COUNSEL: Michael Beloff Q.C. and Richard Jacobs for the reinsurers.

Kenneth Rokison Q.C. and John Lockey for the insurers.

 

SOLICITORS: Ince & Co.; D. J. Freeman.

 

JUDGES: Staughton, Rose and Saville L.JJ.

 

DATES: 1995 July 11, 13; 31

 

 

[*1138] Cur. adv. vult.

 

31 July. The following judgments were handed down.

 

STAUGHTON L.J. The issue in this appeal is whether the agent of a person who wishes to be insured is bound to disclose to the intended insurer that he has been defrauding his principal. Or more accurately, can the insurer avoid the contract if such disclosure is not made? One might have thought that the question was one of statutory construction, and not difficult to resolve. It has not been so treated in these proceedings.

 

The problem arises here in a reinsurance context. The claimants are the members of 56 syndicates at Lloyd’s. I shall call them the insurers, for that is what they were, although they have also been referred to as the Names. Their underwriting was managed, in the period from 1967 to 1982, by P.C.W. Underwriting Agencies Ltd. Part of that management process was the task of arranging reinsurance of the insurers’ liability, if and to the extent that it was appropriate to do so. Reinsurance was arranged with 24 insurance companies and 62 other Lloyd’s syndicates (“the reinsurers”). They have purported to avoid the reinsurance contracts for non-disclosure.

 

The non-disclosure alleged is that over the years in question a number of individuals at P.C.W. Underwriting Agencies Ltd. (“P.C.W. Ltd.”) were misappropriating premiums received for the benefit of the insurers, and applying them for their own purposes. This is said to have been material information for the reinsurers, although it would not have any direct effect on the incidence of the risks that they took upon themselves; it is said to be relevant to the moral hazard. As I understand that expression it means or includes the risk that a person will either deliberately bring about losses so that he may make a claim, or else invent fictitious losses. When there is insurance on jewellery or other possessions, it may not be too difficult to claim for a loss of property that never existed, or that has not in truth been lost. Whether there is moral hazard in the present context of reinsurance and whether the alleged dishonesty at P.C.W. Ltd. was relevant to it are questions which we do not at present have to determine.

 

There was initially an attempt to resolve the whole dispute in arbitration proceedings. But for one reason or another that did not happen; and an agreement was reached to refer a preliminary issue to Waller J. as a judge-arbitrator under the Administration of Justice Act 1970. By that agreement the parties consented to there being an appeal from the award of the judge-arbitrator to this court. But we have only such jurisdiction as is allowed to us by the Arbitration Act 1979 and the arbitration agreement which the parties concluded.

 

There is a similar dispute proceeding between other parties. Initially it led to two actions in the Commercial Court. One was between Deutsche Rueckversicherung A.G. and Walbrook Insurance Co. Ltd. and others, the [*1139] other between Group Josi Re and defendants similarly described. In those actions, which were consolidated, the plaintiffs were reinsurers and the defendants insurers. In point of form the claim was for an injunction restraining the insurers from seeking to operate letters of credit opened by the reinsurers. But somewhere along the road to that relief it is or may be necessary to decide whether the reinsurance contracts have been avoided for non-disclosure. In those cases the non-disclosure was said to have been of misappropriation by H.S. Weavers (Underwriting) Agencies Ltd., to whom the insurers had delegated the placing, administration and handling of reinsurance.

 

At first the reinsurers obtained ex parte injunctions restraining the insurers from drawing on the letters of credit. Those were set aside by Clarke J. in December 1993. But amended grounds of complaint had by then emerged from somebody’s fertile brain, and they were considered by Phillips J. in April 1994 (Deutsche Rueckversicherung A.G. v. Walbrook Insurance Co. Ltd. [1995] 1 W.L.R. 1017). He too rejected the application for interlocutory injunctions. But it seems that there are still interim injunctions pending a decision by this court (now 15 months later) whether there should be interim injunctions. That does not seem an entirely happy interruption of what is said to be the lifeblood of commerce. But I had better not be too critical as I am told that I granted leave to appeal from Clarke J., and referred the application for leave to appeal from Phillips J. to the full court.

