed. He said, “look through and see if everything correct“. I just glanced
through and signed it. I trusted him—took it for granted that form was correct.’
Either on that day or shortly afterwards the Palladin Insurance Co refused the proposal, it would
appear on two grounds. The first was that the insured did not have sufficient driving experience;
he had not apparently had a car before, although he had had a motor bicycle; and the other
ground was (if I may say so, without disrespect to Megaw LJ) that this insurance company did
not like Irishmen. However, that proposal having failed, another proposal form—the one with
which we are concerned in this case—was filled in, again by the broker having got the
information from the insured, to be sent to the Trafalgar Insurance Co, and a good deal of
attention has been given to the terms of that proposal form. Unfortunately the photostat that we
have is very difficult to decipher; but the two important parts of it are, first the question ‘Where
is your car normally garaged? In a private garage’—blank for the answer—‘In a public
authority.
Page | 560
INSURANCE LAW CASES
garage’—blank for the answer—‘In the open’—blank for the answer. That question is
undoubtedly answered in the handwriting of the broker. ‘In a private garage? Yes.’
That was quite inaccurate—I will not use the word ‘untrue’—and I will again read the insured’s
evidence as to what happened when that form was filled in.
‘He asked where car would be kept—[I interpolate “I said”] “in the street“. Again he asked if I
could get a garage in the near future as it would be more expensive if I did not have garage. He
filled in the answers—said “check through to see if everything is in order“. Glanced through.
Signed. Handed back.’
The other relevant part of the proposal form which I need not read in full, is the standard
warranty and promise that everything in the form is true and that the answers form the basis of
the insurance. The car was insured accordingly as from 1 January 1967. It was renewed for the
two subsequent years.
Unfortunately, on 29 January 1969 the car, which had never been garaged by the insured—he
never had a garage, in fact he never tried to get a garage—was parked in its usual place in the
street outside his house, and it was damaged by a hit and run driver. With the assistance of the
broker, it would appear, the insured filled in a claim form claiming against his insurers the
damage to his motor car. That resulted in a letter from the insurance company of 17 February in
these terms:
‘It is noted that this accident occurred whilst your car was parked in the street near your home
address. The Proposal Form you completed for insurance with this company stated the vehicle
was kept in a private garage and the premium was charged accordingly. It seems probable
therefore that we shall be unable to deal with this claim, but before making a final decision we
shall be glad to learn the reason for the lack of garaging facilities.’
Page 1418 of [1971] 2 All ER 1415
The insured said in terms to the judge that he had told the broker that he had no garage and that
the car was kept in the open. The broker, on the other hand, when he came to give his evidence
said—and he said he remembered the particular occasion, which is very remarkable considering
all the other business he must have been conducting over the years—that he had been told by the
insured that this car was kept in a garage. The insured’s case was in essence that it was in the
circumstances the duty of the broker to fill in the answers correctly, that he had told the broker
authority.
Page | 561
INSURANCE LAW CASES
that the car was kept in the open and that the broker negligently or in breach of contractual duty
put the answer in the wrong box, stating the answer as being in a private garage as a result of
which, when the accident happened, the insurers were entitled to repudiate liability.
Before coming back to the real issues in the case, I will go on to mention two other matters, one
of which at any rate seems to have had a great deal of effect on the learned judge’s mind. Having
had this letter of 17 February from the insurance company, the insured went to see the broker
about it and there is no doubt at all that the two of them put their heads together to concoct a
story which, if it had been accepted, might have persuaded the insurance company to change
their minds about repudiation. We have not the actual letter sent by the insured to the insurance
company. What we have is a draft in the broker’s handwriting:
‘I am in receipt of your letter of the 17 Feb and note your remarks, which caused me great
surprise. When I first insured with your company I did garage my car, but, unfortunately I lost
the garage, through a change of ownership. I have searched for another garage, but have not yet
been lucky enough to find one. There was nothing in the policy conditions stating that I should
report to you that I had lost my garage space, and I did not think it mattered.’
That letter brought a reply from the insurance company on 25 February adhering to their
previous position. No doubt the broker was informed of that by the insured, and then the broker
took up the cudgels and wrote an elaboration of the previous letter which I have read. If I can
read it correctly—it is not very clear:
‘Although we agree that the Insured did not comply with the Terms and conditions of his Policy,
we have a certain amount of sympathy with the Insured, as at the time of the proposal in January
1967 [that is not quite right, it was December 1966 although the insurance took effect in January]
and at renewal date in 1968, the information contained on the proposal form was correct. The
Insured lost his garage prior to the 1969 renewal date, and he did not realise that he should have
notified the Company of the loss.’
Those two letters were characterised by the judge as, and really were, quite disgraceful.
One other thing was that on 12 May 1969 when solicitors on behalf of the insured were taking
this matter up with the broker, they wrote this:
‘[The insured] informs us that you acted on his behalf in obtaining the insurance for his car and
that the proposal form was filled up by you. Although [the insured] instructed you that the car
authority.
Page | 562
INSURANCE LAW CASES
would not be garaged you completed the form to the effect that it would be and gave sufficient
explanation of this to [the insured] and he was satisfied that all was in order and he signed the
form accordingly.’
There is a perfectly plain statement that the insured knew that the form had been inaccurately
filled in by the broker and that the inaccuracy was satisfactorily explained to the insured by the
broker; but a long time later that suggestion was completely withdrawn in a letter of 8 January
1970 from the insured’s solicitors:
‘At the time of writing we were under the impression that it was [the insured’s] contention that
the proposal form was completed by you on his behalf
Page 1419 of [1971] 2 All ER 1415
and that this form was deliberately completed incorrectly on behalf of [the insured]. This
unfortunate mistake arose as a result of a Clerk in our office obtaining verbal instructions from
[the insured] and subsequently passing the information on to the writer of the letter and as a
result the facts became somewhat distorted.’
‘Somewhat distorted’ is perhaps a euphemistic description of the difference between the form
being deliberately filled up falsely by the broker to the knowledge of the insured and the case
made at the hearing of this suit, namely the form being (whether dishonestly, by a slip, by a
misunderstanding) filled up inaccurately, and the insured being completely ignorant of that fact.
Those are the main outlines of the case. Counsel for the brokers has vigorously attacked the
judgment of the learned judge. That judgment was, and I may have to refer to one or two
passages in it, to this effect. He accepted the insured’s evidence that he did not (although he
perhaps ought to have done, which is thinking as a judge might think) realise that the form had
been inaccurately filled out. The judge acquitted the broker of any dishonesty and came to the
conclusion that it was due to an accidental slip that he put the ‘Yes’ in the wrong box, or possibly
to a misunderstanding of the insured who, as his name implies, is an Irishman, and might perhaps
not readily be understood by the broker.
I confess that that latter possibility I find it a little difficult to accept. I have read the two
passages in the evidence relating firstly to the proposal form to the Palladin Insurance Co, and
secondly to the one to the Trafalgar Insurance Co. The insured seems to have given his evidence
very clearly, and in the light of enquiries which he said were made of him by the broker on both
authority.
Page | 563
INSURANCE LAW CASES
occasions, and in the light of the broker’s informing him that the question of the garage was
important with regard to premium, I find it very very difficult to see how there could have been
misunderstanding. I should have thought that if anything, assuming, as the judge assumed that
both of these men were acting honestly, it was much more likely to be a slip.
Be that as it may, the judge found, as I have said, that they were both honest. He found that on
this part of the story, as I understand it, it would have been very difficult for him to a conclusion
or very difficult to know what the conclusion was. Having made his findings as to fact, he says:
‘On the face of it neither party had a motive for misrepresentation. If the [insured] said “Yes”, he
was telling a lie. There is no need to find dishonesty against [the broker]. [The broker] may have
been mistaken when he was filling out the form as he obviously had difficulty in understanding
[the insured’s] answers. That is a possibility, but I cannot make him and his wife pay damages
because there is a possibility. If matters ended there I do not quite know what I would decide.’
But then he went on to consider the conspiracy and apparently came to the conclusion that the
broker would not have entered into this or instigated it unless he realised that he had been at
fault.
The case has been extremely well argued by both counsel. Counsel for the brokers made a
number of criticisms of the judgment of the learned judge. One on which he placed great weight
was the passage where the judge says:
‘I can see no reason why the [insured] should want to misrepresent the answer [i e give a false
answer as to garaging]. He had no previous experience of motor cars. He was now in a position
to buy a new car. It is by no means clear to me that it had been explained to the [insured] that it
would be more expensive if he said he had no garage, save in casual conversation.’
It is pointed out by counsel for the brokers, in my view quite correctly, that the learned judge had
not clearly in mind the effect of the evidence when he used those
Page 1420 of [1971] 2 All ER 1415
words. I have already read the passage in which the insured himself admitted that both with
regard to the Palladin proposal, which was abortive, and with regard to this one, it was explained
to him by the broker that to have a car garaged in the street would mean a higher premium than if
the car were in a garage. It is plain, therefore, that the insured had some motive to lie if he
wanted to, though only perhaps a very little one. But when the credibility of these two men and
authority.
Page | 564
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the reliability of their evidence as to the crucial interview and the filling in of this proposal form
was gravely in issue before the learned judge and the learned judge saw and heard them both, I
do not think myself it would be right for this court, whatever criticisms may be made here and
there as to the evidence of the insured, and as to details of the judgment, to interfere and say
‘Well, the judge has made a wrong finding on the facts and we sit here looking at the notes of the
evidence and the judgment and will now come to a different finding on the facts.’
So as to the first ground of the defendant’s appeal, inviting us to reverse the judge as to his
findings of fact, I find myself unable to accede to it.
However, the matter does not by any means stop there. I have indicated already one factor which
to my mind is of the utmost importance in this case. The judge, as I have said, having found the
primary facts, said that if matters ended there ‘I don’t quite know what I would decide’. I read
that as meaning that if it had not been for the subsequent conspiracy there would have been
judgment for the broker. If he did not know how to decide, then the insured had not made out his
case and therefore the broker would be entitled to succeed. I have referred to the subsequent
events, the conspiracy between these two men and the change of ground by the insured through
his solicitors as to what his case was; but there seems to me to be nothing in those matters which
would justify turning an equally balanced case into a case in which the insured either in the
whole or to some extent was entitled to succeed, and I myself would be of opinion that on that
ground the brokers should succeed in this appeal.
But to my way of thinking there is a much more important matter in this case. Let me refer once
more to the evidence. I will take the Palladin case, which I have read, as well as the Trafalgar
one.
‘He said “look through and see if everything correct“. I just glanced through and signed it. I
trusted him—took it for granted that form was correct.’
And as to the proposal form for Trafalgar:
‘He filled in the answers—said “check through to see if everything is in order“. Glanced through.
Signed. Handed back.’
The fact that the insured read that form and failed or omitted to read it properly, and did not
notice, as he said he did not notice, that the form was wrongly filled in with regard to the garage
was the ground on which the learned judge found the insured one-third to blame for his loss.
authority.
Page | 565
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I have already said that to my way of thinking a division of liability on those lines in a case of
this kind is a somewhat novel thing to me and I do not think that ought to have been a ground for
a division of liability.
It is argued by counsel for the brokers that the failure of the insured properly to read the form
was the cause of this loss, the cause of putting the insurance company in a position to repudiate
liability. I think counsel for the brokers is right in that regard. We have been referred to a couple
of authorities from which I do not think it is necessary to quote, as they are concerned with a
rather different subject matter: Biggar v Rock Life Assurance Co and Newsholme Brothers v
Road Transport and General Insurance Co Ltd. They were cases in which an assured sued an
insurance company,
Page 1421 of [1971] 2 All ER 1415
and in each case the proposal form had been falsely or inaccurately filled out by an insurance
agent or broker who was held in each case in that respect to be acting as an agent of the proposer,
the assured, and not an agent of the insurance company; and in each of those cases it was
emphasised that it is the duty of the proposer for insurance to see and make sure that the
information contained in the proposal form is accurate and not to sign it if it is inaccurate, and
that he cannot be heard to say that he did not read it properly or was not fully appraised of its
contents. That, of course, as I have said, is a different subject-matter from that with which we are
presently concerned; but I think the principle applies with equal force in this case. Of course, it
would be different if the insured was unable to read or was in some degree illiterate; but there is
no suggestion of that in this case and there is nothing in the judge’s note of the evidence to
suggest any such thing. The insured was fully able to read this proposal form (though perhaps he
could not have been able to read the copy we have), and there had been this discussion about the
garaging of the car and its relevance to the amount of the premium, and it was there staring him
in the face. If he did not read it properly then I think he has only himself to blame.
Acquitting the broker, as the judge did, of any dishonesty or fraud, and assuming that it was a
mistake on the broker’s part, in some sense it could be said to be a negligent mistake, the judge
having found in favour of the insured as to what had been said at the interview. But in my view,
in accordance with the principle of the two cases to which I have referred, it was the duty of the
insured to read this form; it was his application; he signed it and if he was so careless as not to
authority.
Page | 566
INSURANCE LAW CASES
read it properly, then in my opinion he has only himself to blame. On those two grounds, and
particularly the latter, I would allow this appeal and enter judgment for the brokers.
KARMINSKI LJ. I agree. When the matter was before the learned county court judge, although
the insured was represented by counsel, the second defendant, the broker, was in person
representing also his wife and the firm. In the result therefore the learned county court judge had
not the advantage we have had here of a full and careful argument on behalf of the brokers.
The proposal is in what I imagine would be the usual form, and amongst other questions is one
directed to the place or places where the car is garaged, whether normally garaged in a private
garage, a public garage or in the open. The premium, we understand, varies accordingly—not
surprisingly. The broker put in ‘Yes’ against the words ‘Private garage’, and the premium was
adjusted accordingly. I am not at all persuaded that that was done deliberately in order to attract a
lower premium. I am much more inclined to think that it was a pure mistake; if a word of censure
is applicable, it was a piece of carelessness on the broker’s part.
This is not a case I apprehend where the insured, being an Irishman, is unacquainted with the
English language: he probably speaks no other language. It may be that his pronunciation and
accent are somewhat different from the standard southern English form, but it is not suggested
either that the broker could not understand what the insured said or that the insured himself was a
stupid or an ignorant or an illiterate man; but in fact the word ‘Yes’ was entered against garage
parking. What follows seems to be the vital matter here. The broker told the insured to read
through the proposal form and then check that everything was accurate. The proposal form of
course contained a large number of answers dealing with other questions. The insured apparently
read it through and signed it. The form itself stresses the importance of correct answers to the
questions asked in relation to the policy of insurance.
I myself have come to the conclusion, quite apart from the other matters which Davies LJ has
dealt with, that this is a case where the fifth and last matter in the notice of appeal must be right;
namely that the sole effective cause of the loss here was the insured’s failure to check the entire
contents of the proposal form, failing in consequence to notice the error with regard to the garage
facilities. For those reasons I
Page 1422 of [1971] 2 All ER 1415
authority.
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have no doubt at all that the decision of the learned judge was wrong, and I agree that this appeal
succeeds and the judgment below must be set aside.
MEGAW LJ. I agree that the appeal succeeds but I think that the route by which I arrive at that
conclusion is perhaps somewhat different from that which has been followed by Davies and
Karminski LJJ.
I think that there is much force in the contentions of counsel for the brokers that in certain
respects the learned judge’s findings of fact are difficult to reconcile with the evidence as
recorded in the notes of evidence; but I do not in the end think that such difficulties and doubts
as existed in that respect are sufficiently cogent to justify the conclusion, contrary to what the
judge held, that the insured was fraudulent in providing the answer to the question in the
proposal form with regard to the garaging of the car. Particularly on a matter of this nature, it
would require, in my view, something more cogent than is here shown to justify a departure from
the assessment of the judge as to fraud or absence of fraud, the judge having had the advantage
of seeing and hearing the witnesses.
So it follows that it must be assumed, however charitable or even unreal that assumption might
appear to some minds to be, that what happened on 30 December 1966 when the proposal form
was filled in, was that neither the insured nor the broker was dishonest in thought or deed; but
that what happened, resulting in what was in fact a materially untrue statement being presented
to the insurance company to the immediate benefit of the insured, was only an unfortunate
accident. But it is an accident which the insured says was caused by a breach of contractual duty
on the part of the brokers. What then was the duty owed by the brokers under their contract with
the insured? When the broker took it on himself to fill in the proposal form, the duty on him was
to use such care as was reasonable in all the circumstances towards ensuring that the answers
recorded to the questions in the proposal form accurately represented the answers given to the
broker by the insured; but the duty was not a duty to ensure that every answer was correct.
One of the relevant circumstances which has to be taken into account is that to the brokers’
knowledge the insured himself was going to be asked to check the accuracy of the answer as
recorded in the form before the insured signed the form. Now, one answer given was not
accurate. That might have been because the broker misunderstood the insured or because the
insured misunderstood the broker. In either event, the misunderstanding might have been
authority.
Page | 568
INSURANCE LAW CASES
because one or the other failed to express himself reasonably clearly, or because one or the other
for some reason failed to understand that which had been reasonably clearly expressed by the
other. There is nothing whatever in the evidence, so far as has been shown to us, to indicate, if
there was such a misunderstanding, on which side the fault, if any, occurred resulting in the
‘failure of communication’, to use the modern jargon. Again, the inaccuracy of the recorded
answer might have been (and this is counsel’s primary contention on behalf of the insured)
because the broker, having heard and understood correctly the insured’s answer as to his
garaging the car in the open, inadvertently entered the word ‘Yes’ in the wrong space in the
proposal form. There being all those various possibilities as to what may have given rise to the
error, an error which on those hypotheses was not the result of any dishonesty, I find it difficult
to follow the learned judge’s reasoning in arriving at his conclusion that the broker was liable.
There is the passage in the judgment to which Davies LJ has already referred. After the learned
judge had set out the facts as he found them, he went on to say:
‘There is no need to find dishonesty against [the broker]. [The broker] may have been mistaken
when he was filling out the form as he obviously had difficulty in understanding [the insured’s]
answers. That is a possibility, but I cannot make [the brokers] pay damages because there is a
possibility. If matters ended there I don’t quite know what I would decide.’
Page 1423 of [1971] 2 All ER 1415
Well, if matters ended there, with great respect to the judge, I should have thought the decision
could only be in favour of the brokers. What the judge does say is that the broker is acquitted of
dishonesty, and, so far as the mistake is concerned, it may have been because he had difficulty in
understanding the insured’s accent. That, says the judge, is a possibility. How, on the basis of a
possibility such as a misunderstanding which might have been the fault of one or of the other or
of neither, could it be held to have been shown that the broker was in breach of his duty? I do not
think it could be so held, especially when one adds the admitted fact that it was within the
broker’s contemplation that he was going to ask the insured himself to check the answers, no
doubt partly because of the very possibility that some misunderstanding might occur.
So far, then, I should have no hesitation in saying that the only possible conclusion on the facts
as found by the judge, and without disputing or seeking to alter a single one of those facts, is that
there would have to be judgment for the defendants, the brokers. How then does it come about
authority.
Page | 569
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that the judge gave judgment for the insured? That resulted because of another inference which
he drew from the subsequent disgraceful incident. I call it disgraceful, repeating the word the
learned judge used himself, describing it as an incident disgraceful both to the insured and the
broker. That was the incident of the subsequent lying letter, drafted by the broker, and signed and
sent by the insured to the insurance company. Now what does the judge say about that? He says:
‘I can see the [insured’s] motive in wanting to tell a lie, but I cannot see [the broker] lending
himself to this sort of scheme unless he thought that he had something on his conscience, that he
had let the [insured] down.’
As I understand it, what the judge is saying is this, that the subsequent conduct of the broker in
lending himself to or initiating this disgraceful scheme is an indication, or gives rise to an
inference, that he must have had a motive for so doing; and that his motive for so doing must
have been because he then realised, not that he had previously been dishonest (because the judge
has held that he had not been dishonest) but that he had made a mistake 2 1/4 years before. That
is not a primary fact found by the judge. If it were, it might be that it should not be disturbed. It
is an inference which the judge seeks to draw as to the broker’s motives. With great respect to
the judge, I am unable to follow why that inference should be drawn. To my mind the highest
inference that could be drawn from the facts goes no further than this: the insured came to the
broker and said ‘Look, this mistake has occurred’. The broker may have thought ‘Well, I am
being attacked on a ground of mistake and, whether it was my mistake or not, I am going to be in
trouble about this because [the insured] is going to make things unpleasant for me; therefore, I
shall do my best to get both of us out of trouble’. But that is a very long way from justifying the
inference that the broker had in fact made a mistake on the earlier occasion for which he was
morally or legally responsible, or that his conduct should be treated as being an admission that he
was so responsible.
Having regard to my inability to accept the only reason given by the judge for departing from his
earlier inability to decide, I take the view that the only decision that could properly have been
made on the facts as found by the learned judge was that the insured had failed to establish his
case, and that what had happened was not shown to have been due to any breach by the broker of
the contractual duty which he owed to the insured.
For those reasons I agree that the appeal should be allowed.
authority.
Page | 570
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Appeal allowed. Judgment set aside.
MARIANNE INGRID WINTHER V ARBON LANGRISH AND SOUTHERN LTD [1966]

1 EA 292 (HCK)
Judgment
Harris J: Although the decision at which I have arrived is sufficient to dispose of this case there
is an alternative ground upon which the plaintiff claims that she is entitled to succeed and to
which I should refer lest I be mistaken in my finding of fact that the defendant through Mr.
Cowmeadow [its manager] accepted the plaintiff’s instructions, given on May 4, to renew the
admitted liability policy. If the true position be that the plaintiff instructed Mr. Cowmeadow to
renew the policy but the latter, owing to a genuine misunderstanding did not appreciate and
accept her instructions and, as a result, failed
Page 294 of [1966] 1 EA 292 (HCK)
to renew the policy, the plaintiff’s contention, raised in this alternative ground, is that the general
conduct of the defendant, viewed in the light of the relationship existing between the parties,
amounted to a breach of the duty to take care which that relationship imposed upon the defendant
in the premises, for which breach, if resulting in damage to the plaintiff, the defendant is
answerable. This claim does not arise on the pleadings as they stand but in putting forward this
proposition Mr. Le Pelley, as I understood his argument, relied upon the recent decision of the
House of Lords in Hedley Byrne & Co., Ltd. v. Heller & Partners, Ltd. (1), and in particular
upon a passage from the speech of Lord Devlin in that case. Counsel for the defendant raised no
objection to the claim being put forward in this way but sought to distinguish Hedley Byrne’s
case (1) on the facts and contended that if there was an honest and bona fide misunderstanding
on Mr. Cowmeadow’s part, and therefore no undertaking by him to effect a renewal of the
policy, there can be no liability on the part of the defendant entitled the plaintiff to succeed.
There would appear to be no decision of the courts of this country bearing directly upon the
question so raised and the matter calls for careful consideration.
Although the facts in that case are readily distinguishable from those now before me, the
decision makes clear that, apart from any strict contractual obligation and notwithstanding the
authority.
Page | 571
INSURANCE LAW CASES
absence of consideration, there may exist at common law in appropriate circumstances what has
been called a “duty of care” on the part of a person having dealings with another. After referring
to a number of earlier decisions Lord Morris of Borth-y-Gest said ([1964] A.C., at p. 502):
“My Lords, I consider that it follows and that it should now be regarded as settled that if
someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill
for the assistance of another person who relies upon such skill, a duty of care will arise.”
Similarly Lord Devlin after an examination of the authorities said (ibid., at pp. 528 and 530):
“I think, therefore, that there is ample authority to justify your Lordships in saying now that the
categories of special relationships which may give rise to a duty to take care in word as well as in
deed are not limited to contractual relationships or to relationships of fiduciary duty, but include
also relationships which in the words of Lord Shaw in Nocton v. Lord Ashburton (2) are
‘equivalent to contract’, that is, where there is an assumption of responsibility in circumstances
in which, but for the absence of consideration, there would be a contract . . .
“I shall therefore content myself with the proposition that wherever there is a relationship
equivalent to contract, there is a duty of care. Such a relationship may be either general or
particular. Examples of a general relationship are those of solicitor and client and of banker and
customer. For the former Nocton v. Lord Ashburton (2), has long stood as the authority and for
the latter there is the decision of Salmon, J., in Woods v. Martins Bank, Ltd. (3), which I
respectfully approve. There may well be others yet to be established. Where there is a general
relationship of this sort, it is unnecessary to do more than prove its existence and the duty
follows. Where, as in the present case, what is relied on is a particular relationship created ad
hoc, it will be necessary to examine the particular facts to see whether there is an express or
implied undertaking of responsibility.”
This principle was also illustrated in Candler v. Crane, Christmas & Co. (4) where Denning, L.J.
(as he then was) in a dissenting judgment which was subsequently approved in Hedley Byrne’s
case (1), after considering the position
Page 295 of [1966] 1 EA 292 (HCK)
of company promoters and trustees who answer enquiries about the trust funds, said ([1951] 2
K.B. 180):
authority.
Page | 572
INSURANCE LAW CASES
“Those persons do not bring, and are not expected to bring, any professional knowledge or skill
into the preparation of their statements: they can only be made responsible by the law affecting
persons generally, such as contract, estoppel, innocent misrepresentation or fraud. But it is very
different with persons who engage in a calling which requires special knowledge and skill. From
very early times it has been held that they owe a duty of care to those who are closely and
directly affected by their work, apart altogether from any contract or undertaking in that behalf.”
From the evidence in this case it is clear that the business of an insurance broker in regard to the
effecting or renewing of aircraft insurance with underwriters in London or elsewhere is a
specialized class of insurance business. It is common cause that the defendant was the agent of
the owners and not of the underwriters and that the owners had transacted through the defendant
all the business of transferring the two policies from the Gordon Highlanders to themselves and
it is clear that they had looked to the defendant to advise them upon the policies and to effect the
renewal of, at least, the hull policy. It is manifest that the defendant as an insurance broker, and
Mr. Cowmeadow the manager of its Nairobi branch, each constituted a person possessed of
special skill and experience in the matter of aircraft insurance, that in all their dealings in this
matter they must be assumed to have undertaken to apply that skill and experience for the benefit
and assistance of the owners and, on May 4, 1964, of the plaintiff as the latters’ emissary, and
that the three last-named persons relied upon the defendant in that regard.
In these circumstances I am of the opinion that the relationship which existed between the
defendant and the owners attracted the application of the principle in Hedley Byrne’s case (1)
and that, independently of contract, a duty of care arose. What was the extent of that duty and
was the duty discharged?
The extent of such a duty would appear to depend upon a number of factors including in the
present case the degree to which the owners may reasonably be said to have been, to the
knowledge of the defendant, in the position of having to rely upon the defendant to ensure that
they were made aware, so far as was necessary for their purpose, of the practical implications of
aircraft insurance and that their requirements in the matter were attended to, and in this
connection it should be borne in mind that, as Mr. Cowmeadow must be assumed to have known,
the owners fell within the category of novices. Can it be said then that the duty of care owed to
authority.
Page | 573
INSURANCE LAW CASES
such persons was discharged by the defendant to the extent and with that degree of diligence
properly to be imputed to it?
Notwithstanding the element of uncertainty as to the owners’ instructions that must have been in
Mr. Cowmeadow’s mind when on May 11, he merely suggested to his London representative
that the policy be allowed to lapse instead of giving a firm direction, he took no step at any time
to remove the uncertainty by seeking clarification of those instructions. Furthermore he omitted
to inform either the plaintiff or the owners, as prudence would have suggested, of the fact that,
having failed to contact the Nakuru Club and despite having received no further instructions
from the plaintiff or the owners, he had caused the policy to lapse with effect from midnight on
May 7. Lastly Mr. Cowmeadow, in his evidence, stated that the practice obtaining in Nairobi in
regard to aircraft insurance is that cover is effected through a representative, normally in London,
and that, although with a new client he has to await receipt of a reply from his representative, in
the case of an existing client cover can be given as from the time of his sending a cable to
London. There was no suggestion that in the present case the owners were not existing clients for
this
Page 296 of [1966] 1 EA 292 (HCK)
purpose and it is clear that cover under the new hull policy had been effectively secured by the
mere sending of the cable to London on May 5, although neither the precise terms of the policy
nor the rate of premium had at that stage been determined. Nevertheless when Mr. Cowmeadow
eventually came to realise, as he had done when he wrote to his London representative on June
16, that an admitted liability policy was also required, he took no action either to obtain
temporary cover, as he had done with the hull insurance, or to warn the owners that he was not
doing so and that they would remain for the time being uninsured. Had they been made aware of
the situation they might well have taken steps to rectify the position rather than face the risk of
being killed or injured without the provision of that cover for their dependants which it was one
of the purposes of the admitted liability policy to provide.
The question raised is one of difficulty for the extent of the duty of care must vary according to
the circumstances of each case, but having given to it the most careful consideration I am driven,
for the reasons which I have stated, to the conclusion that, in the circumstances of this particular
authority.
Page | 574
INSURANCE LAW CASES
case, the defendant did not sufficiently discharge the duty of care cast upon it and that upon this
ground also, the plaintiff is entitled to succeed.
Judgment for the plaintiff.
KENINDIA ASSURANCE CO LTD V ALPHA KNITS LTD AND ANOTHER (2003) 2 EA

512
Judgment
KWACH JA: Alpha Knits Limited, the first respondent (hereinafter called “Alpha Knits”) had a
factory on plot number 221 Ruiru (“the factory”). This factory and its contents were insured by
Kenindia Assurance Company Limited (“Kenindia”) against loss or damage by fire. The policy
was issued through the second respondent, Bid Insurance Brokers Limited (“Bid Insurance”), a
firm of insurance brokers.
On 5 April 1997, late in the afternoon the factory and its contents were destroyed by fire
resulting in considerable loss and damage to Alpha Knits, which was assessed at KShs 162 855
227. There was no dispute about the extent of the loss sustained by Alpha Knits as a result of the
fire and Kenindia paid KShs 155 625 577 to Kenya Commercial Bank Limited with the consent
of Alpha Knits as the bank had a financial interest in the factory. The payment was made by
instalments by cheques issued by Kenindia payable to Kenya Commercial Bank Limited and
transmitted through Bid Insurance. After the payments to Kenya Commercial Bank Limited,
there was a balance of KShs 7 229 650 which should have been paid to Alpha Knits. All the
letters from Kenindia to Bid Insurance forwarding the cheques payable to Kenya Commercial
Bank Limited were copied to Alpha Knits.
With regard to the balance of KShs 7 229 650 payable to Alpha Knits, Kenindia did not issue a
cheque for the amount in favour of Alpha Knits. Instead Kenindia paid the money to Bid
Insurance on the strength of a discharge voucher dated 30 October 1997 in which Alpha Knits
acknowledged receipt of the sum in question from Kenindia in full satisfaction and discharge of
all claims made or to be made on Kenindia under the policy. The execution of the discharge
voucher by Alpha Knits was procured by Bid Insurance who then presented it to Kenindia, took
the money and converted it to its own use. Although it is indicated in the discharge voucher that
authority.
Page | 575
INSURANCE LAW CASES
Alpha Knits received payment, that assertion was plainly false because the recorded evidence
shows beyond a peradventure that Kenindia did not pay the money to Alpha Knits. Instead
Kenindia paid the amount to Bid Insurance, which apparently credited it to an account it operated
for Alpha Knits, and then applied the money to pay off a debt owed to it by Alpha Knits. Neither
Kenindia nor Bid Insurance sought or obtained Alpha Knits’ authority or consent to deal with the
money the way they did.
There was a very long delay after the execution of the discharge voucher before Alpha Knits
received payment from Kenindia. So on 15 March 1999 Alpha Knits wrote to Kenindia, with a
copy to Bid Insurance, demanding payment. Upon receiving its copy of that letter, Bid Insurance
wrote to Kenindia on 17 March 1999 as follows:
“We refer to the letter of 15 March 1999 received from our client Alpha Knits Limited regarding
the above claim.
Page 515 of [2003] 2 EA 512 (CAK)
We enclose a statement as at 31 January 1998 which clearly shows that the above claim was
credited on 31 October 1997 for KShs 7 229 650.
Also find herewith our statement as at 28 February 1999 which shows that the client owes us
KShs 1 510 995”.
Bid Insurance did not copy that letter to Alpha Knits. On 26 March 1999 Kenindia replied to
Alpha Knits and stated, inter alia:
“Please find enclosed a copy of our letter dated 17 March 1999 from Bid Insurance Brokers
Limited along with their statement of account. The brokers have credited your account on 31
October 1997 with a sum of KShs 7 229 650 and you owe the brokers as on 28 February 1999
KShs 1 510 995. You may correspond with your brokers in future”.
There is no explanation in that letter why Kenindia did not pay Alpha Knits the money, but I can
deduce from the tone of the letter that Bid Insurance prevailed upon Kenindia to remit the money
to it to pay off a debt owed to it by Alpha Knits. Neither Kenindia nor Bid Insurance sought
Alpha Knits’ authority or consent to deal with that money the way they did. This is clear from
Alpha Knits’ reply to Kenindia dated 7 May 1999, in which they stated inter alia:
“We don’t agree with whatever you have stated in your above letter. The issues which concern
ourselves and Bid Insurance Brokers Limited are not correct. However, claim proceeds are to be
authority.
Page | 576
INSURANCE LAW CASES
paid to us. You have credited this amount of KShs 7 229 650 to Bid Insurance Brokers Limited’s
account without our knowledge or consent. We would insist the amount of KShs 7 229 650 be
paid to us immediately as required by the Insurance Act or we will seek legal redress at your
cost”.
Kenindia ignored this demand and so Alpha Knits made good its threat to seek legal redress. On
14 November 2000 Alpha Knits filed a suit against Kenindia to recover KShs 7 229 650 as the
balance due and owing to Alpha Knits on account of the loss and damage suffered by it as a
result of the fire, together with costs and interest at the rate of 30% per annum from 30 October
1997 until payment in full. Alpha Knits also asked for interest from that date because that was
the date on which the discharge voucher was signed.
Kenindia resisted the claim and filed a defence. In paragraph 3 of the defence it was averred that
the amount payable to Alpha Knits under the policies arising out of the fire was KShs 162 855
227 which sum had been duly paid to Alpha Knits and Alpha Knits had signed discharge
vouchers acknowledging receipt. In paragraph 5, Kenindia stated that the sum of KShs 155 625
577 was paid to Kenya Commercial Bank Limited pursuant to the interest which Kenya
Commercial Bank Limited had in the policies. With regard to the amount for which the suit was
filed, the averment in the defence was:
“(6) The sum of KShs 7 229 650 was paid by credit note passed on 31 October 1997 to
the account of the plaintiff’s insurance brokers Bid Insurance Brokers Limited”.
This payment, so it was alleged in the defence, was in accordance with the course of business
which had existed between the parties since 1993; that Alpha Knits held Bid Insurance out as
their agent authorised to receive payments from Kenindia; that in the circumstances Bid
Insurance had actual or implied authority to receive payment on behalf of Alpha Knits and Alpha
Knits is estopped from denying such authority or payment of the money claimed.
After being served with the defence, Alpha Knits filed an application under Order VI, rule 13(1)
(a), (b), (c) and (d) of the Civil Procedure Rules to strike out the defence on grounds, among
other grounds, that it was scandalous, frivolous, vexatious and an abuse of the process of the
Court. The supporting
Page 516 of [2003] 2 EA 512 (CAK)
authority.
Page | 577
INSURANCE LAW CASES
affidavit was sworn by Dipak Gulabchand Bid, a director of Alpha Knits. He set out the history
of the claim as set out in the plaint and asked the Court to strike out the defence because it was a
sham and likely to delay the trial of the action. The replying affidavit was sworn by Shem
Kimani Macharia, a senior manager in the Legal Department of Kenindia. He basically repeated
the averments contained in the defence and expressed his belief that the defence filed by
Kenindia raised triable issues. In paragraph 12, he deponed that Kenindia was taking out a third
party notice against Bid Insurance, and that because of this he felt it was desirable that the Court
should have all the three parties before it at the same time.
The application was heard by Mbaluto J. The learned Judge considered all the defences taken by
Kenindia and found no substance in any of them. He held that Kenindia had no right to credit
into the accounts of Bid Insurance money due and payable to Alpha Knits in respect of a claim
made under the policy of insurance. The learned Judge also rejected the defence of dealing in
course of business because, in every case where payment was to be made to a third party
Kenindia sought and obtained the consent of Alpha Knits in writing. That is what was done with
regard to the payments made to Kenya Commercial Bank Limited under the same claim.
The learned Judge also held that the payment made by Kenindia to Bid Insurance contravened
the mandatory provisions of section 105 of the Insurance Act (Chapter 487) which provides:
“105 Where a claim arising under a policy is paid, no deductions shall, except with the
consent in writing of the claimant, be made on account of premiums or debts due to the insurer
under any other policy” (emphasis added).
It is abundantly clear from this provision that even if Alpha Knits owed Kenindia any money on
account of premiums or other debt, Kenindia could not deduct it from any amount due to Alpha
Knits under the claim except with Alpha Knits’ express consent. It is clear to me that Bid
Insurance represented to Kenindia that Alpha Knits owed it an amount in excess of KShs 7 229
650, and prevailed upon Kenindia to pay the money to it. This is plain enough from the contents
of Kenindia’s letter to Alpha Knits dated 26 March 1999 to which I have already referred. In my
opinion this payment was clearly illegal because it is expressly prohibited by statute and no
deduction could be made even if Alpha Knits was indebted to Kenindia except with its consent in
writing. So such defence as implied authority, course of dealing or that Alpha Knits had
authority.
Page | 578
INSURANCE LAW CASES
represented Bid Insurance as its agent for purposes of receiving the money due to it arising from
the claim are patently bogus and were properly rejected by the learned Judge.
Mr Fraser, for Kenindia, sought to rely on the provisions of section 156(8) of the Insurance
Companies Act (Chapter 487) but that section only applies to payments between the broker and
the insured and specifically to deductions which a broker can make from claims due to the
insured. That is not the case here. The dispute here relates to deductions made by the insurer
from payment due to the insured. Alpha Knits has, very wisely, not sought to recover the money
from Bid Insurance because the deduction was made by Kenindia and it is irrelevant for whose
benefit and for what reason it was done. In these circumstances, I cannot see what possible
defence Kenindia can have to Alpha Knit’s claim. Having procured a discharge voucher with a
clear acknowledgment that the money had been received by Alpha Knits, Kenindia was under a
duty to ensure that the money reached Alpha Knits. The duty of Bid Insurance was limited to
delivery of the discharge voucher to Kenindia in exchange for a
Page 517 of [2003] 2 EA 512 (CAK)
cheque for the amount due made out in the name of Alpha Knits unless, of course, there was a
request by Alpha Knits that payment be made to Bid Insurance in the first place.
Mr Fraser referred us to a number of authorities laying down the principles applicable on
applications for striking out pleadings. The principles are clear and the courts will not deny a
defendant who has a genuine defence, as opposed to a sham defence, the right to ventilate it. As I
have already said, Kenindia has no genuine defence at all to Alpha Knits’ claim and the so-called
defences it has attempted to raise are untenable on the facts of this case and are merely intended
to delay Alpha Knits. Kenindia had no right whatsoever to pay the money due to Alpha Knits to
Bid Insurance. Bid Insurance had no right to that money and Alpha Knits did not authorise
Kenindia, expressly or otherwise, to pay it to Bid Insurance.
For these reasons, I would dismiss this appeal with costs to be paid by Kenindia. I would make
no order for costs against Bid Insurance as it did not play an active part in this appeal. As Judges
of Appeal Tunoi and Waki also agree, this appeal is dismissed in terms of the orders I have
proposed. Orders accordingly.
authority.
Page | 579
INSURANCE LAW CASES
WAKI JA: I have had the advantage of reading in draft the judgment of my brother Kwach JA. I
generally agree with the conclusions reached by him and the proposal that the appeal be
dismissed and that an order for costs be made against Kenindia.
I wish however to express my views on the central issue raised by Mr Fraser for Kenindia in
urging that the defence filed by Kenindia was not a sham and ought not therefore to have been
visited with the draconian remedy of “striking out”. The submission was that there was a “trade
usage” which Kenindia followed in making direct payment of the disputed amount to Bid
Insurance. The gist of that is captured in five paragraphs of the defence as follows:
“6. The sum of KShs 7 229 650 was paid by credit note passed on 31 October 1977 to
the account of the plaintiff’s insurance brokers, Bid Insurance Brokers Limited.
7. The payment to Bid Insurance Brokers Limited was in accordance with the course
of business which had existed between the parties since at least 1993 and which has continued
until 2000.
8. The plaintiff had held Bid Insurance Brokers Limited out as the agent of the
plaintiff authorised to receive payments from the defendant.
9. The discharge voucher for KShs 7 229 650 was delivered to the defendant by Bid
Insurance Brokers Limited.
10. In the circumstances Bid Insurance Brokers Limited had actual or implied
authority to receive payment on behalf of the plaintiff and the plaintiff is estopped from denying
such authority or the payment of the monies claimed”.
What is pleaded was not a “trade usage” between insurers and insured persons or insurance
brokers but a 10-year-old “course of business” between Kenindia and Alpha Knits wherein
Kenindia would pay out Alpha Knits’ claims to the insurance brokers without express authority.
None of the documents exhibited however support that contention. The documents available
show that Kenindia was given express authority by Alpha Knits to pay out various sums on the
fire insurance claim to other persons, but not the disputed sum.
It is plain, and Kenindia does not dispute it, that the policy of insurance was between it and
Alpha Knits. Bid Insurance features nowhere. It is also plain that the discharge voucher was
executed between Kenindia and Alpha Knits. Bid
Page 518 of [2003] 2 EA 512 (CAK)
authority.
Page | 580
INSURANCE LAW CASES
insurance featured nowhere. On clear principles of contract therefore Alpha Knits was the lawful
payee and the learned Judge of the superior court cannot be faulted for rejecting a non-existent
“course of business”.
As for “trade usage” which was invoked in submissions of counsel, though unpleaded, the law
thereon was expressed in Harilal and Company and another v Standard Bank Limited [1967] EA
512 at 516, per Sir Charles Newbold P thus:
“Before turning to consider the issues raised on this appeal it is necessary to consider the law of
East Africa in relation to a trade usage. A trade usage may be described as a particular course of
dealing between parties who are in a business relationship, which course of dealing is so
generally known to persons who normally enter into that relationship that they must be presumed
to have intended to adopt that course of dealing and to have incorporated it into their contractual
relationship unless by agreement it is expressly or impliedly excluded. Before a course of dealing
can acquire the character of a trade usage it must, first, be so well-known to the persons who
would be affected by it that any such person when entering into a contract of a nature affected by
the usage must be taken to have intended to be bound by it; secondly, be certain in the sense that
the position of each of the parties affected by it is capable of ascertainment and does not depend
on the whim of the other party; thirdly, be reasonable, that is, that the course of dealing is such
that reasonable men would adopt it in the circumstances of the case; and, finally, be such as is
not contrary to legislation or to some fundamental principle of law”.
True it is that trade usage may be proved by calling witnesses to show that it exists as a fact and
is well known and has been acted on generally by persons affected by it. But it cannot be a trade
usage if it is, amongst other limiting factors, contrary to legislation. Mr Fraser vehemently
argued that there was no relevance in the legislative provision under section 105 of the Insurance
Companies Act because the disputed sum was not deducted for payment of premium. The
section however is not limited to deductions for premium payments only but also to “debts due to
the insurer under any other policy”. Kenindia chooses to remain mysterious about the nature of
the deduction made, but for whatever reason Kenindia deducted Alpha Knits’ claim money, it
required express authority under the Act and “trade usage” cannot, in this case, absolve them.
Lastly, Mr Fraser argued that there was a triable issue on the interest awarded at 25% per annum.
In his submissions no interest was payable at all. The question of interest of course lies in the
authority.
Page | 581
INSURANCE LAW CASES
discretion of the Court under section 26(1) of the Civil Procedure Act (Chapter 21). With the
finding that Alpha Knits was unlawfully deprived of the sum of money which was converted to
the use of another person, I see no unreasonableness in awarding interest as pleaded at the rate of
25% per annum. I would not disturb the award by the learned Judge of the superior court.
(Tunoi JA concurred in the judgments of Kwach and Waki JJA.)
CORPORATE INSURANCE CO LTD V WACHIRA [1995–1998] 1 EA 20 (CAK)
Judgment
GICHERU, KWACH AND SHAH JJA: Geoffrey Wachira Mahinda was the original plaintiff
(the plaintiff) in this case. After his death during the pendency
Page 22 of [1995–1998] 1 EA 20 (CAK)
of the suit in the superior court, he was substituted by his wife Loise Wanjiru Wachira (the
respondent) as his legal representative.
The plaintiff was the owner of a motor vehicle registration number KVF 090 (The vehicle) in
respect of which there was a comprehensive insurance policy issued by Corporate Insurance
Company Limited (the appellant) on 25 January 1986. Under this policy, the appellant agreed to
indemnify the plaintiff against loss of or damage to the vehicle and injury to third parties. On 25
December 1987, the plaintiff instructed his son to take the vehicle to a garage at Kiawara, in
Nyeri, owned by Julius Ndegwa Gathuku, so that the exhaust which was said to be leaking, could
be repaired. Gathuku assigned his apprentice welder, one Wilson Kinyua to carry out the
necessary repairs. Without the knowledge, consent or authority of Gathuku, and apparently
against his express instructions barring Kinyua from driving customers’ vehicles, Kinyua took
the vehicle out of the workshop on a road test and crashed into an electric power pylon causing
extensive damage to the vehicle. Kinyua was charged with and convicted of careless driving and
driving a motor vehicle without a driving licence. The plaintiff submitted a claim to be
authority.
Page | 582
INSURANCE LAW CASES
indemnified for the loss and damage arising from the accident but this was rejected by the
appellant which disclaimed liability.
Notwithstanding the fact that the insurance policy contained a clause stipulating that all disputes
arising had to be referred to arbitration, and before any such reference was made, the plaintiff
filed a suit against the appellant claiming damages for alleged breach of contract. The reliefs
sought in the plaint included a sum of KShs 124 938 made up of KShs 64 938 (being repair
charges) and KShs 60 000 in respect of loss of user at the rate of KShs 1 000 per day. There was
also a claim for general damages.
The appellant entered appearance and also filed a defence denying liability on the grounds:
(a) that at the time of the accident the vehicle was being driven by an unauthorised driver in
breach of the policy;
(b) that the suit was premature and incompetent because of a clause in the policy referring all
disputes to arbitration before going to court; and
(c) that the appellant had repudiated the claim.
This defence was filed on 22 April 1998. At the commencement of the trial on 12 August 1992,
counsel for the appellant raised a preliminary objection and asked for the suit to be struck out on
the ground that it had been prematurely brought without the dispute first being referred to
arbitration as stipulated by clause 10 of the policy. The Judge overruled the objection because he
found as a fact that the appellant had not complied with the mandatory provisions of section 6 of
the Arbitration Act (Chapter 49). The appellant after filing an appearance delivered a defence
and made no application to stay. The Judge gave judgment for the plaintiff for KShs 124 938
because he held that although Kinyua was not an authorised driver within the meaning of section
1 of the policy, in the circumstances in which the accident happened, the claim fell under section
IV of the policy where the damage occurs while the motor vehicle is in the custody of a motor
trader for the purposes of being repaired.
authority.
Page | 583
INSURANCE LAW CASES
The Judge did not stop there. He went further and awarded the plaintiff a sum of KShs 1 080 000
in general damages which he referred to as direct consequential loss which had resulted from the
appellant’s failure to expedite payment of the repair charges within a reasonable period. This
amount was
Page 23 of [1995–1998] 1 EA 20 (CAK)
arrived at on the basis that because of the delay in settling the claim, the plaintiff’s suit-making
business, from which he made KShs 12 000 per day, ground to a halt for 90 days for lack of
transport.
Evidence was given that the plaintiff used to sell six suits a day at KShs 2 000 apiece and that he
needed transport to make deliveries to his customers.
The memorandum of appeal contains 14 grounds of appeal but looking at them closely the
appellant’s complaints relate to:
(1) the sum of KShs 1 080 000 awarded as general damages for loss of business;
(2) KShs 60 000 for loss of user for 60 days and KShs 64 938 in respect of repair charges;
(3) the Judge’s rejection of the appellant’s defence based on the arbitration clause.
We deal first with the complaint relating to the arbitration clause. Clause 10 of the policy
provided that all differences were to be referred to arbitration and that the making of an award
was to be a condition precedent to any right of action against the company. As we have already
said, the appellant filed its defence on 22 April 1988, the same day that it also entered
appearance. The appellant made no application for stay of proceedings but when the case came
up for hearing on 12 August 1992, more than four years later, the appellant’s advocate raised the
arbitration issue in the form of a preliminary objection which the Judge overruled.
Section 6(1)(a) of the Arbitration Act (Chapter 49) (the Act) provides that
“6 (1) If a party to an arbitration agreement or a person claiming through or

