As insurers start preparing for the implementation of the Contracts of Insurance Acts, underwriters, product teams and brokers will be considering how the new duties of disclosure will operate in practice. The new New Zealand non-consumer duty of fair presentation of risk is almost identical to the duty in the UK Insurance Act 2015, so decisions by Courts in England and Wales will be very persuasive in New Zealand.

The recent English case of Delos Shipholding v Allianz Global Corporate and Speciality considered whether the insured shipping company, Delos, had actual knowledge of criminal charges brought against its sole nominee director.

The case involved the detention and constructive total loss of a ship by Indonesian authorities, after the ship had anchored in Indonesian waters. The insurer alleged a breach of the duty of fair presentation of the risk because Delos had not disclosed criminal charges brought against the sole nominee director of the insured entity which owned the ship. The director, Mr Bairactarus, had been charged with being involved in organised crime and drug trafficking.

Actual knowledge

The UK and New Zealand Acts both stipulate that a corporate insured knows only what is known to one or more of the people who are part of the insured’s senior management responsible for placing its insurance. The Acts also define senior management as the people who play significant roles in the making of decisions about how the insured’s activities are managed and organised.

The Court in Delos focused on the substance of the director’s role, rather than his ‘label’. The director was a Greek lawyer who was a nominee director for the insured company. He had no control over how Delos’ activities were managed and was found to be a vehicle for the execution of decisions by the owners of Delos. The Court did not accept that having involvement in the administrative management of the company’s paperwork was sufficient to meet the test of involvement in the activities of the company. Therefore, the senior management of Delos did not have actual knowledge of the charges that had been brought against the director.

Constructive knowledge

The Court also considered whether Delos had constructive knowledge of the charges. Constructive knowledge is what should reasonably have been revealed to the insured by a reasonable search of information. The test is what a reasonable, prudent insured in that class would know. The insurer argued that:

Delos should have been making regular enquiries of the director to ensure that he remained a fit and proper person to hold a nominee directorship: The Court did not accept that this level of enquiry was required given the director’s status as a lawyer.
The staff at Delos who were responsible for placing the insurance should have asked the director whether he knew of any circumstances which affected the risk: The Court also found that this wasn’t required as the director had no operational role and would not have known anything about the risk.

What can New Zealand insurers and brokers take from this decision?

The decision reinforces that the knowledge of the insured, for the purposes of the duty of fair presentation of the risk, is the actual knowledge of those who are, in substance, involved in the management of the company. In determining whether the insured has complied with the duty, the focus should be on those in senior management roles, and those who arrange the company’s insurances. Information known only to those in governance roles or in non-executive directorships will not necessarily be imputed to the company.

Fee Langstone is actively working with insurer and broker clients preparing for implementation of the Contracts of Insurance Acts. Feel free to reach out to us if you need assistance.

Resources

Duty of fair presentation of the risk – who has knowledge of a company’s circumstances?

Fee Langstone