 

The claim by Deutsche Rueckversicherung has settled, and only that by Group Josi Re survives. I mention it now because it is the next to be heard in our list; and we have heard counsel in that case on the issue which it has in common with the P.C.W. proceedings.

 

The preliminary issue which Waller J. was required to determine and the assumptions on which it was based were as follows:

 

“The question of law is whether on the assumptions (including alternative assumptions) made hereinafter the respondents (hereinafter ‘the reinsurers’) subscribing to the P.C.W. reinsurances can rely, as against the innocent Names (as hereinafter defined), upon the non-disclosure of the dishonest conduct (as hereinafter defined) at the time of placing or renewing or amending or adjusting those reinsurances or the making of claims upon those reinsurances in order to avoid those reinsurances.

 

“Assumptions (made for the purposes of the preliminary issues only). 1. P.C.W. (Underwriting Agencies) Ltd. (‘the agency’) was at all material times the underwriting agent for the claimants (hereinafter ‘the P.C.W. syndicates’) and was responsible (inter alia) for the conduct of the underwriting on behalf of the P.C.W. syndicates and for arranging and operating the P.C.W. reinsurances to protect the P.C.W. syndicates’ exposure to claims. 2. The findings of fact made in the final report of Messrs. Boyd and Dubuisson into the affairs of Minet Holdings Plc. and W.M.D. Underwriting Agencies Ltd. dated 16 January 1990 (‘the D.T.I. report’) can be proved by reinsurers to the necessary standard of proof. 3. The findings of fact in the D.T.I. report include findings of fact of dishonest conduct (‘the dishonest conduct’). 4. Each of the P.C.W. reinsurances fell within one of the following categories: (1) one or more of the individuals against whom findings of dishonest conduct were so made (‘the dishonest individuals’) were responsible for the decision to effect the P.C.W. [*1140] reinsurance and/or for instructing the brokers in connection with the placement of that reinsurance; (2) one or more of the dishonest individuals participated with other directors or employees of the agency in the decision to effect the P.C.W. reinsurance and/or in the instructing of brokers in connection with the placement of that reinsurance; (3) none of the dishonest individuals was responsible for or participated in the decision to effect the P.C.W. reinsurance and/or in the instructing of brokers in connection with the placement of that reinsurance. 5. The dishonest conduct was at all material times material to be disclosed upon the placing and/or renewal and/or amendment and/or adjustment of, and/or the making of claims upon, the P.C.W. reinsurances, as going to moral hazard. 6. None of the reinsurers had actual knowledge of the dishonest conduct. 7. None of the reinsurers waived disclosure of the dishonest conduct at the relevant times. 8. None of the reinsurers have since affirmed the P.C.W. reinsurances. 9. The dishonest conduct did not in fact involve any fraud on the reinsurers and did not involve any manipulation, deliberate or otherwise, of the information used for the purposes of placing or renewal or amendment or adjustment of or the making of claims upon the P.C.W. reinsurances. 10. The dishonest conduct was not at any time in the actual knowledge of the vast majority of the members of the P.C.W. syndicates (‘the innocent Names’). 11. The dishonest conduct amounted at all times to a continuing fraud on the innocent Names. 12. Alternative 1 It is not known whether the dishonest conduct amounted to a fraud on the agency by the individuals identified in the D.T.I. report as having been guilty of dishonesty. Alternative 2 The dishonest conduct amounted at all times to a continuing fraud on the agency (as well as on the innocent Names) by the individuals identified in the D.T.I. report as having been guilty of dishonesty. Alternative 3 The agency at all times had knowledge of the continuing fraud on the Names.”

 

Waller J. in his award (which bears no date) reached this conclusion: “On any of the assumptions that I have been asked to make, there was, in my view, no obligation to disclose dishonest conduct which amounted to a fraud on the Names.” The judge thus found it unnecessary to differentiate between the alternatives in paragraphs 4 and 12 of the assumptions.

 

In a word or two, the judge’s reasons were as follows. (1) The insurers were not deemed to know of the dishonest conduct under section 18 of the Marine Insurance Act 1906. (2) P.C.W. Ltd. were not an agent to insure within section 19, because they were in the organisation which managed the insurance business of the insurers, as opposed to being outside it. (3) Furthermore they were not the people in direct contact with the reinsurers. There were brokers. (4) The knowledge of P.C.W. Ltd. as to their dishonesty was not held in their capacity as agent for the insurers.