under him, commences any legal proceedings in any court against any other party to the
authority.
Page | 584
INSURANCE LAW CASES
agreement, or against a person claiming through or under him, in respect of a matter agreed to be
referred –
(a) Any party to those proceedings may at any time after appearance, and before
delivering any pleadings or taking any other steps in the proceedings, apply to that court to stay
the proceedings”.
In the present case the appellant did mote than just enter an appearance. It delivered a defence,
which is of course a pleading, raising clause 10 of the policy as a defence. The appellant made no
application for stay of proceedings. The appellant was a party to an arbitration agreement within
the meaning of section 6 of the Act but Mr Muthoga’s submission before us was that because of
the nature of the clause, the appellant was not bound to apply for a stay of proceedings but could
raise it as a defence to the claim. Arbitration clauses such as clause 10 in the policy are known as
Scott v Avery arbitration clauses named after a leading case decided by the House of Lords in
England way back in 1856 in which their efficacy was considered and have long been accepted
as valid. These clauses do more than provide that disputes shall be referred to arbitration. They
also stipulate that the award of an arbitration is to be a condition precedent to the enforcement of
any rights under the contract; so that a party has no clause of action in respect of a claim falling
within the clause, unless and until a favourable award has been obtained.
While we agree with the proposition that a Scott v Avery arbitration clause can provide a defence
to a claim, we cannot accept the submission that the party relying on it can circumvent the
statutory requirement to apply for a stay of proceedings. In the present case, if the appellant
wished to take the benefit of the clause, it was obliged to apply to a stay after entering
appearance and before
Page 24 of [1995–1998] 1 EA 20 (CAK)
delivering any pleading. By filing a defence the appellant lost its fight to rely on the clause.
The procedure in England in relation to these clauses is summarised at 165 in the Law and
Practice of Commercial Arbitration in England by Mustill and Boyd (2 ed) as follows:
authority.
Page | 585
INSURANCE LAW CASES
“A Scott v Avery clause performs two different functions. First, it creates an obligation to
arbitrate: and as such, it gives the defendant in a High Court action the right to apply for a stay of
the proceedings, second, it creates a condition precedent to the plaintiff’s right of action; and as
such, it gives the defendant a substantive defence to the claim. A defendant sued in a breach of a
Scott v Avery provision thus has a choice of remedies. In law, he is entitles to bide his time and
rely on the Scott v Avery point at the trial. But the court does not approve of this procedure,
because, because it wastes the costs of the action. The right is for him to apply for a stay”
(underling ours).
That is what the appellant should have don and that is what this Court said should be done in the
case of Kenindia Assurance Co Ltd v Muturi [1993] LLR 2833 (CAK). In our view, therefore,
the Judge was right to reject the appellant’s preliminary objection. This ground of appeal
accordingly fails.
We now deal with the awards made in respect of repair charges and loss of user. The award of
KShs 60 000 for loss of user was quite plainly erroneous as there was no provision in the policy
for this kind of loss and secondly, because the appellant was not the tort-feasor or the employer
of the person who actually caused the damage to the plaintiff’s vehicle. If the plaintiff had sued
the owner of the garage he would have been entitled to an amount for loss of user. Insurance
claims arising from damage or loss are of such a nature that they take quite a bit of time to
investigate and to attempt to impose a time limit within which they must be settled would not
only be unreasonable, but would also impose an intolerable burden on insurance companies. This
ground of appeal accordingly succeeds and we set aside the award of KShs 60 000 made in
respect of loss of user.
We now consider the sum of KShs 64 938 in respect of repair charges. To determine the
propriety or otherwise of this award we have to interpret the relevant clauses in the policy.
Clause 1 in section 1 of the policy provides:
“(1) The Company will indemnify the insured against loss of damage to the motor
vehicle and its accessories and spare parts whilst thereon. The liability of the company shall not
authority.
Page | 586
INSURANCE LAW CASES
exceed the value of the parts lost or damaged and the reasonable cost of fitting such parts it being
understood that the company’s liability shall be limited to the reasonable market value of the
motor vehicle at the time of the loss or damage but not exceeding the insured’s estimate of value
stated in the schedule”.
Exceptions to section 1 provide, inter alia, that the company shall not be liable to pay for
consequential loss. Under General Exceptions it is provided that the company shall not be liable
in respect of any accident loss damage or liability caused sustained or incurred whilst on the
insured’s order or with his permission or to his knowledge any motor vehicle in respect of which
indemnity is provided by the policy is being driven by any person other than the authorised
driver or is for the purpose of being driven by him in the charge of such person.
Page 25 of [1995–1998] 1 EA 20 (CAK)
“Authorised driver” is defined as the insured or any person driving on his order or with his
permission and is a holder of a valid driving licence.
As the accident occurred while the motor vehicle was in the custody of a motor trader, the
appellant’s liability for the repair charges has to be determined under Section IV of the policy
which so far as material states:
“Notwithstanding General Exception 1(b) the indemnity provided by this policy shall be
operative but only so far as it relates to the insured whilst the motor vehicle is in the custody or
control of a member of the motor trade for the purpose of overhaul upkeep or repair”.
General Exception 1(b) provides that the company shall not be liable in respect of any accident.
Loss, damage or liability caused or incurred, whilst on the insured’s order or with his permission
or to his knowledge the motor vehicle, is being driven by any person other than the authorised
driver. Although the motor vehicle was in the custody and control of a motor trader for the
purpose of repair, the appellant cannot be held liable because Kinyua was not an authorised
driver. Julius Ndegwa Gathuku (the motor trader) who was the employer of Kinyua and who
would have been responsible for his actions disowned him. He was called as a witness by the
plaintiff and he gave evidence in support of the plaintiff’s claim against the appellant. Ndegwa
authority.
Page | 587
INSURANCE LAW CASES
testified that Kinyua was not authorised to drive customers’ motor vehicles but Kinyua’s
evidence was that he was driving the motor vehicle on test after repairs. In the final analysis,
since Kinyua was not an authorised driver, that risk was not covered by the policy. Accordingly,
we allow this ground of appeal and set aside the award made by the Judge in respect of repair
charges.
The award of KShs 1 080 000, general damages, for loss of business cannot stand for two
reasons. First, it is compensation for consequential loss which is expressly excluded under the
terms of policy. Secondly, the claim is in fact one for special damages and it was neither pleaded
not strictly proved as required by law.
For all these reasons, we would allow this appeal, set aside the judgment and decree of the High
Court and substitute therefore an order dismissing the plaintiff’s suit with no order as costs. In
view of the fact that the original plaintiff is now deal, we make no order for costs in the appeal as
well.
PORTAVON CINEMA CO LTD V PRICE AND CENTURY INSURANCE CO LTD

[1939] 4 ALL ER 601
BRANSON J. This action raises a number of interesting points, and arises in the following
circumstances. The plaintiffs are the Portavon Cinema Co Ltd, and the first defendant is a
leading Lloyd’s underwriter of a policy under which the underwriters insured the Portavon
Cinema Co Ltd, against loss by fire in respect of certain interests to which I shall have to refer in
more detail hereafter. The second defendants are the Century Insurance Co Ltd, Messrs
Woodward, who were the lessors of the Empire Cinema in Talbot Road, Port Talbot,
Glamorganshire, leased it to the Portavon Cinema Co Ltd, and, in circumstances which I shall
have to consider, took out a policy insuring it against fire with the Century Insurance Co Ltd.
The Empire Cinema was burnt while both of those policies subsisted in relation to it, and the
authority.
Page | 588
INSURANCE LAW CASES
plaintiffs sued Lloyd’s underwriters upon their policy, claiming to be indemnified against the
loss which they had sustained, they being under contract to reinstate the cinema if it was burnt.
Lloyd’s underwriters have raised a number of defences, and I think that it would conduce to
clarity if I dealt with the facts of the case first, and called attention to the defences when I have
ascertained the facts. There is very little dispute about the facts, which are as follows. In 1937,
by a lease dated 4 May, Woodward Theatres Ltd, leased to the Portavon Cinema Co Ltd, certain
cinemas, including the Empire Cinema in Port Talbot, the one in question. Under that lease, the
Portavon Cinema Co Ltd, agreed that they would insure the premises
Page 603 of [1939] 4 All ER 601
against fire, and they agreed that, if the premises were burned, they would reinstate them. I do
not think that it is necessary to go in detail into the language of that clause.
The lessors, Messrs Woodward, were minded to raise a loan upon those premises from a
company named the Friends’ Provident and Century Life Office, and that company had a
subsidiary called the Century Insurance Co Ltd. The Friends’ Office (as I shall call it for short)
were willing to lend the money, but only upon the term that the buildings should be insured
against fire with their subsidiary office, the Century Insurance Co Ltd. For one year, that
insurance was taken out by the Portavon Cinema Co Ltd, and all was well. When the next year
was approaching, whether because the negotiations for the loan had not materialised, or whether
for some other reason I do not think it is material to discuss, the Portavon Cinema Co Ltd,
declined to continue their insurance with the Century Insurance Co Ltd, and, instead of
continuing that insurance, they placed an insurance with Lloyd’s, which is the insurance upon
which the Portavon Cinema Co Ltd, are now suing their underwriters.
When that became known to the Friends’ Office and to the Century Insurance Co Ltd, those
bodies immediately objected, and took up the position that, unless the insurance of those
premises was given to the Century Insurance Co Ltd, they would decline to go on with the
negotiations for the loan to Messrs Woodward. Thereupon Mr Wehrle, Messrs Woodward’s
solicitor, took out policies with the Century Insurance Co Ltd, and endeavoured to get an
authority.
Page | 589
INSURANCE LAW CASES
agreement with Mr Ewan Davies, the solicitor and managing director of the plaintiffs, that the
plaintiffs would cancel their policy with Lloyd’s and hand over the premiums that they would
have paid under the Lloyd’s policies, and in return get an interest under the policy with the
Century Insurance Co Ltd. However, no such agreement was ever reached. Mr Ewan Davies
objected, and, for reasons best known to himself, refused to have any thing to do with the policy
which had been taken out with the Century Insurance Co Ltd, which remained a policy taken out
by Mr Wehrle, acting for Messrs Woodward, for the sole reason, as appears quite clearly from
the documents in the case, that, without such a policy, Messrs Woodward could not get the loan
which they wanted to get from the Friends’ Office. I think that there is no escape from that
conclusion on the facts, and, if that is borne in mind, I think that it will help to clarify the legal
position when I come to deal with it.
So much for the facts of the case. The result was that, when, on 12 April 1938, the Empire
Cinema was burnt, there were in existence these two policies—namely, the Century policy
insuring Messrs Woodward, and the Lloyd’s policy insuring the Portavon Cinema Co Ltd. In
those circumstances, the Portavon Cinema Co Ltd, claim against Lloyd’s payment of the amount
of the loss which they have suffered. There is no question about figures, and I need not go into
that matter.
Page 604 of [1939] 4 All ER 601
Lloyd’s then took, as I have said, a number of points in defence to that claim. I think that, in
principle, it all comes to the same thing. They say that the effect of the taking out of the policy
with the Century Insurance Co Ltd, by Messrs Woodward has been to call into operation cl 4 of
the general conditions of the Lloyd’s policy. That condition reads as follows:
‘This insurance does not cover any loss or damage or liability which at the time of the happening
of such loss or damage or liability is insured by or would, but for the existence of this policy, be
insured by any other policy or policies except in respect of any excess beyond the amount which
would have been payable under such policy or policies had this insurance not been effected.’
authority.
Page | 590
INSURANCE LAW CASES
Lloyd’s say that the Century policy is an insurance insuring the loss or damage or liability
insured by their policy, and, therefore, in effect, that it is a case of double insurance, and comes
under cl 4.
I think it is necessary in the first place to say what, in my view, is the meaning of cl 4. I do not
think that there is any real dispute as to that. If one looks at the language used, without putting
any restriction upon the wideness of it, it may be urged that the existence of any other insurance
of any other type covering the particular loss or liability, though taken out by a stranger, and
without the knowledge of the assured in question, would operate to bring that clause into effect. I
think it is quite clear upon the authorities, however, that that cannot be said, and, indeed, counsel
for the first defendant does not contend for any such construction in the present case. I think that
the meaning is fairly dealt with in the passages which were cited from Macgillivray on Insurance
(2nd Edn), p 874, by counsel for the second defendants:
‘The clauses, designed to effect these objects appear in many different forms and with many
variations in detail, but in construing them it is always important to remember that they are
aimed primarily at double insurance, that is, at cases where the assured has made contracts with
other insurers upon the same property and the same interest and against the same risk, and unless
a condition contains words which compel a different construction it ought only to be applied to
cases which are strictly cases of double insurance.’
I turn then to see whether there can be said to be any case of double insurance in the present
instance. The first way in which it is contended that a double insurance was created is this. It is
said that the taking out of the insurance with the Century Insurance Co Ltd, by Messrs
Woodward raises an equity in favour of the Portavon Cinema Co Ltd and that, therefore, the
Portavon Cinema Co Ltd having their own insurance with Lloyd’s, and an equitable interest
under the Century policy, there is a double insurance created. The first case which was cited for
that proposition is Waters v Monarch Life Assurance Co. The case was tried before Lord
Campbell CJ and a verdict was found for the plaintiffs, subject to the opinion of the court upon a
case stated. The facts were quite shortly these. The plaintiffs had taken out a policy of insurance
authority.
Page | 591
INSURANCE LAW CASES
with the defendants against fire, and that policy was, amongst other things, on goods in the
plaintiffs’ warehouse and on goods on trust or commission therein. The defendants had
Page 605 of [1939] 4 All ER 601
covenanted to make good any damage by fire to the property insured. The property was property
in which the plaintiffs had an interest and also in which their customers had an interest, the
customers being the owners of the property which the plaintiffs had in their warehouse. The
question which was put before the court was whether, in the circumstances above stated, the
plaintiffs were entitled to recover, and, if they were, what sum or sums, the plaintiffs suing the
insurance company upon the policy. Upon that case, and in answer to that question, the court
found that the plaintiffs were entitled to recover for the value of the goods, and, in giving
judgment, Lord Campbell CJ having dealt with the question as to whether or not the plaintiffs
were entitled to judgment for the amount claimed, said, at p 881:
‘They will be entitled to apply so much to cover their own interest, and will be trustees for the
owners as to the rest.’
That passage is seized upon by counsel for the first defendant as authority for the proposition
that, in any case of that kind, where a person takes out an insurance upon goods which are not
solely his own, a trust is created in favour of the owners of the goods in respect of their interest,
whatever it may be, in them, subject to the interest of the person who has taken out the insurance.
The first comment I have to make upon that case is that that remark of Lord Campbell CJ had
nothing to do with anything which had been argued before the court or raised in the case before
the court. Secondly, Wightman and Crompton JJ, who were the other members of the court, said
nothing whatever in their judgments about there being any equity at all. Wightman J said that
there were two questions, the first being whether the goods destroyed were covered at all by the
policies and proceeded to deal with that question. Then he said, at p 882:
‘Can the plaintiffs recover their value? It seems to me that they may, unless there be something
making it illegal to insure more than the plaintiffs’ own interest.’
authority.
Page | 592
INSURANCE LAW CASES
It was upon that ground that he decided that the plaintiffs were entitled to recover the whole
value. Crompton J gave judgment upon the same lines. He said that they were persons interested
in every particle of the goods, both in respect of their lien and in respect of their responsibility to
their bailors, and that they were entitled to recover the judgment for which they asked, that is, for
the whole of the value.
That really is the only authority which it is suggested shows that there is any equitable right
raised in a case of this kind merely by the fact that one person takes out an insurance upon
buildings in which not only he himself but also somebody else is interested. In my view, no such
equity arises in this case. That is particularly due to the finding which I have already made in
relation to the facts of the case—namely, that this was not a case in which Messrs Woodward or
Mr Wehrle were taking out this insurance with any intention of giving a present interest in it to
the plaintiffs, the Portavon Cinema Co Ltd. The utmost that
Page 606 of [1939] 4 All ER 601
can be said is that, when Mr Wehrle took out this insurance, he probably hoped to be able to
make some arrangement with Mr Ewan Davies under which Mr Ewan Davies’ company—the
Portavon Cinema Co Ltd—would take over the insurance, provided that Messrs Woodward
would pay any excess in the amount of the premium over and above that at which the plaintiffs
had been able to secure the Lloyd’s policy. The mere taking out of a policy cannot possibly give
an equity to somebody else. An intention is necessary, and I am satisfied that, when this policy
was taken out, there was no such intention in the minds of Mr Wehrle or Messrs Woodward.
Then it is said that, supposing that that is not the case, yet there was a declaration of trust when
the Century Insurance Co Ltd, at the request of Mr Wehrle, indorsed a memorandum upon the
Century policy. Mr Wehrle has not been called, and one can only guess at what his intentions in
the matter were, but in April 1938 Mr Atkinson, the solicitor for the Century Insurance Co Ltd,
wrote a letter to the Century Insurance Co Ltd, telling them to put this memorandum upon the
policy:
authority.
Page | 593
INSURANCE LAW CASES
‘The loan by the office to Woodward Theatres, Ltd., was made yesterday. I received at
completion the four policies mentioned in the list. … Will you please have each of them indorsed
with a memorandum showing that the office is interested as mortgagee and the Portavon Cinema
Co., Ltd., of 10, Windsor Place, Cardiff, is also interested as lessee, and return them to me.’
That was done. It is said that that was a declaration of trust made by Messrs Woodward (who,
after all, were the people in whose favour the policy with the Century Insurance Co Ltd had been
issued) in favour of the Portavon Cinema Co Ltd. I cannot see that there is really any excuse for
saying so. The declaration is not made by Messrs Woodward. It is not made by Messrs
Woodward’s solicitor. It is made by the solicitor to the Century Insurance Co Ltd. How he came
to make the suggestion has not been investigated, because none of these gentlemen has been
called before me, and I decline to draw inferences of that kind, in the absence of proof, from the
mere fact that a letter is written by Mr Atkinson giving that instruction to the company whose
solicitor he was.
Then counsel for the first defendant says that, if there is not a declaration of trust, then I am to
infer that the Century policy was taken out by the authority of the Portavon Cinema Co Ltd. I
think that the answer to that is again to be found in the documents. I need not refer to them, but
the letters of Mr Ewan Davies make it clear beyond peradventure that, so far from authorising
anybody to take out policies with the Century Insurance Co Ltd, when those policies were being
taken out, he was saying that he would have nothing whatever to do with them, though he did say
that, with regard to future years, he would be prepared to invite his company to do what they
could to make things easy for Messrs Woodward in respect of the loan that Messrs Woodward
required to get. That, again, is a pure question of fact, and, as I say,
Page 607 of [1939] 4 All ER 601
I see no evidence to support the suggestion of authority from the Portavon Cinema Co Ltd, to
anybody to take out this policy with the Century Insurance Co Ltd.
The next point is this. It is said that, supposing that the court comes to the conclusion that there
was no authority, yet there was ratification. The answer to that is quite a short answer, and is to
authority.
Page | 594
INSURANCE LAW CASES
be found in Grover & Grover Ltd v Mathews. In that case, Hamilton J, saying that he was bound
by a decision in the Court of Appeal, came to the conclusion that one could not ratify a fire
policy which had been taken out after the loss had arisen, and said, at p 404:
‘… it appears to me that the judgments in Williams v. North China Insurance Co., which is a
decision of the Court of Appeal, compel me to say that it was too late for ratification; because, as
it appears to me, the Court of Appeal in Williams v. North China Insurance Co. recognised that a
rule which would permit a principal to ratify an insurance even after the loss was known to him
was an anomalous rule which it was not, for business reasons, desirable to extend, and which,
according to the authorities, had existed only in connection with marine insurance. No case has
been cited to me which suggests that this anomalous rule ought to be extended to fire insurance.’
Counsel for the first defendant urges me, with what I might perhaps describe as vicarious
courage, to refuse to follow that decision and hold that the rule should be extended. However, I
have not the boldness of youth, and I decline to differ from Hamilton J.
That leaves two ways in which the matter is attempted to be dealt with. Perhaps it is one way,
and the objection to it under the Act of 1774. It is said that the Fires Prevention (Metropolis) Act
1774, s 83, enacting, as it does, that any person interested in, or entitled to, any house or houses
or other buildings which may thereafter be burned down or damaged, and so on, by fire, may
give notice to the governors or directors of the several insurance offices for insuring houses or
other buildings against loss by fire, calling upon them to expend the insurance moneys upon
reinstating the premises burnt down, has the effect of giving anybody entitled to any interest in a
building upon which an insurance has been effected by somebody else an insurance upon that
building. In my view, that is a misinterpretation of the statute. There is all the difference in the
world between giving A, who is interested in the premises upon which B has taken out a policy,
a right to call upon B’s insurers to expend those policy moneys upon the property, and saying
that the statute has invested A with an insurance upon those properties. One is a statutory right
and the other is a right arising ex contractu, and I think that it is quite wrong to say that the effect
of the Fires Prevention (Metropolis) Act 1774, s 83, is to make anybody an insured. What it does
authority.
Page | 595
INSURANCE LAW CASES
do is to give him, though not an insured, a statutory right to direct people who have to pay
moneys to an insured in respect of premises to expend those moneys in a particular way.
That makes it unnecessary to deal with the other question which is raised—namely, whether or
not Lloyd’s underwriters fall within the description “governors or directors of the several
insurance offices for
Page 608 of [1939] 4 All ER 601
insuring houses or other buildings against loss by fire,” which is the description of persons who
can be called upon to spend the money in reinstatement of places burnt under that section. It is
suggested, first of all, that the words might apply to the corporation of Lloyd’s. The answer to
that is that the corporation of Lloyd’s do not insure anybody against anything. It is the
underwriters who undertake the burden of insurances.
Then it is said that, when one finds a certain group of underwriters continually acting as a body,
allowing their names to be written by a particular individual, that might be such an association of
persons as to fall within the language of the Act. Again, I disagree. If one thing is plain with
regard to underwriting by members of Lloyd’s, it is that each member makes a contract for
himself for the amount of his liability, the contract being an independent contract of his own, and
he is in no way interested in the other contracts undertaken at the same time by other members
who underwrite the same policy. No authority is needed for that which, by now, one would have
thought was known to everybody who had to deal with Lloyd’s policies and the liabilities of
underwriters under them. Thus, that endeavour to bring about a double insurance in this case also
fails.
That leaves only one point to be dealt with on the question of law. It is said by counsel for the
second defendants that, even supposing that there were a declaration of trust, and supposing that,
by means of the Fires Prevention (Metropolis) Act 1774, some insurance right was created for
the Portavon Cinema Co Ltd, still there is no double insurance, because, if any such right were
created, the Portavon Cinema Co Ltd, not having its name put in the Century policy, that policy
is an unlawful policy under the Life Assurance Act 1774, s 2, except perhaps that insurances
authority.
Page | 596
INSURANCE LAW CASES
bona fide made by any person or persons on ships, goods or merchandise are excluded from the
operation of the Act by s 4 thereof. As I say, it is not material to decide that point, because I have
already decided that, in my view, no double insurance has been created, and, therefore, it was
quite right in the Century policy not to put in the name of the Portavon Cinema Co Ltd.
For those reasons, I have come to the conclusion that the defence of Lloyd’s underwriters fails in
general.
Judgment for the plaintiffs against the first defendant for a sum to be agreed between the parties.
Costs of plaintiffs and second defendants to be paid by first defendant.
LEGAL AND GENERAL ASSURANCE SOCIETY LTD V DRAKE INSURANCE CO

