Higherdelta Limited Against Covea Insurance Plc

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 84

CA51/16

OPINION OF LORD BANNATYNE

In the cause

HIGHERDELTA LIMITED

Pursuers

against

COVEA INSURANCE PLC

Defenders

Pursuers: A Smith QC, O’Brien; Balfour & Manson LLP for Levy & McRae

Defenders: Stephenson QC, Thomson; DAC Beachcroft

14 June 2017

Introduction
[1] This matter came before me in the Commercial Court as a Proof of the liability of the defenders (the insurers) to indemnify the pursuers (the insured) in respect of a fire at the pursuers property at Loch 17, Annandale, Bonnybridge, Stirlingshire (“the premises”), which was operated as a restaurant, on 16 July 2013.

Issues
[2] The following two questions required to be determined by the court:

1. Whether or not, at 16 July 2013, the pursuers held a valid policy of insurance with the defenders in respect of the premises?

2. In particular, whether the insurance policy ex facie held by the pursuers was void as a result of the pursuers’ failure to disclose or misrepresentation of facts material to the appraisal of risk under the insurance policy?

The Grounds for Avoidance
[3] Initially the defenders sought to avoid the policy on the basis as set out in their letter of 17 September 2014 and it is perhaps convenient at this stage to set out the material terms of that letter:

“AMENDMENT TO THE POLICY 12 MARCH 2012

When proposing for amendment to the Policy by the addition of a property at 4 Larchfield Road, Moodiesburn, Glasgow, G69 OEF, you failed, when proposing the amendment to the insurance cover, to disclose to us :-

(a) that your director Harbhajan Singh Sandhu, your beneficial owner (hereafter referred to as ‘Mr Sandhu’) had been declined insurance cover for his substantial personal residential property portfolio by his then insurer AVIVA due to poor claims experience; and

(b) that as at that date, Mr Sandhu had been unable or unwilling to insure his said personal residential property portfolio, whether through choice or through a failure to obtain an insurer willing to underwrite the risk.

These facts were material to the risks for which the insurance was being proposed. The withholding of these facts, which were known to you, amounted to non-disclosure of material facts. Had we been aware of these facts when you were proposing for the amendment to the insurance, we would not have accepted the additional risk. As a result of the non-disclosure of these material facts, we were induced into making the amendment to the Policy that we would not have made.

As a result of the said non-disclosure of these material facts, we are entitled to, and do hereby, void the amendment of the Policy with effect from the effective date of the amendment. As a result, the amendment to the Policy is of no effect.

Renewal of the policy on 19 January 2013

Further, when proposing for renewal of the Policy, which purportedly commenced again on 19 January 2013, you failed to disclose the following facts, which facts were material to our consideration of the risks for which you were proposing for insurance:-

(a) You again failed to disclose to us that Mr Sandhu had had insurance declined for his personal portfolio of residential properties due to poor claims experience and further, that his said substantial personal portfolio of residential properties had remained uninsured for a period of at least 9 months, if indeed the properties have ever been validly insured at all;

(b) You failed to disclose to us that Mr Sandhu, in relation to his own personal property portfolio, in December 2012, proposed for insurance for a number of properties within his portfolio and when he did so, he misrepresented to those insurers the following facts:- (i) that he had never had insurance declined or a refusal to renew by an insurer when in fact he knew very well that his previous insurers Aviva had refused to renew his insurance due to his poor claims experience; ( ii) that the properties had been continuously insured when in fact there had been a break of insurance of nine months; (ii) that he had had no losses in the previous three years when in fact he had had a very substantial loss following a fire at his property at 11 Pine Place, Cumbernauld in 2011, a property which in fact we have been advised has remained, and continues to remain, uninsured.

(c) You failed to disclose to us that during the course of the two years prior to renewal, you had had significant problems with tenants who had failed to pay rent, electricity, gas, and other charges, the problems becoming so pronounced that for a period of at least four weeks the Premises were required to be closed, during which time they were boarded up and unoccupied. These facts, which were material, and were known to you, are indicative of a failure on your part to take reasonable steps to ascertain the credit worthiness of prospective tenants before letting the Premises, and your other commercial properties. It was in itself a material fact that your judgment as to the choice of tenants appears to have been significantly impaired.

