Professional indemnity insurers began asking questions about the work that surveyors undertake for sub-prime lenders following the global financial crisis, thanks to their belief that such lenders are more likely to allege that surveyors have been negligent because their appetite for higher loan-to-value ratios, together with the enhanced risk posed by the quality of their borrowers’ covenants, are more likely to result in a higher level of borrower default.
In UK Acorn Finance Ltd v Markel (UK) Ltd [2020] EWHC 922 (Comm), a sub-prime lender sought £13.2m from an insurer in relation to negligence claims made against a firm of surveyors that had overvalued 11 agricultural properties. The insurer sought to avoid liability, arguing that the surveying firm had failed to disclose its work for sub-prime lenders when it renewed its professional indemnity insurance. Instead, the firm had stated that it worked only for British clearing banks or building societies. And, although the firm’s insurance policies (which pre-dated the Insurance Act 2015) included an unintentional non-disclosure clause stating that the insurer would waive its rights to avoid the policies if it was satisfied that “any non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive”, the insurer took the view that the misrepresentations that it had relied on were deliberate and dishonest.
Was the insurer subject to a duty, preventing it from exercising its decision making powers under that clause arbitrarily, capriciously or irrationally? The Supreme Court decision in Braganza v BP Shipping Ltd [2015] UKSC 17 established that, in cases involving the exercise of a contractual discretion, judgment or evaluation of some state of affairs by one party, as a decision-maker, which affects the interests of both where there is a conflict of interest between them, the court can imply a term that the decision must be judged by the same principles that apply to the exercise of public law discretions. In other words, the decision must be made honestly and in good faith, and not in an arbitrary, capricious or irrational way.
The judge accepted that the clause in question was a classic example of a clause to which the Braganza duty, as it has become known, should be applied. The duty requires rationality, as opposed to reasonableness. The court must first consider the decision making process. Did the decision-maker ignore something that should have been taken into account, or consider something that was irrelevant? And, secondly, was the decision so perverse that no reasonable person, acting reasonably, could have made it – even though the decision-making process itself could not be faulted?
The evidence suggested that there was significant force in the argument that the insurer had failed to approach the question of the firm’s honesty, or dishonesty, with an open mind – or bearing in mind that it was more probable that a misrepresentation has been made innocently or negligently, rather than dishonestly. The insurer had assumed that the firm had dishonestly tried to conceal the fact that it was undertaking valuation work for sub-prime lenders, rather than testing whether that was the case by reference to conduct that was apparently inconsistent with that intent. And that made it very difficult to conclude that the insurer would have reached the same conclusion about the firm’s behaviour, had it approached the issue correctly.
Allyson Colby, property law consultant