LTD [1992] 1 ALL ER 283
Appeal
LLOYD LJ. In this case we are concerned with the right of contribution between co-insurers.
The principles on which one insurer is entitled to recover from another in a case of double
insurance have been settled since Lord Mansfield’s day. Yet the particular problem which has
arisen in the present case seems never to have been considered save for a decision in the Mayor’s
and City of London Court (see Monksfield v Vehicle and General Insurance Co Ltd [1971] 1
Lloyd’s Rep 139). The question is whether that case was correctly decided.
The problem can be stated very simply on assumed facts. Suppose there are two insurances in the
same interest on the same subject matter, each policy covering the same risks, so that each would
be liable to the assured for the whole of the loss which has occurred. The conditions giving rise
to a claim for
Page 286 of [1992] 1 All ER 283
authority.
Page | 597
INSURANCE LAW CASES
contribution are thus satisfied. If the assured recovers 100% from insurer A, insurer A can
recover 50% from insurer B. Why? Not, clearly, because there is any contract between them,
whether express or implied. There is no such contract. The insurers may be complete strangers.
Each may have entered into the insurance in ignorance of the other. No: the right of contribution
is based not in contract, but on what has been said to be the plainest equity, that burdens should
be shared equally. Qui commodum sentit sentire debet et onus. For well over two centuries the
right of contribution has been enforced, and the same principles applied, not only between co-
insurers, but also between co-obligors in various other branches of the law, notably in the case of
co-sureties (see Eyre CB’s judgment in Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318,
[1775–1802] All ER Rep 140).
Now suppose that each of the policies contains provision that claims must be notified within 14
days. Since the assured is entitled to go against A for the whole of his loss, he gives notice of
claim to A within 14 days, and in due course recovers. No commercial purpose is served by the
assured giving notice to B, since he does not intend to claim against B. Does the failure of the
assured to give notice to B within 14 days deprive A of his right of contribution?
My answer to that question is No. Since the assured could have gone against B, had he chosen to
do so, in which case B would have been liable for the whole of the loss, the burden as between A
and B should be shared equally. It would be inequitable for either of the insurers to receive the
benefit of the premium without being liable for their share of the loss.
Mr Woods for the defendants argues that A’s right to claim contribution does not arise until he
has paid more than his share. Since, by that date, 14 days would almost certainly have elapsed, B
would no longer be liable to the assured, and would not therefore be obliged to contribute. I do
not accept this argument. Obviously, A cannot enforce his equity until he has paid more than his
share. But this does not mean that the conditions for the existence of the equity are determined at
the same date. Since the existence of the equity depends on the ability of the assured to claim
against either A or B at his choice, the obvious date at which to determine whether the conditions
are satisfied is the date when the assured is assumed to exercise his choice, namely the date of
the loss. Thus, if A were to settle the claim in full on the day after the loss, he would clearly have
authority.
Page | 598
INSURANCE LAW CASES
an immediate right of contribution against B. I do not see how he could lose that right, because
of the failure of the assured to give notice to B within 14 days, when ex hypothesi the assured
could have no reason for giving such notice. Nor could A be obliged to give notice within 14
days himself in order to preserve his equity, since he might well be ignorant of the existence of
the other insurance, let alone its terms.
A more difficult question arises, at any rate in theory, when the giving of notice is a condition
precedent to liability. In such a case B is not liable to indemnify the assured until after he has
been given notice. So it could be argued that A cannot claim contribution, since B has never been
liable to the assured.
The answer to this difficulty lies in a correct appreciation of the conditions which have to be
satisfied for a claim in contribution. It is said that B must be ‘liable’ to the assured. Obviously
this cannot mean held liable. Nor does it mean presently liable. It is enough that B is potentially
liable. In other words it is enough if the assured could have made B liable, instead of A, by
giving notice in time, and taking whatever other steps might be required to enforce his claim.
But, when I say potentially liable, there is a sharp distinction between steps required to enforce a
valid claim under a policy in force at the time of the loss,
Page 287 of [1992] 1 All ER 283
and a claim which never was valid, and never could be enforced. Thus if B has a good defence to
the assured’s claim on the basis of misrepresentation or non-disclosure, there is no double
insurance. Since the effect of the defence is that the contract is avoided ab initio, it is as if B had
never been on risk at all. So also where the assured is in breach of condition, or has repudiated
the contract, prior to the loss, even if (though this is not so clear) the repudiation is only accepted
thereafter. It may be said that the distinction between breach of condition prior to the loss and
breach of condition subsequent to the loss is a narrow one. So it may be. But the difference is
crucial. For it is at the date of the loss that the co-insurer’s right to contribution, if any, accrues.
It is often said that, though the right to contribution is founded in equity, yet it may be varied or
excluded by contract. As long ago as 1641, in Swain v Wall 1 Rep Ch 149, 21 ER 534, it was
authority.
Page | 599
INSURANCE LAW CASES
held that the right of contribution could be modified by contract between the co-obligors. But it
can also be modified or excluded by contract between the assured and the insurer, in this sense,
that the policy may limit the amount of the insurers’ liability, or may provide, typically, that the
insurer should not be liable beyond his rateable proportion of the loss. But a provision requiring
the assured to give notice of claim does not, in my opinion, modify or exclude the equitable right
to contribution in the same sense.
Finally Mr Woods argued that it is unfair that B, who has stipulated for liability on certain terms,
should find himself deprived, as it were, of his accrued defence, by being made liable, maybe
years after the event, to a co-insurer of whom he has never heard. I see the force of that
argument. I can see too that the defendant insurers will lose the opportunity of investigating the
claim themselves, and of discovering, perhaps, an unforeseen defence. But these unfairnesses to
B must be balanced against the unfairness in making A liable for the whole loss, when the
assured might as easily have claimed, and recovered, against B instead. To my mind the balance
of equity comes down clearly in favour of enforcing the right to contribution. On the facts
assumed, I would hold that A can recover 50% contribution from B, even though the failure of
the assured to give notice to B is characterised by the policy as a breach of condition precedent.
I now turn to the authorities. I start with Weddell v Road Transport and General Insurance Co
Ltd [1932] 2 KB 563, [1931] All ER Rep 609. The claimant was driving his brother’s car when
he was involved in an accident. The injured third party brought proceedings against him. The
claimant failed to report the accident to his own insurers, Cornhill Insurance Co Ltd, within three
days as required. So Cornhill repudiated liability. But the claimant then sought to recover under
his brother’s policy, issued by the respondents, Road Transport and General Insurance Co Ltd.
The respondents’ policy contained a rateable proportion clause as follows:
‘If at any time any claim arises under this policy there is any other existing insurance covering
the same loss, damage or liability the company shall not be liable … to pay or contribute more
than its rateable proportion of any loss, damage, compensation, costs or expense.’
The respondents repudiated liability. The dispute went to arbitration. The arbitrator held that the
claimant could recover. But his recovery was limited to 50% of his loss by reason of the rateable
authority.
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proportion clause. There was ‘another existing insurance’ covering the same loss. The claimant
appealed. One of the arguments advanced on his behalf was that the Cornhill policy was not an
‘existing insurance’ within the meaning of the rateable proportion clause, since the claimant
could no longer succeed against Cornhill. He had failed to give notice of the
Page 288 of [1992] 1 All ER 283
accident in time. The argument was rejected as being, in the words of Rowlatt J ([1932] 2 KB
563 at 566, [1931] All ER Rep 609 at 611)—
‘too obviously unsound to require further notice. The position is to be regarded as at before the
time for giving the notice expired.’
In Weddell’s case the decision turned on the language of the rateable proportion clause. But what
is a rateable proportion clause other than an attempt by insurers to exclude the equitable doctrine
of contribution by a contractual provision intended to achieve the same effect? I find in
Rowlatt J’s observations strong support for the view that one looks at the position, not when A
seeks to enforce his right of contribution, but when the ‘loss’ occurred. The relevant date of loss
may vary between different types of insurance. But in general it will be when the assured’s claim
first arises.
Another case often cited in the present context is Austin v Zurich General Accident and Liability
Insurance Co Ltd [1945] 1 All ER 316, [1945] KB 250. The facts were broadly similar. The
plaintiff was insured by Bell Assurance Association. He was driving the car of a friend when he
was involved in an accident. The friend was killed. The friend’s executrices brought a claim
against the plaintiff, which was settled by Bell. Bell then sought to recover against the friend’s
insurers, Zurich General Accident and Liability Insurance Co Ltd. But instead of bringing
contribution proceedings, Bell brought an action in the name of the plaintiff. Zurich’s policy
required the assured to give immediate notice of any impending prosecution resulting from the
accident. The plaintiff had received a summons for dangerous driving. He failed to give notice to
Zurich. Tucker J rejected the plaintiff’s claim. It was argued on appeal that the plaintiff was not
bound by the terms of Zurich’s policy, of which he was in complete ignorance. It is hardly
authority.
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surprising that counsel for the defendants were not called on. Lord Greene MR stated the obvious
in the first few sentences of his judgment ([1945] 1 All ER 316 at 317, [1945] KB 250 at 253–
254):
‘… the only question that arises in the action is: Has Austin [the plaintiff] the rights which he
claims against the respondents, the Zurich General Accident & Liability Insurance Co., Ltd.? No
doubt he is bringing the action because he has been called upon to do so by his own
underwriters. But that does not alter the fact that the action is his action and the rights to be
ascertained are his rights.’
It seems to me that Austin v Zurich General Accident and Liability Insurance Co Ltd throws no
light whatever on whether a claim for contribution would have succeeded. MacKinnon LJ
observed that the claim had been wrongly framed. It should have been framed as a claim for
contribution and not a claim by way of subrogation. But MacKinnon LJ does not say whether a
claim for contribution would have succeeded or failed. It was pointed out by Mr Woods that if
the plaintiffs in the present case are right then a claim for contribution should have succeeded; it
is therefore all the more surprising, he says, that distinguished counsel failed to take the right
point. But there may have been other reasons why a claim for contribution would have failed. It
is seldom that one can get much help, or sure guidance, from the failure of counsel, however
distinguished, to take the ‘right’ point.
Lastly there is Monksfield v Vehicle and General Insurance Co Ltd [1971] 1 Lloyd’s Rep 139.
Again the facts were similar, except that this time the claim was properly framed as a claim for
contribution. Judge Graham Rogers referred to Weddell’s case and Austin’s case. Not without
doubt he rejected the plaintiff’s claim (at 141):
Page 289 of [1992] 1 All ER 283
‘In my view it cannot be an equitable result that an insurance company which had no notice of an
accident, had no say in the handling of the claim, and for whom, to quote the words of [Lord
Denning MR in Farrell v Federated Employers Insurance Association Ltd [1970] 3 All ER 632 at
636, [1970] 1 WLR 1400 at 1406], there was no opportunity “to investigate the rights or wrongs
authority.
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INSURANCE LAW CASES
of it”, should be called upon to make a contribution in a case in which it would quite clearly have
had the right to repudiate if the claim had been brought under the terms of its own policy. The
defendants are entitled to take advantage of the conditions in their policy and are in my view not
liable for contribution.’
I do not find this reasoning convincing. The fact that a co-obligor has no ‘say in the handling of
the claim’ has never been an answer to a claim for contribution, whether in the field of insurance
or in any of the other fields in which the equitable doctrine prevails. As to the right to repudiate,
this would, as I have said, have been a good defence to a claim for contribution if the assured had
been in breach of condition prior to the loss. The failure to distinguish between breaches of
condition prior to the loss and a breach of condition subsequent to the loss by failing to give
notice in time vitiates, if I may respectfully say so, the learned judge’s conclusion. So I would
hold that Monksfield’s case was wrongly decided.
Should it be overruled? When a case has stood for a long time, and may therefore be assumed to
have been the basis on which commercial men have conducted their business, and settled their
disputes, the courts are always reluctant to upset it. I do not regard Monksfield’s case as coming
within that class. It is mentioned by Professor Ivamy in his General Principles of Insurance Law
(5th edn, 1986) p 492, and in the title Insurance, of which Professor Ivamy was the contributor,
in 25 Halsbury’s Laws (4th edn) para 539. It is not mentioned in MacGillivray and Parkington on
Insurance Law (8th edn, 1988), Goff and Jones Law of Restitution (3rd edn, 1986) or Colinvaux
Law of Insurance (5th edn, 1984). In Colinvaux (6th edn, 1990) p 157 the decision of the deputy
judge below in the present case ([1989] 3 All ER 923), refusing to follow Monkfield’s case, is
described as a sensible result. I agree with that comment.
I conclude that the course of business would not be greatly disturbed if we now overrule
Monksfield’s case. In taking this view, I bear in mind the widespread use of the rateable
proportion clause.
It is time to turn away from assumed facts, and look at the facts as they were. The trial took place
on an agreed statement of facts. On 14 June 1976 Mr Arora was driving his car when he collided
with a pedestrian, causing him serious injury. Mr Arora was insured under two policies, the first
authority.
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INSURANCE LAW CASES
issued by the plaintiffs (Legal and General) covering the period 13 August 1975 to 12 August
1976, and the second issued by the defendants (Drake) covering the month 1 to 30 June 1976.
The reason for the double insurance remains a mystery. On 5 December 1977 the plaintiffs
informed the defendants of the existence of the claim, of which the defendants had hitherto been
ignorant. On 23 December 1982 the plaintiffs reasonably settled the third party’s claim for
£65,000 plus costs. On 31 March 1983 the court approved the compromise. On 14 April 1983 the
plaintiffs paid £65,000 into court, pursuant to order. On 1 June 1984 they commenced these
proceedings.
The Drake policy contains a provision, condition 2, whereby immediate notice of an event which
might give rise to a claim had to be given in writing to the defendants. It further provided, by
condition 1, that due observance should be a condition precedent to the defendants’ liability to
make payment under the
Page 290 of [1992] 1 All ER 283
policy. There were similar provisions in the Legal and General policy. Both policies contained a
rateable proportion clause in the following, or similar, terms:
‘If at the time any claim arises under the Policy there is any other insurance covering the same
loss, damage or liability the Society will not pay or contribute more than its rateable proportion if
the person claiming to be indemnified is the Policyholder nor make any payment or contribution
if the person claiming to be indemnified is not the Policyholder.’
For the reasons which I have given when dealing with the assumed facts, I am satisfied that, but
for the rateable proportion clause, the plaintiffs are entitled to contribution from the defendants.
Thus the learned deputy judge reached the right conclusion on the case as presented before him.
Before us Mr Woods has sought to rely on the rateable proportion clause in the Legal and
General policy. The point was raised for the very first time by amendment to his skeleton
argument. It is very inadequately covered, if covered at all, by his notice of appeal. Nevertheless
Mr Playford QC for the plaintiffs did not object. Since there was ‘another insurance covering the
same loss’ at the time the claim arose, the plaintiffs were not liable for more than 50% of Mr
authority.
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Arora’s claim. The point is precisely covered by the judgment of Rowlatt J in Weddell’s case. Is
it possible for the plaintiffs now to recover the 50% which they need not have paid? Mr Woods
argued that the excess over 50% was a voluntary payment. Since the right of contribution only
arises in equity where an insurer has been obliged under his policy to pay more than his rateable
proportion, the plaintiffs cannot recover the excess from the defendants. The rateable proportion
clause excludes the right of contribution.
I find this new point a difficult one, the more so because of the impact of Pt VI of the Road
Traffic Act 1972, now re-enacted in the Road Traffic Act 1988. It is therefore unfortunate that
the point was not so fully argued as the other points in the case. Under s 149 of the 1972 Act (see
now s 151 of the 1988 Act), a third party who has obtained judgment against an assured in
respect of a liability required to be insured under the Act can enforce the judgment against the
insurer, notwithstanding any provision contained in the policy of insurance, such as the rateable
proportion clause. Assuming that the settlement of the third party’s claim, followed by a court
order approving the settlement, is a ‘judgment’ for the purposes of s 149 of the 1972 Act, it could
be argued that the plaintiffs were compelled to pay the whole of the claim by force of law, in
which case the excess over 50% was not a voluntary payment.
The difficulty with that argument is that the plaintiffs, though obliged to pay the third party the
whole of his claim, were entitled to recover the excess over 50% from Mr Arora himself: see
s 149(4) of the 1972 Act and s 151(7) of the 1988 Act. It follows that, so far as the defendants
are concerned, the excess over 50% was a voluntary payment. I cannot see any answer to that
reasoning. Nor can I see how the plaintiffs could recover from the defendants half the 50%,
which was their net liability to Mr Arora, whether by way of contribution or on any other basis.
Mr Playford argued that the plaintiffs were acting very properly in not seeking to recover the
excess over 50% from Mr Arora, and that it would be an unmerited consequence to deprive them
of their right to contribution. Insurers should not be encouraged to take every legal defence, and
pursue every legal remedy, which may be open to them against their assured. This is a valid
point so far as it goes. But to allow a claim against the defendants based on such considerations
authority.
Page | 605
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would extend the equitable doctrine of contribution beyond any previous authority. I conclude,
somewhat reluctantly, that the new argument must prevail.
Page 291 of [1992] 1 All ER 283
For the sake of completion I should say that the facts of the present case antedate the Civil
Liability (Contribution) Act 1978, even if it would otherwise have been applicable.
To summarise: I would hold that the plaintiffs were entitled to succeed on the case as presented
in the court below. But the defendants are entitled to succeed on their new point. I would allow
the appeal accordingly.
NOURSE LJ. I have had the advantage of reading in draft the judgments of Lloyd and Ralph
Gibson LJJ. On the principal question which arises on this appeal, and putting the rateable
proportion clause on one side for the moment, I agree with Lloyd LJ and the learned deputy
judge that the plaintiffs are entitled to contribution from the defendants. In other circumstances I
would have been content to adopt the reasoning of Lloyd LJ, but the division of opinion in this
court makes it desirable that I should briefly express myself in my own words.
In the simple case where one of two insurers, who are independently and unconditionally liable
to the same assured for the whole of his loss, accepts sole liability for settling the claim, he has
an undoubted right to contribution from the other insurer for half the costs of the settlement.
There being no contract between the two insurers, the right of contribution depends, and can only
depend, on an equity which requires someone who has taken the benefit of a premium to share
the burden of meeting the claim.
Why should that equity be displaced simply because the assured has failed to give the notice
which is necessary to make the other insurer liable to him? At the moment of the accident either
insurer could have been made liable for the whole of the loss. Why should he who accepts sole
liability for settling the claim be deprived of his right to contribution by an omission on the part
of the assured over which he has no control? As between the two insurers the basis of the equity
is unimpaired. He who has received a benefit ought to bear his due proportion of the burden.
authority.
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While accepting that a line must be drawn somewhere, I am of the opinion that a denial of the
right to contribution in circumstances such as these would be unduly restrictive and indeed
inequitable. An attempt to state in general terms where the line ought to be drawn is neither
necessary nor desirable. For present purposes it is enough to say that it ought not to be drawn so
as to exclude the right to contribution in a case where, at the moment of the accident, each
insurer is potentially liable for the whole of the loss.
As to the second question, there is little which I wish to add to the judgment of Lloyd LJ. The
plaintiffs’ right to recover the excess over 50% from Mr Arora himself under s 149(4) of the
Road Traffic Act 1972 (re-enacted in s 151(7) of the Road Traffic Act 1988) seems to be a
conclusive objection to their having a right to contribution against the defendants. I agree that the
appeal must be allowed on that ground.
RALPH GIBSON LJ. For the reasons which follow I would allow this appeal on the ground
argued for the defendants at trial. I am not persuaded that there was any ground in law to impose
upon the defendants in favour of the plaintiffs a liability which the defendants did not agree to
satisfy under the terms of their contract with their assured.
The grounds of decision of the learned deputy judge ([1989] 3 All ER 923) can, I think, be
summarised as follows: (1) he stated the issue as being whether a co-insurer, from whom
contribution is sought, can set up a failure by his assured to comply with the condition precedent
as a defence against its fellow co-insured; (2) he noted the contentions of each of the parties that
the text books and ‘equity’
Page 292 of [1992] 1 All ER 283
supported their opposing cases; and the decision of Judge Graham Rogers in Monksfield v
Vehicle and General Insurance Co Ltd [1971] 1 Lloyd’s Rep 139 was the only case which
unequivocally supported the defendants; (3) he then ‘turned to principle’, cited a passage from
the judgment of Hamilton J in American Surety Co of New York v Wrightson (1910) 103 LT
663 at 667, and held that it supplied the answer to the case ([1989] 3 All ER 923 at 925):
authority.
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‘… the object … is to put people who have commonly guaranteed or commonly insured in the
same position as if the principal creditor or the assured had pursued his remedies rateably among
them instead of doing as he is entitled to do, exhausting them to suit himself against one or other
of them’;
(iv) he held that this case was covered by that statement of principle because the assured, Mr
Arora, at the time of the accident could successfully have sought indemnity from the defendants;
and the defendants cannot be absolved from their liability to contribute by the fact that Mr Arora
chose only to sue the plaintiffs; (v) if the defendants at the time of the accident had already
avoided the policy they would not have been liable to contribute because they would not have
been co-insurers; (vi) the plaintiffs’ right to contribution was not based upon rights acquired
from or through Mr Arora, but arose between co-insurers simply because the plaintiffs and the
defendants were co-insurers of Mr Arora; and it therefore mattered not that the plaintiffs’ claim
‘overrode’ the terms of the contract between the defendants and Mr Arora; (vii) therefore
Monksfield’s case was wrongly decided; and (viii) the plaintiffs had not acted unreasonably or to
the prejudice of the defendants and there was nothing to show that it would be inequitable to
require the defendants to contribute.
Certain comments should, I think, be made upon that chain of reasoning by way of introduction
to examination of such guidance as can be obtained from the statements of principle in the text
books and in the decisions of the courts. These comments are made in explanation of why the
decision of the learned deputy judge seemed to me to be surprising.
Firstly, the original basis of and reasons for the application of the principle of contribution
seemed to me to suggest strongly, if I correctly understand them, that the principle is not
applicable on the facts of this case so as to impose liability upon the defendants when they could
not, at the time when they first heard of the accident, have been held liable to their assured upon
their policy in respect of the liability in question.
Secondly, no case has been cited from any common law jurisdiction in which liability was
imposed for contribution by one insurer in such circumstances. The one case in which the point
authority.
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was expressly decided, Monksfield’s case, was decided and reported 19 years ago and is to the
opposite effect.
Thirdly, the case from which the learned deputy judge derived the statement of principle which,
in his view, provided the answer to this case, namely American Surety Co of New York v
Wrightson (1910) 103 LT 663, did not decide the point or anything near it: in that case the right
to contribution was conceded and the judge was concerned only to establish the proportions.
Fourthly, there has been in this case no suggestion of any settled practice or understanding in the
insurance industry which would be disturbed if Monksfield’s case were followed and applied. To
the contrary, the relevant passages in the textbooks suggest at least that the decision in
Monksfield’s case has probably been regarded as correctly stating the law.
The origins of the principle of contribution appear to have been concerned
Page 293 of [1992] 1 All ER 283
with the control and direction, by the courts of equity, of the causes of action arising under deeds
or contracts and not with the creation of independent and separate causes of action. Thus, in 16
Halsbury’s Laws (4th edn) para 1214, after reference to the history of the exclusive jurisdiction
in equity, there is an account of the nature of the concurrent jurisdiction which reads:
‘In certain matters which were ordinarily the subject of jurisdiction at law, equity exercised a
concurrent jurisdiction. This was based on various circumstances: that the legal remedy was not
available, that the equitable remedy was more efficient, or that the procedure in equity afforded
advantages which were not attainable at law. In addition, the Court of Chancery could mould its
decrees so as to adjust the parties’ rights in a manner not practicable at law, and, by bringing all
the parties interested before it, could avoid multiplicity of suits. Upon some one or more of these
considerations was based the jurisdiction in specific performance, fraud, mistake, accident,
account, apportionment, contribution …’
The nature of contribution is described in general terms as follows (para 1252):
authority.
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‘Although its extent may be modified by contract, contribution is not based on contract, but on
principles of natural justice. Payment by one person liable releases the others from the principal
demand, and they are required to contribute as a return for this benefit; but the principle does not
apply unless all the parties are liable to a common demand, and such liability, therefore, is a
condition of contribution. As between the principal debtor liable under a bond and a surety, the
surety, on paying the debt, became in equity, as at law, only a simple contract creditor of the
principal unless he procured an assignment of the bond. In matters of contribution equity
exercised jurisdiction concurrent with that at law, but the procedure in equity was more
convenient and extensive.’
The concept seems to have developed out of cases of co-sureties in which all are liable to the
creditor. If one surety is required to pay the creditor, then the others, all being equally liable to
pay, receive the benefit of that payment. The co-sureties might be joint, each aware of the
promises made by the others, but it made no difference if the promises made by the sureties were
several and in different instruments and made in ignorance of the promises made by the others.
An example, which is, upon analysis, not precisely the same as the circumstances of this case,
but which seems to me to be useful for the purposes of comparison, would be the giving of time
by a creditor to the principal debtor where there are three sureties for the debt, two of the sureties
being liable on separate contracts of guarantee in which there is express provision that the giving
of time by the creditor shall not release the surety, and the third surety being liable upon a
separate contract of guarantee in which there is no such provision or a provision expressly
providing that if time is given the third surety shall be released. Upon the facts of that example,
as I understand the law, the third surety would be released and, if contribution were claimed from
him by the other two sureties, he could not be made liable in equity to them, notwithstanding the
fact that all three were originally co-sureties potentially liable to the creditor and it is the act of
the creditor which has the effect of releasing the third surety.
We were not referred to any case which expressly decides the point with reference to
contribution between co-sureties in the circumstances of the example given, but I think that it is
authority.
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clear on principle that the third surety, who is released as against the creditor, is not liable in
contribution to the two sureties who are not
Page 294 of [1992] 1 All ER 283
released: see the discussion of contribution between co-sureties in Goff and Jones Law of
Restitution (3rd edn, 1986) ch 13, pp 274–284. The rule of law by which a surety is released if
the creditor gives time to the debtor, a rule of law which does not require proof of detriment to
the surety, has been criticised by Blackburn J as ‘consistent neither with justice nor common
sense’ (see Swire v Redman (1876) 1 QBD 536 at 541, cited by Goff and Jones p 282) but it is,
and has long been, firmly established. The basis of the rule is that the creditor, by his act in
giving time to the debtor without the consent of the surety, is regarded as having impaired that
surety’s ability to exercise his right against the debtor by putting ‘it out of the power of the surety
to consider whether he will have recourse to his remedy against the principal or not’ (per Lord
Eldon in Samuel v Howarth (1817) 3 Mer 272, 36 ER 105, cited in Ward v National Bank of
New Zealand Ltd (1883) 8 App Cas 755 at 763). In other words, as I understand it, the law
refuses to expose a surety even to the risk of being compelled to pay the debtor’s debt to the
creditor at a time or in circumstances different from those contemplated by the surety when he
entered into the contract of guarantee and in which the surety’s right to recourse against the
debtor might be less efficacious than he was entitled to expect that it would or might be.
If a surety is released for that reason, upon the giving of time by the creditor to the debtor, an act
not permitted in advance by the terms of the surety’s contract of guarantee, it would be contrary
to the principle of equity in accordance with which he was released to hold him liable to the first
and second surety for contribution when, in the example given, the first and second sureties did
expressly by their separate contracts of guarantee with the creditor, permit the giving of time.
The basic purpose of the concept of equity known as contribution is to make sureties who are
liable to the creditor contribute rateably to that common liability and, in the example given, the
surety released is not under that liability.
The example is, as I have said, not a precise analogy. The act of giving time, which would
release the third surety, is that of the creditor who is entitled to receive the debt and to whom the
authority.
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promises of the three sureties are made. In the present case, the act, or failure to act, which
released one of the so-called co-insurers from liability on his contract of insurance, i e the failure
by Mr Arora to give notice, is again that of the person to whom the promises of the two insurers
were made, but the promises are to indemnify the assured in respect of a liability which he owes
to another as contrasted with a promise to indemnify the creditor in respect of a debt which he is
entitled to receive from another. That difference seems to me not to affect the answer which the
principles of equity should give.
As to the account given in the textbooks as to contribution between insurers it is sufficient to

start with that given under the title Insurance in 18 Halsbury’s Laws (2nd edn, 1935). Under the
heading ‘Marine insurance’ the following appeared (para 320):
‘Where the assured is over-insured by double insurance each insurer is bound, as between
himself and the other insurers, to contribute rateably to the loss in proportion to the amount for
which he is liable under his contract [see s 80(1) of the Marine Insurance Act 1906], and if any
insurer pays more than his proportion of the loss, he is entitled to maintain an action for
contribution against the other insurers, and to the like remedies as a surety who has paid more
than his proportion of the debt.’
The Marine Insurance Act 1906 was a codification of the common law. The phrase ‘for which he
is liable under his contract’ is, of course, not decisive of the point, but it seems clear that the
editors were not aware of any ruling or principle of law such as that for which the plaintiffs
contend in this case.
Page 295 of [1992] 1 All ER 283
The description of the right of contribution in non-marine insurance is to be found at para 714:
‘To give rise to a right of contribution the following conditions must be fulfilled, namely:—(1)
Each policy must cover the event which in fact happens, namely, the loss of the same property
by the same peril … (2) Each policy must cover the same interest in the same property, that is to
say, each policy must be intended to protect the same assured against the same loss … (3) Each
authority.
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policy must be in force at the time of the loss. There is no contribution if one of the policies has
already become void or the risk thereunder has not yet attached. (4) Each policy must be a legal
contract of insurance …’
Finally, para 715 asserted that the right of contribution may be restricted or excluded altogether
by the terms of the policy.
In summary, it seems that the point in this case had neither been decided in any reported case nor
had it been specifically addressed in any text book to which we were referred before the decision
in Monkfield’s case.
It is necessary now to consider two of the earlier authorities to which we were referred. Weddell
v Road Transport and General Insurance Co Ltd [1932] 2 KB 563, [1931] All ER Rep 609 has,
as Mr Woods and Mr Playford QC pointed out, been both misquoted and misunderstood. It was
not a case of contribution. The claimant (as I shall call him) was driving a car owned by his
brother when he injured a third party. The claimant had a motor car accident policy issued by
Cornhill Insurance Co Ltd. The brother’s motor car accident policy was with Road Transport, the
defendants, and that policy extended cover to a relative of the insured who might drive the car,
provided that the relative was not entitled to indemnity for the same risk under another policy.
The claimant’s policy with Cornhill extended to liability incurred while driving another person’s
car, provided that he was not entitled to indemnity in respect of that liability from another
insurance company. There was a rateable proportion clause in the Road Transport policy but not
in the Cornhill policy. It was not in dispute that Cornhill were not liable to the claimant because
of failure by him to give notice of the accident to Cornhill. Upon the claimant’s claim against
Road Transport, the arbitrator awarded that Road Transport were liable to indemnify him as to
one half only of the sums which he was legally liable to pay to the third party. The claimant
claimed to be entitled to a full indemnity from Road Transport on the ground that his Cornhill
policy was not ‘other existing insurance’ within condition 4, the rateable proportion clause,
because of his failure to give notice. That clause, however, provided: ‘If at any time any claim
arises under this policy there is any other existing insurance …’ Rowlatt J upheld the award and
rejected the claim to full indemnity as obviously unsound because the position was to be
authority.
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regarded as at before the time of giving the notice expired. The two exclusion clauses cancelled
each other out but the rateable proportion clause was effective to reduce the claimant’s right
against Road Transport to one half of his liability. It is to be noted that in National Employers
Mutual General Insurance Association Ltd v Haydon [1980] 2 Lloyd’s Rep 149 at 152
Stephenson LJ spoke of Rowlatt J in Weddell’s case invoking—
‘the equitable principle of contribution between co-insurers to avoid the absurdity and injustice
of holding that a person who has paid premiums for cover by two insurers should be left without
insurance cover because each insurer has excluded liability for the risk against which the other
has indemnified him.’
Page 296 of [1992] 1 All ER 283
Rowlatt J, in fact, made no express reference to the principle of contribution: he decided the
case, as I understand it, upon his construction of the wording in the two policies. Thus he said
([1932] 2 KB 563 at 567, [1931] All ER Rep 609 at 612):
‘… it is unreasonable to suppose that it was intended that clauses such as these should cancel
each other (by neglecting in each case the proviso in the other policy) with the result that, on the
ground in each case that the loss is covered elsewhere, it is covered nowhere. On the contrary the
reasonable construction is to exclude from the category of co-existing cover any cover which is
expressed to be itself cancelled by such co-existence, and to hold in such cases that both
companies are liable, subject of course in both cases to any rateable proportion clause which
there may be.’
The only point at which the decision of Rowlatt J in Weddell’s case approaches the issue in this
case is, I think, where he rejected the argument that the Cornhill policy could not be ‘other
existing insurance’ within the meaning of the provision in the Road Transport policy: the
Cornhill policy although it provided no indemnity to the claimant in the event which happened
because of his failure to give notice, was, nevertheless, ‘other existing insurance’ at the relevant
time, i e ‘at the time any claim arises under the policy’, the date of the accident. There was,
however, no indication or suggestion that Road Transport could, with reference to the one half of
authority.
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INSURANCE LAW CASES
the claim which they were held liable to pay to the claimant, recover any proportion from
Cornhill by way of contribution. In Commercial Union Assurance Co Ltd v Hayden [1977] 1
Lloyd’s Rep 1 at 3 Donaldson J commented upon Weddell’s case thus:
‘… the facts there were very special in that the assured had, by his own inaction after the loss,
defeated the right of insurer “A” to claim contribution from the insurer “B”.’
The next case to be mentioned is Austin v Zurich General Accident and Liability Insurance Co
Ltd [1945] 1 All ER 316, [1945] KB 250. Austin was driving a car owned by one Aldridge.
Austin was insured by Bell Assurance Association. Aldridge was insured by Zurich. No notice
was given to Zurich of the prosecution of Austin arising out of the accident and there was thus
breach of a condition. Bell, the insurers of Austin, settled the claim by the injured third party.
Bell then commenced proceedings for contribution from Zurich by means of an action brought in
the name of Austin, but it was in substance a claim to contribution by Bell. The claim failed
because on the form of the action it was hopeless. Austin claimed the benefit of Aldridge’s
policy, but Austin had not complied with the conditions contained in it. Mr Playford has
acknowledged that, if his arguments are correct, Bell had an unanswerable claim for contribution
and Austin’s failure to fulfil the condition precedent to the liability of Zurich was irrelevant. If
such was the right of Bell, according to ancient principles of equity, it is surprising that the
insurers and their advisors were so unaware of it that they did not advance any claim based upon
it; and it is surprising that no member of the court mentioned it; and in particular that
MacKinnon LJ, who drew attention to the fact that the claim which Bell was trying to advance in
the name of Austin was in truth a claim in contribution and not by way of subrogation, added
that that ‘is a very technical matter. It does not really concern the merit of this case or of this
appeal’ (see [1945] 1 All ER 316 at 320, [1945] KB 250 at 258). That comment by
MacKinnon LJ does not, I think, clearly demonstrate that he thought that there could be no claim
in contribution but it suggests, at least, that it was not obvious
Page 297 of [1992] 1 All ER 283
that such a right existed and, further, it shows that the attention of the insurers and of their
lawyers was drawn to the point.
authority.
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We are now more than 45 years after that case was decided. As I have said, the only reported
attempt to recover contribution in these circumstances failed in Monksfield’s case, in which there
was no appeal. 25 Halsbury’s Laws (4th edn) para 539 under the title Insurance describes the
conditions giving rise to the right of contribution in terms substantially similar to those in the
second edition. To the third necessary condition there is added the following:
‘… the insurer from whom contribution is claimed can repudiate liability under his policy on the
ground that the assured has broken a condition.’
The authority for that proposition is Monksfield’s case.
Since there is no authority binding on this court it is our task to decide this case in that way
which appears to be most in accord with the established principles of the law. In my judgment,
those principles require us to reject the plaintiffs’ claim and to allow the appeal.
The plaintiffs assert the right to recover against the defendants upon the ground of an equity
based solely upon the fact that the plaintiffs and the defendants were at the date of the accident
co-insurers. The plaintiffs did not at any relevant time know of the existence of the defendants’
policy given by them to Mr Arora and the plaintiffs did not rely upon its existence for any
purpose. The plaintiffs do not seek the assistance of equity to obtain an order for the defendants
to pay to the plaintiffs part of what the defendants have promised to pay to Mr Arora. It is
common ground that nothing is due from the defendants to Mr Arora. The plaintiffs disclaim any
reliance upon the contractual rights of Mr Arora.
Next, neither Mr Arora nor the defendants had any intention of conferring any benefit upon the
plaintiffs. The defendants had no knowledge of the plaintiffs’ policy; and the defendants did
nothing to procure that which caused the defendants to be free of liability to Mr Arora under the
terms of their contract with him. For the defendants to be held free of liability to the plaintiffs is
to give effect to the terms of their contract of insurance. For the defendants to be held liable to
the plaintiffs in accordance with the decision of the learned deputy judge is to give to the
plaintiffs relief to which they are not entitled under the terms of their contract of insurance with
authority.
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INSURANCE LAW CASES
Mr Arora. In the absence of clear authority I would hold that the ground of claim put forward by
the plaintiffs does not give rise to any such equity.
The last point mentioned, namely the terms of the contract between the plaintiffs and Mr Arora,
brings me to the matter of the rateable proportion clauses in the two insurance policies. The
plaintiffs made specific provision in their contract of insurance with Mr Arora as to what should
be the consequence if Mr Arora should have any other relevant insurance: by condition 7 of the
policy, if ‘at the time any claim arises under the Policy there is any other insurance covering the
same loss, damage or liability the Society will not pay or contribute more than its rateable
proportion …’ Upon the authority of Weddell’s case, the policy cover given by the defendants to
Mr Arora was ‘other insurance at the time that the claim arose under the plaintiffs’ policy’. The
plaintiffs were therefore liable to Mr Arora for no more than one-half of his liability to the
claimant. It is true that, if a judgment had been obtained by the injured third party, the plaintiffs
would have been obliged to settle it in full (see s 151 of the Road Traffic Act 1988, formerly
s 149 of the Road Traffic Act 1972), but they could have obtained from Mr Arora (subject to his
ability to pay) the excess paid by them (see s 151(7)). This fact was to me surprising because it
seemed to me to be possible that an insured might
Page 298 of [1992] 1 All ER 283
well give notice to his primary insurers, i e the insurers with whom he had placed a full year’s
cover, and ignore secondary insurers by whom a cover note for only one month had been
provided, without understanding the consequence of so doing. Donaldson J in Commercial
Union Assurance Co Ltd v Hayden, to which I have referred above, called the result surprising
but Templeman LJ in National Employers Mutual General Insurance Association Ltd v Haydon
[1980] 2 Lloyd’s Rep 149 at 155–156, in referring to Weddell’s case, cast no doubt upon the
correctness of the decision and observed:
‘The insured was only entitled to recover 50 per cent. under one policy because there was a
rateable proportion clause which reduced the liability under that policy in the event of another
insurance policy existing at the date of the accident, as it did.’
authority.
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INSURANCE LAW CASES
Thus, both insurers in this case by the terms of the contract between themselves and their
assured, gave compelling reason to the assured to preserve any right he might have under any
‘other insurance’. If the assured had preserved his rights against both insurers by complying with
the conditions, there could be no doubt of the right of contribution between the insurers and
probably in such circumstances by agreement between them one company would have handled
the claim. It is, however, common ground that Mr Arora did not preserve his right against the
defendants. It follows, in my judgment, that although the plaintiffs were obliged under the Road
Traffic Act 1972 to settle the full amount of the claim of the injured third party, the plaintiffs
were entitled to limit their liability to Mr Arora to 50% of what they were compelled by statute to
pay out. This point was not raised before the judge, but it has not been objected by Mr Playford
that the point is not open to the appellants as part of their argument. Mr Playford submitted that
the plaintiffs were acting properly in handling the claim in the way in which they did and has
contended that they should not be penalised in consequence. For my part, I accept that the
plaintiffs acted sensibly and generously towards Mr Arora, but I am unable to see that their
conduct can increase or alter the nature of their rights against the defendants. At best, in my
judgment, the plaintiffs could recover only contribution in respect of their legal liability to Mr
Arora but, since the basis of contribution is a payment by a claimant in excess of his rateable
proportion as between co-insurers, there can be no claim in contribution by these plaintiffs or, as
it seems to me, in any case where there are effective rateable proportion clauses in the policies of
each co-insurer. I agree, therefore, that the appeal should be allowed on this ground in
accordance with the judgments of Lloyd and Nourse LJJ. I would add, however, that the fact that
insurers commonly make provision with reference to the effect of existing ‘other insurance’ by
means of rateable proportion clauses seems to me to support my view that there is no right to
contribution in the circumstances of this case.
Appeal allowed.
LEPPARD V EXCESS INSURANCE CO LTD [1979] 2 ALL ER 668
authority.
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MEGAW LJ. This is an appeal from the judgment of Mars-Jones J delivered on 19 August 1977.
The claim of the plaintiff is on a policy of insurance against fire and other risks, issued to him by
the defendants. The property insured was a cottage known as ‘Janor’, at Higher Pennance,
Lanner, Redruth, owned by the plaintiff. The cottage was destroyed by fire on 25 October 1975.
The defendants denied liability, on the basis of an alleged non-disclosure and an alleged breach
of conditions of the policy. Mars-Jones J, on the evidence, accepting the evidence of the plaintiff,
rejected those defences and held that the defendants were liable on the policy. From that part of
the judgment there is no appeal. The appeal is only as to the amount which the plaintiff is
entitled to recover.
The judge describes in his judgment how the plaintiff came to own the cottage. He says:
‘It was the home of his father-and mother-in-law until 1972, when they left to move into
a council house. Father-in-law had had a leg amputated and could no longer get up and down the
hill to the cottage. When the cottage was put up for sale a neighbouring farmer by the name of
Bernard Maitland offered £1,500 for it. The plaintiff rightly thought it was worth much more
than that; and, as I find, decided to buy it himself for that sum in order to ensure that his in-laws
should have the capital to make the move and furnish their new home, and thereafter to share
with them any profit made on a subsequent sale. The plaintiff had to borrow the money from the
bank, and they insisted on the deeds being in his name. They also insisted quite naturally that the
premises should be insured in the meantime.’
The first insurance of the cottage was with other insurers, not the defendants. In
September 1974, however, the plaintiff changed his insurers and took out a policy of insurance
with the defendants. This he did through a firm of brokers whose representative in this
transaction was a Mr Excell. The judge’s account of the plaintiff’s evidence as to the discussion
with Mr Excell leading up to the issue of the policy is as follows:
‘The plaintiff gave details of that discussion so far as it affected the cottage in Cornwall.
He told me that he informed Mr Excell that he had a cottage in Cornwall which he wanted to sell.
He told him that he wanted it insured. It was in fact already insured with the Co-operative
authority.
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INSURANCE LAW CASES
Insurance Society. He told Mr Excell it was an empty cottage that he had for the purpose of sale.
Mr Excell said he would take it on when the current policy lapsed.’
The judge accepted that evidence in its entirety. He said:
‘I was impressed by the plaintiff’s evidence. Despite strenuous but quite proper cross-
examination by [counsel for the defendants], he emerged with his credit unscathed. He was a
patently honest man who, in my judgment, was trying to tell me the truth to the best of his
recollection. What he told me about this initial conversation is what I would expect to happen
between an assured and a broker in these circumstances. I believe that the plaintiff has told me
accurately the substance of that conversation.’
I come to the documents. At a meeting with Mr Excell, the plaintiff filled in a proposal
form. Against ‘Sum insured’ the figure filled in was £10,000. The declaration signed by the
plaintiff on the proposal form contained these words:
‘Declaration. I declare that: (1) the sums to be insured represent not less than the full
value (the full value is the amount which it would cost to replace the property in its existing form
should it be totally destroyed).’
It is unnecessary for me to read declarations (2) and (3).
The evidence which the judge accepted, given by the plaintiff, as to the completion of the
proposal form was summarised by the judge as follows: ‘He [that is Mr Excell] already knew the
cottage was in Cornwall. I gave him particulars. I told him that it was
Page 671 of [1979] 2 All ER 668
insured for £10,000, but I was not asking that for it as the selling price. Mr Excell
explained that it was not the selling price that the plaintiff should insure for but the cost of
reinstatement of the premises in the event of total destruction.’
There is nothing in the pleadings or in the submissions before Mars-Jones J or before us

to suggest, assuming that Mr Excell was acting at this point as agent for the defendants, that
authority.
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INSURANCE LAW CASES
there was any oral collateral contract as a result of this conversation, or that what was then said
can properly be used to determine the true construction of the policy of insurance which
followed on that proposal by the plaintiff. I therefore say no more on that matter. That is not to
say that the contents of the proposal form itself are irrelevant. They are incorporated into the
contract (the policy of insurance) by express reference.
I come to that policy, on the construction of which the first question in this appeal
depends. I set out those parts of the words of the policy which are or may be said to be relevant.
The first three paragraphs of the text of the policy contain the following:
‘The Insured by the proposal which shall be the basis of and incorporated in this contract
has applied to the Company for the insurance contained herein and had paid or agreed to pay the
premium.
‘Subject to the terms and conditions contained herein or attached hereon the Company
agrees to provide insurance and indemnity as hereinafter set out in respect of events occurring
during any period of insurance.
‘The liability of the Company shall not exceed the sum insured on any one item in any
one section nor in respect of any one section the total sum insured.’
Then comes ‘Section 1. Buildings’. The first paragraph reads:
‘The sum insured is declared by the Insured to represent and will at all times be
maintained at not less than the full value of the buildings (including architects and surveyors fees
and an amount in respect of debris removal).’
Then there are two paragraphs in italic print under the heading ‘The Property Insured’.
The first of those paragraphs shows that the policy is intended to relate to ‘the Insured’s private
dwelling(s)’. I need not read that paragraph. The second paragraph, which is printed in italics and
capital letters, reads:
authority.
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INSURANCE LAW CASES
‘The Company will at its option by payment reinstatement or repair indemnify the
Insured in respect of A LOSS OR DAMAGE CAUSED BY ANY OF THE
UNDERMENTIONED PERILS (1) Fire … ’
The other so-called ‘peril’ to which I ought to refer is para (10), under the main head ‘A’.
It reads:
‘(10) (a) architect’s or surveyor’s legal and other fees for estimates plans and
specifications necessarily incurred in the reinstatement of the buildings following damage by an
insured peril … ’
I need not read any more of it. For the plaintiff reliance is placed on that paragraph
because it is said to show that the parties were contemplating, in the event of a loss under the
policy, that there should be reinstatement of the building.
The schedule to the policy as originally issued in 1974 showed the sum insured as
£10,000. When arrangements were made for the renewal of the policy in September 1975 the
sum insured, apparently as a result of Mr Excell’s suggestion to the plaintiff, was increased to
£14,000. In fact that renewed policy, which is the relevant policy for present purposes, has, as
‘Date of issue’, the date 28 October 1975. That is three days after the fire. But that was merely an
administrative time-lag. The renewal of the policy had been agreed before the fire.
The effect of the fire, counsel agreed before us, was to cause a total loss of the building,
not a partial loss. The fact that some part of the wall remained does not affect the position. The
building was destroyed. It was so pleaded in the statement of claim, and
Page 672 of [1979] 2 All ER 668
it was so admitted in the defence. The judge was, I fear, in error when he said in his
judgment: ‘We are not dealing with a total loss here.’
The judge in his judgment then described what had happened regarding the cottage
between the time of its purchase by the plaintiff from his parents-in-law and the time of the fire. I
shall read the relevant passage, for these are relevant findings of fact. The judge said:
authority.
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INSURANCE LAW CASES
‘This brings me to the question of damages and the basis on which those should be
calculated. By way of introduction I must set out in summary form what happened to the
property after it had been put on the market. At first the plaintiff was asking £12,000 for it. That
was within months of his purchasing the property from his parents-in-law for £1,500. However
as the months went by the asking price was reduced until by July 1975 it was down to £4,250.
Indeed the plaintiff frankly admitted that he would have sold the cottage for £4,000 just before
the fire. What appears to have happened is that the neighbouring farmer, Bernard Maitland, who
gave evidence before me, did everything in his power to dissuade prospective purchasers from
going through with their deals. Having failed to get it himself for a bargain price, he put every
obstacle in the way of others who were minded to buy it at a higher price. His land surrounded
that owned by the plaintiff. Mr Maitland challenged the plaintiff’s right to run a water main
through his land and his right of way over the lane leading to the property. He went as far as to
ask for the sum of £3,000 for granting such rights to the plaintiff or a prospective purchaser. So,
although there were literally hundreds of enquiries from prospective purchasers, nothing came of
them. It is only right to add that there were other reasons given for breaking off negotiations, but
I am satisfied that Mr Maitland’s intransigence was undoubtedly the primary cause for the estate
agents’ failure to sell this cottage at a reasonable price. Now it would seem that those differences
which had arisen between the plaintiff and Mr Maitland have been resolved, but I am concerned
for the purposes of this judgment with the value of the property at the date of the loss.’
I agree with the judge that the relevant date for the ascertainment of the amount of the
loss is the date of the loss, ie 25 October 1975.
Mars-Jones J then records the facts of the helpful agreement made between the parties as
to certain figures. I had better read it as the judge set it out:
‘The parties are happily agreed about figures. If the plaintiff is entitled to the cost of
reinstatement, the correct sum after taking betterment into account is £8,694. [Counsel for the
plaintiff] contended that he was so entitled. Mr Preston [Counsel for the defendants] on the other
hand argued that the plaintiff was only entitled to recover the value of the loss which he put at
the agreed figure of £3,000, being the difference between the realistic value of the property in
authority.
Page | 623
INSURANCE LAW CASES
October 1975 put at £4,500 by [an estate agent] minus the site value which is agreed at the figure
of £1,500.’
The judge quoted at length from Ivamy on Fire and Motor Insurancea, and he cited
passages from casesb decided as to the measure of damages in the particular circumstances of
those cases, being actions for tort or breach of contract. However, as I understand his judgment,
the judge then accepted the submission of counsel of the plaintiff that those cases ‘dealt with an
entirely different situation from that which arises here. They were concerned with the measure of
damages in tort and for breach of contract.' I agree with
Page 673 of [1979] 2 All ER 668
the judge that those cases, which were cited to us again on this appeal, are not helpful on
the issue before us, even though a claim on a policy of insurance is a claim for damages for
breach of contract.
The judge then went on:
‘Basically this is an action for specific performance, for a declaration that the plaintiff is
entitled to the full reinstatement cost of actual reinstatement. It is not an action for breach of
contract as such. The contract here was that in return for the payment of a premium the
defendants would indemnify the plaintiff against loss sustained from a peril covered by the
policy. The plaintiff is to be put in the position that he was in just before the damage occurred,
and this result could only be achieved by paying him the cost of reinstatement minus
“betterment“. I have come to the conclusion that those submissions are well-founded and that the
plaintiff in this case is entitled to a declaration in the terms sought.’
I respectfully disagree with the judge’s analysis. This is a claim for damages for breach of
a contract of insurance. It is not an action for specific performance.
The first question which arises is whether, on the true construction of the insurance
policy, the plaintiff is entitled to require the defendants to pay him the cost of reinstatement of
the cottage, even assuming (and, to answer the first question, one makes this assumption) that the
authority.
Page | 624
INSURANCE LAW CASES
loss actually suffered by the plaintiff was less than the cost of reinstatement. If the answer to that
be No, then the second question falls to be answered: on the facts of this case, was the amount of
the loss actually suffered by the plaintiff the cost of reinstatement (agreed at £8,694) or was it the
figure of £3,000 for which the defendants contend?
The argument put before us by counsel for the plaintiff, in support of the answer which
the plaintiff seeks on the first question is not, I think, the same argument as was submitted to
judge on that question. But there can be no objection to the point being taken in this court as
counsel wishes to put it; and no such objection was taken on behalf of the defendants.
Ever since the decision of this court in Castellain v Preston, the general principle has
been beyond dispute. Indeed I think it was beyond dispute long before Castellain v Preston. The
insured may recover his actual loss, subject, of course, to any provision in the policy as to the
maximum amount recoverable. The insured may not recover more than his actual loss. As it was
put by Brett LJ in Castellain v Preston (11 QBD 380 at 386, [1881–5] All ER Rep 493 at 495):
‘In order to give my opinion upon this case, I feel obliged to revert to the very foundation
of every rule which has been promulgated and acted on by the Courts with regard to insurance
law. The very foundation, in my opinion, of every rule which has been applied to insurance law
is this, namely that the contract of insurance contained in a marine or fire policy is a contract of
indemnity, and of indemnity only, and that this contract means that the assured, because of a loss
against which the policy has been made, shall be fully indemnified but shall never be more than
fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is
brought forward which is at variance with it, that is to say, which either will prevent the assured
from obtaining a full indemnity, or which will give to the assured more than a full indemnity,
that proposition must certainly be wrong.’
Counsel for the plaintiff submits that when one looks at the declaration in the proposal
form in this case, it shows that the parties define ‘the full value’ as being the reinstatement cost.
The first paragraph of s 1 of the policy, which I have read, with its parenthetical reference to
‘(including architects and surveyors fees and an amount in respect of debris removal)’, shows,
counsel for the plaintiff submits, that ‘the full value’ is to be deemed to
authority.
Page | 625
INSURANCE LAW CASES
Page 674 of [1979] 2 All ER 668
be the reinstatement cost. When there has been, as here, as the parties agreed before us, a
total loss, that necessarily involves a loss of ‘the full value’. Therefore, the policy provides that
the plaintiff, on a total loss, shall be entitled to the cost of reinstatement, irrespective of whether
or not it is the actual loss. The parties have, it is argued, by the words used in the declaration and
the policy, agreed that this contract, though it is not a valued policy (no specific amount of
money representing the value of the thing insured has been agreed) nevertheless shall have the
same effect as a valued policy, though with the substitution for a specific agreed figure of an
agreed basis of assessment of the loss, namely whatever may prove to be the cost of
reinstatement as at the date of the loss. It remains, counsel agrees, a contract of indemnity, with
the insured entitled to recover no more than the amount of his loss; but on the words of this
policy the parties, as they are entitled to do, have agreed, not what the loss is, but on what basis it
is to be computed. That agreement, it is submitted, is overriding. The parties are free to agree
how the loss shall be computed, even though the computation may produce a figure different
from the actual loss. If they so agree, then their agreement prevails, even though it gives what in
fact is more than a full indemnity.
I disagree. What the insurers have agreed to do is to indemnify the insured in respect of
loss or damage caused by fire. The ‘full value’ is the cost of replacement. That defines the
maximum amount recoverable under the policy. The amount recoverable cannot exceed the cost
of replacement. But it does not say that that maximum is recoverable if it exceeds the actual loss.
There is nothing in the wording of the policy, including the declaration which is incorporated
therein, which expressly or by any legitimate inference provides that the loss which is to be
indemnified is agreed to be, or is to be deemed to be, the cost of reinstatement, ‘the full value’,
even though the cost of reinstatement is greater than the actual loss. The plaintiff is entitled to
recover his real loss, not exceeding the cost of replacement.
There remains the second question. Was the plaintiff’s actual loss the cost of the
reinstatement of the cottage? Or was it, as the defendants contend, the market value of the
property as it was at the time of the fire? The defendants do not rely on any general principle in
authority.
Page | 626
INSURANCE LAW CASES
support of their submission. They say, rightly in my judgment, that this is a question of fact, and
that one must look at all the relevant facts of the particular case, to ascertain the actual value of
the loss at the relevant date. Of course, one is entitled to look to the future so as to bring in
relevant factors which would have been foreseen at the relevant date as being likely to affect the
value of the thing insured in one way or the other, if the loss of it had not occurred on that date.
But on the evidence in this case, and the judge’s statement of the relevant facts in the passages
from his judgment which I have read earlier, it is beyond dispute that the plaintiff himself, at the
relevant date, wished to sell the house, and was ready and willing to sell it for £4,500; indeed, on
his own evidence, for less. Counsel for the plaintiff submits that he was not bound to sell it. Of
course not. He might thereafter, if the loss had not occurred, have changed his mind. The value
of the property might have increased or it might have decreased. But there is no getting away
from the reality of the case: ‘It was’, said the judge, ‘an empty cottage that he had for the
purpose of sale.' The judge later said:
‘I do not think that this man, the plaintiff, would be put in the same position as he was
before this fire merely by being paid the sum of £3,000, the difference between the price that he
was prepared to accept for the property at the time of its loss and its site value.’
With very great respect, I am unable to see why not. If the plaintiff himself was ready and
willing, as he plainly was, to sell the property for £4,500, or less, on 25 October 1978, just before
the fire, how can it be said that that was not its actual value at that time: unless, indeed, some
reason could be shown why the plaintiff himself should have made a mistake about, or
underestimated, its real value. No basis is shown for any such suggestion. The amount of the loss
here, in my judgment, is shown by the facts to have been the figure agreed, hypothetically, on
this basis, as £3,000.
Page 675 of [1979] 2 All ER 668
I would allow the appeal and vary the judge’s judgment so as to provide that judgment be
entered for the plaintiff for £3,000.
authority.
Page | 627
INSURANCE LAW CASES
GEOFFREY LANE LJ. I agree. Counsel for the plaintiff in this court has posed two
questions. The first question was: were the defendants entitled to contend that the full value of
the building was less than the cost of reinstatement? No doubt they were not, in the light of the
definition of ‘full value’ which is contained in the proposal form as follows: ‘… (the full value is
the amount which it would cost to replace the property in its existing form should it be totally
destroyed).' But the difficulty facing counsel for the plaintiff is this: that is not the problem
which is at the root of this case. The question really is: what did the plaintiff lose as a result of
the fire? Was it the market value of the cottage at that time, or was it the reinstatement cost?
Counsel for the plaintiff sought to argue, as indeed he had to if he was going to succeed
on this point, that this was in the nature of a valued policy, the defendants undertaking, so he
suggested, in the case of total destruction to pay the reinstatement cost, whatever that might be,
up to the limit of £14,000 contained in the schedule. But the wording of the contractual
document does not admit of such a construction. It is to be observed that that construction was
never alleged in the statement of claim; nor was the case before the judge argued on that basis at
all. This was an ordinary indemnity-only contract. The plaintiff was entitled to be paid his actual
loss and no more.
The citation which counsel for the defendants gave to us from the Australian case of
British Traders’ Insurance Co Ltd v Monson ((1964) 111 CLR 86 at 92–93) was directly in
point. The material passage is in the joint judgment of Kitto, Taylor and Owen JJ; and it reads as
follows:
‘On appeal to the Full Court of the Supreme Court the respondents’ contention was
upheld by a majority of the Judges. One line of reasoning which was sustained commenced by
construing the policy as containing an unqualified promise by the company to pay the
respondents in the event that happened the full amount of the sum insured; and on this basis it
was said, in answer to the appellant’s insistence that a policy of fire insurance is only a contract
of indemnity against loss, that according to undoubted authorities on the subject a party insured
may in some circumstances recover more than the value of his insurable interest and that the
most cogent of all categories of such circumstances must be that in which the parties have by
authority.
Page | 628
INSURANCE LAW CASES
express words so contracted. It is convenient to deal first with this way of putting the case for the
respondents. Its fault lies, we think, not in the fact that it begins with the policy, but in the fact
that it gives the policy a meaning which neither general understanding nor the law of insurance
will support. It concentrates attention upon the words of obligation: “if the property insured …
be destroyed … by fire … the Company will pay to the Insured the value of the property … “. If
those words be read in isolation from their context, no doubt the obligation is to pay the full
value of the property, regardless of the quantum of loss sustained by the respondents by reason
of the destruction by fire. But the all-important fact is that they are words in a document
possessing unmistakably and on its face a character which flatly contradicts the notion that the
obligation of the company is to pay more than the amount of the respondents’ loss. It is issued by
an insurance company. It is headed “Fire Insurance Policy“. All its provisions, even the very
words that are relied upon for their literal meaning, are characteristic of fire insurance policies. It
is far too late to doubt that by the common understanding of business men and lawyers alike the
nature of such a policy controls its obligation, implying conclusively that its statement of amount
which the insurer promises to pay merely fixes the maximum amount which in any event he may
have to pay, and having as its sole purpose, and therefore imposing as its only obligation, the
indemnification of the insured, up to the amount of the insurance, against loss from the accepted
risk.’
Page 676 of [1979] 2 All ER 668
Then their Honours cite a portion of the judgment of Brett LJ in Castellain v Preston
((1883) 11 QBD 380 at 386, [1881–5] All ER Rep 493 at 495), to which reference has already
been made.
It is plain that the first question posed by counsel for the plaintiff must be answered
against him.
The second point was this: was the judge correct in holding that the plaintiff would not be
completely indemnified unless the building was in fact reinstated? It seems to me, in agreement
with Megaw LJ, that as to that the evidence was all one way. The plaintiff had, from the very
moment when he bought this cottage from his father-in-law, wanted to sell it; and it is quite plain
authority.
Page | 629
INSURANCE LAW CASES
(he said so himself) that at the time of or immediately before the fire he would have snapped up
the very first offer for this cottage of £4,000. One need only refer to one short passage in the
judgment of Mars-Jones J to illustrate that fact. It reads as follows:
‘This brings me to the question of damages and the basis on which those should be
calculated. By way of introduction I must set out in summary form what happened to the
property after it had been put on the market. At first the plaintiff was asking £12,500 for it. That
was within months of his purchasing the property from his parents-in-law for £1,500. However
as the months went by the asking price was reduced until by July 1975 it was down to £4,250.
Indeed the plaintiff frankly admitted that he would have sold the cottage for £4,000 just before
the fire.’
The judge does not make it altogether clear as to the basis of his conclusion on this
aspect. He sets out his reasons in the passage which Megaw LJ has already cited, and there is no
need for me to cite it again. That is the passage dealing with the question of specific
performance. But it is clear, with great respect to the judge, that by awarding the sum that he did
to the plaintiff, the plaintiff is undoubtedly £5,000 or so better off than if he had succeeded in
achieving his ambition of selling this cottage for £4,500 or £4,000. That means, in short, that he
has received more than an indemnity against his loss. He has had a bonus; and this policy does
not provide for him to have such a bonus. This is an indemnity policy: it entitles him to the
amount of his loss, and no more. Accordingly, it seems to me that the amount to which he is
entitled in respect of this fire is the £3,000 which is the agreed value of the cottage as it was
immediately before the fire. That is all he is entitled to recover. I agree with the proposed order.
DUNN J. I also agree; and there is nothing that I can usefully add.
Appeal allowed. Judgment below varied by deleting declaration granted and substituting
the sum of £3,000 for the sum of £8,694, with consequential adjustment of interest.
authority.
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INSURANCE LAW CASES
LORD NAPIER AND ETTRICK AND ANOTHER V HUNTER AND OTHERS LORD
NAPIER AND ETTRICK V R F KERSHAW LTD AND OTHERS [1993] 1 ALL ER 385
Consolidated appeals and cross-appeal
The appellants, the fifth to fourteenth defendants, Charles Hunter, Colin Mackinnon, William
Deem, Michael Seaby, Mark Swinbank, Jeremy Guy Nelson, Ron Cleverly, David McElhiney,
David Holman and Derek Walker, represented the members of 12 syndicates at Lloyd’s (the
stop-loss insurers), each of which wrote a substantial number of personal stop-loss policies
issued to Lloyd’s names, including 246 members of the Outhwaite Syndicate 317/661 for the
1982 year of account (the assureds) who were represented by the first respondent plaintiff, the Rt
Hon Francis Nigel Baron Napier and Ettrick. Each of the policies provided for an excess to be
borne by the assured with a layer of cover above that excess. The assureds made claims under the
policies in respect of their underwriting losses, the majority of which arose as a result of losses
on the underwriting of the Outhwaite Syndicate and such claims were met. In 1989 proceedings
were commenced by 987 members of the Outhwaite Syndicate (the names), including the
assureds, against the syndicate’s managing agents and over 80 other members’ agents at Lloyd’s
claiming damages for negligence and breach of duty occasioning the losses of the Outhwaite
Syndicate. The proceedings were settled in February and March 1992 by payment to the second
respondent plaintiff, Richards Butler (a firm), solicitors to the names, on behalf of, inter alios, the
assured of almost £116m (the settlement moneys), including moneys attributable to the losses in
respect of which the assureds had received payment from the stop-loss insurers. Shortly before
the settlement moneys were due to be distributed by the second plaintiff in accordance with the
arrangements announced to the names, Lloyd’s asserted that the settlement moneys could not be
distributed because they were subject to the premium trust deeds executed by each name.
Accordingly, on 10 April 1992 the plaintiffs issued an originating summons (the Lloyd’s
proceedings) against the first to fourth defendants, R F Kershaw Ltd, Lloyd’s, Simon Gillilan
Weber-Brown and Christopher James Hodgson, seeking, inter alia, determination of the
authority.
Page | 631
INSURANCE LAW CASES
respective rights to and interests in the settlement moneys in the light of Lloyd’s contention. By
an order of Saville J dated 12 May 1992 Bruce Cameron Douglas-Hamilton was substituted for
Mr Hodgson as fourth defendant. On 14 May 1992 Saville J decided the question raised by
Lloyd’s adversely to those four defendants, including Lloyd’s and there was no appeal
therefrom. Following
Page 388 of [1993] 1 All ER 385
the commencement of the Lloyd’s proceedings the stop-loss insurers claimed an