(d) You failed to disclose to us that during the period of closure of the Premises in 2012, they were subject to a break in, when electrical equipment was stolen from the Premises. This fact had a material bearing on the risk to the Premises;

(e) You failed to disclose to us that the Premises, insured for in excess of £1 million, were let on the basis of informal leases prepared without the benefit of any legal or other professional advice, to the extent that it ought to have been obvious to you, and Mr Sandhu from his relationship and knowledge of his latter tenant, and from his commercial experience in the letting of property, that tax lawfully due to HM Revenue & Customs, such as Stamp Duty Land Tax, was not, and would not be, paid, on the lease purportedly entered into between you and Balraj Singh Sohal, the purported tenant of the Premises. It was a material fact that you knew, or ought reasonably to have known, that preparing an informal lease in this manner would result in taxes being improperly kept from the knowledge of the tax authorities and this fact ought to have been disclosed to us by you.

(f) You failed to disclose to us that as at the date of commencement of the purported lease, and as at the date of renewal of the Policy, according to the records of the local licencing authority of the Premises, Falkirk Council, Mr Sandhu remained as the Personal Licence Holder in respect of the Premises, and yet he maintained during the investigation into this matter, that at no time from the re-letting of the Premises in November 2012, or indeed earlier, had he taken any part in the proper running of the Premises. If true, this means that Mr Sandhu was in breach of his statutory obligations under and in terms of the Licencing (Scotland) Act 2005. This fact was a material fact and ought to have been disclosed to us by you when proposing for insurance.”

[4] The defenders position somewhat changed. In particular the failures to disclose as set out in paragraphs (c), (d) and (e) were at the proof not asserted to be material to the appraisal of the risk of the policy. There was also an alteration of position as regards inducement with respect to paragraph (f). Lastly a further failure to disclose was added at a later date. The significance of these changes of position will be discussed later.

The Agreed Factual Background
[5] The following background was agreed in terms of a Joint Minute of Admissions:

· the Defenders are providers of insurance;

· the Pursuers are owners of commercial properties;

· at all the material times Harbhajan Singh Sandhu (sometimes known as “Johnny Sandhu”) (hereafter “Mr Sandhu”) was the Company Secretary, a Director and a shareholder, of the Pursuers;

· by contract of insurance dated 19^th January 2007, and renewed annually thereafter, the Pursuers contracted with the Defenders whereby the Defenders insured certain premises against a number of risks (the “Policy”);

· number 6/1 of process is a true copy of the schedule applicable to the Policy (the “Schedule”);

· Property 4 on the Schedule is “Loch 17”, Annandale, Bonnybridge, Stirlingshire (also known variously as “Lock 17” and “The Underwood Lockhouse”) (hereafter the “Premises”);

· Mr Sandhu, on behalf of the Pursuers, had proposed the addition of the Premises to the Policy by proposal form dated 11^th March 2009;

· Number 7/3 of process is a true copy of the foregoing proposal form dated 11^th March 2009;

· the Premises were situated on the B816 road between Allandale and Bonnybridge, directly opposite Lock 17 of the Forth and Clyde Canal;

· the Premises comprised a detached building, originally constructed in or around 1770 but substantially rebuilt following a fire in or around 1980;

· the Premises included a bar, a restaurant and function rooms;

· number 6/2 of process is a true copy of the terms and conditions applicable to the Policy;

· as more fully set out in the Policy, the Premises were insured against certain risks;

· the Policy did not provide cover· in respect of loss of rent resulting from damage to the Premises;

· on or around 16^th July 2013 the Premises were seriously damaged as a consequence of fire;

· following the foregoing loss, the Pursuers submitted a claim to the Defenders under the Policy;

· the Defenders refused to make payment under the Policy;

· by letter dated 17^th September 2014 the Defenders alleged that the Pursuers had failed to disclose facts material to their appraisal of the risks under the Policy and that the Policy was therefore void;

· certain of the alleged non-disclosures contained within the Defenders' letter dated 17 September 2014 are not now relied upon by the Defenders as being material to the appraisal of the risks of the policy;

· number 6/3 of process is a true copy of the letter from the Defenders to the Pursuers dated 17^th September 2014;

· Mr Sandhu was at all material times prior to...