In an English court judgment in Brit UW Limited v F&B Trenchless Solutions Limited the insurer successfully sought a declaration that avoided a contractor’s combined liability policy.

The policy had been issued to the insured as a specialist tunnelling contractor. A derailment of a train occurred at a site where the insured had recently constructed a tunnel beneath the railway line and crossing. The cause of the derailment was settlement of the railway tracks caused by a void in the ground underneath the tracks.

The insurer avoided the policy on the basis that the insured had failed to disclose the settlement and also on the basis that it had misrepresented that it did not carry out tunnelling works on active railway lines.

The court held that the test for materiality of a non-disclosure is an objective one. A subjective test then applies to whether that non-disclosure induced the underwriter in question to enter into the policy.

On the facts it was found that the insured had become exposed to claims for liability in respect of potential remedial costs as soon as significant settlement occurred at the site. That exposure was a material fact which should have been disclosed. It did not matter that the insured considered the settlement as insignificant.

It was also found on the facts that the insured had informed the insurer that it had not and would not conduct tunnelling works under or near railway lines and that that was false. That was also a matter which materially increased the risk and should have been disclosed.

The insured argued that even if there had been material non-disclosure the insurer had affirmed coverage. The court said with regard to affirmed coverage that the insurer must have knowledge of both the facts giving rise to the right to avoid the policy and the legal right to avoid, and the affirmation had to be unequivocal.

The insurer had properly reserved its rights while investigating coverage and there could be no waiver of the entitlement to avoid.

The judgment would have been no different under South African law where the principles of avoidance and waiver are substantially similar.

In South Africa section 53 of the Short-term Insurance Act (and its long-term equivalent) deals with the objective nature of the materiality of the non-disclosure or misrepresentation. But on these facts the outcome would be the same.