equitable proprietary interest in that part of the settlement moneys attributable to losses insured
and paid by them and raising contentions as to the manner in which the settlement moneys
should be applied as between themselves and their assureds. By consent the Lloyd’s proceedings
were amended and the stop-loss insurers were added as defendants by an order of Saville J dated
14 May 1992 for the purpose of having determined, inter alia, the following issues; (1) whether
the stop-loss insurers had an equitable proprietary interest in any settlement moneys and/or
whether any of the settlement moneys were impressed with a trust in their favour; and (2)
whether, in any event, in determining the amount which the stop-loss insurers were entitled to
claim in respect of the settlement moneys, the stop-loss insurers were entitled to be reimbursed
any indemnity paid by them to an assured before that assured was fully indemnified by applying
his share of the settlement moneys to a loss occurring below the excess in that assured’s policy.
On 12 June 1992 Saville J decided against the stop-loss insurers on both issues and they
appealed. On 9 July 1992 the Court of Appeal (Dillon, Staughton and Nolan LJJ) (see (1992)
Times, 17 July) allowed the appeal in part by deciding against the stop-loss insurers on the first
issue and in their favour on the second issue. The stop-loss insurers appealed on the first issue
and the assured’s cross-appealed on the second issue with the leave of the Appeal Committee of
the House of Lords given provisionally on 22 July 1992. If the stop-loss insurers were successful
in their appeal on the first issue, it was in issue whether an ancillary order should be made
ordering the second plaintiff to pay the relevant moneys to the stop-loss insurers and/or
restraining the second plaintiff from paying those moneys to the assureds. The facts are set out in
the opinion of Lord Templeman.
authority.
Page | 632
INSURANCE LAW CASES
David Donaldson QC and Michael Swainston (instructed by Clyde & Co) for the fifth to
thirteenth defendants and (instructed by Waltons & Morse) for the fourteenth defendants.
Anthony Boswood QC and Stephen Moriarty (instructed by Richards Butler) for the
assureds.
10 December. The following opinions were delivered.
LORD TEMPLEMAN. My Lords, when an insured person suffers a loss he will be

entitled to the insurance money and may also be entitled to sue for damages anyone responsible
for the loss. For example, if a house is insured for £100,000 against fire and is damaged by fire to
an extent exceeding £100,000, the insurance company will pay £100,000. If the fire has been
caused by a negligent builder or some other contractual or tortious wrongdoer, the insured person
will sue the wrongdoer for damages. If the house has been damaged to the extent of £160,000,
the insured person will receive damages from the wrongdoer of £160,000. At that stage the
insured person will have made a profit since he will have only suffered a loss of £160,000 but
will have collected a total of £260,000 from the insurance company and the wrongdoer. A policy
of insurance is however a contract of indemnity and by the doctrine of subrogation the insured
person must pay back to the insurer the sum of £100,000. The insured person will then have
made neither a loss nor a profit. This appeal requires consideration of the principles and
application of the doctrine of subrogation.
The persons insured are 246 members of the Outhwaite Syndicate 317/661 of
Page 389 of [1993] 1 All ER 385
Lloyd’s (the names). The wrongdoer was the managing agent of the syndicate
(Outhwaite), who negligently wrote large numbers of policies on behalf of the names in respect
of asbestosis claims without adequate reinsurance cover. The insurers are the appellants (the
stop-loss insurers).
authority.
Page | 633
INSURANCE LAW CASES
As members of the Outhwaite Syndicate the names were entitled to share the net
premiums and personally liable to pay claims received under policies issued by Outhwaite on
their behalf in the year of account 1982. The names were desirous of insuring themselves against
part of any loss they might incur as members of the syndicate. Each name therefore paid a
premium to stop-loss insurers for a policy whereby the stop-loss insurers agreed to—
‘indemnify the Assured for the amount by which the Assured’s overall ascertained net
underwriting loss as hereinafter defined for the Underwriting Year(s) of Account shown in the
schedule exceeds the amount stated as “Excess” in the schedule.’
The policy contained a definition of ‘net underwriting loss’ in the following terms:
‘The Underwriters liability hereunder shall not exceed the amount stated as “Limit” in the
Schedule. The “Limit” and “Excess” shall apply separately to each Underwriting Year of
Account covered hereunder. The term “overall ascertained net underwriting loss” shall mean:—
(a) such sums with which the Assured shall be debited by any of his/her Underwriting Agents in
respect of his/her Underwriting results being the disclosed loss as per the Underwriting Accounts
as at the end of the 36th month of each separate Underwriting Year of Account: less (b) such
sums as the Assured shall be credited from any of his/her Underwriting results as shown in the
account as at the end of the 36th month of each separate Underwriting Year of Account …’
One of the underwriting years of account was 1982. The limit and the excess varied from
policy to policy.
For purposes of illustration, the arguments in the courts below and in this House assume
that for the 1982 year of account a particular hypothetical name suffered a net underwriting loss
of £160,000, that the excess was £25,000, and that the limit was £100,000. On these figures the
stop-loss insurers paid to the name £100,000 being the fixed amount of the limit (£100,000)
which exceeded the excess (£25,000). The names together with other names sued Outhwaite for
damages for negligence and breach of duty in respect of, inter alia, the 1982 year of account.
Those proceedings were compromised on payment by Outhwaite of £116m to the respondents
Messrs Richards Butler as solicitors for the plaintiffs in the action. For the purposes of the
authority.
Page | 634
INSURANCE LAW CASES
illustration it is assumed that included in the sum of £116m Richards Butler hold £130,000
attributable to the overall ascertained net loss of £160,000 suffered by the hypothetical name for
the 1982 year of account.
On these assumptions two problems arise. First, how much is payable to the stop-loss
insurers by way of subrogation? Secondly, are the stop-loss insurers entitled to be paid the
amounts found due to them by way of subrogation out of the damages now held by Richards
Butler?
At first instance Saville J decided that the hypothetical name would be entitled to be fully
indemnified for his loss of £160,000. He received £100,000 from the stop-loss insurers. He will
receive £130,000 from Outhwaite. He will keep £60,000 and pay £70,000 to the stop-loss
insurers. In the result the name will
Page 390 of [1993] 1 All ER 385
have fully recouped his loss of £160,000. This analysis however ignores the fact that the
name agreed to bear the first £25,000 excess of any loss.
The problem must, in my opinion, be solved by assuming that the name insured the first
£25,000 of any loss and also insured the excess over £125,000 as well as insuring the £100,000
payable under his policy with the stop-loss insurers. There would then be three insurance policies
as follows: (1) a policy for the payment of the first £25,000 of any loss; (2) a policy for payment
of the next £100,000 of any loss; (3) a policy for payment of any loss in excess of £125,000.
When the name suffered a loss of £160,000 the name received £25,000 under the first
policy, £100,000 under the second policy and £35,000 under the third policy. The damages
payable by Outhwaite were £130,000. The third insurer is entitled to be the first to be subrogated
because he only agreed to pay if the first two insurances did not cover the total loss; accordingly
the third insurer must be paid £35,000. The second insurer is entitled to be the second to be
subrogated because he only agreed to pay if the first insurance cover proved insufficient;
accordingly, the second insurer must be paid £95,000. The sum of £35,000 payable by way of
subrogation to the third insurer and the sum of £95,000 payable by way of subrogation to the
authority.
Page | 635
INSURANCE LAW CASES
second insurer exhausts the damages of £130,000 received by the name from Outhwaite. There is
nothing left to recoup to the second insurer the balance of £5,000 out of the £100,000 he paid
under his policy. There is nothing left by way of subrogation for the first insurer in respect of the
first £25,000 which he agreed to bear.
Under the stop-loss insurance the name agreed to bear the first £25,000 loss and any loss
in excess of £125,000. In my opinion the name is not entitled to be in a better position than he
would have been if he had taken out the three insurances I have mentioned. The name in fact acts
as his own insurer for the first £25,000 loss and acts as his own insurer for any loss in excess of
£125,000. So the name must pay £95,000 to the stop-loss insurers just as he would have been
liable to pay £95,000 to the second insurer if he had taken out three policies. In the result, out of
the loss of £160,000, the name will have borne the first £25,000 because he agreed with the stop-
loss insurers that he would bear that loss. The stop-loss insurers having paid £100,000 under the
policy will receive back £95,000 by way of subrogation.
Saville J reached a different conclusion. He found that the name was entitled to retain
from the damages he received the whole of the loss he had sustained before recouping the stop-
loss insurers. Accordingly, the name who suffered a loss of, £160,000 and received £100,000
under the policy with the stop-loss insurers and a further £130,000 from Outhwaite was entitled
to retain £60,000 and to recoup to the stop-loss insurers the sum of £70,000 and no more. Thus
the name covered all his loss notwithstanding that he had agreed to bear the first £25,000 of the
loss. For his conclusion Saville J relied on the following passage from the judgment of Brett LJ
in Castellain & Preston (1883) 11 QBD 380 at 386, [1881–5], All ER Rep 493 at 495:
‘The very foundation, in my opinion, of every rule which has been applied to insurance
law is this, namely, that the contract of insurance contained in a marine or fire policy is a
contract of indemnity, and of indemnity only, and that this contract means that the assured, in
case of a loss against which the policy has been made, shall be fully indemnified, but shall never
be more than fully indemnified. That is the fundamental principle of insurance, and if ever a
proposition is brought forward which is at variance with it, that is to say, which either will
prevent the assured from obtaining a full indemnity,
authority.
Page | 636
INSURANCE LAW CASES
Page 391 of [1993] 1 All ER 385
or which will give to the assured more than a full indemnity, that proposition must
certainly be wrong.’
Saville J therefore concluded that the name would be entitled to indemnify himself
against the first £25,000 loss even though he had expressly contracted with the stop-loss insurers
that he would bear that loss. I do not consider that Castellain v Preston is helpful in deciding
whether a name who promised the stop-loss insurers to bear the first £25,000 loss is entitled to be
put in the same position as an insured person who makes no such promise. When Brett LJ
delivered his judgment upon which Saville J relied, he was not concerned with competing claims
to subrogation or with any problem arising from underinsurance or partial insurance or layers of
insurance. In Castellain v Preston a vendor, after insuring his property against fire, contracted to
sell the property for £3,100. A fire then occurred and the insurance company paid the vendor
£330 in respect of the damage caused by the fire. The purchaser paid the full £3,100 purchase
price without deducting anything for the damage caused by the fire. The Court of Appeal held
that the insurance company was entitled to be subrogated to the extent of £330 and to receive
that sum from the vendor because, as Brett LJ said (11 QBD 380 at 386, [1881–5] All ER Rep
493 at 496): ‘… the assured have recovered, notwithstanding the loss, from the purchasers, the
very sum of money which they were to obtain whether this building was burnt or not.' In my
opinion an insured is not entitled to be indemnified against a loss which he has agreed to bear. I
agree therefore with the Court of Appeal that the name must bear the loss to the extent of the
excess, namely £25,000.
The second question is whether the stop-loss insurers have an interest in the moneys held
by Richards Butler. For this purpose it may be assumed by way of example that the moneys held
by Richards Butler include £130,000 paid by Outhwaite as damages for negligence which
inflicted a loss of £160,000 on a name in respect of the 1982 year of account; can the stop-loss
insurers assert an interest in that sum of £130,000 to the extent of the £95,000 which, as I have
indicated, is due to them by way of subrogation?
authority.
Page | 637
INSURANCE LAW CASES
When the hypothetical name suffered a loss of £160,000 as a result of the negligence of
Outhwaite, the stop-loss insurers were bound to pay and did pay £100,000 under the policy. The
stop-loss insurers immediately became entitled to be subrogated to the right of the name to sue
and recover damages in an action against Outhwaite, albeit that the amount payable to the stop-
loss insurers by way of subrogation could not be quantified until the action had been concluded
and the damages paid. Nevertheless in my opinion the stop-loss insurers had an interest in the
right of action possessed by the name against Outhwaite. That action, if brought by the name,
would be an action for the benefit of the name and for the benefit of the stop-loss insurers.
Where an insurer has paid on the policy, the courts have recognised the interests of the insurer in
any right of action possessed by the insured person which will enable the insurer to claim back
the whole or part of the sum which he has paid under the policy. The courts recognise the
interests of the insurer by allowing him to sue in the name of the insured person against the
wrongdoer if the insured person refuses to pursue the action.
In Randal v Cockran (1748) 1 Ves Sen 99, 27 ER 916 a vessel was insured against loss
and the insurance company paid the amount of the insurance when the vessel was captured by
the Spaniards. The owner of the vessel became entitled to share in the prize money from the sale
of captured Spanish vessels in accordance with a royal proclamation. The commission for the
distribution of the prize money refused to entertain a claim from the insurer. Lord Hardwicke LC
—
Page 392 of [1993] 1 All ER 385
‘was of opinion, that the plaintiffs had the plainest equity that could be. The person
originally sustaining the loss was the owner; but after satisfaction made to him, the insurer. No
doubt, but from that time, as to the goods themselves, if restored in specie, or compensation
made for them, the assured stands as a trustee for the insurer, in proportion for what he paid …’
In Blaauwpot v Da Costa (1758) 1 Eden 130, 28 ER 633 a ship insured for, £1,636 was
seized by the Spaniards and the insurance company paid the sum insured. Subsequently prize
money amounting to £2,050 18s 6d was paid to the executors of one of the former owners of the
authority.
Page | 638
INSURANCE LAW CASES
vessel. The executors were ordered to pay the sum £1,636 7s 3d to the insurers in accordance
with the following judgment of Sir Robert Henley LK (1 Eden 130 at 131, 28 ER 633 at 634):
‘I am of opinion that upon the policy, and the peril happening, and the payment of the
money by the underwriters, the whole rights of the assured vested in them. The assured had this
right of restitution vested in them against the Spanish captors, which was afterwards prosecuted
by the crown by reprisals. Satisfaction having been made in consequence of that capture, I think
the plaintiffs are entitled to that benefit; and that it was received by the executors … in trust for
them.’
In Mason v Sainsbury (1782) 3 Doug 61, 99 ER 538 a house had been insured against
damage and the insurance company paid under the policy when damage was caused by the riots
of 1780. The insurance company brought an action under the Riot Act (1714) against the local
authority. The insurance company sued in the plaintiff’s name and with his consent and for the
benefit of the insurance company. Lord Mansfield CJ said that the contract of insurance was an
indemnity and that ‘Every day the insurer is put in the place of the insured’ (see 3 Doug 61 at 64,
99 ER 538 at 549).
In Yates v White (1838) 1 Arn 85 the owner of a vessel sued the defendant for damaging
his ship by collision. The defendant claimed to deduct from the amount of damages the sum
which the plaintiff had received from his insurers in respect of such damage. The claim was
rejected.
In White v Dobinson (1844) 14 Sim 273 the ship Diana was insured against damage.
After a collision the insurers paid £205 in respect of the damage. The owner of the vessel, Hicks,
was awarded damages of £817 against a defendant who was held liable for the collision.
Shadwell V-C granted an injunction restraining the insured person Hicks from receiving and the
wrongdoer Dobinson from paying the sum of £817 in respect of damages without first paying or
providing for the sum £205 in respect of which the insurers were entitled to be subrogated. On
appeal Lord Lyndhurst LC said (5 LTOS 233):
authority.
Page | 639
INSURANCE LAW CASES
‘What is an insurance but a contract of indemnity? Then Hicks having received a full
satisfaction under the award, what right has he to retain money received from the insurance
office as an indemnity for damage? … If Hicks had received an indemnity before the payment of
the money by the company, it would clearly have been contrary to equity that he should retain
that money. Parke on Marine Assurances [Park A System of the Law of Marine Insurances
(8th edn, 1842)] says, that a contract to insure is one of indemnity only, and that the insured shall
not receive double compensations for a loss but in case the loss has been paid, and the insured
afterwards recovers the amount of damages from another source, the insurer shall stand in his
place to the extent of the sum they have paid.’
Page 393 of [1993] 1 All ER 385
Hicks then argued that the plaintiff had no remedy in equity and that his only course was
an action in a court of law for money had and received. This argument was rejected and the Lord
Chancellor said:
‘Here the company have paid for a loss, for which the insured afterwards obtains full
satisfaction, and it is contrary to equity that he should retain the money. The underwriters have a
claim upon the fund awarded, and they are entitled in some shape or other to recover back the
money they have paid.’
The injunctions were accordingly upheld.
This is authority for the proposition that, if application is made to the court before the
wrongdoer has paid damages in respect of which an insurer is entitled to subrogation, the court
will not allow the damages to be paid over without satisfying the claims of the insurer.
In Commercial Union Insurance Co v Lister (1874) LR 9 Ch App 483 the owner of a

building insured it for £33,000 against fire but not for the full value. The building was burnt by
what was said to be the negligence of the servants of a municipal corporation and suffered
damage estimated at £56,000. The owner brought an action for damages against the corporation.
It was held by the Court of Appeal, upholding the Master of the Rolls, that the owner
undertaking to sue for the whole amount of damage would be allowed to conduct the action
authority.
Page | 640
INSURANCE LAW CASES
without interference from the insurers, but would be liable for anything done by him in violation
of any equitable duty towards the insurers. In the course of his judgment Jessel MR had said (at
484n):
‘The total amount of the loss is admitted to exceed very largely the total amount of the
insurances. It is alleged that the fire was caused … by the act of the corporation of Halifax …
whose carelessness is alleged to have been the cause of the fire, and that the carelessness was of
such a kind as to render the corporation liable for the whole of the loss. In that state of things the
insurance company or companies is or are willing to pay the amount of the insurance, and they
say that, having paid that amount (they pay of course by way of indemnity), if the assured
obtains from the corporation of Halifax a sum larger than the difference between the amount of
the insurance and the amount of the loss, he is a trustee for that excess for the insurance company
or companies—a proposition which I take to be indisputable.’
In Castellain v Preston (1883) 11 QBD 380 at 388, [1881–5] All ER Rep 493 at 496
Brett LJ said:
‘In order to apply the doctrine of subrogation, it seems to me that the full and absolute
meaning of the word must be used, that is to say, the insurer must be placed in the position of the
assured. Now it seems to me that in order to carry out the fundamental rule of insurance law, this
doctrine of subrogation must be carried to the extent to which I am now about to endeavour to
express, namely, that as between the underwriter and the assured the underwriter is entitled to the
advantage of every right of the assured, whether such right consists in contract, fulfilled or
unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any
other right, whether by way of condition or otherwise, legal or equitable, which can be, or has
been exercised or had accrued, and whether such right could or could not be enforced by the
insurer in the name of the assured by the exercise or acquiring of which right or condition the
loss against which the assured is insured, can be, or has been diminished.’
Page 394 of [1993] 1 All ER 385
authority.
Page | 641
INSURANCE LAW CASES
Clearly Brett LJ considered that an insurer was subrogated to any right of action
subsisting when the insurer paid under the policy.
In Re Miller Gibb & Co Ltd [1957] 2 All ER 266, [1957] 1 WLR 703 the Export Credits
Guarantee Department of the Board of Trade issued to a company a policy of insurance for 90%
of the amount of any loss sustained in respect of goods sold to Brazil in the event of local
regulations preventing payment or a transfer of payment from the buyer to the company. The
buyer paid in Brazil into a bank for the account of Martins Bank, who were acting for the
company. Transfer of this payment was prevented by Brazilian currency exchange regulations
and the department accordingly paid 90% under the terms of the indemnity policy. The company
was ordered to be wound up. The department gave notice to Martins Bank of their claim to be
subrogated to the rights of the company with respect to the payment from Brazil when received.
In January 1956 the bank received the full purchase price from Brazil and the Board of Trade
claimed 90%. Wynn-Parry J ordered the liquidator of the company to execute all such documents
and do all such things necessary to enable the department to obtain from Martins Bank 90% of
the sum which had been received by the bank. This case is indistinguishable from the present.
In Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1961] 2 All ER 487, [1962] 2
QB 330 a vessel was insured for £72,000 and became an actual total loss. The insurers paid
£72,000. The assured brought proceedings in Canada for the loss of the vessel and the defendants
paid to the assured in Canada $Can336,000-odd, then worth £75,000-odd. The pound was
devalued and when the damages were transmitted to London they were worth £127,000.
Diplock J held that the doctrine of subrogation only entitled the insurers to recoupment of the
£72,000 which they had paid. Diplock J referred to the doctrine of subrogation in these terms
([1961] 2 All ER 487 at 490–491, [1962] 2 QB 330 at 339–341):
‘The doctrine of subrogation is not restricted to the law of insurance. Although often
referred to as an “equity” it is not an exclusively equitable doctrine. It was applied by the
common law courts in insurance cases long before the fusion of law and equity, although the
powers of the common law courts might in some cases require to be supplemented by those of
the court of equity in order to give full effect to the doctrine; for example, by compelling an
authority.
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INSURANCE LAW CASES
assured to allow his name to be used by the insurer for the purpose of enforcing the assured’s
remedies against third parties in respect of the subject-matter of the loss … The expression
“subrogation” in relation to a contract of marine insurance is thus no more than a convenient way
of referring to those terms which are to be implied in the contract between the assured and the
insurer to give business efficacy to an agreement whereby the assured in the case of a loss
against which the policy has been made shall be fully indemnified, and never more than fully
indemnified … In my view the doctrine of subrogation in insurance law requires one to imply in
contracts of marine insurance only such terms as are necessary to ensure that notwithstanding
that the insurer has made a payment under the policy the assured shall not be entitled to retain, as
against the insurer, a greater sum than what is ultimately shown to be his actual loss … Thus, if
after payment by the insurer of a loss that loss, as a result of an act of a third party, is reduced,
the insurer can recover from the assured the amount of the reduction because that is the amount
which he, the insurer, has overpaid under the contract of insurance. This sum he can recover at
common law, without recourse to equity, as money had and received … the duty of the assured
to take proceedings to reduce his loss and the correlative right of the insurer to
Page 395 of [1993] 1 All ER 385
require him to do so was a contractual duty. The remedy for its breach, by compelling the
assured to allow an action to be brought in his name, was an equitable remedy in aid of rights at
common law, and was alternative to the common law remedy of recovering damages for the
breach of the duty …’
In Hobbs v Marlowe [1977] 2 All ER 241 at 254–255, [1978] AC 16 at 39 Lord Diplock

said:
‘For my own part I prefer to regard the doctrine of subrogation in relation to contracts of
insurance as having its origin at common law in the implied terms of the contract and calling for
the aid of a court of equity only where its auxiliary jurisdiction was needed to compel the assured
to lend his name to his insurer for the enforcement of rights and remedies to which his insurer
was subrogated: see Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1961] 2 All ER 487,
[1962] 2 QB 330. But the practical effects of the doctrine of subrogation on the rights and
authority.
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INSURANCE LAW CASES
remedies of insurer and assured are similar in many respects to the effect of an equitable
assignment of a chose in action …’
Thus Lord Diplock, far from deciding that a court of equity could not lend its aid to
compel the assured to direct that the insurer be recouped under the doctrine of subrogation out of
the damages recovered from the wrongdoer, equated the right of the insurer to that of the
assignee of an equitable interest, a right which equity will of course enforce.
It may be that the common law invented and implied in contracts of insurance a promise
by the insured person to take proceedings to reduce his loss, a promise by the insured person to
account to the insurer for moneys recovered from a third party in respect of the insured loss and a
promise by the insured person to allow the insurer to exercise in the name of the insured person
rights of action vested in the insured person against third parties for the recovery of the insured
loss if the insured person refuses or neglects to enforce those rights of action. There must also be
implied a promise by the insured person that in exercising his rights of action against third
parties he will act in good faith for the benefit of the insured person so far as he has borne the
loss and for the benefit of the insurer so far as he has indemnified the insured person against the
insured loss. My Lords, contractual promises may create equitable interests. An express promise
by a vendor to convey land on payment of the purchase price confers on the purchaser an
equitable interest in the land. In my opinion promises implied in a contract of insurance with
regard to rights of action vested in the insured person for the recovery of an insured loss from a
third party responsible for the loss confer on the insurer an equitable interest in those rights of
action to the extent necessary to recoup the insurer who has indemnified the insured person
against the insured loss.
In the hypothetical case under consideration, the intervention of equity is required to

ensure that the insured person exercises his right of action against the wrongdoer in good faith
and that the insurer is recouped out of the damages recovered from the wrongdoer. The stop-loss
insurer is out of pocket to the amount of £100,000 from the time that he pays, as he must pay,
£100,000 to the name immediately the loss has been suffered. The stop-loss insurer is entitled to
be recouped £95,000 as soon as the damages of £130,000 are available from the wrongdoer. The
authority.
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INSURANCE LAW CASES
name cannot delay or frustrate recoupment without inflicting harm on the insurer who remains
out of pocket to the extent of £100,000 until he is recouped. The name cannot make use of the
damages payable by the wrongdoer and available for recoupment of the stop-loss insurers
without the
Page 396 of [1993] 1 All ER 385
name receiving a benefit or advantage to which he is not entitled. When I asked why the
names were defending these present proceedings, your Lordships were blandly informed that the
names wished to benefit their ‘cash flow’ by making use of all the damages payable by
Outhwaite and deferring recoupment until each stop-loss insurer was able to obtain a judgment
against each name for money had and received. The stop-loss insurers were not in a position to
sue the name to whom they had paid £100,000 until the action against Outhwaite resulted in
judgment or compromise which included £130,000 for the insured loss and the damages of
£130,000 had been paid to the name; they were even then not in a position to sue the name until
the amount which the stop-loss insurers were entitled to recoup under the doctrine of subrogation
had been ascertained and calculated. There are 246 names, some of whom are resident in the
United States of America and elsewhere abroad. In order to succeed in an action for money had
and received stop-loss insurers might be obliged to pursue litigation at considerable expense and
subject to considerable delay in a country which knows nothing of an action for money had and
received or does not recognise the doctrine of subrogation or confines its civil litigation to the
tender mercies of juries who are unsympathetic towards insurers. By the time that the stop-loss
insurers ascertain that they are entitled to be repaid the sum of £95,000 and no more and no less
under the doctrine of subrogation and bring and succeed in a claim against the hypothetical name
to be paid £95,000, whether judgment for that sum be obtained at home or abroad, the name,
having had and received £100,000 from the stop-loss insurers, may not be in a position to pay
back £95,000. We were informed and accept that the respondent and representative name Lord
Napier and Ettrick is a man of honour and substance and will fulfill his obligations although he is
not apparently willing to fulfill them until a writ is issued and judgment is obtained against him
for money had and receiveda. But no one can answer for the other 245 names.
authority.
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INSURANCE LAW CASES
If the stop-loss insurers have no equitable remedy in connection with their rights and if a
name becomes bankrupt then subrogation is a mockery. Suppose, for example, that a name
receives £100,000 from an insurer under a policy, recovers judgment for £130,000 damages from
the wrongdoer and the name goes bankrupt before he receives the damages owing £1m and
possessing no assets other than assets representing the £100,000 he has received from the insurer
and the asset of £130,000 payable by the wrongdoer. In that case, if the argument on behalf of
the names is correct, the unsecured creditors of the insured name will benefit by double payment.
The stop-loss insurers will be in a worse position than an unsecured creditor because the insurers
could resist payment under the policy whereas an unsecured creditor may choose whether to
advance moneys or not. In the case of the bankruptcy of the name, the right of the insurer to
subrogation will be useless unless equity protects that right.
Saville J and the Court of Appeal held that the stop-loss insurers were confined to their
remedy for money had and received. The damages must first be distributed to the names. The
stop-loss insurers must then agree or determine by application to the court the amount due to
them respectively and must then bring proceedings for money had and received against each of
the names. All the authorities which indicated that an insurer who pays on the policy and is
entitled to recoupment by way of subrogation has an equitable interest in the right of action of
the insured person against a wrongdoer and an equitable interest in the damages payable by the
wrongdoer were said not to be binding on the courts. Those authorities which I have cited, and
there are others, included Randal v Cockran 1 Ves Sen 98, 27 ER 916 decided in 1748, White v
Dobinson 14 Sim 273,
Page 397 of [1993] 1 All ER 385
60 ER 363; affd 5 LTOS 233 decided in 1844, Commercial Union v Lister LR 9 Ch App
483 decided in 1874 and Re Miller Gibb & Co Ltd [1957] 2 All ER 266, [1957] 1 WLR 703
decided in 1957. I am not prepared to treat authorities which span over two centuries in a
cavalier fashion. The principles which dictated the decisions of our ancestors and inspired their
references to the equitable obligations of an insured person towards an insurer entitled to
subrogation are discernible and immutable. They establish that such an insurer has an
authority.
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INSURANCE LAW CASES
enforceable equitable interest in the damages payable by the wrongdoer. The insured person is
guilty of unconscionable conduct if he does not provide for the insurer to be recouped out of the
damages awarded against the wrongdoer. Equity will not allow the insured person to insist on his
legal rights to all the damages awarded against the wrongdoer and will restrain the insured
person from receiving or dealing with those damages so far as they are required to recoup the
insurer under the doctrine of subrogation.
Where the insured person has been paid policy moneys by the insurer for a loss in respect
of which the insured person recovers damages from a wrongdoer the insured person is guilty of
unconscionable conduct if he does not procure and direct that the sum due to the insurer shall by
way of subrogation be paid out of the damages.
It is next necessary to consider how equity copes with such unconscionable conduct.
Saville J and the Court of Appeal appear to have thought that equity can only interfere by
creating a trust fund held in trust by trustees for different beneficiaries in different shares, the
trustees being burdened with administrative and investment duties, the trustees being liable for
all the duties imposed on trustees but being free from liability if the trust fund is lost without
negligence. I agree that if this were the only method of protecting the rights of an insurer the
practical disadvantages would be fearsome. Fortunately, equity is not so inflexible or powerless.
In order to protect the rights of the insurer under the doctrine of subrogation equity considers that
the damages payable by the wrongdoer to the insured person are subject to an equitable lien or
charge in favour of the insurer. The charge is imposed by equity because the insurer, once he has
paid under the policy, has an interest in the right of action against the wrongdoer and an interest
in the establishment, quantification, recovery and distribution of the damages awarded against
the wrongdoer. It would be unconscionable for the insured person, who has received £100,000
from the insurer, to put damages of £130,000 into his own pocket without providing for the
recoupment of the insurer who only contracted to indemnify the insured person.
The insurer can give notice to the wrongdoer of his equitable charge. When the
wrongdoer is ordered or agrees to pay £130,000 and has notice of the rights of the insurer to
subrogation, the wrongdoer can either pay the damages into court or decline to pay without the
authority.
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INSURANCE LAW CASES
consent of both the insured person and the insurer. It would be the duty of the insured person to
direct the wrongdoer to pay £95,000 of the damages to the insurer in recoupment and to pay the
balance of £35,000 to himself. The equitable charge in favour of the insurer is enforceable
against the damages ordered to be paid; that charge can be enforced so long as the damages form
an identifiable separate fund. If, in the present case, Richards Butler had distributed the damages
to the names before the stop-loss insurers issued proceedings or notified Richards Butler of their
equitable charge, the stop-loss insurers would have been reduced to exercising their rights to sue
the names for money had and received.
In the present case damages of £116m are in a separate fund held by Richards Butler on
behalf of the names albeit that the damages in the fund also include moneys held on behalf of
other names and other insurers. For the reasons I have indicated it would be unconscionable for
the names to take their shares of the
Page 398 of [1993] 1 All ER 385
damages without providing for the sums due to the stop-loss insurers to be paid out of
those damages. The equitable charge still affects the damages and affects Richards Butler, who
hold the damages with notice of the charge.
It is true that it may not be possible to distribute the damages between the stop-loss
insurers and the names at once because the amounts due to the names as opposed to other names
may still be uncertain and because the amounts due to the stop-loss insurers in any particular
case by way of subrogation may still be uncertain. These uncertainties are due to the fact that
losses of Lloyd’s underwriters surface and are quantified in some cases many years after the
relevant year of account. The calculations are also complicated by the fact that the damages of
£116m are in compensation of claims extending over different years of account with different
names and insurers and with insurance policies containing different provisions. Delay in
distributing the damages cannot be blamed on the stop-loss insurers. Delay is as much a
disadvantage to the stop-loss insurers as it is to the names. It is in the interests of everybody that
the damages shall be distributed as soon as possible. Interim distributions can be made in favour
of those names and stop-loss insurers whose rights and liabilities have been or are now capable
authority.
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INSURANCE LAW CASES
of being calculated with certainty. If necessary the court will decide how much can now be
distributed. Any reserves for uncertain events can be invested in joint names for the benefit of
the name and the stop-loss insurers concerned.
In the result I would allow the appeal by the stop-loss insurers against the refusal of
Saville J and the Court of Appeal to grant any relief in equity against the names and Richards
Butler. In my opinion the stop-loss insurers are entitled to injunctions restraining Richards Butler
from paying and each name from receiving any part of the damages of £116m now held by
Richards Butler without first providing or paying out of the damages payable to the name the
amounts which have been or shall be found to be due from that name to the stop-loss insurers by
way of subrogation.
I would dismiss the cross-appeal by the names against the declaration made by the Court
of Appeal in these terms:
‘That, when determining the amount which stop loss insurers are entitled to claim in
respect of the Settlement monies, the stop loss insurers are entitled to be reimbursed any
indemnity paid by them to an assured before that assured is fully indemnified by applying his
share of the Settlement monies to a loss occurring below the excess in that assured’s policy.’
Since drafting this speech I have read in draft the speech to be delivered by my noble and
learned friend Lord Goff of Chieveley. He agrees that the doctrine of subrogation confers on the
insurer an equitable proprietary lien or charge on the moneys recovered by the insured person
from a third party in respect of the insured loss. I agree that in the circumstances it is not now
necessary to decide whether the equitable lien or charge attaches also to the rights of action
vested in the insured person to recover from a third party. I have expressed the view that the
doctrine of subrogation does apply in those circumstances but in any future case, if the point
becomes material, that view may require reconsideration in the light of further research. Subject
to this observation I agree with the views expressed by Lord Goff and I also agree with the
speeches to be delivered by my noble and learned friends Lord Jauncey of Tullichettle and Lord
Browne-Wilkinson.
authority.
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INSURANCE LAW CASES
The names must pay the costs of the stop-loss insurers before this House and in the courts
below.
Page 399 of [1993] 1 All ER 385
LORD GOFF OF CHIEVELEY. My Lords, I, too, have reached the conclusion that the
appeal should be allowed. I start with the common law. In Yorkshire Insurance Co Ltd v Nisbet
Shipping Co Ltd [1961] 2 All ER 487, [1962] 2 QB 330, a case concerned with marine
insurance, Diplock J analysed the principle of subrogation in purely contractual terms. He said
([1961] 2 All ER 487 at 490, [1962] 2 QB 330 at 339–340):
‘The expression “subrogation” in relation to a contract of marine insurance is thus no

more than a convenient way of referring to those terms which are to be implied in the contract
between the assured and the insurer to give business efficacy to an agreement whereby the
assured in the case of a loss against which the policy has been made shall be fully indemnified,
and never more than fully indemnified.’
He went on to say that subrogation is concerned solely with the mutual rights and
liabilities of the parties to the contract of insurance. The remedies of the insurer were, he said,
essentially common law remedies; in particular, if the assured has, after payment of the loss by
the insurer, received a sum from a third party in reduction of the loss, the insurer can recover the
amount of the reduction as money had and received (for which Diplock J referred to Bullen and
Leake’s Precedents of Pleadings (3rd edn, 1868) p 187). The only role which Diplock J assigned
to equity was to come to the aid of the common law by compelling the assured to allow his name
to be used in proceedings against the third party: see also his judgment, as Lord Diplock, in
Hobbs v Marlowe [1977] 2 All ER 241 at 254–255, [1978] AC 16 at 39.
Now there is no reason why, subject to the one matter to which Lord Diplock refers, the
principle of subrogation in the field of insurance should not have developed as a purely common
law principle. But as a matter of history it did not do so. It is true that our law of marine
insurance was very largely established by Lord Mansfield, in a remarkable series of decisions
during his tenure of office as Chief Justice at the Court of King’s Bench, so much so that Park J
authority.
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INSURANCE LAW CASES
dedicated the first edition of his treatise on the law of marine insurance (Park A System of the
Law of Marine Insurances (1786)) to Lord Mansfield, describing the subject in the dedication as
one which ‘must be admitted to be the exclusive property of your Lordship’. But in the early
editions of the book there is little trace of the principle of subrogation, though there is much
learning on the subject of abandonment. Lord Mansfield CJ’s decision in the leading case of
Mason v Sainsbury (1782) 3 Doug 61, 99 ER 538 established that payment of a claim by an
insurer did not preclude him from thereafter proceeding in the name of the assured against the
wrongdoer who had caused the relevant damage, and recovering damages in full from him. The
payment of the loss by the insurer to the assured did not affect the liability of the wrongdoer; the
action against him was to be considered ‘as if the insurers had not paid a farthing’ (see 3 Doug
61 at 64, 99 ER 538 at 540). However the insured could not proceed against the third party in his
own name; he had to proceed in the name of the assured (see London Assurance Co v Sainsbury
(1783) 3 Doug 245, 99 ER 636).
It is of some interest that in Mason v Sainsbury the action against the wrongdoer was
brought in the name of the assured with his consent, for the benefit of the insurer. Here we can
see an early example of the fact that the insurer, upon payment to the assured of his loss, receives
from him as a matter of course not merely a receipt for the money, but also what has for many
years been called a letter of subrogation signed by the assured which authorises the insurer to
proceed in this way, and indeed nowadays may assign the relevant rights of action to the
Page 400 of [1993] 1 All ER 385
insurer. It is very difficult to imagine an insurer paying a claim without taking this
elementary precaution, especially as the assured can have little or no incentive to refuse to sign
such a document. I strongly suspect that letters of subrogation have been a commonplace of
insurance claims for a very long time, and that it is their regular use which explains what appears
to be a dearth of authority on such matters as proceedings to compel the assured to allow the
insurer to commence proceedings in his name, and actions for money had and received by
insurers against assured, because third parties would have settled direct with the insurer as
expressly authorised by the assured (hence, pace Lord Diplock, the absence of any reference to
authority.
Page | 651
INSURANCE LAW CASES
such an action in Bullen and Leake’s Precedents of Pleading (3rd edn)). On the other hand, there
is a substantial body of case law on the subject of the respective rights of insurer and assured in
the institution, control and settlement of proceedings against wrongdoers who have caused the
relevant loss (as to which see MacGillivray and Parkington on Insurance Law (8th edn, 1988)
paras 1191ff).
At all events, what appears to have happened is not simply that equity came to the aid of
the common law by compelling an assured whose loss has been paid to allow the insurer to
proceed in his name against a third party wrongdoer responsible for the loss, but that a principle
of subrogation was the subject of separate development by courts of equity in a line of authority
dating from Randal v Cockran (1748) 1 Ves Sen 99, 27 ER 916, which was decided before Lord
Mansfield was appointed Chief Justice of the Court of King’s Bench. This line of authority is
traced in the speech of my noble and learned friend Lord Templeman, and I am therefore spared
the burden of setting it out in this opinion. Spasmodic but consistent, the cases assert that
recoveries by the assured which reduce the loss paid by the insurer are held in trust for the
insurer, so much so that by 1881 Jessel MR regarded this proposition as indisputable (see
Commercial Union Insurance Co v Lister (1874) LR 9 Ch App 848n). This principle was
moreover recognised not only in courts of equity, but also in courts of common law (see the
decision of the Court of Common Pleas in Yates v White (1838) 1 Arn 85, 4 Bing NC 272, 132
ER 793, subsequently approved by this House in Simpson & Co v Thomson (1877) 3 App Cas
279, in which Lord Cairns LC (at 285–286) cited in extenso passages from the judgment in Yates
v Whyte 4 Bing NC 272 at 282–283, 132 ER 793 at 797 in which reliance was placed on Randal
v Cockran, and Lord Blackburn (at 293) relied on Randal v Cockran itself in a passage to which I
shall refer later in this opinion. It is perhaps also relevant that in 1783 Lord Mansfield CJ had
justified his conclusion that the insurer could not proceed in his own name but must proceed in
the name of the assured on the ground that ‘Trustee and cestui que trust cannot both have a right
of action’: see London Assurance Co v Sainsbury (1783) 3 Doug 245 at 253, 99 ER 636 at 640.
I agree with my noble and learned friend Lord Browne-Wilkinson that the decisive case
in the line of equity cases is White v Dobinson (1844) 14 Sim 273, 60 ER 363; affd (1845) 5
LTOS 233. The case was concerned with a collision at sea. The owner of one of the ships, after
authority.
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INSURANCE LAW CASES
payment by his underwriter of £205, was awarded £600 damages in arbitration proceedings
against the other shipowner. Shadwell V-C, relying upon Randal v Cockran and Blaauwpot v da
Costa (1758) 1 Eden 130, 28 ER 633, granted an interlocutory injunction which had the effect of
retaining the fund, and not letting it pass into the hands of the assured. The injunction appears to
have restrained both the assured from receiving, and the other shipowner from paying, the money
without first paying or providing for the sum of £205 paid by the insurer (see 5 LTOS 233). Lord
Lyndhurst LC discharged the injunction as against the other shipowner, but otherwise maintained
it in force. The case is important for a number of reasons. First, the
Page 401 of [1993] 1 All ER 385
insurer’s case was advanced on the basis that he had a lien on the sum awarded, and was
resisted on the ground that the insurer’s right, if it existed at all, was a right to proceed at law in
an action for money had and received, and was not an equitable right. That argument was
rejected. Second, the Lord Chancellor also rejected a claim by a bank as assignee from the
assured, on the ground that the bank’s security was taken subject to all the equities which would
have affected the money received in the hands of the assured himself. Third, the Lord Chancellor
held that the insurers had a claim upon the fund awarded, and were ‘entitled in some shape or
other to recover back the money they have paid’.
Now it is true that the case was concerned with an interlocutory injunction, a point which
evidently concerned the Lord Chancellor himself. But he nevertheless upheld the injunction on
the basis of the authority cited to him, in which, as he said (5 LTOS 233):
‘… we have the clearly expressed opinions of Lord Hardwicke [in Randal v Cockran
(1748) 1 Ves Sen 98, 27 ER 916] and Lord Northington [in Blaauwpot v da Costa (1758) 1 Eden
130, 28 ER 633], recognized by Mr. Baron Parke, and more recently by Lord Abinger [in Brooks
v MacDonnell (1835) 1 Y & C Ex 500, 160 ER 204], who at that time possessed considerable
experience of the practice in equity, from having presided for several years on the equity side of
the Court of Exchequer …’
authority.
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INSURANCE LAW CASES
Subsequent authorities to the same effect are King v Victoria Insurance Co [1896] AC
250 at 255–256 per Lord Hobhouse, who (in a passage in which he appears to have placed no
reliance upon the existence of an assignment by the assured of its rights and causes of action
against the third party) expressed the opinion that the assured would have held any damages
recovered from the third party as trustee for the insurer, and Re Miller Gibb & Co Ltd [1957] 2
All ER 266, [1957] 1 WLR 703. The only case in equity which appears at first sight to be
inconsistent with this line of authority is Stearns v Village Main Reef Gold Mining Co Ltd
(1905) 10 Com Cas 89. However, as my noble and learned friend Lord Browne-Wilkinson has
pointed out, that case was concerned with the recovery of an overpayment; indeed, it was upon
that basis that it was distinguished by Wynn-Parry J in Re Miller Gibb & Co Ltd [1957] 2 All ER
266 at 272, [1957] 1 WLR 703 at 710–711.
Despite Saville J’s reservations on this point, I can discern no inconsistency between the
equitable proprietary right recognised by courts of equity in these cases and the personal rights
and obligations embodied in the contract of insurance itself. No doubt our task nowadays is to
see the two strands of authority, at law and in equity, moulded into a coherent whole; but for my
part I cannot see why this amalgamation should lead to the rejection of the equitable proprietary
right recognised in the line of cases to which I have referred. Of course, it is proper to start with
the contract of insurance, and to see how the common law courts have worked out the mutual
rights and obligations of the parties in contractual terms with recourse to implied terms where
appropriate. But, with all respect, I am unable to agree with Diplock J that subrogation is in this
context concerned solely with the mutual rights and obligations of the parties under the contract.
In this connection, I observe from the report of Yorkshire Insurance Co Ltd v Nisbet Shipping
Co Ltd [1961] 2 All ER 487, [1962] 2 QB 330 that the important case of White v Dobinson
(1844) 14 Sim 273, 60 ER 363; affd 116 LTOS 233 was not cited in argument, and indeed the
existence of an equitable proprietary right was not in issue in that case. In these circumstances I
cannot derive from Diplock J’s judgment any justification for sweeping the line of equity cases
under the carpet as though it did not exist. In my opinion, this line of authority must be
recognised,
Page 402 of [1993] 1 All ER 385
authority.
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INSURANCE LAW CASES
and appropriate weight should be given to the views expressed in the cases by the
distinguished judges who decided them. I wish to add that I do not read s 79 of the Marine
Insurance Act 1906 (concerned with the right of subrogation) as in any way detracting from this
conclusion.
Even so, an important feature of these cases is that the principle of subrogation in the law
of insurance arises in a contractual context. It is true that in some cases at common law it has
been described as arising as a matter of equity. Thus in Burnand v Rodocanachi Sons & Co
(1882) 7 App Cas 333 at 339 Lord Blackburn described it simply as ‘an equity’. Furthermore, it
has not been usual to express the principle of subrogation as arising from an implied term in the
contract. Even so it has been regarded, both at law and in equity, as giving effect to the
underlying nature of a contract of insurance, which is that it is intended to provide an indemnity
but no more than an indemnity. Not only does this principle inform the judgments of the Court of
Appeal in the leading case of Castellain v Preston (1883) 11 QBD 380, [1881–5] All ER Rep
493, but it underlies Lord Lyndhurst LC’s judgment in White v Dobinson (1845) 5 LTOS 233. In
so far as the principle requires the payment of money, it could no doubt be formulated as an
implied term, to which effect could have been given by the old action for money had and
received. But I do not see why the mere fact that the purpose of, subrogation in this context is to
give effect to the principle of indemnity embodied in the contract should preclude recognition of
the equitable proprietary right, if justice so requires. If I search for a parallel, the closest analogy
is perhaps to be found in the law of agency, in which, although the relationship between principal
and agent is governed by a contract, nevertheless the agent may be held in certain circumstances
to hold money, which he has received from a third party in his capacity as agent, as trustee for
his principal. It is by no means easy to ascertain the circumstances in which a trusteeship exists;
but, in a valuable discussion in Bowstead on Agency (15th edn, 1985) pp 162–163, Professor
Francis Reynolds suggests that it is right to inquire—
‘whether the trust relationship is appropriate to the commercial relationship in which the
parties find themselves; whether it was appropriate that money or property should be, and
whether it was, held separately, or whether it was contemplated that the agent should use the
authority.
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money, property or proceeds of the property as part of his normal cash flow in such a way that
the relationship of debtor and creditor is more appropriate.’
He also suggests that—
‘a central question, perhaps too often overlooked (because not directly in issue), is
whether the rights of the principal are sufficiently strong, and differentiable from other claims,
for him to be entitled to a prior position in respect of them on the agent’s bankruptcy.’
I have little doubt that the distinguished judges who decided the cases in the line of equity
authority to which I have referred must have considered that money received by an assured from
a third party in reduction of a loss paid by an insurer should not be treated as available for the
assured’s normal cash flow, and further that the rights of the insurer to such money were
sufficiently strong to entitle the insurer to priority in the event of the assured’s bankruptcy, as
was indeed held by Wynn-Parry J in Re Miller Gibb & Co [1957] 2 All ER 266, [1957] 1 WLR
703. I for my part can see no good reason to depart from this line of authority. However, since
the constitution of the assured as trustee of such money may impose upon him obligations of too
onerous a character (a point which troubled Saville J in the present case), I am very content that
the equitable proprietary right of the insurer
Page 403 of [1993] 1 All ER 385
should be classified as a lien, as proposed by my noble and learned friend Lord

Templeman, and indeed as claimed by the insurer in White v Dobinson (1844) 14 Sim 237, 60
ER 363 itself. Indeed a lien is the more appropriate form of proprietary right in circumstances
where, as here, its function is to protect the interest of the insurer in an asset only to the extent
that its retention by the assured will have the effect that he is more than indemnified under the
policy of insurance.
There is one particular problem to which I wish to refer, although, as I understand it, it
does not fall to be decided in the present case. Does the equitable proprietary interest of the
insurer attach only to a fund consisting of sums which come into the hands of the assured in
reduction of the loss paid by the insurer? Or does it attach also to a right of action vested in the
authority.
Page | 656
INSURANCE LAW CASES
assured which, if enforced, would yield such a fund? The point is not altogether easy. I can see
no reason in principle why such an interest should not be capable of attaching to property in the
nature of a chose in action. Moreover that it should do so in the present context appears to have
been the opinion of Lord Blackburn in Simpson v Thomson (1877) 3 App Cas 279 at 292–293.
On the other hand, cases such as Morley v Moore [1936] 2 All ER 79, [1936] 2 KB 359 appear
to point in the opposite direction, as perhaps does the decision of Lord Lyndhurst LC in White v
Dobinson (1845) 5 LTOS 233 to discharge the injunction as against the owner of the ship at fault
in that case. However, since the point was not directly addressed in the argument before your
Lordships, I am reluctant to reach any conclusion upon it without a full examination of the
authorities relating to the respective rights and obligations of insurer and assured, especially with
regard to the conduct and disposal of litigation relating to causes of action of the relevant kind. I
therefore wish to reserve my opinion upon this question, the answer to which I do not regard as
necessary for the resolution of the issue which has arisen in the present case.
For these reasons, I would allow the appeal. For the reasons given by my noble and
learned friends Lord Templeman and Lord Jauncey of Tullichettle, I would dismiss the cross-
appeal.
LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the advantage of reading

in draft the speeches of my noble and learned friends Lord Templeman, Lord Goff of Chieveley
and Lord Browne-Wilkinson. I agree that for the reasons which they have given the appeal of the
stop-loss insurers should be allowed and I cannot usefully add anything to what they have said. I
also agree that the cross-appeal by the names should be refused and wish only to add a few
words of my own thereanent.
The cross-appeal raises the question of how moneys recovered (the recoveries) by the
names in the Outhwaite actions are to be applied as between the names and the stop-loss
insurers. A typical policy granted by the stop-loss insurers undertook to—
‘indemnify the Assured for the amount by which the Assured’s overall ascertained net
underwriting loss as hereinafter defined for the Underwriting Year(s) of Account shown in the
schedule exceeds the amount stated as “Excess” in the schedule.’
authority.
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INSURANCE LAW CASES
The policy further provided that the insurers liability should not exceed a specified limit.
The names contended that the recoveries should be applied first towards their losses above the
specified limit, second towards their losses up to the excess and thereafter to the stop-loss
insurers. The latter accepted that the recoveries should be applied in the first instance towards the
names’ losses above the specified limit but contended that they should then be applied for their
benefit. The
Page 404 of [1993] 1 All ER 385
competing arguments may perhaps be best illustrated by a hypothetical example which

was relied upon in the Court of Appeal and before this House. A name having a policy with an
excess of £25,000 and insurers’ liability limited to £100,000 suffers a total loss of £160,000, but
receives £100,000 under his policy and later recovers £130,000 in the action. The names argued
that the £130,000 fell to be applied as to £35,000 to meet the uninsured top slice of the loss, as to
£25,000 to meet the initial excess and as to the remaining £70,000 for the benefit of the stop-loss
insurers. There was no dispute as to the application of £35,000 but the stop-loss insurers
maintained that the remaining £95,000 should be applied for their benefit leaving them with a
liability to the insured of only £5,000. In short the question was whether the names were entitled
to recoup themselves out of the recoveries for their initial uninsured £25,000 loss in priority to
the stop-loss insurers. Saville J held that the names were so entitled but the Court of Appeal held
that they were not. Your Lordships were informed that a sum of about £6m was affected by this
issue.
The basis of the stop-loss insurers’ right to receive any part of the recoveries is the
doctrine of subrogation. In Castellain v Preston (1883) 11 QBD 380 at 386, [1881–5] All ER Rep
493 at 495 Brett LJ said:
‘The very foundation, in my opinion, of every rule which has been applied to insurance
law is this, namely, that the contract of insurance contained in a marine or fire policy is a
contract of indemnity, and of indemnity only, and that this contract means that the assured, in
case of a loss against which the policy has been made, shall be fully indemnified, but shall never
be more than fully indemnified.’
authority.
Page | 658
INSURANCE LAW CASES
He later went on to give an enlarged definition of subrogation pointing out that ‘the
insurer must be placed in the position of the assured’ (see 11 QBD 380 at 388, [1881–5] All ER
Rep 493 at 496). He pointed out that although an insurer who had not yet fully indemnified an
insured could not, in relation to prior recoveries, be subrogated to any right of action
nevertheless it would be contrary to the doctrine of subrogation if the insured’s loss were not
diminished vis-à-vis the insurer (see 11 QBD 380 at 389–390, cf [1881–5] All ER Rep 493 at
496). Brett LJ was thus equiparating the effect of recoveries made before indemnification by the
insurer with those made afterwards. In the case of recoveries made towards a loss which was
indemnifiable but had not yet been indemnified the matter could equally well be approached by
saying that the loss which the insurer had undertaken to meet was the initial loss diminished by
all relevant recoveries prior to payment by the insurer. This appears to have been the approach of
Cotton LJ in Castellain v Preston 11 QBD 380 at 393, [1881–5] All ER Rep 493 at 498, where
after referring to the loss insured against he said:
‘In order to ascertain what that loss is, everything must be taken into account which is
received by and comes to the hand of the assured, and which diminishes that loss. It is only the
amount of the loss, when it is considered as a contract of indemnity, which is to be paid after
taking into account and estimating those benefits or sums of money which the assured may have
received in diminution of the loss.’
He said (11 QBD 380 at 395, [1881–5] All ER Rep 493 at 498):
‘The principle which I have enunciated goes further, and if there is a money or any other
benefit received which ought to be taken into account in diminishing the loss or in ascertaining
what the real loss is against which the
Page 405 of [1993] 1 All ER 385
contract of indemnity is given, the indemnifier ought to be allowed to take advantage of it

in order to calculate what the real loss is …’
A similar approach was adopted by Lord Blackburn in Burnand v Rodocanachi Sons &
Co (1882) 7 App Cas 333 at 339 in these words:
authority.
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INSURANCE LAW CASES
‘The general rule of law (and it is obvious justice) is that where there is a contract of
indemnity (it matters not whether it is a marine policy, or a policy against fire on land, or any
other contract of indemnity) and a loss happens, anything which reduces or diminishes that loss
reduces or diminishes the amount which the indemnifier is bound to pay; and if the indemnifier
has already paid it, then, if anything which diminishes the loss comes into the hands of the
person to whom he has paid it, it becomes an equity that the person who has already paid the full
indemnity is entitled to be recouped by having that amount back.’
What is, in my view, particularly significant about the foregoing dicta is the emphasis
which they place upon the fact that in the context of recoveries subrogation is concerned only
with the loss against which the assured is insured rather than any general loss. If an assured has
suffered an insured loss and an uninsured loss full indemnification of the former subrogates the
insurers irrespective of the fact that the assured has not yet recovered the uninsured loss.
Saville J in rejecting the argument of the stop-loss insurers said that it ‘involves the
proposition that they can take account of the recovery before the assured has been reimbursed for
his loss’. He concluded his judgment by saying:
‘The question to be asked … is whether the recovery together with the indemnity will
more than compensate the assured for the loss. If it will, then, if this arises before payment, the
amount of the indemnity will be reduced so as to avoid overcompensation, while, if it occurs
after payment, the assured will have to repay the amount of overcompensation to his
indemnifiers. I can only repeat that any approach which does not achieve this result but instead
leaves the assured over- or under-compensated must be wrong, since it offends the very reason
why subrogation exists in our law.’
With respect to the learned judge it seems to me that he was there confusing the whole
loss suffered by the assured with the loss against which the insurer had agreed to indemnify him.
When the indemnity extends to the total loss sustained the two will be coincident but in the
present case they were not. In my view Staughton LJ was correct in stating that—
authority.
Page | 660
INSURANCE LAW CASES
‘It is [the loss against which the policy has been made] which the insured must have been
reimbursed for, if the insurer is to claim any benefit by way of subrogation.’
In this case the stop-loss insurers undertook to indemnify the assured for the amount by
which their overall ascertained underwriting loss exceeded a specified excess but did not exceed
a stated limit. In the given example they undertook to meet losses neither below £25,000 nor
above £125,000. When they paid over the £100,000 to the names the latter were fully
indemnified against the insured loss although they themselves had further uninsured losses of
£60,000 and the stop-loss insurers were subrogated to any recoveries which reduced the insured
loss. If in the given example recovery of £130,000 had been achieved before the stop-loss
insurers were called upon to pay what would have been the loss which the names had at that
stage sustained? The insurers would answer ‘£30,000’ upon
Page 406 of [1993] 1 All ER 385
the view that a recovery of £130,000 had reduced an initial loss of £160,000 to that
figure. The names however would answer, ‘We have sustained a loss of £30,000 lying within a
band between £25,000 and £55,000 for which loss we are entitled to indemnity from the
insurers’. My Lords, not only does the names’ answer defy common sense but it also involves
their accepting that they have sustained no loss in respect of the initial excess, a loss whose
existence is a prerequisite to any liability on the part of the stop-loss insurers. To put the matter
another way, the names’ answer involves treating the ‘loss against which the policy has been
made’ not as provided for in that policy but as the first £100,000 without excess, an exercise for
which there is, in my view, no warrant whatsoever. Suppose that instead of carrying the first
£25,000 themselves the names had insured that sum with another insurer. Could they on receipt
of the £130,000 of recoveries have paid £25,000 to that insurer at the expense of the stop-loss
insurers? The answer can only be No. The fact that they have chosen to carry their own insurance
for that sum cannot in my view place them in a better position vis-à-vis the other insurers than
would have been an insurer of that sum. When an insured loss is diminished by a recovery from
a third party, whether before or after any indemnification has been made, the ultimate loss is
authority.
Page | 661
INSURANCE LAW CASES
simply the initial loss minus the recovery and it is that sum to which the provisions of the policy
of assurance apply including any provision as to an excess.
My Lords, for the foregoing reasons and for those given by my noble and learned friend
Lord Templeman I consider that the Court of Appeal reached a correct conclusion on this matter
and that the cross-appeal should be dismissed.
LORD BROWNE-WILKINSON. My Lords, I agree with the speeches of my noble and

learned friends Lord Templeman and Lord Jauncey of Tullichettle. I add some words of my own
on the question whether the stop-loss insurers have a proprietary interest in the damages
recovered by the names from Outhwaite because we are differing from the Court of Appeal on
that point.
Dillon LJ (with whom Staughton and Nolan LJJ agreed on this point) based his
conclusion that the doctrine of subrogation does not give rise to any proprietary interest primarily
on the statement of the law by Diplock J in Yorkshire Insurance Co Ltd v Nisbet Shipping Co
Ltd [1961] 2 All ER 487 at 490, [1962] 2 QB 330 at 339–340 and, as Lord Diplock, in Hobbs v
Marlowe [1977] 2 All ER 241 at 254–255, [1978] AC 16 at 39. Lord Diplock said, in effect, that
in relation to insurance the right of subrogation was a common law doctrine based on the implied
terms of the contract of insurance, the role of equity being limited to aiding the common law
right of recovery by forcing the assured to permit the insurers to sue third parties in the name of
the assured. It was the view of the Court of Appeal that, as a common law doctrine, the right of
subrogation enjoyed by insurers was unlikely to give rise to a trust or other equitable or
proprietary right.
However, the researches of counsel in the present case have failed to disclose any
reported decision before the fusion of law and equity in which an insurer successfully sued the
assured at law for money had and received, being moneys recovered by the assured from a third
party wrongdoer in reduction of the insured loss. Nor has any case been found in which a court
of equity was asked to make an order directing the assured to permit the insurers to sue in the
name of the assured. Nor can I find in Bullen and Leake’s Precedents of Pleadings (3rd edn,
1868) p 187 (on which Diplock J relied in the Yorkshire Insurance case [1961] 2 All ER 487 at
authority.
Page | 662
INSURANCE LAW CASES
491, [1962] 2 QB 330 at 341) any precedent for a common law action for money had and
received brought by the insurer against the insured.
On the other side, the authorities cited by Lord Templeman show a series of decisions
from 1748 onwards in which courts of equity were themselves enforcing
Page 407 of [1993] 1 All ER 385
rights of subrogation against the assured and in which both equity and common law
courts referred to the assured as holding benefits received from a third party as ‘trustee’ for the
insurers or subject to a lien in favour of the insurers.
In my judgment therefore Lord Diplock’s dicta are not well founded if they suggest that
subrogation in insurance cases was purely a common law doctrine and that equity only
intervened for the purpose of enabling the insurer to sue in the name of the assured. Equity itself
enforced rights of subrogation against the assured. Despite the lack of reported cases, it may well
be that before 1875 the common law also recognised the right of insurers to sue the assured for
money had and received. The probability is that in the majority of cases there was a letter of
subrogation obtained from the assured when the insurance moneys were paid. Such a letter
would regulate the rights of the insurers to sue and the destination of the moneys recovered.
What, then, was the basis on which equity enforced rights of subrogation? Was it merely
a personal obligation of the assured to account to the insurers for benefits received from third
party wrongdoers in diminution of the insured loss, or was it a proprietary right of the insurers in
the damages recovered from third parties? In my judgment, the authorities show that it was a
proprietary right in the damages recovered.
First, the question arose whether, in an action at law by the assured against the third party
wrongdoer, the damages recoverable had to be reduced by the amount of the insurance moneys
received by the assured. It was argued that, unless such reduction were made, the assured would
be obtaining double compensation. In Yates v White (1838) 1 Arn 85 such an argument was
rejected by the Court of Common Pleas on the ground that the assured was not making a double
authority.
Page | 663
INSURANCE LAW CASES
recovery since he would be a trustee for the insurers of the moneys recovered from the third
party wrongdoer. Tindal CJ said (at 91):
‘The principle that the insured stands as trustee for the insurer, after the latter has paid, is
established by the case of Randal v. Cockran ((1748) 1 Ves Sen 98, 27 ER 916): whatever
money therefore the plaintiff may recover in the present action, equity will undoubtedly compel
him to pay over to the underwriters.’
Park J followed the decision in Mason v Sainsbury (1782) 3 Doug 64, 99 ER 538,
holding that there would be no double recovery by the assured since he would hold the damages
recovered as trustee for the insurer. Both Mason v Sainsbury and Yates v White were approved
by this House in Simpson & Co v Thomson (1877) 3 App Cas 279.
Next, the question arose whether an insurer entitled by way of subrogation could at law
sue a third party wrongdoer in his own name or only in the name of the assured. It was held that
he could only sue in the name of the assured: see London Assurance Co v Sainsbury (1783) 3
Doug 245, 99 ER 638. Lord Mansfield CJ said (3 Doug 245 at 253, 99 ER 638 at 640):
‘If the insurer could sue in his own name, no release by the insured would bar, nor would
a verdict by him be a bar. It is impossible that the insured should transfer, and yet retain his right
of action. Trustee and cestui que trust cannot both have a right of action.’
However, in my judgment the decisive case is White v Dobinson (1844) 14 Sim 273, 60
ER 363; affd (1845) 5 LTOS 233. In that case Hicks had insured the ship Diana with the
plaintiff. Diana was in collision with Xenophon owned by Dobinson. The plaintiff paid the full
sum due under the insurance to Hicks. Hicks then brought an action against Dobinson as owner
of the Xenophon and
Page 408 of [1993] 1 All ER 385
was awarded £600 damages. Hicks had assigned to a bank whatever he recovered from
the owner of the Xenophon. The plaintiff sought, and Shadwell V-C granted, an interlocutory
injunction restraining Hicks from receiving and Dobinson from paying the £600 damages
authority.
Page | 664
INSURANCE LAW CASES
without first recouping to the plaintiff the amount of the insurance he had paid, on the ground
that by way of subrogation the plaintiff had a lien in equity on the fund. Lord Lyndhurst LC
upheld the Vice-Chancellor’s decision, but discharged the injunction against Dobinson. First, the
Lord Chancellor disregarded the rights of the bank as assignee from Hicks since the bank’s rights
were ‘subject to all the equities which would have affected the money recovered’. Second, he
held that ‘the underwriters have a claim upon the fund awarded, and are entitled in some shape or
other to recover back the money they have paid’.
Although this was only an interlocutory decision, it was argued for two days and decided
by a distinguished Lord Chancellor. It is clear that it recognised that the insurer enjoyed a
proprietary right in the damages (not merely a personal right of recovery from Hicks) both
because the injunction froze the damages in specie and because the assignment of the damages to
the bank was disregarded as being subject to the plaintiff’s equities in the fund. This is therefore
a clear decision before the fusion of law and equity that equity treated an insurer entitled to be
subrogated as having a proprietary interest in damages recovered from a third party wrongdoer.
However, it should be noted that Lord Lyndhurst LC did not continue the injunction
against the third party wrongdoer, Dobinson. The case therefore established only that there is a
proprietary right in the damages once recovered by the assured.
In Re Miller Gibb & Co Ltd [1957] 2 All ER 266, [1957] 1 WLR 703 the insurer was
held to have a proprietary interest in the damages recovered from the third party wrongdoer. In
my judgment, that case was rightly decided.
With one possible exception we were not referred to any decided case pointing in the
other direction. The Court of Appeal in the present case treated the decision in Stearns v Village
Main Reef Gold Mining Co (1905) 10 Com Cas 89 as being to the contrary effect. In that case,
gold belonging to the defendants had been insured by the plaintiffs. The Transvaal government,
shortly before the outbreak of the Boer War, commandeered the defendants’ gold to the value of
£21,880. In 1899 the plaintiffs were paid £7,239-odd by the Transvaal government, which
payment the court decided had to be treated as a reduction in the defendants’ loss. On 2 August
1900 the plaintiffs, in ignorance of the payment by the Transvaal government, accepted liability
authority.
Page | 665
INSURANCE LAW CASES
for the full £21,880 and paid the sum into the joint names of the plaintiffs and the defendants to
await the outcome of certain other litigation. On 19 November 1902 the £21,880 together with
the amount earned on it was paid out to the defendants. When the plaintiffs subsequently learnt
of the payment by the Transvaal government, they sued to recover the £7,239 plus interest. The
trial judge held that the plaintiffs were entitled to recover the £7,239 plus interest from 2 August
1900 (the date of its investment in the joint names) until 19 November 1902 (the date of its
payment out to the defendants). The defendants appealed and the plaintiffs cross-appealed,
claiming interest down to the date of trial on the ground that the defendants were trustees. Only
Stirling LJ dealt in his judgment with the cross-appeal. He rejected the claim for interest, holding
that the relationship was one of debtor and creditor not that of trustee and cestui que trust.
That case is difficult to understand. So far as trusteeship was concerned, there was no
fund capable of being the subject matter of a trust since the moneys were recovered by the
assured from the third party (the Transvaal government) before
Page 409 of [1993] 1 All ER 385
the plaintiff insurers settled the insurance claim. It was a case of overpayment by the
insurers under a mistake, not subsequent recovery by the assured from a third party of a fund for
which the assured was accountable to the insurer. The only possible form of equitable relief in
that case would be to have imposed on the assured some form of constructive trusteeship not of
specified funds but as a general equitable liability.
Although the principles underlying subrogation as stated in Castellain v Preston (1883)

11 QBD 380, [1881–5] All ER Rep 493 apply to sums recovered from a third party whether such
recovery takes place before or after the insurers have paid under the policy, the proper legal
analysis of the parties’ rights does depend on the order of receipts. If the assured recovers from
the third party (thereby reducing the insured loss) before the insurers have paid under the policy,
there is an overpayment of the insurance money: there is no fund of money which can be the
subject matter of a trust or charge. If, on the other hand, the assured does not recover from the
third party until after payment of the insurance moneys the moneys recovered from the third
party constitute a defined fund which can be impressed with a lien or trust.
authority.
Page | 666
INSURANCE LAW CASES
The decision of Stirling LJ in that case goes no further than the facts of that case
demanded, namely to hold that an overpaid assured is not accountable as a constructive trustee
for the amount of the overpayment, there being no defined trust fund. He was not considering a
case where there was a defined fund arising from a subsequent recovery by the insured which the
insured was still holding.
In my judgment, therefore, an insurer who has paid over the insurance moneys does have
a proprietary interest in moneys subsequently recovered by an assured from a third party
wrongdoer. Although many of the authorities refer to that right as arising under a trust, in my
judgment the imposition of a trust is neither necessary nor desirable: to impose fiduciary
liabilities on the assured is commercially undesirable and unnecessary to protect the insurers’
interests. In my judgment, the correct analysis is as follows. The contract of insurance contains
an implied term that the assured will pay to the insurer out of the moneys received in reduction
of the loss the amount to which the insurer is entitled by way of subrogation. That contractual
obligation is specifically enforceable in equity against the defined fund (ie the damages) in just
the same way as are other contracts to assign or charge specific property, eg equitable
assignments and equitable charges. Since equity regards as done that which ought to be done
under a contract, this specifically enforceable right gives rise to an immediate proprietary interest
in the moneys recovered from the third party. In my judgment, this proprietary interest is
adequately satisfied in the circumstances of subrogation under an insurance contract by granting
the insurers a lien over the moneys recovered by the assured from the third party. This lien will
be enforceable against the fund so long as it is traceable and has not been acquired by a bona fide
purchaser for value without notice. In addition to the equitable lien, the insurer will have a
personal right of action at law to recover the amount received by the assured as moneys had and
received to the use of the insurer.
As to the question whether the insurers have a proprietary interest in the assured’s cause
of action against the third party (as contrasted with the damages actually recovered) I prefer to
express no concluded view. I do not think that the proprietary interest in the damages necessarily
postulates a pre-existing proprietary interest in the cause of action. The contrary view could be
reached by an argument along the following lines. Any equitable proprietary right must be based
authority.
Page | 667
INSURANCE LAW CASES
on the contract between the insurers and the assured. The implied terms of such contract are
established by the decided authorities. Some of those implied terms may be inconsistent with the
insurers having any right of property in the cause of action
Page 410 of [1993] 1 All ER 385
as opposed to the damages recovered. Thus, the third party can compromise the claim
with the assured alone, without requiring the concurrence of the insurers. Again, the third party
will obtain a good discharge for a judgment only if he pays the assured as opposed to the
insurers. If the insurers have a proprietary interest in the cause of action it could be argued that
the assured alone could neither effect a valid compromise nor give a good discharge: the insurers
also would have to be parties. Accordingly, it could be said that the implied terms of the contract
between the insurers and the assured are such that equity would not be specifically enforcing the
parties’ bargain if it treated the insurers as having proprietary rights in the cause of action
inconsistent with the rights of the assured and that accordingly the rights of the insurers are
purely personal rights to require the assured either to pursue the cause of action against the third
party or to permit the insurers to do so in his name. But there are plainly factors pointing the
other way and since the question was not fully argued I prefer to express no view on the point.
For these reasons, in addition to those given by my noble and learned friends Lord
Templeman and Lord Jauncey of Tullichettle, I would allow the appeal and dismiss the cross-
appeal.
LORD SLYNN OF HADLEY. My Lords, I have had the advantage of reading in draft
the speech of my noble and learned friend Lord Templeman. I agree that for the reasons he gives,
the appeal should be allowed and the cross-appeal dismissed.
17 December. The House of Lords let it be known that the following addendum should be
added to the speeches.
LORD TEMPLEMAN. Their Lordships are now given to understand that, although
joined to the action as a representative name, Lord Napier and Ettrick was not in fact insured by
authority.
Page | 668
INSURANCE LAW CASES
any of the stop-loss insurers and that there was therefore no question of him personally delaying
any payment to the stop-loss insurers.
Appeal allowed against first respondent. Stop-loss insurers granted injunction in terms set
out in speech of Lord Templeman. Cross-appeal dismissed.
HILL V MERCANTILE AND GENERAL REINSURANCE CO PLC

[1996] 3 ALL ER 865, HL
Conjoined appeals
LORD MUSTILL. My Lords, these are the latest in a series of appeals arising from heavy losses
in the London reinsurance market. On this occasion, although the notorious ‘LMX spiral’ forms
part of the history it did not found or enhance the claim, nor are there allegations of negligent
underwriting, the question at the present stage being one of construction alone.
The issue arises on assumed facts in proceedings for summary judgment under RSC Ord 14.
Four sets of contracts are involved. First, there was a contract between Kuwait Airways Corp
(KAC) and a number of Kuwaiti insurance companies whereby the latter insured KAC against
loss or damage to 15 aircraft for the period between 1 July 1990 and 30 June 1991 caused by,
inter alia:
‘(a) War, invasion, acts of foreign enemies, hostilities (whether war be declared or not) … (e)
Confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition for title or
use by or under the order of any Government …’
The 15 aircraft were insured on agreed values totalling $US692m. The policy also provided that
‘the Maximum Sum Insured in respect of Ground Risks is US$300,000,000 any one occurrence’
and also—
authority.
Page | 669
INSURANCE LAW CASES
‘It is noted and agreed that the indemnity provided by this Policy other than Paragraph (a) of
Section One is extended to include loss of or damage to Aircraft Spares and equipment which is
the property of the Assured or for which they are responsible.’
Also concerned in this dispute was a single aircraft belonging to British Airways. No separate
point arises in relation to the insurance and reinsurance of this aircraft, and for simplicity I will
concentrate on the aircraft owned by KAC.
The second contract was a policy whereby syndicates or companies in the London market (the
primary reinsurers) reinsured the Kuwaiti insurers in respect of the direct insurances on terms
said to be identical to those of the direct insurance. The contract gave the primary reinsurers
complete control over negotiations and settlement of losses. Whether this was the reflection of a
‘fronting’ arrangement between them does not appear, but the two sets of insurers, and the two
contracts of insurance and reinsurance, were treated for present purposes as a single transaction.
Since this is convenient and raises no difficulties in principle, I will refer to them collectively as
‘the direct contracts’ and ‘the direct insurers/reinsurers’ respectively.
Page 869 of [1996] 3 All ER 865
Next, there were chains of excess of loss reinsurances (the intermediate reinsurances) which
started with the primary reinsurers and came to rest, evidently after many circles through the
spiral, with syndicates or companies whose identities are not in evidence, and whom I will call
‘the inward reinsured’. It has been assumed that these contracts were written on terms identical
(except of course as to the definitions of the layers of cover, the premiums and the like) as those
of the ‘inward contracts’, to which I will come in a moment.
The penultimate set of contracts comprised further excess of loss reinsurances made between the
inward reinsured and certain syndicates (the syndicates) represented in this litigation by the
individual respondents to the two conjoined appeals now before the House. These contracts have
been called ‘the inward contracts’. According to the agreed statement of facts and issues
prepared for this appeal, ‘It is believed that each of the [syndicates’] inwards contracts of
reinsurance were in materially identical terms’. I will assume this belief to be correct, and that
authority.
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the specimen contract in the appeal papers is typical of the others. It is important to note that in
contrast to the direct contracts the period of cover was for 12 months from 1 January 1990. The
contract included the following term, described as ‘Settlements Clause 1987 (XL on XL) in
respect of Aviation Business’:
‘All loss settlements by the Reassured including compromise settlements and the establishment
of funds for the settlement of losses shall be binding upon the Reinsurers, providing such
settlements are within the terms and conditions of the original policies and/or contracts … and
within the terms and conditions of this Reinsurance.’
I will call this the ‘follow settlements’ clause.
Finally, there were the ‘outward contracts’. These were excess of loss policies, made by the
syndicates with various companies and syndicates, including the appellants, in respect of the
risks reinsured under the inward policies. It is under these contracts that the present dispute has
arisen. It is agreed that they all incorporated the follow settlements clause. They also included
the Joint Excess Loss Committee Clauses 1 January 90, but since in my opinion these add
nothing relevant to the present appeals I will not set them out. The tranche of cover was
expressed by reference to the net loss suffered by the reinsured, the definition of which stipulated
that ‘loss’ meant loss, damage, liability or expense ‘arising from any one event’: a formula
different from that employed in the direct insurance/reinsurance.
The provisions in the outward contracts concerning the duration of the cover are of cardinal
importance. According to the agreed facts, in the case of all but three of these contracts the
period of cover was (like the inward contracts) from 1 January 1990 to 31 December 1990. In the
case of two contracts protecting one of the syndicates the period of the reinsurance was from 1
April 1990 to 31 March 1991, and in the case of another syndicate it was from 1 October 1989 to
30 September 1990.
In summary, therefore, the insurances were as follows. (1) The direct contracts between KAC
and the direct insurers/primary reinsurers, for 12 months ending 30 June 1991, covering war,
authority.
Page | 671
INSURANCE LAW CASES
hostilities etc (para (a)) and seizure etc (para (e)), with ground risks limited to $US300m for ‘any
one occurrence’ and with additional cover for spares under para (a). (2) Chains of intermediate
Page 870 of [1996] 3 All ER 865
reinsurances, with the primary reinsurers at one end and the inward reinsured on the other, on
terms not precisely known. (3) The inward contracts between the inward reinsured and the
syndicates, for cover between 1 January and 31 December 1990, on terms including the follow
settlements clause. (4) The outward contracts between the syndicates and the appellants,
Mercantile and General Reinsurance Co plc (M & G), for cover in most instances between 1
January and 31 December 1990, on terms including the follow settlements clause, and with the
layer of cover defined in terms of ‘any one event’.
I now turn to the events which are said to found claims under the policies along the chain. On 2
August 1990 Iraqi invading forces seized control of the 15 aircraft on the ground at Kuwait
airport. Within the following few days, the aircraft were flown to Iraq. During January 1991 six
of the aircraft were removed to Iran, and one to Jordan. Of the aircraft remaining in Iraq, seven
were destroyed on the ground by Allied attacks during January and February 1991. The eight
surviving aircraft were later recovered and returned to KAC.
It will be seen that the events of August 1990 took place during the cover of the direct contracts
and of all the reinsurances. As regards the later events they occurred—(i) during the period
covered by the direct contracts; (ii) after the expiry of the inward contracts, and (apparently) of
the unknown intermediate insurances; (iii) during the period covered by two of the outward
contracts and after the expiry of the remainder.
Thus, on any view of the facts, the losses occurred whilst the aircraft were on-risk under the
direct contracts. Further, on the basis that the origin of the ultimate destruction was the invasion
of Kuwait and the removal of the aircraft, it would be arguable that the whole matter constituted
‘any one occurrence’ for the purposes of the aggregate limit of the direct contract
insurance/reinsurance, thus confining the recovery to the $US300m limit for ground risks under
para (a).
authority.
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INSURANCE LAW CASES
As to the outward contracts, if the aircraft should be regarded as lost when they were seized in
Kuwait and soon afterwards taken away to Iraq, the losses happened whilst the aircraft were on-
risk under the outward contracts; and it would be arguable that the losses were ‘arising from any
one event’, within cl 3.1 of the joint excess loss clauses, for the purpose of calculating the ‘net
loss’. But if the losses did not happen until the aircraft were actually destroyed, this would (as
regards the majority of the contracts) have been after the expiry of the cover, and the argument
for aggregating them all into a single loss would be much less strong.
Finally, I must describe the claims, so far as they emerge from the agreed facts. On 12 September
1990 the brokers of KAC wrote to underwriters notifying a claim in respect of 15 aircraft, under
‘paragraph e of the policy wording’. On 18 September the leading underwriter indorsed the letter
as follows:
‘Agree settle war loss under Section 1(a) with reference to 2. 8. 90, for this slip’s proportions of
the maximum ground limit of US$300.000.000., (subject to Leading Underwriters having been
satisfied as to entitlement/legitimacy of claimants’ appropriate safeguards on payment of claim).
Basis of claims as presented on detention/seizure/confiscation … on various dates rejected. Any
claim in excess of US$300m rejected. Position fully reserved on any further claims as intimated.’
Page 871 of [1996] 3 All ER 865
In circumstances not in evidence the direct insurers/reinsurers paid $300m to KAC in respect of
the loss of the 15 aircraft. By a letter dated 8 January 1991 and headed ‘Form of receipt release
and subrogation …’ KAC agreed, amongst other matters, to—
‘1) confirm that the Reinsurers named herein have acquired pro tanto such rights of subrogation
as would otherwise devolve upon the Reassureds by operation of law … 3) acknowledge formal
receipt of the payments so made, and confirm the Reassureds are released from further liability
in respect of the loss only to the extent of such payment.’ (KAC’s emphasis.)
The schedule to the letter gave the date of payment as 21 December 1990, the identity of the
payers as the Institute of London Underwriters, and the amount as $US22,761,162·22.
authority.
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INSURANCE LAW CASES
A further letter from KAC of 17 January 1991 was in identical terms, except that the payers were
Lloyds, the date of payment was 11 January 1991, and the amount of the payment was
$US138,662,238·64. It will be seen that the total amount covered by the letters was barely more
than half of the $300m which the parties to the present dispute agree to have been paid. This is
not explained.
Leaving aside the point just mentioned, the position as at mid-January 1991 was as follows. (1)
The primary insured had claimed under a policy which covered the aircraft against loss or
damage occurring between 1 July 1990 and 30 June 1991. (2) The claim was made under cl 1(e)
of the policy, that is as a loss by ‘Confiscation, nationalisation, seizure, restraint, detention,
appropriation, requisition for title or use by or under the order of any Government’. (3) The
reinsurers had agreed to settle the loss under cl 1(a) of the policy, that is as a loss by ‘War,
invasion, acts of foreign enemies, hostilities (whether war be declared or not)’. (4) The reinsurers
had refused to acknowledge a loss under cl 1(e) or any loss in excess of $300m. (5) The
reinsurers recognised that a further claim might be made, and reserved their position about it. (6)
Before the payment of $300m, and the issuing of the letters of subrogation, the aircraft had been
seized by the Iraqi forces on the ground at Kuwait airport and they had been flown to Iraq. Also,
they had been, or were about to be, severally removed to Iran and Jordan, or destroyed in Iraq.
(7) All these events occurred during the currency of the primary insurance/reinsurance. But as
regards most of the excess of loss reinsurances now sued upon, only those events happening
before 1 January 1991 were covered.
It can be seen therefore that so far as the primary insurance/reinsurance was concerned there was
no doubt that an insured loss had occurred, and that the amount was at least $300m, the limit of
the ground risks cover for ‘any one occurrence’. There was however an issue about whether the
loss was payable under cl 1(a) or 1(e) of the conditions, which was important both because it
would be much easier for the direct reinsurers to contend for a single ‘occurrence’ if the loss of
the aircraft was by war etc than by detention etc, and because the cover under para (a) extended
to spares and equipment, whereas that under para (e) did not.
authority.
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INSURANCE LAW CASES
The position under the more distant reinsurances was different. Whereas there was no doubt that
all the events which might have constituted losses under the direct insurance/reinsurance
happened during the currency of the policy, this was not the case with the inward and outward
contracts and (we are
Page 872 of [1996] 3 All ER 865
asked to assume) the numerous intermediate contracts, where the cover terminated before some
of the aircraft were destroyed. Moreover, the deductible in the contracts further up the chain was
for ‘each and every loss’, defined as a loss ‘arising from any one event’, which opened the way
to an argument that each aircraft suffered a loss arising from an independent event.
Furthermore, not only was there a discontinuity between the direct insurance/reinsurance on the
one hand and the remaining reinsurances on the other in relation to the terms of the cover, but the
ways in which the claims were handled were also entirely different. As already described, at the
direct level there were explicit negotiations between the opposing parties. For practical reasons
this could not happen as the claims originating from the direct reinsurers made their way up and
around the LMX spiral, the artificial complexity of which is well illustrated by the fact that Mr
Hill paid out over 10,000 claims in respect of this particular casualty or set of casualties.
Ultimately, it seems that claims arrived at the inward policies, and that some payments were
made by the syndicates to the inward reinsured. We know nothing of these in the particular, but
the general course of events was the subject of affidavit evidence by Mr I R Fisher, who was at
the material time the manager and adjuster of the syndicate excess of loss group on the
establishment of the Lloyds Claims Office (the LCO). His evidence is crucial to the syndicates’
case on ‘settlement’ under para (a) of the clause. No application was made to cross-examine Mr
Fisher on his statement, so that not only his candour (which I would be very surprised to hear
doubted) but also the accuracy of his recollection is not challenged. Nevertheless, there are
problems in applying what he says to para (a). A full appreciation of them, such as would be
required at a trial, would require extensive quotation from the evidence. This is, however, an
application for summary judgment, and since the statement of Mr Fisher is extensively reported
in the judgment of Hirst LJ ([1995] LRLR 160) it is enough to give the gist. On the occurrence of
authority.
Page | 675
INSURANCE LAW CASES
circumstances which might give rise to a claim an insurer/reinsured considered what would be
his exposure if and when a claim was settled, and notified it to his reinsurers. The details were
then entered in an electronic database, which constitutes notice to the market generally. The
physical files were not normally retained by the LCO. In the case of excess of loss claims the
details would be entered in the database, at which point ‘the market’ considered questions such
as aggregation. It seems that in situations such as the present ‘the market’ was represented by the
LCO. In the case of the KAC aircraft Mr Fisher and his colleagues gave thought to the question
whether there was one single event (the invasion of Kuwait) or several events arising out of that
invasion.
Mr Fisher then went on to describe the test which he and his experienced deputy, Mr E A
Andrews, employed to answer this question. This need not be described, since the correctness of
Mr Fisher’s conclusion, reached in January 1991, is not in issue at the present stage. In the event,
he decided that the KAC loss was to be regarded as one event, and he circulated his staff to that
effect. Mr Fisher continued:
‘When we had satisfied ourselves of the [ultimate net loss] the claim would be agreed and paid
as long as all other contract terms of the contract on which the claim was being made were
complied with … Our system enables us to ensure that the settlement upon which a claimant is
attempting to recover was considered by us to be a proper and correct
Page 873 of [1996] 3 All ER 865
settlement in the first instance. The LPSO settlement number and date is proof positive that a
claim has been vetted by LCO (if appropriate) and/or by the interested underwriter/s and part of
that vetting procedure would have involved a consideration of all material aspects to the claim
being made on Lloyds.’
It seems therefore that the issues of law and construction arising under the reinsurances, starting
from the first of the intermediate contracts (and perhaps starting from the direct
insurance/reinsurance) and ending with the inward reinsurance, were all decided by Mr Fisher in
authority.
Page | 676
INSURANCE LAW CASES
consultation with his assistant, and that the thousands of claims were paid or not paid in
accordance with Mr Fisher’s opinion.
All these matters related to the inward contracts and those below them in the chain. At the same
time M & G were reflecting on the legal position under the outward contracts, and ultimately
sent out a market circular stating:
‘Whilst we are still keeping an open mind on the situation and are prepared to consider any
comments, it seems increasingly clear that no losses or event occurred during 1990 so that
nothing is payable under 1990 covers.’
The syndicates were not satisfied and in due course issued a series of writs under the outward
contracts seeking (a) the appropriate proportions of the full insured value of the relevant aircraft,
(b) a declaration that M & G was—
‘liable … to follow the [syndicates’] settlement in respect of the claim made by the original
assured and settled by the original insurers on the basis of one event occurring on the 2nd August
1990 insofar as subsequently claimed on that basis against the … Plaintiff’,
and (c) a declaration that M & G was liable—
‘to pay to the [syndicates] any claims calculated in accordance with [the subject matter of the
previous declaration] notwithstanding that whether the loss was one event and/or occurred on the
2nd August 1990 has not yet been finally determined in the litigation between the original
insured/insurer.’
It will be seen that the relief claimed was of two kinds. First, a monetary payment, on the
straightforward basis that on the facts and the wording of the outward contracts M & G were
unanswerably liable under those policies, whatever might be the position under the direct
contracts. Secondly, a claim founded on the follow settlements clause, the settlement in question
being the outcome of the exchanges between the primary reinsurers and KAC between
September 1990 and January 1991, coupled with the payment of $US300m.
authority.
Page | 677
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When these claims came before Rix J on the application for summary judgment they were
differently expressed. As to the first contention it was accepted by counsel for the syndicates
that, leaving aside the settlements clause, there were triable issues fatal to any claim for summary
judgment. This is still the position. For the purposes of this appeal it is conceded that the
following contentions raise triable issues. (1) There was no immediate loss of any aircraft on
2 August 1990 by reason of the invasion of Kuwait: if there was any loss, it took place later. (2)
Whatever losses there may have been were individual losses of individual aircraft. There was no
single loss, nor did the losses arise
Page 874 of [1996] 3 All ER 865
‘from any one event’, within the meaning of the outward contracts. (3) At the most, only eight
aircraft have been lost (seven KAC and one British Airways aircraft); the remaining KAC
aircraft have been recovered. (4) These eight aircraft, if lost at all, were lost during 1991, not
1990, and hence were outside the periods of cover of all except two outward contracts.
Secondly, as the proceedings continued it came to be recognised, as was undoubtedly correct

though not perhaps obvious at first sight, that for the purpose of the follow settlements clause in
the outward contracts the search for a relevant settlement should be directed, not to the dealings
between KAC and the direct insurers/reinsurers but to whatever settlement within the meaning of
the clause may have been reached between the inward reinsured and the syndicates under the
inward contracts.
The matter accordingly came down to this. Was the effect of whatever settlement had been
reached between the syndicates and those immediately below them in the chain (of which the
only evidence was that given in the general by Mr Fisher) to make M & G either finally or in the
alternative provisionally liable for the amounts paid by the syndicates under the inward contracts,
to the exclusion of the potential grounds of defence summarised above?
It is convenient once more to give the terms of the follow settlements clause, on this occasion
dividing it into lettered paragraphs:
authority.
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‘[a] All loss settlements by the Reassured including compromise settlements and the
establishment of funds for the settlement of losses shall be binding upon the Reinsurers,
[b] providing such settlements are within the terms and conditions of the original policies and/or
contracts
[c] and within the terms and conditions of this Reinsurance.’
Paragraphs [b] and [c] of this clause have been called the first and second provisos.
I return to the actions. Understandably, the judgment of Rix J ([1995] LRLR 160) was much
concerned with an important passage from a judgment delivered by Robert Goff LJ in Insurance
Co of Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312 at 330, where the
clause in question read: ‘Being a Reinsurance of and warranted same … terms and conditions as
and to follow the settlements of the Insurance Company of Africa.' At the conclusion of an
extensive review of the authorities Robert Goff LJ said:
‘The intention must, in my judgment, have been to bind insurers to follow settlements, even
where the effect was that they could not dispute that there was in fact liability on the insurers
under their policy with the assured. In my judgment, the effect of a clause binding reinsurers to
follow settlements of the insurers, is that the reinsurers agree to indemnify insurers in the event
that they settle a claim by their assured, i.e., when they dispose, or bind themselves to dispose, of
a claim, whether by reason of admission or compromise, provided that the claim so recognized
by them falls within the risks covered by the policy of reinsurance as a matter of law, and
provided also that in settling the claim the insurers have acted honestly and have taken all proper
and businesslike steps in making the settlement. This construction seems to me consistent with
the approach of Mr. Justice Branson in Excess Insurance Co. v. Mathews ((1925) 23 Ll L Rep
71). In
Page 875 of [1996] 3 All ER 865
authority.
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particular, I do not read the clause as inhibiting reinsurers from contesting that the claim settled
by insurers does not, as a matter of law, fall within the risks covered by the reinsurance policy;
but in agreement with Mr. Justice Bigham [in Western Assurance Co of Toronto v Poole [1903]
1 KB 376], I do consider that the clause presupposes that reinsurers are entitled to rely not
merely on the honesty, but also on the professionalism of insurers, and so is susceptible of an
implication that the insurers must have acted both honestly and in a proper and businesslike
manner … in my judgment, if insurers have so settled a claim, acting honestly and in a proper
and businesslike manner, then the fact that reinsurers may thereafter be able to prove that the
claim of the assured was fraudulent does not of itself entitle reinsurers not to follow the
settlement of the insurers.’
I now turn to the judgment of Rix J at first instance, where, after citing the passage just quoted,
he said (at 167–168):
‘It follows that what Lord Justice Robert Goff said about the nature of a follow settlements
clause was probably obiter. I regard it as nonetheless authoritative for that, but a consequence is
that Lord Justice Robert Goff did not have to elaborate about how in certain circumstances such
a clause would operate. He plainly considered that, had it not been for the claims co-operation
clause, the follow settlements clause would have been binding on the reinsurers in that case,
despite their allegation of fraud, and even if that allegation had subsequently been proved in fact
([1985] 1 Lloyd’s Rep 312 at 330). Nevertheless, that is arguably different from a situation
where the dispute is, not about whether a claim prima facie within the policy is vitiated by the
primary assured’s fraud, but, about whether the loss in respect of which the reassured claims
against reinsurers is within the terms of the reinsurers’ policy at all. Moreover, in such
circumstances, on which side of the line drawn by Lord Justice Robert Goff between “in fact”
and “in law” am I to regard M and G’s defences that the losses in respect of which the plaintiffs
are in these actions claiming, on the basis of the settlements which they have made, fall below
the excess limits to which they have subscribed, or fall within a period for which (save in the
case of the Hill contracts) M and G have not agreed to cover the plaintiffs? It is not clear to me
that these are defences “in fact” as distinct from defences “in law”. It seems to me to be at least
arguable that the period in respect of which a reinsurer covers his reassured is as essential an
authority.
Page | 680
INSURANCE LAW CASES
element of the risk which he has agreed to bear as a risk defined in terms of, say, fire or theft. It
seems to me that the same is arguably true, in the context of excess of loss reinsurance, about the
excess limit below which there is no protection: this is not a mere matter of quantum, but
arguably an essential part of the reinsurer’s bargain. Under a clause, therefore, which binds the
reinsurer to his reassured’s settlements only subject to those settlements being within the terms
of their contract, it seems to me to be at least arguable that the reassured must be entitled to say
that he is not bound by settlement of a loss which in law is properly to be regarded as occurring
in a year in which he is not a reinsurer, or which in law is to be regarded as made up of several
distinct losses, each of which falls below the limit at which he has agreed to accept liability.
Indeed, the argument seems to me to be potentially wider than that, in circumstances where there
is uncertainty, reflected in the
Page 876 of [1996] 3 All ER 865
argument before me, as to the nature of the settlements relied upon. Mr. Popplewell pressed upon
me that KAC’s claim upon primary insurers had been settled by the primary insurers and
reinsurers on the basis of one loss occurring on Aug. 2, 1990, and that that settlement had been
reflected by consequent settlements all the way along the line up to and including the plaintiffs.
He went on to submit that the settlements with which I, however, am concerned are those made
by the plaintiffs—and that would seem to be correct. Nevertheless, it appears to be the case that
the primary insurers’ and reinsurers’ payments of U.S.$300,000,000 were not so much in
settlement of KAC’s claim on the basis of one loss, as in settlement of an admitted liability of at
least U.S.$300,000,000, premised but not settled upon the basis of there being only one loss.
That premise was not agreed between the parties, who have therefore entered into litigation
about it. In these circumstances it is not clear to me exactly what the status of the plaintiffs’
payments to their assureds is. Mr. Popplewell was willing to describe these payments to me in
argument as provisional settlements, submitting that provisional settlements were as much within
the settlements clause as any settlements, and indeed pointing out that the settlements clause
includes even “the establishment of funds for the settlement of losses” within the matters which
are binding upon reinsurers. However, the plaintiffs’ claims before me have not been advanced
as consequent upon the establishment of funds for the settlement of losses, and if I am to regard
authority.
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INSURANCE LAW CASES
the payments in respect of which the plaintiffs claim as provisional settlements, then it seems to
me that it is at least arguable, as Mr. Longmore has submitted, that such payments are not in
truth “settlements” (to use the language of the settlements clause) or sums paid “in settlement”
(to use the language of JELC cl. 1), but rather merely provisional payments consequent upon the
primary reinsurers’ payment of U.S.$300,000,000, but otherwise subject to the litigation
proceeding between KAC and its primary insurers.’ (Rix J’s emphasis.)
Later, Rix J summarised his opinion as follows (at 169):
‘In these circumstances, whatever may be the position under the settlements clause’s first
proviso, I am not persuaded that M and G do not have an arguable defence under at any rate the
second proviso. None of the cases cited above have been specifically concerned with the
operation of the second proviso, save (as in Hiscox v. Outhwaite (No 3) ([1991] 2 Lloyd’s Rep
524)) in the case of circumstances where the reinsurance policy has been expressly made on the
same terms and conditions as the original policy. Moreover, it is in issue whether there were any
“settlements” properly so called, or whether such settlements can properly be described as
settlements on the basis of only one loss occurring on Aug. 2, 1990. As for the first proviso, I
would merely observe that JELC cl. 1.3 states that it is a condition precedent to the reinsurers’
liability that any settlement by the reassured shall be “in accordance with” the terms and
conditions of the original policies. The settlements clause uses the language “within” the terms
and conditions of the original policies. Presumably the clauses are to be read, if possible,
together. If “within” is to have the same meaning as “in accordance with”, the argument that a
settlement to be binding has to be in respect of a claim not merely arguably within the original
policy’s terms but
Page 877 of [1996] 3 All ER 865
properly in accordance with them seems to be to be open to the reinsurer. In their points of claim
the plaintiffs adopt the burden of alleging that the loss settlements relied upon are “in accordance
with” the inward reinsurances. If this goes somewhat to emasculate a follow settlements clause,
it is arguably what the parties have agreed.’
authority.
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In the result, Rix J considered that this was not a proper case for summary judgment, and gave
unconditional leave to defend.
The Court of Appeal disagreed. The leading judgment was delivered by Hirst LJ, who, after
quoting extensively from the judgments of Robert Goff LJ in the Scor case and Evans J in
Hiscox v Outhwaite (No 3) [1991] 2 Lloyd’s Rep 524 at 530, expressed his own opinion in the
following passages (at 185–186):
‘[Counsel for the syndicates] submits that, applying the clear words of the majority (Lord Justice
Robert Goff and Lord Justice Fox) (in the Scor case), the clause binds reinsurers to follow the
settlement provided the claim on its face falls within the risks covered by the policy of
reinsurance as a matter of law, and provided also of course that the insurers have acted honestly
and in a businesslike manner. Thus, for example, if an insurer under a burglary policy paid up a
claim for arson, the reinsurer would not be liable; but if the insurer paid up honestly and in a
businesslike manner under a burglary policy for an alleged burglary, it would not be open to the
reinsurer to re-open issues on which the insurer had exercised his own honest judgment, e.g.,
whether or not there was a breaking and entering. This, [counsel for the syndicates] submitted,
was fully in line with the views of Mr. Justice Branson in Excess Insurance Co. v. Mathews
((1925) 23 Ll L Rep 71 at 75–76), of which Lord Justice Robert Goff expressly approved. Here
for example a claim arising out of a war between the U.S.A. and China, or out of a nuclear
detonation, would by virtue of the General Exclusion plainly fall outside the risks covered by the
policy … In summary, therefore, I have come to the conclusion that, on its proper interpretation
Scor’s case delimits the ability of the reinsurer to raise points of law within the very narrow
confines submitted by [counsel]; a fortiori, the reinsurer is not entitled to re-open issues of fact,
as is manifestly demonstrated by the Court of Appeal’s refusal to allow the reinsurers to rely on
the owners’ alleged fraud.’
Hirst LJ then turned to the two provisos. As to the first, he recorded and rejected a contention by
counsel for M & G that it entitles the reinsurer to take any point, or at least any point of law open
to the original insurer, on the grounds that if this had been intended the draftsman would have
included an express provision, and that the suggested interpretation would rob the clause of any
authority.
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INSURANCE LAW CASES
significant meaning. The same considerations applied, in the opinion of Hirst LJ, to the second
proviso.
Next, Hirst LJ came to the meaning of ‘settlement’ as follows (at 187):
‘One well-established legal meaning is synonymous with compromise; another is synonymous

with payment. [Counsel for M & G] submitted that “settlements” connote arrangements whereby
primary insurers or reinsurers disposed or bound themselves to dispose of KAC’s claim either by
compromise or admission. In my judgment this meaning cannot apply in the present context, not
least because in its second appearance the word
Page 878 of [1996] 3 All ER 865
“settlements” is qualified by the adjective “compromise”. It thus seems to me that, as [counsel

for the syndicates] submits, the natural grammatical meaning of “settlements” in the context is
equivalent to payments. [Counsel for M & G] nonetheless seeks to circumscribe that meaning by
limiting it to final payments, or interim payments where liability is conceded, thus excluding the
present case. I can see no rhyme or reason for such an artificial distinction, which is not to be
found in the words themselves, and for which [counsel] was unable to suggest any commercial
logic.’
Finally, Hirst LJ dealt with an argument that it would be unfair that M & G should be tied to a
settlement which, if KAC ultimately won their case under the direct contracts, would result in a
number of losses being established, on none of which would M & G’s minimum excess of loss
figure be reached (at 187–188):
‘To this there seems to me to be two valid answers … Firstly, it is inherent in the present system,
as shown by Lord Justice Greer in his judgment in [Gurney v Grimmer (1932) 44 Ll L Rep 189],
that reinsurers take the rough with the smooth, to their overall advantage, particularly bearing in
mind that in the present case, should KAC win their action, the total liability to be borne by the
reinsurance market as a whole will more than double, even though as a result M & G themselves
might go free. Secondly, it seems to me plain that if, as a result of the outcome of the KAC case
liabilities up the LMX chain were revised, M & G would be entitled to an appropriate re-
authority.
Page | 684
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adjustment reflecting their true liability (if any) on well-established principles of equity and
quasi-contract and/or under JELC cl. 2.2; this was not merely conceded but positively asserted
by [counsel for the syndicates]. This also meets another criticism advanced by [counsel for M &
G], which is indeed inherent in the LMX market system, that there may be a conflict of interest
between the original insurers on the one hand and the reinsurers up the line on the other, in that a
settlement which is to the advantage of the former (since it reduces global liability to the
minimum) may be to the disadvantage of the latter (if and insofar as the bottom line of their
excess of loss liability is breached).’
My Lords, these quotations, long as they are, do less than justice to the care taken by the courts
below to analyse the various forms of settlement clause, the decisions upon them, and the
propositions of Robert Goff LJ in the Scor case. Acknowledging this, I shall take a different and
more direct course, for although it is easy to suppose from the difficulty of the reported cases and
the eminence of the judges involved that questions of deep principle are involved, this is not so.
There are only two rules, both obvious. First, that the reinsurer cannot be held liable unless the
loss falls within the cover of the policy reinsured and within the cover created by the reinsurance.
Second, that the parties are free to agree on ways of proving whether these requirements are
satisfied. Beyond this, all the problems come from the efforts of those in the market to strike a
workable balance between conflicting practical demands and then to express the balance in
words.
These practical demands can be seen most easily in the context of traditional reinsurance, where
the party reinsured is the insurer under a contract made directly with the person whose property
or other interest is at risk. Two impulses act in opposite directions. The first is to avoid the
investigation of the
Page 879 of [1996] 3 All ER 865
same issues twice; and, moreover, an investigation on the second occasion by a reinsurer whose
knowledge of what happened when the risk was written, and whose facilities for investigating
the claim, are inferior to those of the direct insurer. The second impulse, acting in the other
authority.
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INSURANCE LAW CASES
direction, is to ensure that the integrity of the reinsurer’s bargain is not eroded by an agreement
over which he has had no control.
This conflict is quite easily managed where the insurance and the reinsurance are on the same
terms and where the parties are essentially co-adventurers: for example, in participatory
reinsurance, or facultative reinsurance with a large retention. Here, the interests of the direct
insurers and the reinsurers are broadly the same, and it is not imprudent for the reinsurers to put
themselves unconditionally in the hands of their reinsured for the settlement of claims which will
be passed on to them.
The problems are more acute when either or both of two situations exists: (a) the terms of the
successive policies are not the same, (b) the reinsurance is of another reinsurer, and stands at one
or more remove from the direct cover, so that the reinsured are themselves reinsurers. For
example, in the former case it may well happen that a claim under the direct policy does not
require the determination of issues which are crucial to liability under the reinsurance: as
happened in the ‘constructive total loss’ cases like Chippendale v Holt (1895) 65 LJQB 104; and
indeed in the present case, where there can be no doubt that the loss, whatever exactly it was, fell
within the direct contracts, whereas this was not necessarily the case under the reinsurances.
Again, it may happen that where cumulative perils (call them X and Y) are covered by the direct
policy, whereas only Y is covered by the reinsurance, a direct insurer, to whom the choice
between X and Y is indifferent if he is willing to admit or compromise liability, may even in
good faith settle a claim on his own policy which impinges on the mutual rights of himself and
his reinsurer under the reinsurance. These are only examples.
Situations of type (b), where the reinsurer is at a distance from the direct insurance, may also
cause practical problems. There is an obvious administrative advantage in binding the ultimate
reinsurer by a settlement made further down the chain, to avoid a full reinvestigation of fact and
law at each stage of the chain; and the desirability does of course become even more obvious
where the chains suffer from the extravagances of the LMX spiral. On the other hand, a remote
reinsurer, who may know nothing beyond the identity of his reinsured, and the terms of his own
authority.
Page | 686
INSURANCE LAW CASES
cover, could hesitate to entrust his liabilities to a stranger, which is what will happen if all the
reinsurances down the chain embody unqualified follow settlements clauses.
These tensions have revealed themselves for a century in successive reformulations of the clause.
They can also be seen in the strenuous efforts by the courts to maintain some continuity of
principle, by applying prior decisions given on one form of clause in one state of facts to another
form of clause in a different state of facts. I find this process unfruitful, as shown by the attempts
to transfer the reasoning of the Scor case to the present dispute.
This is well shown by the Scor decision itself. Mr Veeder QC for M & G rightly (in my opinion)
made no attempt to argue that the formulation of Robert Goff LJ was incorrect. He had no need
to do so. The clause in question was in the simplest form; it was part of a first-tier reinsurance,
apparently on identical terms to the direct cover; and the dispute arose from an allegation that the
local
Page 880 of [1996] 3 All ER 865
judgment satisfied by the direct insurer was wrong in fact. The present case is different in every
respect, and I cannot see how the decision in the Scor case, or the reasons given for it, can have
any decisive bearing on the issues now before the House. I prefer to read the follow settlements
clause, see what it says, and apply what it says to the special facts of the present dispute.
I start with the two provisos: paras [b] and [c] of the follow settlements clause. The intent of
these seems clear in broad outline, although it may be difficult to apply on the margins. The
crucial words are ‘within the terms and conditions’ of the original policies and of the
reinsurance. To my mind these draw a distinction between the facts which generate claims under
the two contracts, and the legal extent of the respective covers: the purpose of the distinction
being to ensure that the reinsurer’s original assessment and rating of the risks assumed are not
falsified by a settlement which, even if soundly based on the facts, transfers into the inward or
outward policies, or both, risks which properly lie outside them. This restriction is perhaps more
clearly visualised in relation to the second proviso. Here, the reinsurers are entitled to say that
they rated the policy by reference to its chronological and geographical extent, to the types of
authority.
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INSURANCE LAW CASES
casualty insured, to the boundaries of the insured layer, the mode of calculating the loss, and so
forth. These variables, defined by the terms of the policy, founded the bargain between reinsurers
and reinsured on the basis of which the premium and other terms were set. The purpose of the
second proviso is in my view to keep this foundation intact, and it would be undermined if an
honest attempt by those further down the chain to ascertain the legal consequences of the facts
could impose on the reinsurers responsibilities beyond those expressed in the policies. So also
with the first proviso. The reinsurers undertake to protect the reinsured against risks which they
have written, not risks which they have not written. To allow even an honest and conscientious
appraisal of the legal implications of the facts embodied in an agreement between parties down
the chain to impose on the reinsurers risks beyond those which they have undertaken and those
which the reinsured have undertaken would effectively rewrite the outward contract: and it is
this, in my opinion, which the provisos are designed to forestall.
Before continuing, however, I must record three responses to this conclusion. The first is that the
interpretation given to the provisos would emasculate the clause. I cannot agree. There is ample
room for the clause to operate in every situation except where the settlement would bind the
reinsurer to a definition of cover different from that which he has contracted to accept. Secondly,
it is said that if the result proposed had been intended the clause could have said so. In my
opinion it does say so. The final objection is that to allow the reinsurers to raise defences like the
present would cause chaos in the market. I recognise the force of the submission to this extent,
that allowing the defences to be maintained will leave not only the validity but also the size of
the claims and their incidence on various claims in suspense, through a large section of the
market; an adverse effect which is multiplied by the size of the claims and by the pathological
length and self-referring effects of the various spirals. Repercussions of this nature must,
however, be inherent in the clause itself, unless the provisos are to be totally ignored and the
clause read as delivering the reinsurers into the hands of those down the chain, to modify the
terms of the clause as they honestly but mistakenly decide. This result could undoubtedly have
been achieved by choosing the right words, but looking back over the
Page 881 of [1996] 3 All ER 865
authority.
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INSURANCE LAW CASES
decades one can see that the market has understandably shrunk from going so far. The wording
of the clause shows that an even less far-reaching result is intended today.
This opinion, combined with the admissions as to arguable defences already recorded, is
sufficient to exclude the possibility of summary judgment, based upon the settlements alleged to
have been made. Quite apart from this, however, there is the question whether there was a ‘loss
settlement … or compromise settlement’ within para [a] of the clause. As already remarked, the
instinct is to relate this question to the written exchanges between KAC, its brokers and the
direct insurers/reinsurers. If this had been so, there would have been good reason to find a
settlement by which the parties irrevocably agreed on a loss by perils insured against, on the
occurrence of the loss during the period of the direct contracts, and on the recoverable amount of
at least $US300m. That the settlement was to this extent final is apparent not only from the
documents themselves, but also from the agreement by KAC to give the insurers rights of
subrogation. The settlement was however incomplete, since it left open for negotiation or
subsequent proceedings the identification of the relevant peril, and the question of aggregation
(which was linked to the date of the loss or losses).
The instinct to concentrate on this transaction is however mistaken, for para [a] of the clause as
incorporated in the outward contracts directs attention to a ‘loss settlement[s] by the reinsured’,
and in the context of those contracts the reinsured was the syndicates, not the primary reinsurers
at the other end of the chain. Accordingly, the question is whether there was a settlement of a
claim by the inward reinsured against the syndicates under the inward contracts: and the only
evidence of such a settlement is the account of market practice by Mr Fisher, on which it appears
to be contended that all the thousands of claims round the spirals were settled at one blow by the
decision of Mr Fisher about the dates of the losses and about the extent to which the losses would
be aggregated as being, or not being, ‘from one event’. Because this evidence was not explored
in cross-examination, it leaves some important questions unanswered. By way of example only,
it seems most remarkable for all the participants to have agreed to be unconditionally bound by
the opinion of an official of the LCO on a question of law, or mixed fact and law, involving such
large sums of money, without even having, so far as the evidence goes, an opportunity to
persuade him to a different view. It is suggested by the syndicates that the consequences are less
authority.
Page | 689
INSURANCE LAW CASES
striking because the parties were not unconditionally bound, since if the opinion proved incorrect
the computations could be reworked throughout, and reimbursements made of any payments
incorrectly demanded. I must own to uncertainty about the legal basis on which repayments
could be demanded, but apart from this I do not at present understand how in practice the
incorrectness of Mr Fisher’s decision would be established. A judgment in proceedings brought
under the direct insurance/reinsurance (such as the judgment given by Rix J) would shed light on
the decision, but would not be conclusive because the parties would be different, and the
judgment would not necessarily be sent up the chain as a settlement via whatever follow
settlement clauses there may have been in the first of the intermediate contracts, since the terms
of the cover were not the same. The only alternative that I can see would be to have the questions
of mixed fact and law authoritatively determined by litigation between the parties to the
Page 882 of [1996] 3 All ER 865
reinsurances, which is precisely the solution which the syndicates by their application under Ord
14, r 1(1) are seeking to avoid.
My Lords, I do not suggest that these problems (and there are others) are necessarily insuperable,
but I do consider that they require closer scrutiny than is feasible on an application for summary
judgment. In other words, under para [a] of the clause, as well as under paras [b] and [c], there is
(within the words of Ord 14, r 3(1)) an ‘issue or question in dispute which ought to be tried’.
My Lords, I shall not prolong this speech by discussing additional points canvassed in argument.
They will all be open at the trial. For the reasons given I would allow the appeals, and restore the
order of the learned judge.
LORD SLYNN OF HADLEY. My Lords, I have had the advantage of reading in draft the
speech prepared by my noble and learned friend Lord Mustill. For the reasons he gives I, too,
would allow the appeal and restore the order of Rix J.
LORD HOFFMANN. My Lords, I have had the advantage of reading in draft the speech of my
noble and learned friend Lord Mustill, and for the reasons he gives I, too, would allow the
appeals.
authority.
Page | 690
INSURANCE LAW CASES
Appeals allowed.
COMMERCIAL UNION ASSURANCE CO PLC AND OTHERS V NRG VICTORY

REINSURANCE LTD
SKANDIA INTERNATIONAL CORP AND ANOTHER V NRG VICTORY

REINSURANCE LTD
[1998] 2 ALL ER 434 CA
Appeals
Commercial Union Assurance Co plc and ors v NRG Victory Reinsurance Ltd
The reinsurers, NRG Victory Reinsurance Ltd, appealed with leave from the decision of Clarke J
([1998] 1 Lloyd’s Rep 80) given in the Commercial Court of the Queen’s Bench Division on 1
August 1997, whereby he gave summary judgment under RSC Ord 14 in favour of the plaintiff
insurers, Commercial Union Assurance Co plc, Indemnity Marine Insurance Co Ltd, Ocean
Marine Insurance Co Ltd, London Assurance, Gan Insurance Co Ltd and Bishopsgate Insurance
Ltd, for claims under 16 excess of loss reinsurance contracts. The facts are set out in the
judgment of Potter LJ.
Skandia International Corp and anor v NRG Victory Reinsurance Ltd
The reinsurers, NRG Victory Reinsurance Ltd, appealed with leave from the decision of Clarke J
([1998] 1 Lloyd’s Rep 80) given in the Commercial Court of the Queen’s Bench Division on 1
August 1997, whereby he gave summary judgment under RSC Ord 14 in favour of the plaintiff
authority.
Page | 691
INSURANCE LAW CASES
insurers, Skandia International Insurance Corp and Vesta Forsikring AS, for claims under 16
excess of loss reinsurance contracts. The facts are set out in the judgment of Potter LJ.
POTTER LJ (giving the first judgment at the invitation of Lord Woolf MR).
Introduction
In this appeal the defendant/appellant reinsurers (NRG) appeal from the judgment of Clarke J
([1998] 1 Lloyd’s Rep 80) delivered in the Commercial Court on 1 August 1997 whereby he
gave summary judgment in favour of the plaintiffs under RSC Ord 14 in two actions (the
Commercial Union action and the Skandia action) in which the plaintiffs claimed for sums
alleged to be due under 16 excess of loss reinsurance contracts made with NRG.
The facts
The background facts are that on 24 March 1989 the tanker Exxon Valdez ran aground in Prince
William Sound Alaska, thereby causing a major spillage of oil which led to heavy environmental
damage and necessitated a huge clean-up operation. The tanker’s owners, Exxon Shipping Co,
had protection and indemnity cover in respect of their liability for spillage of $400m in excess of
$US210m and recovered the full amount insured from their P and I club. The owners of the
cargo of oil were the parent company of the shipowners, Exxon Corp (Exxon). Exxon made
claims under a general corporate excess insurance policy (the GCE policy). The plaintiffs were
among the insurers who subscribed to the GCE policy. It was placed through brokers in the
London Market and
Page 437 of [1998] 2 All ER 434
authority.
Page | 692
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comprised a Lloyd’s policy, a UK companies’ policy and a policy led in the Scandinavian
market, all in materially identical terms. The plaintiffs in the Commercial Union action
subscribed to the UK companies’ policy and the plaintiffs in the Skandia action subscribed to
Scandinavian-led policy; however, no further distinction need be drawn between them.
The GCE policy
The addendum to the GCE policy described the interests insured as:
‘Section 1 Property of the Assured or property held in trust for others for which they have
responsibility or elect to insure (including but not limited to Hulls and Machinery, Cargo,
Drilling Rigs, Offshore Platforms, Pipe Lines, construction risks and Onshore Property of every
description) including Costs of Control, Removal of debris and/or Residual Structure and
Liabilities and Directors and Officers and Fidelity Coverages.
Section 3 All liabilities in respect of Assured’s World-wide operations all as per form.’
Section 1 provided coverage under art VII (Interest and coverage) on the following terms:
‘For each loss occurrence covered by this Policy the Insurers agree with the Insured to pay or to
pay on their behalf subject to the Basis of Recovery art VIII: 1. All losses incurred by the Insured
as a result of physical loss or damage to Property of any kind or description owned by the
Insured or property of others held in trust or for which the Insured may have assumed
responsibility, or for which the Insured may have an obligation to insure repair or replace … 4.
All sums which the Insured pays or incurs as costs or expenses on account of … (b) Removal of
or attempted Removal of Debris or Wreck of Property and/or Residual Structure covered
hereunder …’ (My emphasis.)
Section 1, art VIII(2) (Basis of recovery: cargo and stock) provided:
‘(a) Recovery for any loss hereunder shall be determined as follows: (i) for crude oil … (b) …
recovery shall also include costs and expenses incurred in defending, safeguarding, recovering,
preserving and forwarding the property, as well as costs and expenses in respect of general
average, sue and labour, salvage, salvage charges and expenses incurred in removal or attempted
authority.
Page | 693
INSURANCE LAW CASES
removal of debris or wreck or property even if incurred solely as a result of governmental or

other authoritative order and the amount of the reasonable extra cost of temporary repair or of
expediting the repair, including overtime and the extra cost of express or other rapid means of
transportation.’ (My emphasis.)
Section 1, art IX, para 3 excluded from cover under section 1:
‘Loss of, or damage to property, liability for which is imposed on the insured by law, other than
such property as may be included under the terms of this policy.’
Section 1, art IV, para 3 provided:
‘Notwithstanding anything else contained herein to the contrary, there shall be no recovery
hereon for liabilities as described under Assured
Page 438 of [1998] 2 All ER 434
Liability Policy(ies) (as more fully defined and covered under policy numbers 8 KM52362 &
O3-036-88 as applicable) …’
Similar words were also contained in art VII.
It is common ground that the specified policy numbers under para 3 above were a reference to
section 3 of the GCE policy itself. Thus, on the face of it at least, the policy intended that losses
sustained which might otherwise fall within the wording of section 1, but which were
recoverable under section 3, should not also be recoverable under section 1.
Section 3A, art 1, under the heading ‘Protection and indemnity risks etc’, covered inter alia:
‘(a)(i) … all sums for which the Insured may become liable or incur which are absolutely or
conditionally recoverable from or undertaken by The Standard Steamship Owners’ Protection
and Indemnity Association (Bermuda) Limited and without the application of any limits or
excesses contained in the rules of that Association in respect of the vessels and/or craft as per
schedule. (ii) … it is further agreed that this insurance is extended to also cover any loss
sustained by the Insured or indemnify or pay on behalf of the Insured any sum or sums which the
authority.
Page | 694
INSURANCE LAW CASES
Insured may be obliged to pay or agrees to pay or incurs as expenses, on account of Removal of
Debris or Wreck of Vessels and/or craft as per schedule … even if incurred solely as a result of
governmental or other authoritative order … (c) … this Section of this insurance is also to cover
the legal … liability of the Insured … cargo owners for … pollution and/or contamination … (e)
… all legal and/or contractual liability of the Insured arising out of or incidental to or in any way
connected with the Insured’s marine operations anywhere in the world.’
Section 3B, art 1 of the GCE policy provided that the insurers agreed:
‘To pay the Insured … all sums which the Insured shall … incur as expenses by reason of the
liability imposed upon the Insured by law or by governmental or other local authoritated order,
or assumed by the Insured under contract or agreement on account of … “Property damage”
caused by or arising out of each loss occurring during the policy period, anywhere World-wide in
respect of … all transportation activities …’
Section 1, art VI, cll 11 and 12 and identical provisions in section 3A conferred a choice upon
the insured (Exxon) where to take proceedings in the event of dispute. In effect it could choose
arbitration in New York (under cl 11) or litigation in New York (under cl 12) but there was no
exclusive jurisdiction clause or any provision to prevent it issuing and serving proceedings in
whatever jurisdiction it chose. Further, in the event of arbitration the arbitrators were entitled to
abstain from following strictly the rules of law. To the extent that they did, however, such law
was to be exclusively the law of New York. Further in section 3B, cl 10, it was provided that in
relation to the particular liabilities thereby insured, either party could require the other to submit
to arbitration in New York, in which event the arbitrators were also entitled to abstain from
following strictly the rules of law.
The reinsurance
The reinsurances in this case are excess of loss treaties on the XL market standard form (the
JELC) and short form schedule. [In fact the JELC terms are
Page 439 of [1998] 2 All ER 434
authority.
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INSURANCE LAW CASES
incorporated in all but four of the 16 reinsurance contracts, but the parties are agreed that the
JELC terms should be treated as applicable in all cases for the purpose of the argument before
us.] The words of reinsurance in the JELC reinsurance clause (cl 1) are a promise:
‘1.1 … [to] indemnify the reassured in settlement of its net loss … under business accepted by
the reassured as fully described in section C of the schedule …
1.3 It is a condition precedent to liability under this contract that settlement by the reassured shall
be in accordance with the terms and conditions of the original policies or contracts.’
In section C (as set out in the cover note) the business is typically described (the differences as
between the various contracts are immaterial) as:
‘All losses howsoever and wheresoever arising sustained by the Re-assured in respect of all
business allocated to their Drilling Rigs Account …’
Clause 3.1 of the JELC provides:
‘Loss under this contract means loss, damage, liability or expense arising from any one of event
or as described in Section J of the Schedule.’
Section J of the schedule refers to: ‘Any one loss or series of losses arising from one event.' In 11
of the 16 contracts comprising the reinsurance contracts there is a form of settlements clause.
They are similar in all material respects, nine being in the form of the ‘Aviation Settlements
Clause 1987’, which provides as follows:
‘All loss settlements by the Re-assured including compromise settlements and the establishment
of funds and the settlement of losses shall be binding upon the Re-insurers, providing such
settlements are within the terms and conditions of the original policies and/or contracts … and
within the terms and conditions of this Re-assurance …’ (My emphasis.)
The various proceedings
In August 1993 Exxon commenced proceedings against the direct insurers including the
plaintiffs in a Texas state court, claiming clean-up costs arising out of the oil spillage under both
authority.
Page | 696
INSURANCE LAW CASES
sections 1 and 3 of the GCE policy. Exxon’s object was to recover under both the sections so as
to be able to exceed the limits of indemnity under each. Thus, notwithstanding the provisions of
section 1, art IV, para 3 of the GCE policy, which, on the face of it, prevented recovery in respect
of liabilities under section 3, and notwithstanding the assertion of Exxon in the proceedings that
the clean-up costs represented ‘the legal … liability of the Insured as … cargo owners for …
pollution and/or contamination’ (see section 3, art 1(c)), Exxon asserted for the purpose of
section 1 that such costs were also incurred in the ‘removal or attempted removal of debris’. The
direct insurers disputed the claim under section 1, principally on the ground that coverage for
removal of debris or property did not in its context apply to the clean-up of tanker oil spills, and
that in any event such spills were covered and denominated as pollution risks under rules of
various P and I associations including the International Tanker Indemnity Association which
covered the Exxon Valdez and thus came within the ambit of section 3. The Exxon claim was for
payment of the coverage limits of section 1 in the amount of $US600m plus interest in
Page 440 of [1998] 2 All ER 434
excess of $US400m. Exxon also claimed to be entitled to payment of the separate coverage
limits of section 3A in the amount of $US250m plus interest. Finally, it also claimed punitive
damages for alleged breach of the Texas Insurance Code.
The direct insurers countered with an action in the Federal Court in New York seeking a
declaratory judgment that they were not liable to Exxon under the GCE policy and asking the
court to compel arbitration of the claim under section 3B. Exxon accepted that the claim under
section 3B be arbitrated in New York but applied to have the declaratory judgment action
dismissed. That application eventually failed in January 1996.
In the meantime proceedings in the Texas state court moved towards trial. In October 1995
Exxon sought summary judgment on its claim under section 1 only, on the basis that the plain
meaning of the language entitled it to coverage for its clean-up costs and expenses. However,
despite their defences based on arts IV and VII of section 1, shortly before that application was
heard the direct insurers (including the plaintiffs) entered into a settlement agreement (the first
authority.
Page | 697
INSURANCE LAW CASES
settlement agreement) dated 15 March 1996 whereby they agreed to pay $US300m and Exxon
agreed to the dismissal of the section 1 claim from both the Texas and New York proceedings.
The reasoning behind the direct insurers’ decision to settle appears from the affidavit of Mr
Reasoner, the managing partner of the Texas law firm acting for the insurers, who had the
conduct of their defence. In para 13 of his affidavit in support of the RSC Ord 14 proceedings he
stated:
‘In my judgment, liability under Section 1 of the GCE was not going to turn simply upon
construction of the policy language in the light of the factual matrix. Rather, the outcome of the
claim depended upon an interpretation of the parties’ intentions as to the meaning of the policy
language, as determined by a Texas jury directed by a non-specialist Judge. Exxon Corporation
was in a position to advance a simple straight-forward case based on policy wording, bolstered
by the argument that the GCE policy provided all-risk coverage for catastrophic losses and that
Exxon Corporation suffered such losses in an amount far in excess of the policy limits … Jurors
are often unfavourable to insurers and biased against them when insurers are arguing for a
limitation of cover. On the other hand, Underwriters’ case depended upon a complex explanation
of the structure of Exxon Corporation insurance, the interplay between the GCE policy and the P
& I Cover, market practices and market capacity, and the allocation of risks among the
participants in the world-wide insurance market.’
He continued:
‘Underwriters’ denial of Exxon Corporations’ Section 1 claim, when viewed purely as a matter
of construction in the commercial context, was certainly reasonable, and based upon reasonable
and credible arguments. However, in my judgment, a jury verdict on Exxon Corporation’s
Section 1 claim in a District Court in Houston, 189th Judicial District, was going to depend in
large part on wider factors. As stated above, after settlement of Section 1, Exxon Corporation’s
claim under Section 3A of the GCE policy went to trial, in April–June 1996, before a jury in the
District Court in Houston, Texas … The same judge and jury would have tried Exxon
Corporation’s Section 1 claim had that claim not been settled. Based on my experience at the
authority.
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INSURANCE LAW CASES
Section 3 trial, in my opinion it is probable that Underwriters would have lost a jury trial of
Section 1.’
Page 441 of [1998] 2 All ER 434
The claim of Exxon under section 3A of the GCE policy was excluded from the first settlement
agreement. As indicated by Mr Reasoner above, it eventually came to trial in Texas before the
same judge and jury which would have tried the claim under section 1. That claim succeeded, the
jury deciding that the insurers were liable to Exxon for $US250m under section 3. Since there
was a deductible of $US210m, that decision indicated the view of the jury that the recoverable
liability was at least $US460m.
Following judgment against them on the claim under section 3A, the insurers appealed. By a
further settlement agreement (the second settlement) dated 23 January 1997, the insurers
compromised both the appeal in respect of the Texas judgment under section 3A and the New
York arbitration proceedings on section 3B (which were still in progress) on terms that they
would pay Exxon a further $480m.
The two actions presently before this court were begun in June 1996 and April 1997, the sole
claim made being for the amounts paid under the first settlement agreement in respect of section
1. Clarke J gave summary judgment in the plaintiffs’ favour on 1 August 1997.
On 19 September 1997 the first three plaintiffs in this action began a new action (1997 Folio No
1893), and on 21 November 1997 a further action (1997 Folio No 2183) was begun by
companies including the remaining plaintiffs in the present action and the plaintiffs in the
Skandia action, for the purposes of recovering the sums paid in settlement of the claim made by
Exxon under sections 3A and 3B of the GCE policy (the section 3 actions). On this appeal,
NRG’s position has been that the plaintiffs are indeed under a liability under section 3A and that,
as a matter of construction of the GCE policy, the clean-up costs were covered under para 1(c) of
section 3A. The plaintiffs have applied for summary judgments in the 1997 actions, those
applications standing adjourned until after the present appeal has been determined. If the appeal
authority.
Page | 699
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is successful, a number of the issues arising out of the stance taken by each of the parties in the
section 3 actions will fall away.
The judgment of Clarke J
Before the judge, it was common ground between the parties that in order to recover under
reinsurances the plaintiffs must establish that they were liable under the GCE policies, the only
question being whether they had done so. The authorities upon the basis of which both sides
proceeded were those of Re London County Commercial Reinsurance Office Ltd [1922] 2 Ch 67
and Hill v Mercantile and General Reinsurance Co plc, Berry v Mercantile and General
Reinsurance Co plc [1996] 3 All ER 865, [1996] 1 WLR 1239.
In the former, P O Lawrence J said ([1922] 2 Ch 67 at 80):
‘The fact that the policies are reinsurance policies and that the reassured have paid under the
policies which they have issued does not in my judgment operate to enable them to substantiate
their claims against the company. It is well settled that (subject to any provision to the contrary
in the reinsurance policy) the reassured, in order to recover from their underwriters, must prove
loss in the same manner as the original assured must have proved it against them, and the
reinsurers can raise all defences which were open to the reassured against the original assured.
This is equally true whether the reassured had or had not paid their assured, inasmuch as it would
be inequitable for them to renounce any of their defences so as to prejudice the reinsurers …’
Page 442 of [1998] 2 All ER 434
In the latter, Lord Mustill ([1996] 3 All ER 865 at 880, [1996] 1 WLR 1239 at 1253), in the
context of his consideration of the effect of a ‘follow settlements’ clause said:
‘The reinsurers undertake to protect the reinsured against risks which they have written, not risks
which they have not written. To allow even an honest and conscientious appraisal of the legal
implications of the facts embodied in an agreement between parties down the chain to impose on
the reinsurers risks beyond those which they have undertaken and those which the reinsured have
authority.
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undertaken would effectively rewrite the outward contract: it is this, in my opinion, which the
provisos are designed to forestall.’
In relation to the question whether the plaintiffs were liable to Exxon under section 1 of the GCE
policy the judge found it was unnecessary to decide, as it seems to me unnecessary for this court
to decide, whether the GCE policy was governed by English law as Mr Sumption QC submitted
for NRG, or alternatively New York law, as Mr Kendrick QC submitted for the plaintiffs. The
judge said he was prepared to assume that the policy was governed by English law and to assume
it was correct that, if section 1 of the GCE policy were construed in accordance with English law
by an English court, the plaintiffs would have had at least arguable defences to Exxon’s claim.
However, he accepted the submission of Mr Kendrick for the plaintiffs that such assumptions
were irrelevant, in that, so long as the plaintiffs proved that they were, or would have been, held
liable under the GCE policy by a court of competent jurisdiction (in this case the Texas court),
they thereby established the necessary liability under the original policy in order to satisfy the
principle that the reinsured can only recover in respect of payments for which they were liable in
law under the policy. In this respect the judge said ([1998] 1 Lloyd’s Rep 80 at 84):
‘In many policies such as the GCE policy it will be open to the insured to proceed against the
insurers in one of a number of jurisdictions. The result of such an action might be different
depending upon which jurisdiction is chosen. Some Courts may have more experience of
insurance disputes than others. It would or ought to be within the contemplation of the plaintiffs
when they entered into the GCE policy that that was so. The same is, in my judgment, true of
NRG and the other reinsurers. If they had thought about it they would have appreciated that the
insured might be sued in several jurisdictions of varying experience. They would also have
appreciated that the nature and extent that the liability which they were reinsuring would or
might depend upon where Exxon Corporation sued the plaintiffs. In my judgment it would make
no sense to hold that reinsurers were only reinsuring the liability of the insurers as it would be
established by an English Judge in an English Court. The position might I suppose be different if
there were an English exclusive jurisdiction clause in the underlying insurance, but in
circumstances where it was permissible for the insured under the underlying insurance to sue in
any of a number of jurisdictions, the reinsurers were in my judgment reinsuring the insurers’
authority.
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INSURANCE LAW CASES
liability in the jurisdiction in which they were in fact sued. It is in my judgment irrelevant what
view an English Court might have taken if Exxon Corporation had sued the plaintiffs in England.
I shall therefore not embark upon an analysis of the liability of the plaintiffs to Exxon
Corporation on that hypothesis.’
Page 443 of [1998] 2 All ER 434
Later in his judgment he said (at 85–86):
‘… Mr. Kendrick submitted that it was reasonably foreseeable by the parties when the policy
was made that the insured would choose the forum which seemed most favourable from its point
of view. I accept that submission. It was no doubt because Texas seemed to satisfy that test that
Exxon Corporation chose the State Court in Texas in which to proceed against the insurers. By
the time that suit was commenced its head office was in Texas and it has not been suggested that
the Texas Court was not a Court of competent jurisdiction. It plainly was … As Mr. Kendrick
pointed out, it must have been obvious that the claim arising out of business allocated to the
reinsured’s “Drilling Rig Account” might well be litigated in Texas. In these circumstances it
was to be expected that the insurers’ liability might be determined in any one of a number of
different Courts … In my judgment, if the insured was entitled to proceed in Texas against the
insurers any liability established in Texas would be liability under the policy and (subject to any
relevant terms of the reinsurance) the reinsurers would be liable in respect of it, provided only
that all proper defences were advanced in Texas … The question here is what was the liability of
the insurer under the GCE policy. The answer to that question depends or may depend upon
where that liability is established. If it is established in Texas, as a Court of competent
jurisdiction, the answer is the liability of the insurer is whatever liability is established in the
Texan Court … The crucial point is that the liability under the terms of the policy, which is what
is in effect is being reinsured, is not the liability of the insurer in a vacuum but that liability as
determined by a Court of competent jurisdiction … any other conclusion would, as I see it, be
unjust, because if insurers are sued in a Court in which the insured is entitled to proceed under
the terms of the policy and if the insurers take every point open to them, but are still held liable
and (say) all appeals fail, if those insurers cannot recover under their contracts of reinsurance,
authority.
Page | 702
INSURANCE LAW CASES
they will not in truth be covered in respect of their liability under the policy, which is the whole
point of the reinsurance.’
Having stated what he regarded as the appropriate principle in a case where a court of competent
jurisdiction has pronounced judgment in favour of an insured against the original insurer, the
judge turned to consider the position where a claim, and in particular the claim of Exxon against
NRG, had been made but settled before adjudication.
He summarised the rival contentions of the parties in the Texas proceedings for summary
judgment under section 1 much as I have summarised it above. He emphasised that there was no
suggestion (as indeed there has been no suggestion on this appeal) that the insurers did not seek
to advance all the points which NRG considered should be made as to why there was no liability
under section 1 of the policy. He then set out the passages in Mr Reasoner’s affidavit which I
have already quoted. He observed that there was no evidence to contradict the evidence of Mr
Reasoner that, if the action against the insurers had continued, it would have succeeded. He went
on to say (at 88):
‘A judgment in favour of the insured, while arguably wrong as a matter of construction of the
policy from the viewpoint of an English lawyer, would be readily understandable, and indeed in
my opinion arguably right. However that may be, there is uncontradicted evidence of the liability
of the
Page 444 of [1998] 2 All ER 434
insurers to the insured in Texas, namely liability for at least U.S. $600m. in respect of principal. I
am not sure of the position with regard to interest.’
Having so decided, the judge proceeded to deal with two further matters advanced by NRG. In
relation to a ‘Seepage and pollution exclusion’ to which several of the plaintiffs only were
parties, the judge held that it was not apt to exclude liability. He also considered a submission for
NRG that the plaintiffs had failed to provide evidence reasonably required by NRG relating to
the make up of their claim. In relation to that, he held that the evidence relied on established both
the fact and amount of the insurers’ liability to Exxon and it was not arguable that it was
authority.
Page | 703
INSURANCE LAW CASES
reasonable for NRG to require any more evidence. Although the judge’s decision on those two
matters is the subject of grounds 5 and 7 in the notice of appeal, they have not been pursued
before this court. The judge (at 89) concluded that—
‘the plaintiffs are in principle entitled to succeed against NRG under the contract of reinsurance
and that NRG has no arguable defence to the plaintiffs’ claim …’
The issues on this appeal
Much of the time spent on this appeal has been taken up in submissions as to the appropriate
classification of the contract between the parties beneath the umbrella heading of ‘reinsurance’.
As stated in McGillivray and Parkinson on Insurance Law (9th edn, 1997) para 33-1, the English
authorities do not provide a satisfactory definition of reinsurance and the evolution of
reinsurance in its various forms has made it difficult to achieve a comprehensive definition. As
pointed out by Hobhouse LJ in Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd’s Rep 516
at 522, the word ‘reinsurance’ is often used loosely (ie in a broad sense), simply to describe any
contract of insurance which is placed by or for the benefit of an insurer. In Toomey’s case
Hobhouse LJ described a reinsurance contract as ‘properly defined’ in the narrow sense
enunciated by Buckley LJ in British Dominion General Insurance Co v Duder [1915] 2 KB 394
at 400, [1914–15] All ER Rep 176 at 178 (‘a contract of reinsurance is a contract which ensures
the thing originally insured … not the interest of the reinsurer in the ship by reason of his
contract of insurance upon the ship’) and by Viscount Cave LC in Forsikringsaktieselskabet
National (of Copenhagen) v A-G [1925] AC 639 at 642, [1925] All ER Rep 182 at 184 (‘the
reinsuring party insures the original insuring party against the original loss, the insurable interest
of the original insuring party being constituted by its policy given to the original assured’).
Hobhouse LJ ([1994] 1 Lloyd’s Rep 516 at 522–523) went on to say:
‘The fact that the insurance is a reinsurance means that the extent of the reinsured’s insurable
interest has to be identified by reference to the terms of the original policy and that the reinsured
must therefore give to the reinsurer the benefit of any protection which the reinsured is entitled to
enjoy or may have obtained under the original policy.’
authority.
Page | 704
INSURANCE LAW CASES
In that connection he also quoted the passage from P O Lawrence J in Re London County
Commercial Reinsurance Office Ltd to which I have already alluded.
In Toomey’s case an argument was advanced by Eagle Star which sought to equate reinsurance
with liability insurance. Hobhouse LJ stated (at 522):
Page 445 of [1998] 2 All ER 434
‘This is not and never has been correct. Liability insurance is a species of original insurance
whereby an assured insures the risk of his becoming liable to others.’
He went on (at 523–524) to point out:
‘The element of “liability” was effectively introduced into this branch of insurance by the
attempts of insurers, through the use of special clauses, to get round the need to prove their loss
by proving an insured loss of the original subject matter. The history of this part of the law is
reviewed in the judgments of the Court of Appeal in Insurance Company of Africa v. Scor
(U.K.) Reinsurance Co. Ltd. ([1985] 1 Lloyd’s Rep 312). The original form of the relevant
clause required reinsurers “to pay as may be paid thereon”, a wording which Mr. Justice
Matthew in Chippendale v. Holt ((1895) 1 Com Cas 157) held only went to the quantum of any
payment that had been made by the reinsured not to the question whether a loss covered by the
original insurance had ever taken place. The market then introduced the clause which required
the reinsurers to “follow the settlements” of the reassured. This clause was successful in
requiring the reassured to accept any bona fide settlements made by the reassured with the
original assured. The position was summarised by Lord Justice Robert Goff in Scor ([1985] 1
Lloyd’s Rep 312 at 330): “… the effect of a clause binding reinsurers to follow settlements of the
insurers, is that the reinsurers agree to indemnify insurers in the event that they settle any claim
by their assured … provided that the claim as so recognised by them falls within the risks
covered by the policy of reinsurance as a matter of law and provided also that in settling the
claim the insurers have acted honestly and have taken all proper and businesslike steps in making
the settlement.” … Over the years, Judges have on a number of occasions, when dealing with
reinsurance policies containing various types of settlement or payment clauses, used the
authority.
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INSURANCE LAW CASES
language of indemnification in respect of liabilities … In my judgment these references to

liability must not be read out of context. They derive in part from particular reinsurance clauses
which have been included in policies and from the basic proposition that a reinsured must prove
a loss and must give the reinsurer the benefit of all rights of subrogation. These, and similar,
statements do not alter the character of reinsurance or make it into something which is a mere
liability insurance.’
Hobhouse LJ went on to hold that the particular contract in that case, whereby Eagle Star agreed
to pay ‘all claims, returns, reinsurance premiums and other outgoings’ in respect of particular
underwriting years of account, was in fact equivalent to a 100% ‘stop loss’ policy and amounted
neither to a reinsurance contract properly so described nor a ‘mere liability’ insurance.
The reinsurance in this case is non-proportional excess of loss reinsurance. The promise is—
‘to indemnify the reinsured in settlement of its net loss … under business accepted by the
reassured as fully described in Section C of the schedule [ie] … all losses howsoever and
wheresoever arising sustained by the reassured in respect of all business allocated to their
Drilling Rig Account.’
Mr Kendrick has submitted to this court that those words are appropriate to a reinsurance of
liabilities, there being no reinsuring words referring to the many underlying risks. However, it
seems to me that such doubts as might arise from
Page 446 of [1998] 2 All ER 434
the wording as to whether or not the reinsurer should only be liable to the extent of the insurers’
liability in respect of the original risk, are dispelled by reason of cl 1.3 of the JELC, which
provides that it is a condition precedent to liability that settlement by the reinsured shall be in
accordance with the terms and conditions of the original policies or contracts. Thus, while
language of indemnity against loss is used, it is still in effect an indemnity against risks falling
within the original policy or policies.
authority.
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In Charter Reinsurance Co Ltd v Fagan [1996] 3 All ER 46, [1997] AC 313 the House of Lords
was concerned with the meaning of the words ‘actually paid’ in the context of the ‘ultimate net
loss’ clause of two whole account excess of loss reinsurances. The terms of the reinsuring clause
were ‘to pay all losses howsoever and wheresoever arising during the period of this Reinsurance
on any Interest under Policies … underwritten by the Reinsured in their Whole Account’, ie
terms effectively indistinguishable from the contracts of reinsurance in this case. In construing
the clause, Lord Mustill said ([1996] 3 All ER 46 at 51, [1997] AC 313 at 385):
‘This is not the place to discuss the question, perhaps not yet finally resolved, whether there can
be cases where a contract of reinsurance is an insurance of the reinsurer’s liability under the
inward policy or whether it is always an insurance on the original subject matter, the liability of
the reinsured serving merely to give him an insurable interest.’
Thus, he left open the possibility that, in some cases, a contract of reinsurance may more
properly be regarded as liability insurance than a reinsurance of the original subject matter, but
the burden of his observation appears to be that such a case would be rare. Certainly, it is clear
that Lord Mustill ([1996] 3 All ER 46 at 53, [1997] AC 313 at 387) did not think that was the
case in the policy before him when he observed:
‘As I have already suggested, under this form of words, although perhaps not under all forms, the
policy covers not, as might be thought, the suffering of loss by the reinsured in the shape of a
claim against him under the inward policies, but the occurrence of a casualty suffered by the
subject matter insured through the operation of an insured peril. The inward policies and the
reinsurance are wholly distinct. It follows that in principle the liability of the reinsurer is wholly
unaffected by whether the reinsured has satisfied the claim under the inward insurance …’
Again, against the background of the whole account excess of loss reinsurances before the court,
Lord Hoffmann ([1996] 3 All ER 46 at 58, [1997] AC 313 at 392) said of contracts of
reinsurance:
‘Such a contract is not an insurance of the primary insurer’s potential liability or disbursement. It
is an independent contract between reinsured and reinsurer in which the subject matter of the
authority.
Page | 707
INSURANCE LAW CASES
insurance is the same as that of the primary insurance, that is to say, the risk to the ship or goods
or whatever might be insured. The difference lies in the nature of the insurable interest, which in
the case of the primary insurer, arises from his liability under the original policy (see British
Dominion General Insurance Co v Duder [1915] 2 KB 394 at 400, [1914–15] All ER Rep 176 at
178 per Buckley LJ).’
I do not think it is necessary on this appeal further to consider the general question whether, or
where, the line should be drawn between reinsurance
Page 447 of [1998] 2 All ER 434
‘properly’ or ‘narrowly’ so-called and ‘mere’ liability insurance effected by a reinsurer. That is
because cl 1.3 of the JELC specifically provides the answer to the particular question in relation
to which such an exercise in classification usually requires to be performed. In the light of its
provisions, it seems to me that the parties were correct to pursue the matter before the judge on
the basis that the first question which required to be answered for the purposes of the Ord 14
proceedings was whether NRG had demonstrated an arguable defence that the plaintiffs were not
liable to Exxon in respect of the claim under section 1 of the GCE policies.
In holding that NRG had not done so, the judge’s reasoning involved two essential steps. First,
he dealt with the question of whether, if the Texas court (as a court of competent jurisdiction)
had given judgment for Exxon despite the insurers’ having advanced all reasonable defences (as
Mr Reasoner predicted was the likely outcome), the plaintiffs would have established their
liability under the original policy for the purposes of indemnity by NRG under the reinsurance
policy. He answered that question in the affirmative. Second, having done so, he treated the
prediction in Mr Reasoner’s affidavit, (uncontradicted as it was by affidavit evidence to the
contrary), as conclusive of the likely outcome of the Texas proceedings and thus held that
liability was similarly established by virtue of the settlement agreement.
Before this court, Mr Sumption has attacked the judge’s reasoning upon the following grounds.
(1) He relies upon certain passages in the judgment of Clarke J to suggest that the judge
misunderstood the nature of reinsurance and that, by adopting the approach he did, he dealt with
authority.
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INSURANCE LAW CASES
the matter essentially as a reinsurance of the insurers’ liability and not a reinsurance of the
original risk ie losses in respect of which it was necessary for the plaintiffs to prove that they
were in law losses for which they were liable under the terms of the original policy, as opposed
to simply being losses sustained by the plaintiffs in respect of business allocated to the plaintiffs’
drilling rig account.
(2) Mr Sumption submits that the judge was wrong to approach the question of liability under the
reinsurance policy from the starting point of a notional decision of the Texas court in favour of
Exxon for two reasons. (a) In Mr Sumption’s submission, such decision would not in itself have
been definitive that the loss was recoverable under the terms of policy, that question depending
on the view of the English court as to the proper construction of the policy according to its
governing law and not (as Mr Reasoner treated it and as the judge appeared to accept) of
predicting the uncertain outcome of a Texas jury trial. (b) In any event, no trial had in fact taken
place. That being so, the settlement, and the question of whether or not it was a settlement in
respect of a loss for which the insurers (and hence the reinsurers) were liable, fell to be
considered by the court seised of the question of liability under the reinsurance contract, ie the
English court. That question in turn fell to be decided according to the appropriate rules of
construction under the applicable law and not according to the predicted findings of a Texan jury
which, on the basis of Mr Reasoner’s affidavit, might well not approach its task from the same
standpoint.
(3) Finally, given the necessity for the plaintiffs to establish their liability under the terms of the
original contract, Mr Sumption submits that Mr Reasoner’s affidavit was neither appropriate nor
sufficient. It did not assert that it was, or purport to be, an affidavit of Texas law, or of any law
different in substance from English law as applied to the proper construction of the original
insurance contract. In effect, all that the affidavit did was to set out the arguments advanced
Page 448 of [1998] 2 All ER 434
by Exxon on one side and the insurers on the other and assert the likelihood that a Texas jury,
charged with the task of deciding the case, would have found in favour of Exxon. Further, the
affidavit was in terms which, expressly or by implication, suggested that such a result was likely
authority.
Page | 709
INSURANCE LAW CASES
to follow, at best, by reason of the jury’s inexperience and lack of expertise in insurance law, and
at worst, by reason of bias in favour of an insured which had suffered heavy losses.
Discussion and conclusions
As to Mr Sumption’s submission (1), I do not consider that any individual passage in the
judgment indicates that the judge misunderstood the nature and boundaries of reinsurance in
general or as applicable in the particular context. The passage particularly relied on by Mr
Sumption is that in which the judge said ([1998] 1 Lloyd’s Rep 80 at 86):
‘The question here is what was the liability of the insurer under the GCE policy. The answer to
that question depends or may depend upon where that liability is established … The crucial point
is that the liability under the terms of the policy, which is what is in effect being reinsured, is not
the liability of the insurer in a vacuum but that liability as determined by a Court of competent
jurisdiction … if those insurers cannot recover under their contracts of reinsurance, they will not
in truth be covered in respect of their liability under the policy …’ (My emphasis.)
I consider that passage to have been no more than an acknowledgement of the fact that, in
considering questions of liability, especially those which turn on the construction of a contract of
insurance, different courts of competent jurisdiction may reach different conclusions, but that, if
the effect of a decision of one such court as to the liability of an insurer to his original insured is
not honoured or recognised by the (different) court which later determines the liability of the
reinsurer to his reinsured, the overall purpose of the reinsurance will not have been achieved.
The judge well understood, and proceeded on the basis, that, in relation to the particular contract
of reinsurance before him, it was common ground that the plaintiffs must establish that they were
liable under the GCE policy. It was also common ground that, in the absence of special wording,
NRG as reinsurers did not agree to indemnify the plaintiffs in respect of any payments which
they considered it in their business interest as insurers to make, as to which the judge quoted
Lord Mustill in Hill v Mercantile and General Reinsurance Co plc [1996] 3 All ER 865 at 880,
[1996] 1 WLR 1239 at 1253 in commenting on the terms of the ‘follow the settlements’ clause
(already set out above).
authority.
Page | 710
INSURANCE LAW CASES
Turning to Mr Sumption’s submission (2), I do not consider that the judge was wrong to hold in
principle that, had it been the case that Exxon’s claim had proceeded to trial in Texas (being a
court of competent jurisdiction) and had it been the subject of a verdict against the insurers (they
having taken all proper defences) then liability would prima facie have been established so as to
render NRG liable as reinsurers, subject to any reversal on appeal. My reasons are essentially the
same as those of the judge, which I have already quoted in extenso.
The broad purpose of reinsurance, if only as a corollary of its conventional definition, is for the
reinsured to be covered (within the limits stated in the reinsurance) in respect, and to the extent,
of his liability under the original policy, pursuant to which the original insured is entitled to
recover from him. In a reinsurance giving world-wide cover of the kind in this case, it is within
the
Page 449 of [1998] 2 All ER 434
inevitable contemplation of the parties that the reinsurance will apply to large numbers of
insurance contracts made with corporations in various parts of the world and that the liability of
the reinsured will be determined by courts of competent jurisdiction, or arbitrators, in many
countries or states who will apply the law applicable to the original insurance. Indeed it may
even be, as in this case, that the contract of insurance between the reinsured and his assured will
provide for arbitration of those parties’ disputes by an arbitrator who is not to be bound by strict
rules of law. Thus the law applied to determine the original liability of the reinsured may differ
to a greater or lesser extent in its content and approach from the law governing the reinsurance
contract. However, it would be quite impracticable, productive of endless dispute, and against
the presumed intention of the contract of reinsurance (absent contrary or special provision of a
kind which does not exist in this case) for an English court trying a dispute concerning the
reinsurers’ liability to the reinsured not to treat the judgment of a foreign court as to the
reinsured’s original liability as decisive and binding, save within the most circumscribed limits.
Like the judge, I would hold those limits to be: (1) that the foreign court should in the eyes of the
English court be a court of competent jurisdiction; (2) that judgment should not have been
obtained in the foreign court in breach of an exclusive jurisdiction clause or other clause by
authority.
Page | 711
INSURANCE LAW CASES
which the original insured was contractually excluded from proceeding in that court; (3) that the
reinsured took all proper defences; and (4) that the judgment was not manifestly perverse.
Mr Sumption has resisted that approach as one of convenience rather than logic. He has argued
that, since the reinsured must establish that he was legally liable ie liable on a proper application
of the applicable law, the decision of a foreign court can be no more than evidence of such
liability which ultimately falls to be decided by the court deciding the dispute as to the liability
of the reinsurer to the reinsured. He concedes that, in many cases, the foreign decision is likely to
be treated as conclusive evidence of liability, but says that should not affect the principle. In my
view, the matter is better treated as a question of implication into the reinsurance contract, the
implied term being that, absent any provision to contrary effect, the insurer will treat the decision
of a foreign court of competent jurisdiction as to the liability of the reinsured to his original
insured as binding, subject only to reversal on appeal and the limits which I have mentioned.
I would only add that, as to the ambit of limit (4), it does not seem to me necessary or desirable
in the course of this judgment to explore the situations in which a plea of perversity might
successfully be raised in respect of the decision of a foreign court. That is because there has been
no such decision in this case. While I accept that the judge was correct in his view as to the effect
of a judgment of the Texas court had that position been reached, it seems to me that (given no
such judgment existed) he fell into error in his approach to the question of whether or not the
liability of the plaintiffs to Exxon under section 1 of the GCE policy was proved.
In my view, in the absence of such a judgment, it was for the judge to form his own view of
whether or not an arguable defence had been shown by the reinsurers that the plaintiffs were not
liable to Exxon under section 1 of the GCE policy according to the applicable law and rules of
construction. There had been debate before him as to what was the applicable law (ie New York
law or English law), but he had no evidence before him that New York law differed in any
relevant respect from English law, or indeed that Texas law (which was not in fact advanced as
the applicable law) differed from either. Nor did he have before him any assertion that, by reason
of any particular law or rule of construction properly
Page 450 of [1998] 2 All ER 434
authority.
Page | 712
INSURANCE LAW CASES
applied to the provisions of sections 1 and 3 of the GCE policy, Exxon were entitled, under the
scheme of policy, to recover their clean-up costs under section 1. It therefore fell to the judge to
deal with the question of whether there was an arguable defence on the basis of English law. It
seems to me that, had the judge sought to embark upon the question of whether the insurers were
indeed liable to Exxon under section 1, he could not have failed to find that there were at least
strong arguments that they were not. However, he never did embark upon that task. He simply
stated in his judgment ([1998] 1 Lloyd’s Rep 80 at 84), when proceeding to answer the question
whether the plaintiffs were liable to Exxon under section 1:
‘I shall assume for the moment that the GCE policy was governed by English law. I shall also
assume that Mr. Sumption was correct in submitting that if section 1 were construed in
accordance with English law by an English Court the plaintiffs would have had at least arguable
defences to Exxon Corporation’s claim.’
He then went on to accept the submission of Mr Kendrick that—
‘so long as the plaintiffs were or would have been held liable under the GCE policy by a Court of
competent jurisdiction they have established the necessary liability under the original policy in
order to satisfy the principle that the reinsured can only recover in respect of payments which
they were liable in law to make under that policy … provided only that any such Court was a
Court of competent jurisdiction and that the plaintiffs took all the defences available to them.’
(See [1998] 1 Lloyd’s Rep 80 at 84.)
Thereafter, having reached his conclusion as to the position had judgment been obtained against
the plaintiffs in the Texas court, the judge simply treated the question of the plaintiff’s liability to
Exxon as answered by Mr Reasoner’s predictions. He thus, in effect, treated Mr Reasoner’s
opinion as to the likely outcome if the matter had proceeded before the jury as evidence of what
the law was.
I now turn to Mr Sumption’s submission (3). The difficulty with the judge’s approach as just
described was that Mr Reasoner did not purport to predict the jury’s verdict by reference to the
answer which a proper application of the law and appropriate rules of construction would
authority.
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produce. He stated that, in his judgment, liability was not going to turn ‘simply upon
construction of the policy language in the light of the factual matrix’, as to which he stated that
the insurers’ case was ‘certainly reasonable and based upon reasonable and credible arguments’.
Rather, he made his prediction as to the verdict of the jury based upon the fact that they were
likely to be directed by a ‘non-specialised judge’ in an area in which they lacked expertise, and
that ‘jurors are often unfavourable to insurers and biased against them when insurers are arguing
for a limitation of cover’.
The judge accepted the evidence of Mr Reasoner as to the matters to which I have just referred
with the observation: ‘that evidence seems to me to make good sense’. While it seems to me that
such an observation might appropriately have been directed to the decision of the insurers to
settle in the light of Mr Reasoner’s prediction, it did not bite on the question of whether the
evidence demonstrated legal liability under the insurance contract.
As to the decision of the insurers to settle in the light of Mr Reasoner’s prediction, as Mr

Sumption in my view rightly submitted, it was not enough for
Page 451 of [1998] 2 All ER 434
the plaintiffs to establish that the settlement was business-like and sensible. They were required
to demonstrate liability to Exxon, and could only be entitled to recover on some wider basis if
they could show some kind of ‘follow settlements’ clause binding the reinsurers to the plaintiffs’
settlement. However, as already noted, of the 16 contracts making up the GCE policy, five
contained no follow settlements clause at all and 11 contained clauses in substantially the same
form as in Hill’s case [1996] 3 All ER 865, [1996] 1 WLR 1239. None bound the reinsurers to
reasonable or business-like settlements regardless of the scope of the direct insurance. All
provided that settlements should be binding upon the reinsurers only ‘providing such settlements
are within the terms and conditions of the original policies and/or contracts’.
The judge ([1998] 1 Lloyd’s Rep 80 at 88) found that it was unnecessary to consider the terms of
the follow settlement clauses because he found that the plaintiffs had—
authority.
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INSURANCE LAW CASES
‘in the words of Mr. Justice Lawrence, proved the loss in the same way as the original assured
must have proved it against them. They have proved the amount of the insurers’ liability in the
Court of competent jurisdiction, where they were properly sued. Since it is not suggested that
they did not take all points available to them, it follows that none of the defences now suggested
by NRG, whether relating to liability or quantum (which are the same as those which were
advanced by the plaintiffs) would have been of any avail.’
In that passage the judge appears to have equated Mr Reasoner’s prediction with an actual
verdict of the Texas court. In my view he was wrong to do so. A judgment of the court would
have given rise to a source of obligation conclusive as between the plaintiffs and Exxon (subject
to any appeal) and conclusive as between the plaintiffs and NRG subject to a possible argument
of perversity, if later study of the issues as deployed at trial and the form of any judgment or
verdict realistically gave rise to such a plea. Without it, if the plaintiffs wished to claim from
NRG as reinsurers, there was an independent necessity to demonstrate legal liability which the
affidavit of Mr Reasoner did not attempt to achieve other than by a prediction directed to other
considerations than those of legal merit.
In this context, the judge’s reference to proof in court after taking ‘all points available to them’
does not seem to me relevant. The matter did not proceed to judgment and payment was made
pursuant to a settlement in which the insurers (no doubt for good and business-like reasons)
decided that they would not submit the points available to them to the decision of the court, but
would rather reach a compromise. It is in just such a position, that the reinsurer, in response to
the reinsured’s claim for indemnity has the right to require the reinsured to show that he was
legally liable to the original assured, unless there is in the reinsurance contract an effective
‘follow the settlements’ provision which precludes such right (see Insurance Co of Africa v Scor
(UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312).
In finding as he did, the judge placed his decision in large measure upon the fact that there was
no affidavit evidence proffered by NRG to contradict the evidence of Mr Reasoner that, if the
action against the insurers had continued, it would have succeeded. However, in the context of
this case, and in the light of the nature of the contents of Mr Reasoner’s affidavit, it does not
authority.
Page | 715
INSURANCE LAW CASES
seem to me that the reinsurers were obliged to file such evidence in order to make their point.
Their point was simply that, in the absence of any evidence as to a different law to be
Page 452 of [1998] 2 All ER 434
applied, the judge should apply English law which would treat the question of liability as
dependent on the construction of the documents rather than upon the uncertain approach which it
appeared Mr Reasoner was suggesting a Texas jury might bring to the case.
In my view, there was evidence before the judge on the documents alone which not only entitled
but obliged him to assume (as he did) that under English law NRG would have an arguable
defence that the plaintiffs were not liable to Exxon under section 1 of the GCE policy. I do not
think there was good reason for him to accept Mr Reasoner’s assessment that the jury, properly
directed, would not decide the matter in favour of Exxon. There should be an instinctive
reluctance in any court required to make predictions about a decision in another court, to
conclude that such decision, whether in the form of a judge’s ruling or a jury’s verdict, will not
be arrived at according to law.
The statement by Mr Reasoner that in his opinion, based on his experience at the section 3A trial,
it was probable that underwriters would have lost the trial under section 1, seems to me to be
objectionable on a number of grounds. First it was not said to be based on the principles of law
or construction properly to be applied. Second, it was, in truth, no more than a prediction of
human behaviour based on the jury’s consideration of different matters in the section 3A trial.
Third, it ignored the fact that it was the decision of the plaintiffs to settle the section 1 claim
which prevented the jury having the opportunity to consider the provisions of sections 1 and 3
together, so that, even assuming they were inclined to give judgment on a broad basis rather than
one of strict legal principle, they would have had the opportunity to apply their minds as to
whether it was right to give judgment under section 1 as well as section 3, in the light of the
overall scheme of the insurance and the clear provision in art IV, para 3 of section 1.
Finally, I would observe by way of footnote that, given the nature of NRG’s defence and the
need for an early resolution of this dispute, it does seem to be one particularly appropriate for
authority.
Page | 716
INSURANCE LAW CASES
early determination in the proceedings as a matter of law. That result might well have been
achieved had the judge been asked to determine the question of law as to the liability of the
plaintiffs to Exxon under section 1 of the GCE policy at the same time as the Ord 14
proceedings. In the absence of such a request, it remains the unhappy position following this
appeal that the question has yet to be determined despite two lengthy hearings relating to it.
I would allow this appeal and order that the judgment of Clarke J under Ord 14, r 3 be set aside
and the plaintiffs’ application by summons dated 20 May 1996 be dismissed.
MAY LJ. I agree.
LORD WOOLF MR. I also agree.
Appeal allowed. Leave to appeal to the House of Lords refused.
CHARTER REINSURANCE CO LTD V FAGAN [1996] 3 ALL ER 46
LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading in draft the
speech of my noble and learned friend Lord Mustill and for the reasons he gives I too would
dismiss this appeal.
Page 48 of [1996] 3 All ER 46
LORD GRIFFITHS. My Lords, I have had the advantage of reading in draft the speech of my
noble and learned friend Lord Mustill and for the reasons he gives I too would dismiss this
appeal.
LORD BROWNE-WILKINSON. My Lords, for the reasons given in the speech by my noble
and learned friend Lord Mustill I too would dismiss this appeal.
LORD MUSTILL. My Lords, this appeal turns on the meaning of the words ‘actually paid’ in
three contracts of reinsurance. The question is whether the words prescribe that no sum will be
authority.
Page | 717
INSURANCE LAW CASES
paid by reinsurer to reinsured in respect of a loss, or more accurately that no sum will be brought
into the balance of account between the two parties, until the reinsured has paid out a sum of
money to the person whose claim against him has brought the reinsurance into play. At first sight
this seems the shortest of questions, requiring a very short answer; and so in the end it proves to
be. But the instinctive response must be verified by studying the other terms of the contract,
placed in the context of the factual and commercial background of the transaction. I will
therefore go straight to the nature of the business and to the terms of the contract in which it was
embodied, concentrating for the moment on only one of the three policies, namely policy no X
20693/5386.
By this contract two syndicates, represented in these proceedings by Mr P F Fagan (the

syndicates), reinsured for small percentages of a total line Charter Reinsurance Co Ltd (Charter)
in respect of Charter’s whole account for losses occurring during the calendar year 1989. The
contract formed part of a programme which also comprised ‘specific reinsurances’ taken out
with others on four of Charter’s accounts viz, Non-Marine LMX; Non-Marine International;
Marine; and Aviation. These accounts were reinsured in a series of tranches to limits of,
respectively, £23m, £11m, £32·25m and £31·5m. Above these reinsurances of separate accounts
were the levels of whole account reinsurance with which two of the three contracts in suit were
concerned. Above a retention of £100,000, there were successive layers of £2·9m, £2m, £2·5m
and £2·5m. Policy No 5386 insured the second of these layers, for £2m excess of £3m and one of
the other policies sued upon covered the fourth layer up to £7·5m. For the purposes of the
present litigation it is assumed that a series of major casualties arising from perils insured under
the policy have caused valid claims to be made against Charter under policies issued by it to
other reinsured or insured companies or syndicates (the inward policies). These claims are so
large as to exhaust all the reinsurances comprising the specific accounts of the programme, and
to encroach upon the relevant layers of whole-account reinsurance. The problem arises from the
fact that Charter is in provisional liquidation, being unable to pay its debts as they fall due, and
these debts include claims under the inward policies. For their part, the syndicates do not for
present purposes dispute that all the requirements of a valid claim against them by Charter are
authority.
Page | 718
INSURANCE LAW CASES
present, save only one: that Charter have not paid, and cannot pay, the inward claims which they
have reinsured. Thus, say the syndicates, Charter have no cause of action under the reinsurance.
The practical importance of this defence, if sound, is obvious; and its implications have been
multiplied by the levels of financial frailty experienced in the London insurance market in recent
years. Across the market as a whole very large sums depend upon it, and the litigation from
which this appeal stems has been brought in practice, if not in form, as a test case. The
proceedings take the
Page 49 of [1996] 3 All ER 46
shape of an action by Charter for a summary declaration that payment by way of transfer of
funds or other means of satisfaction by Charter under the inward policies was not a condition
precedent to the liability of the syndicates. Within a very few months it proved possible to obtain
the opinion of the Commercial Court in the shape of a meticulous and thoughtful judgment of
Mance J, granting a declaration in those terms. Upon recourse to the Court of Appeal ([1996] 1
All ER 406) this decision was upheld by a majority, Staughton LJ dissenting. The syndicates
now appeal to this House.
This being, I believe, a sufficient summary of the dispute I turn to policy No X 20693/5381. It is
important to quote its terms at some length.
For ease of reference I have added numbers and letters, and have placed in italics the words
around which the controversy revolves.
‘1 REINSURING CLAUSE
This Reinsurance is to pay all losses howsoever and wheresoever arising during the period of this
Reinsurance on any Interest under Policies and/or Contracts of Insurance and/or Reinsurance
underwritten by the Reinsured in their Whole Account. Subject however to the following terms
and conditions.
2(a) LIABILITY CLAUSE
authority.
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INSURANCE LAW CASES
The Reinsurers shall only be liable if and when the Ultimate Nett Loss sustained by the
Reinsured in respect of interest coming within the scope of the Reinsuring Clause exceeds
£3,000,000 or U.S. or Can. $6,000,000 each and every loss and/or Catastrophe and/or Calaíity
and/or Occurrence and/or Series of Occurrences arising out of one event and the Reinsurers shall
thereupon become liable for the amount in excess thereof in each and every loss, but their
liability hereunder is limited to £2,000,000 or U.S. or Can. $4,000,000 each and every loss
and/or Catastrophe and/or Calamity and/or Occurrence and/or Series of Occurrences arising out
of one event.
(b) WARRANTED Reinsurers hereon to have benefit of Specific Reinsurances as per Schedule
attached.
ULTIMATE NET LOSS CLAUSE
(c) The term “Nett Loss” shall mean the sum actually paid by the Reinsured in settlement of
losses or liability after making deductions for all recoveries, all salvages and all claims upon
other Reinsurances whether collected or not and shall include all adjustment expenses arising
from the settlement of claims other than the salaries of employees and the office expenses of the
Reinsured.
(d) All Salvages, Recoveries or Payments recovered or received subsequent to a loss settlement
under this Reinsurance shall be applied as if recovered or received prior to the aforesaid
settlement and all necessary adjustments shall be made by the parties hereto. Provided always
that nothing in this clause shall be construed to mean that losses under this Reinsurance are not
recoverable until the Reinsured’s Ultimate Nett Loss has been ascertained.
(e) Notwithstanding anything contained herein to the contrary, it is understood and agreed that
recoveries under all Underlying Excess Reinsurance Treaties and/or Contracts (as far as
applicable) are for the sole benefit of the Reinsured and shall not be taken into account in
computing the Ultimate Nett Loss or Losses in excess of which this Reinsurance attaches nor in
any way prejudice the Reinsured’s right of recovery hereunder.
Page 50 of [1996] 3 All ER 46
authority.
Page | 720
INSURANCE LAW CASES
3 PERIOD OF REINSURANCE CLAUSE
This Reinsurance covers Losses Occurring during the period commencing with the 1st January,
1989 and ending with the 31st December, 1989 both days inclusive, Local Standard time at the
place where the loss occurs …
4 PREMIUM CLAUSE
The Minimum and Deposit Premium for this Reinsurance shall be U.S.$600,000·00 10%
Payable in Sterling, namely £37,500·00 89% Payable in U.S. Dollars, namely $537,000·00%
Payable in Can. Dollars, namely $3,000·00 …
5 CURRENCY CLAUSE
Losses (if any) paid by the Reinsured in currencies other than Sterling, shall be converted into
Sterling at the rate of exchange ruling at the date of the settlement of loss or losses by the
Reinsured other than losses paid in U.S. or Can. Dollars which will be paid in those currencies.
6 REINSTATEMENT CLAUSE
In the event of loss or losses occurring under this Reinsurance, it is hereby mutually agreed to
reinstate this Reinsurance to its full amount of £2,000,000 or U.S. or Can. $4,000,000 from the
time of the occurrence of such loss or losses to expiry of this Reinsurance and that an additional
premium shall be paid by the Reinsured upon the amount of such loss or losses when they are
settled in the first instance calculated at 100% of the Minimum and Deposit Premium hereunder
subject to a further payment hereunder (if any) when the Final Earned Premium is known.
Reinstatement premiums to be paid in the currency of loss settlement hereunder for which
purpose U.S. or Can. $1·60 = £1.
Nevertheless the Reinsurers shall never be liable for more than £2,000,000 or U.S. or Can.
$4,000,000 in respect of any one loss and/or series of losses arising out of one event, nor for
more than £6,000,000 or U.S. or Can. $12,000,000 in all.’
authority.
Page | 721
INSURANCE LAW CASES
The case for the appellants concentrates almost exclusively on the words in italics. It is very
simple. These words plainly create a condition precedent to any liability of the syndicates. The
condition is that Charter shall have ‘actually paid’ under the original policies. If this expression
has a natural and ordinary meaning, effect should be given to it. The expression and the words
which comprise it do have such a meaning. By no stretch of language can it be extended to cover
a situation in which Charter has not made any disbursement, actual or even notional, and will
never do so.
My Lords, to a substantial degree I accept this argument. I believe that most expressions do have
a natural meaning, in the sense of their primary meaning in ordinary speech. Certainly, there are
occasions where direct recourse to such a meaning is inappropriate. Thus, the word may come
from a specialist vocabulary and have no significance in ordinary speech. Or it may have one
meaning in common speech and another in a specialist vocabulary; and the context may show
that the author of the document in which it appears intended it to be understood in the latter
sense. Subject to this, however, the inquiry will start, and usually finish, by asking what is the
ordinary meaning of the words used. I begin, therefore with ‘actually’. In my opinion this word
is used by way of qualification or precaution, in the sense of ‘really’, ‘in truth’, ‘not notionally’
or ‘not prospectively’. On this, I feel no doubts. The word ‘paid’ is more slippery.
Unquestionably, it is no longer confined to the delivery of cash or its equivalent.
Page 51 of [1996] 3 All ER 46
In ordinary speech it now embraces transactions which involve the crediting and debiting of
accounts by electronic means, not only transfers between bank accounts by payment cards and
direct debits, but also dealings with credit cards and similar instruments. Conditional payment by
cheque would also be covered, at any rate outside a strictly legal context. Furthermore, I think it
plain that in a document created to govern a transaction in the London insurance market payment
would extend beyond remittances from debtor to creditor and would include the settlements in
account with brokers which are a feature of that market. None the less, even giving ‘paid’ an
extended meaning the word would at first sight, and even without the qualifier ‘actually’, fall
authority.
Page | 722
INSURANCE LAW CASES
well short of encompassing a situation in which the debtor had suffered no immediate financial
detriment through a transfer of funds in the direction of the creditor, and would never do so.
My Lords, I have used the expression ‘at first sight’ because I had initially thought that the
meaning of the words was quite clear, and that the complexities and mysteries of this specialist
market had hidden the obvious solution, and had led the courts below to abjure the simple and
right answer and to force on the words a meaning which they could not possibly bear. I was not
deflected from this opinion by any of the cases cited, which with few exceptions (to which I must
return) seemed too remote from the present to offer any useful guidance.
This is, however, an occasion when a first impression and a simple answer no longer seem the
best, for I recognise now that the focus of the argument is too narrow. The words must be set in
the landscape of the instrument as a whole. Once this is done the shape of the policy, and the
purpose of the terms which I have grouped as cl 2 become quite clear. As one would expect, four
essential features of the insurance are described: the perils insured against; the measure of
indemnity; the duration of the cover; and the premium. Clause 1, read together with various later
clauses of enlargement and restriction, which I have not quoted, describes the nature and
geographical scope of the perils insured against. In principle, all events happening within the
period laid down by cl 3 (construed in association with special provisions relating to liability
insurance) which constitute losses by perils insured under the original policies are to be losses
insured under this policy. This is not the place to discuss the question, perhaps not yet finally
resolved, whether there can be cases where a contract of reinsurance is an insurance of the
reinsurer’s liability under the inward policy or whether it is always an insurance on the original
subject matter, the liability of the reinsured serving merely to give him an insurable interest. This
may be important in the context of regulation, but it makes no difference here, for it is quite plain
that payment by reinsurer is not the insured event. There has still been an insured loss, and even
if the argument for the syndicates is right the consequence is only to reduce or eliminate the
amount of Charter’s recovery under cl 2 in respect of a loss which has undoubtedly occurred.
Clause 1 therefore has no bearing on the present dispute. Nor of course is the premium provision
in cl 4 of any relevance.
authority.
Page | 723
INSURANCE LAW CASES
What does matter is the group of provisions which establish the measure of indemnity, once a
loss by an insured peril has taken place. I would break these down as follows.
(i) Clause 2(a) fixes the level at which financial prejudice suffered by Charter under the inward
policies in consequence of a loss by a peril insured under this policy causes a liability to attach.
This happens when the ultimate net loss in relation to each and every loss and/or catastrophe
and/or calamity and/or
Page 52 of [1996] 3 All ER 46
occurrence (which I will call a set of linked losses) exceeds £3,000,000. This sub-clause also
fixes the upper limit of indemnity under the policy. An additional limit, this time fixed by
reference not to each set of linked losses but to the cover for the entire policy year, is imposed by
the last sentence of cl 6.
(ii) Clause 2(b) incorporates into the scheme of the policy the four sets of layered ‘specific’
insurances (ie the ‘accounts’) identified in the schedule. When an event occurs which is a peril
insured under one of those sets of insurances and also under this policy the limits of all the
insurances comprising that account must be exceeded before any indemnity begins to fall due
under this policy.
(iii) Clause 2(c) gives meaning to cl 2(a) by defining ultimate net loss. (In fact the sub-clause
omits ‘ultimate’. This must be a mistake, for otherwise the entire group of provisions makes no
sense. The word does appear in the clause as typed in the aviation policy.) The purpose of cl 2(c)
is to make clear that the syndicates are not to pay losses gross, but that there is to be a netting-
down for recoveries, salvage and the like when ascertaining whether, and if so by how much, the
relevant liabilities of Charter cross the boundary into the layer covered by this policy.
(iv) The first sentence of cl 2(d) elaborates cl 2(c) by making clear that the fixing of an ultimate
net loss in respect of any set of linked losses is provisional, in the sense that the amount of it, and
hence its impact if any on this layer of insurance, is to be open to recomputation if and when
items of the identified description subsequently accrue to the benefit of Charter.
authority.
Page | 724
INSURANCE LAW CASES
(v) The proviso in the second sentence of cl 2(d) emphasises that even though the computation of
an ultimate net loss is provisional, if it yields a figure broaching the bottom of the layer insured
under this policy it will then be ‘recoverable’ even if a subsequent recalculation when all the
figures are in may lead to an upward or downward adjustment, or even to the elimination of any
recovery at all.
(vi) Clause 2(e) is puzzling at first sight, because the use of initial capitals may suggest that, like
‘Specific Insurances’ in cl 2(b), the expression ‘Underlying Excess Reinsurance Treaties and/or
Contracts’ has a meaning specifically ascribed for the purpose of this policy. Yet one finds it
nowhere defined. In fact, however, a reading of the document as a whole shows that capitals are
used indiscriminately throughout, and that they have no special significance in cl 2(e). In the
light of the explanations given in argument, I accept that the purpose of the sub-clause is simply
to ensure that the calculation of the ultimate net loss under sub-cl (a) does not involve a
deduction of the liabilities on the underlying layers, so as to diminish the possibility of a
recovery on the layer covered by this policy.
Analysed in this way, the policy makes complete sense, and works perfectly well in practice
when understood as requiring the satisfaction of only two conditions before an indemnity falls
due. First, that an insured event shall have occurred within the period of the policy, and second
that the event shall have produced a loss to Charter of a degree sufficient, when ultimately
worked out, to bring the particular layer of reinsurance into play. This reading accommodates
without strain the words ‘if and when’, in cl 2(a); for they are concerned only with the point, not
of time but of arithmetic, at which the figures for the ultimate net loss reach the appropriate
level. Equally, I am now satisfied that the purpose of ‘the sum actually paid’ in cl 2(c) is not to
impose an additional condition precedent in relation to the disbursement of funds, but to
emphasise that it is the ultimate outcome of the net loss calculation which determines the final
liability of the syndicates under the policy. In this context, ‘actually’ means ‘in the event
Page 53 of [1996] 3 All ER 46
when finally ascertained’, and ‘paid’ means ‘exposed to liability as a result of the loss insured
under cl 1’. These are far from the ordinary meanings of the words, and they may be far from the
authority.
Page | 725
INSURANCE LAW CASES
meanings which they would have had in other policies, and particularly in first-tier policies of
reinsurance. But we are called upon to interpret them in a very specialised form of reinsurance,
and I am now satisfied that, as Mance J expressed it in his judgment at first instance, the words
in question did not have the purpose of introducing a temporal precondition to recovery in the
form of disbursement or other satisfaction of the precise net commitment between Charter and its
reinsured, but were there ‘for the purpose of measurement’.
Whilst I have come to this conclusion simply from a study of the document I ought to comment
on a number of other matters which are said to bear upon it. In the first place, there is an
argument ad absurdum to the effect that the parties cannot have intended Charter to retain such
liquidity as would enable it to answer claims under the incoming policies without recourse to the
reinsurance. At a time when the use of money was a vital element in the profitability of insurance
business it is impossible to suppose (the argument runs) that Charter should have agreed to
finance its own outlays, the more so since, if the syndicates’ interpretation of cl 2 is right,
Charter would have to find, not only the funds required to disburse the sum due under this
particular layer, but also the total of the underlying reinsurances. This would be a wholly
impracticable arrangement, and would bear especially hard on Charter if it fell into financial
trouble and lacked the means to make the payments necessary to unlock the reimbursements due
under its contracts with the syndicates.
This argument draws strength from the shape of the policy. As I have already suggested, under
this form of words, although perhaps not under all forms, the policy covers not, as might be
thought, the suffering of loss by the reinsured in the shape of a claim against him under the
inward policies, but the occurrence of a casualty suffered by the subject matter insured through
the operation of an insured peril. The inward policies and the reinsurance are wholly distinct. It
follows that in principle the liability of the reinsurer is wholly unaffected by whether the
reinsured has satisfied the claim under the inward insurance (see, amongst several authorities, Re
Eddystone Marine Insurance Co, ex p Western Insurance Co [1892] 2 Ch 423). This result can
undoubtedly be changed by express provision, but clear words would be required; and it would
to my mind be strange if a term changing so fundamentally the financial structure of the
authority.
Page | 726
INSURANCE LAW CASES
relationship were to be buried in a provision such as cl 2, concerned essentially with the measure
of indemnity, rather than being given a prominent position on its own.
Further arguments, to my mind some way short of conclusive, were advanced on each side. The
syndicates pointed out a possible disconformity between the postponement of the reinsurers’
liability to pay with the statutory provisions governing margins of solvency. For Charter
attention was drawn to long-established contractual provisions creating just such a condition
precedent as is argued for here: for example, in the running down clause and in protection and
indemnity club cover against third party liabilities, the effect of which was discussed in Firma C-
Trade SA v Newcastle Protection and Indemnity Association, The Fanti [1990] 2 All ER 705,
[1991] 2 AC 1. Each side suggested reasons why such a provision would or would not make
commercial sense; and proposed ways in which the hardship to the reinsured might be
ameliorated by devices such as the making of a series of small ‘pump priming’ payments, which
would produce a
Page 54 of [1996] 3 All ER 46
sufficient trickle of cash to satisfy ultimately the inward claim in full, hence unlocking a
recovery under the reinsurance.
These arguments are fully explored in the judgments delivered below. Intending no disrespect I
do not enter into them here, for in my opinion they cannot be decisive. If, as I believe, a proper
reading of the policy discloses no condition precedent, there is little profit in considering whether
it would have been absurd to include one. If, per contra, the words ‘actually paid’ can only as a
matter of language and context mean what the syndicates maintain, I would hesitate long before
giving them any other meaning, just because the result would be extraordinary. The words of
Lord Reid in L Schuler AG v Wickman Machine Tool Sales Ltd [1973] 2 All ER 39 at 45,
[1974] AC 235 at 251 do of course reflect not only a method of constructing contracts but also
the common experience of how language is understood:
‘The fact that a particular construction leads to a very unreasonable result must be a relevant
consideration. The more unreasonable the result the more unlikely it is that the parties can have
authority.
Page | 727
INSURANCE LAW CASES
intended it, and if they do intend it the more necessary it is that they shall make that intention
abundantly clear.’
This practical rule of thumb (if I may so describe it without disrespect) must however have its
limits. There comes a point at which the court should remind itself that the task is to discover
what the parties meant from what they have said, and that to force upon the words a meaning
which they cannot fairly bear is to substitute for the bargain actually made one which the court
believes could better have been made. This is an illegitimate role for a court. Particularly in the
field of commerce, where the parties need to know what they must do and what they can insist
on not doing, it is essential for them to be confident that they can rely on the court to enforce
their contract according to its terms. Certainly, if in the present case the result of finding a
condition precedent would be anomalous there would be good reason for the court to look twice,
and more than twice, at the words used to see whether they might bear some other meaning. In
the end, however, the parties must be held to their bargain. Thus, if I had adhered to my first
impression that the expression ‘actually paid’ could possess, even in the context of the policy,
only the meaning which it has in ordinary speech, I would have wished to consider very carefully
whether the opinion expressed in the dissenting judgment of Staughton LJ, austere as it might
seem, ought to be preferred. In the event however, for the reasons stated, this is not my present
understanding of the words, and since the broader question does not on this view arise I prefer to
say no more about it.
Next, I must notice three decisions from the United States. The first is Allemannia Fire Insurance
Co of Pittsburgh v Firemen’s Insurance Co of Baltimore (1908) 209 US 326. A proportionate
policy of reinsurance stipulated:
‘11. Each entry under this compact … shall be subject to the same conditions, stipulations, risks
and valuations as may be assumed by the said reinsured company under its original contracts
hereunder reinsured, and losses, if any, shall be payable pro rata with, in the same manner, and
upon the same terms and conditions as paid by the said reinsured company under its contracts
hereunder reinsured, and in no event shall this company be liable for an amount in excess of a
authority.
Page | 728
INSURANCE LAW CASES
ratable proportion of the sum actually paid to the assured or reinsured …’ (See 209 US 326 at
332.)
Page 55 of [1996] 3 All ER 46
After the great fire in Baltimore of 1904 the direct insurer became insolvent and could not pay
more than 55 cents in the dollar, and therefore was unable to satisfy claims under its policies
unless it could first recover from the reinsurer. The Supreme Court of the United States held that
payment by the reinsured was not a condition of recovery under the reinsurance. Delivering the
opinion of the court, Justice Peckham stated (at 336):
‘We agree with the court below, that the language of the eleventh subdivision, taken in
connection with the fact that it is used in a contract designated by the parties as one of
reinsurance, means that the reinsuring company shall not pay more than its ratable proportion of
the actual liability payable on the part of the reinsured, after deducting all liability of other
reinsurers. To hold otherwise is to utterly subvert the original meaning of the term “reinsurance”
and to deprive the contract of its chief value. The losses are to be payable pro rata with, in the
same manner, and upon the same terms and conditions as paid by the reinsured company under
its contracts. This means that such losses, payable pro rata, are to be paid upon the same
condition as are the losses of the insurer payable under its contract … [This] does not mean there
must be an actual payment of such liability by the insurer before it can have any benefit of the
contract of reinsurance which is made with defendant.’
In the second case, Fidelity and Deposit Co v Pink (Superintendent of Insurance of New York)
(1937) 302 US 224 the contract was in very different terms. It stipulated that the reinsurer’s
proportionate share of the loss should be paid to the reinsured upon proof of payment by the
reinsured, and on tender of documents in support. It was furthermore stipulated that the reinsured
might give the reinsurer prospective notice of its intention to pay on a certain date, and might
require the reinsurer to put its share of the loss in the hands of the reinsured by that date.
Distinguishing the Allemannia case, without differing from the statement of general principle
therein contained, the Supreme Court held that on this occasion the contract was effective to
make prior payment a condition payment to liability.
authority.
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Finally, in Stickel v Excess Insurance Co of America (1939) 23 NE 2d 839 an ultimate net loss
clause defined that term as ‘the sum actually paid in cash in settlement of losses for which the
company is liable, after making proper deductions’ (see 23 NE 2d 839 at 841). Founding on the
language of the particular policy in question, the Supreme Court of Ohio found the case closer to
Pink than to Allemannia, and held that once again actual disbursement was a condition precedent
to recovery.
There was some suggestion in argument that there is an inconsistency between these cases. On
examination I can detect none. Even the brief account given above is sufficient to make the
individual decisions perfectly understandable. Whether they were all right it is unnecessary and
inappropriate to consider; and it is of course true that the Allemannia case was concerned with
proportionate insurance, whereas the present is not. What it is permissible to say however is that
the brief statement of general principle in that case accords with the law as it has been
understood for many years, in common law jurisdictions and elsewhere. I can see nothing in
these cases to cast doubt on the opinion which I have expressed as to the effect of the present
policy.
Finally, there are the inferences about the purpose of the words ‘actually paid’ which may be
drawn from the history of the ‘follow settlements’ clause. The matter is fully developed in the
speech of my noble and learned friend Lord
Page 56 of [1996] 3 All ER 46
Hoffmann. If I own to hesitation in adopting this as a direct answer to the problem it is because
the historical materials presented in argument are incomplete, and subsequent reading has not
filled the gaps. It is however clear that in the long timeframe of the insurance industry excess of
loss reinsurance is comparatively modern, probably dating from transactions arranged by C E
Heath in the United States in the last two decades of the nineteenth century. It was not until after
the Baltimore fire that the need for an excess of loss non-proportionate cover written on a treaty
basis became obvious. Such cover would of course need to provide for a means of ascertaining
the point at which the reinsurance (or its first layer) attached; equally important however, was
that this determined the amount of the reinsured’s retention, always a matter of prime importance
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when writing reinsurance. I think it a reasonable surmise that this retention was expressed in
terms of net rather than gross. It is likely therefore that there was from the start some form of
ultimate net loss clause in American excess of loss policies. Given that the Allemannia
proportional reinsurance, effected in 1903, already included these words, I think it as likely that
they were simply copied into excess of loss policies, as that they were deliberately included to
combat a puzzling English decision some 20 years old, not referred to at all in the report of the
Allemannia case, and not yet the subject of acute controversy even in England. This is however
surmise but it is possible to say with some confidence that there is nothing in the available
history to suggest that the words ‘actually paid’ were and are included in order to create a
condition precedent.
There is one final point, directed to the wording of this particular policy. It will be recalled that
cl 2(c) defined net loss as ‘the sum actually paid … after making deductions for all recoveries
[etc] whether collected or not’. There is a discontinuity here, if the syndicates are right. There is
good reason why the provisional ascertainment of the effect which the losses will have on the
reinsured layer should be made in the light of forecasts about the funds which will be transferred
out, and the funds which will be transferred in, on future occasions before the ultimate net loss is
finally ascertained, but I can see no reason why uncollected funds should be used as a contra sum
at a time when through the absence of payment under the inward policies there is nothing against
which to set them. Here again, I do not regard the point as conclusive, but it does reinforce the
solution at which I have independently arrived.
For these reasons, therefore, I consider that the interpretation given by Mance J and Simon
Brown LJ to policy No X 20693/5386 was correct. This makes it unnecessary to consider the
alternative line of reasoning which led Nourse LJ to conclude in favour of Charter. The position
under the second policy is acknowledged to be the same.
There remains the aviation policy. There are differences between this and the first two policies
which might for other purposes be important. Mance J has drawn attention to some of them. But
in my opinion none of them bear on the present dispute, and the reasoning which I have proposed
applies equally to all three contracts.
authority.
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In these circumstances I would dismiss the appeal.
LORD HOFFMANN. My Lords, this appeal turns upon the construction of a standard clause
known as the ultimate net loss (UNL) clause which is in common use in the London excess of
loss reinsurance market. Although the action concerns three particular policies of reinsurance
written on behalf of two Lloyd’s syndicates, it raises an issue which affects the whole
reinsurance market.
Page 57 of [1996] 3 All ER 46
The relevant provisions are set out in the speech of my noble and learned friend Lord Mustill and
I need not repeat them. The question is whether the words ‘actually paid’ mean that the liability
of the reinsurers is limited to the sum in respect of which Charter Reinsurance Co Ltd has
discharged its liabilities in respect of the risks which it insured. Mr Sumption QC says that this is
the natural meaning of the words. There is nothing in the context which requires them to be
given a different meaning and that is the end of the matter.
I think that in some cases the notion of words having a natural meaning is not a very helpful one.
Because the meaning of words is so sensitive to syntax and context, the natural meaning of
words in one sentence may be quite unnatural in another. Thus a statement that words have a
particular natural meaning may mean no more than that in many contexts they will have that
meaning. In other contexts their meaning will be different but no less natural.
Take, for example, the word ‘pay’. In many contexts, it will mean that money has changed
hands, usually in discharge of some liability. In other contexts, it will mean only that a liability
was incurred, without necessarily having been discharged. A wife comes home with a new dress
and her husband says: ‘What did you pay for it?' She would not be understanding his question in
its natural meaning if she answered, ‘Nothing, because the shop gave me 30 days’ credit’. It is
perfectly clear from the context that the husband wanted to know the amount of the liability
which she incurred, whether or not that liability has been discharged.
What is true of ordinary speech is also true of reinsurance. In Re Eddystone Marine Insurance
Co, ex p Western Insurance Co [1892] 2 Ch 423 the policy contained the form of reinsurance
authority.
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clause then in common use—‘and to pay as may be paid thereon’. As in this case, the reinsured
company was in insolvent winding up and could not pay its debts. Stirling J said that the policy
did not mean that the liability should have been discharged. They meant only that ‘the payment
to be made on the reinsurance policy is to be regulated by that to be made on the original policy
of insurance’ (see [1892] 2 Ch 423 at 427). In other words, the clause is concerned with the
amount of liability and is indifferent to whether or not it has been discharged.
But, said Mr Sumption, there is the word ‘actually’. Stirling J might have been willing to accept
that paid could in some artificial or figurative sense mean ‘liable to be paid’.· But the word
‘actually’ was surely added to make it clear that money must have changed hands. ‘Actually
paid’ said Mr Sumption, meant actually paid.
One speaks of something being ‘actually’ the case to point a contrast; perhaps with what appears
to be the case, or with what might be the case, or with what is deemed to be the case. The effect
of the word therefore depends upon the nature of the distinction which the speaker is wanting to
make. This can appear only from the context in which the phrase is used. It is artificial to start
with some contextual preconception about the meaning of the words and then see whether that
meaning is somehow displaced. The context might indicate that the word was used to reverse the
ruling in the Eddystone case and require the liability of the reinsured to have been discharged.
On the other hand, it might suggest that a different contrast was intended.
To revert to my domestic example, if the wife had answered ‘Well, the dress was marked £300,
but they were having a sale’ and the husband then asked ‘So what did you actually pay?’, she
would again be giving the question an unnatural meaning if she answered, ‘I have not paid
anything yet’. It is obvious that the
Page 58 of [1996] 3 All ER 46
contrast which the husband wishes to draw is between the price as marked and the lower price
which was charged. He is still not concerned with whether the liability has been discharged. This
is not a loose use of language. In the context of the rest of the conversation, it is the natural
meaning.
authority.
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What then is the context? Is the draftsman wanting to draw a contrast with the meaning given to
‘paid’ in the Eddystone case or does he have some other contrast in mind? My noble and learned
friend Lord Mustill has analysed the structure of the policies and for the reasons which he gives,
I agree that the context points to a wish to emphasise the net character of the liability as opposed
to what, under the terms of the policies, the liability might have been.
I think that these conclusions are reinforced by the history of reinsurance clauses. Contracts of
reinsurance were unlawful until 1864. Such a contract is not an insurance of the primary
insurer’s potential liability or disbursement. It is an independent contract between reinsured and
reinsurer in which the subject matter of the insurance is the same as that of the primary
insurance, that is to say, the risk to the ship or goods or whatever might be insured. The
difference lies in the nature of the insurable interest, which in the case of the primary insurer,
arises from his liability under the original policy (see British Dominions General Insurance Co
Ltd v Duder [1915] 2 KB 394 at 400, [1914–15] All ER Rep 176 at 178 per Buckley LJ).
The difference in the nature of the insurable interest does however mean that, insurance being a
contract of indemnity, the amount recoverable will not necessarily be the same as under the
primary insurance. For example, the liability of the primary insurer will not necessarily be for the
whole loss suffered by the original insured but may be subject to exceptions and limitations. His
net outlay can also be reduced by recoveries under his right of subrogation. It therefore became
customary in the market to have a special clause or clauses which defined the extent of the
reinsurer’s liability. It appears that the most commonly used form in the early years of
reinsurance was to add the words ‘Being a reinsurance, subject to all clauses and conditions of
the original policy or policies, and to pay as may be paid thereon’ (see McArthur The Contract of
Marine Insurance (2nd edn, 1890) p 332 and the form of policy in Uzielli & Co v Boston Marine
Insurance Co (1884) 15 QBD 11 at 12).
As construed by the courts, however, the phrase ‘and to pay as may be paid thereon’
disappointed the expectations of the market on both sides. The original insurers assumed that it
meant that if they agreed in good faith to pay under the original policy, they would be able to
recover without having to prove their own legal liability. Reinsurers assumed that whatever the
authority.
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loss of the original insured might be, their liability would not exceed the nett outlay of the
reinsured, after taking all recoveries into account. Both assumptions were to prove false.
The story of how the expectations of original insurers were disappointed by the decision of
Mathew J in Chippendale v Holt (1895) 65 LJQB 104 and the subsequent development of the
‘follow settlements’ clause to restore what had been thought to be the effect of the old clause has
been told more than once, including by Scrutton LJ, who was junior counsel in Chippendale v
Holt, in Gurney v Grimmer (1932) 44 Ll L Rep 189 at 192–194. (For subsequent developments,
see Robert Goff LJ in Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s
Rep 312.)
The second assumption, on the part of reinsurers, had however been shaken by an even earlier
decision. In Uzielli v Boston Marine Insurance Co the defendants were reinsurers of the
reinsurers of the Rose Middleton, which had been insured
Page 59 of [1996] 3 All ER 46
in the sum of £1,000. The ship went aground and the owners gave notice of abandonment to the
original underwriters. The underwriters disputed the validity of the notice but eventually settled
the claim for 88%. But they also spent more money in getting the ship off the rocks than they
eventually realised in selling her. The result was that they incurred a total loss of 112%. They
recovered the additional sum from the plaintiffs, their reinsurers, under a ‘sue and labour’ clause
in the policy which entitled them to recover such expenditure reasonably incurred by the insurers
or their ‘factors or servants or assigns’. The plaintiffs in turn claimed £1,120 from the
defendants. Matthew J held that there had been a constructive total loss, that the reinsurers were
entitled to add the expenditure of the underwriters on salvage under the ‘sue and labour’ clause
and gave judgment for £1,120. The reinsurers appealed and the Court of Appeal held that, as
against the defendants, the ‘sue and labour’ clause did not cover expenditure by the original
underwriters because they were not the ‘factors or servants or assigns’ of the first reinsurers. One
might have thought that the result would be that the plaintiffs could recover only the 88% of the
£1,000 for which the claim of the shipowner had been settled. That was what had been paid on
authority.
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the original insurance policy. Instead, however, the court substituted a judgment in favour of the
underwriters for £1,000.
The Uzielli case caused a good deal of puzzlement in the market and among marine insurance
lawyers. McArthur The Contract of Marine Insurance p 335 said that ‘as the facts in the case
were peculiar, no general principle can be deduced from the decision’. In Western Assurance Co
of Toronto v Poole [1903] 1 KB 376 Mr Hamilton QC and Mr Scrutton QC offered Bigham J
different explanations of the case, neither of which he found satisfactory (see [1903] 1 KB 376 at
387–388). In British Dominions General Insurance Co Ltd v Duder Buckley LJ said that he
could not find any principle in the case. Pickford LJ likewise said that it was very hard to
understand and Bankes LJ was similarly perplexed (see [1915] 2 KB 394 at 402, 405, 413,
[1914–15] All ER Rep 176 at 179, 180, 184). Although the principle of indemnity is fully
reaffirmed in Duder it would not be surprising if the market felt nervous that the House of Lords
might one day see some light in Uzielli which had eluded other judges since the time it was
decided.
Although the commercial history of the matter is not as well documented as that of the ‘follow
settlements’ clause, it is clear that the formula ‘pay as may be paid thereon’ disappeared from
standard forms of reinsurance. The objects which it had sought to achieve on behalf of the
original insurers were taken over by the follow settlements clause. It does not seem unreasonable
to infer that its function in delimiting the liability of the reinsurers was taken over by the ultimate
net loss clause. The UNL clause shows throughout a preoccupation with ensuring that the
reinsurer cannot be called upon to pay more than the reinsured has been required to pay. In
Uzielli the words ‘pay as may be paid’ had proved ineffective to achieve this result, even though
they had been thought apt to do so. In his argument in Duder Mr Roche QC, arguing for a similar
result to that in Uzielli, said plaintively but truthfully, that the words ‘pay as may be paid
thereon’—
‘weakened the case of the plaintiffs, and yet this Court held that they could recover the full 100
per cent. and not merely the 88 per cent. for which they had settled the claim against them.’ (See
[1915] 2 KB 349 at 398.)
authority.
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It would not therefore be surprising if underwriters thought that if ‘paid’ was not good enough to
satisfy the courts, ‘actually paid’ might drive the point home.
Page 60 of [1996] 3 All ER 46
The UNL clause in the policies before the House has been traced back in unaltered form to the
early 1930s and I would not be surprised if it went even further back than that. The words
‘actually paid’ can be found in the policy considered in Allemannia Insurance Co of Pittsburgh v
Firemen’s Insurance Co of Baltimore (1908) 209 US 326 where they were given the construction
which I suggest in this case.
I find further support for my view in the fact that the UNL clause has been thought suitable for
use in the London excess of loss reinsurance market. There are certainly forms of reinsurance in
which it may be commercially appropriate to make discharge of his liability by the reinsured a
condition of the liability of the reinsurer. It may be, as in cases of mutual insurance, that the
reinsurer has an interest in making certain that the reinsured maintains sufficient liquid assets to
meet his liabilities. Or it may be a protection against fraudulent claims. But the London excess of
loss market operates on the assumption that a reinsurance programme will relieve the insurer of
the burden of having to pay claims covered by the reinsured layers. The regulation of insurers in
this country uses a test of solvency which treats reinsurance cover as a proper deduction from the
insurer’s liabilities. None of this would make sense if the insurer had first to satisfy the claim out
of his own resources before he could call upon his reinsurers to pay.
Mr Sumption suggested a stratagem which insurers might use to avoid having to pay the whole
claim themselves. They could pay a part, even a very small part, of the reinsured liability and
then, having to this extent actually paid, they could call upon the reinsurer to reimburse them.
Having thus primed the pump, they could by successive strokes draw up the full amount from the
reinsurance well. I cannot imagine that the parties could ever have contemplated such a strange
procedure and one is bound to ask what commercial purpose the reinsurer could have expected to
achieve by being able to insist upon it.
authority.
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Considerations of history, language and commercial background therefore lead me to the

conclusion that the word ‘actually’ in the UNL clause is used to emphasise that the loss for
which the reinsurer is to be liable is to be net and that the clause does not restrict liability to the
amount by which the liability of the reinsured for the loss has been discharged. I think that this is
the natural meaning of the clause.
In conclusion I would like to pay tribute to the judgment of Mance J which deals
comprehensively with the issues and all the relevant authorities and with which I am in full
agreement. I would dismiss the appeal.
Appeal dismissed.
authority.

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DEPARTMENT OF TRADE AND INDUSTRY V ST CHRISTOPHER MOTORISTS

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MEDICAL DEFENSE UNION V. DEPARTMENT OF TRADE [1979] 2 ALL ER 421

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conduct of legal proceedings on behalf of members; indemnifying members, wholly or in part,

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SUFFISH INTERNATIONAL FOODS PROCESSORS UGANDA LTD AND ANOTHER V

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JADAVJI SHAMJI PANDYA V THE ORIENTAL FIRE AND GENERAL INSURANCE

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Page 23 of [1957] 1 EA 21 (CAM)

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“Subject otherwise to the terms, exceptions and conditions of this Policy.”

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Page 24 of [1957] 1 EA 21 (CAM)

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JUPITER GENERAL INSURANCE CO V KASANDA COTTON CO [1966] 1 EA 252

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Page 254 of [1966] 1 EA 252 (CAK)

A preliminary decree was extracted which merely provided that

“the said contract of insurance was an oral one.”

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Page 255 of [1966] 1 EA 252 (CAK)

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“as good as a policy”.

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Page 256 of [1966] 1 EA 252 (CAK)