 

The reinsurances were in part of marine risks and in part of non-marine. Nevertheless it is agreed that the law which we have to consider is to be found in the Marine Insurance Act 1906; either it is directly applicable, or else indirectly because the Act codified the common law applicable to all classes of insurance.

 

Sections 18 and 19 of the Marine Insurance Act 1906 are said to be relevant for present purposes:

 

“18(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material [*1141] 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. (3) 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 matters which an insurer in the ordinary course of his business, as such, ought to know; (c) any circumstance as to which information is waived by the insurer; (d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty. (4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact. (5) The term ‘circumstance’ includes any communication made to, or information received by, the assured.

 

“19. Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer – (a) every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and (b) every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.”

 

Section 18

 

There is an argument that this section has no application at all when an agent is involved; it only operates when the assured is in direct contact with the insurer. I shall return to this argument later. For the present I leave it on one side.

 

Mr. Beloff, who appeared for the reinsurers in the P.C.W. case, did not contend that there ought to have been disclosure under section 18. The insurers are all natural persons and not corporations. The actual knowledge of a natural person means what it says – he knows what he knows. As to the second part of section 18(1) – every circumstance which, in the ordinary course of business, ought to be known to him – Mr. Beloff does not argue that dishonesty at P.C.W. Ltd. comes within that category. We can, I think, take judicial notice of the fact that outside members of Lloyd’s are told little or nothing about how their underwriting business is being conducted, beyond the occasional bulletin about the actual or anticipated annual result; or at any rate that was the situation in the period with which we are concerned. And it seems distinctly implausible that an agent would disclose to his principal, whether in the ordinary course of business or otherwise, that he has been defrauding the principal.

 

It is, however, necessary to consider for the purposes of the Group Josi Re case how section 18 operates when the person seeking insurance is a corporate body. It seems to me that one has to examine this aspect of section 18 before proceeding to section 19.

 

It is sometimes said that a company can have no knowledge itself, and can only know things by its servants or agents; others say that there can [*1142] be knowledge which is in truth that of the company. I do not find it necessary to enter upon that debate (and if I did I would not know how to resolve it). The extent of the knowledge of a company can only be determined by reference to the rule of law which makes the inquiry necessary. That was explained by Lord Hoffmann delivering the advice of the Judicial Committee in Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 2 A.C. 500, 507:

 

“This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company?”

 

I can give an example from my own judicial experience. It is an offence to sell a video recording classified “18” to a purchaser who is known to be not 18 but 14 or thereabouts. But whose knowledge is relevant, in particular if the sale is made in a branch of a supermarket chain? The board of directors or the check-out girl? The answer is not too difficult: see Tesco Stores Ltd. v. Brent London Borough Council [1993] 1 W.L.R. 1037.

 

The metaphor which has been used to describe knowledge or state of mind or conduct at a high level in a company has been “the directing mind and will:” see Lennard’s Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] A.C. 705, 713, per Viscount Haldane L.C. (“active and directing will . . . directing mind”); H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd. [1957] 1 Q.B. 159, 172, per Denning L.J.; Tesco Supermarkets Ltd. v. Nattrass [1972] A.C. 153, 171, per Lord Reid.

 

I can see no reason to restrict the knowledge of a company under section 18 to what is known at a high level, by the directing mind and will. I would have thought that knowledge held by employees whose business it was to arrange insurance for the company would be relevant, and perhaps also the knowledge of some other employees. But we need not decide that point, even in the Group Josi Re case. It is not said that any person, high or low, in the companies seeking reinsurance knew of the dishonesty of their underwriting agents. (There is one very limited exception which I shall mention when we come to that case.)

 

The argument of Mr. Bartlett for Group Josi Re is that a person who is not even an employee of the company in question can still be its directing mind or will. In that he has some modest support from the Lennard’s Carrying case [1915] A.C. 705, 712: Mr. John Lennard, the managing director of another company (John M. Lennard & Sons Ltd.), but also a director of Lennard’s Carrying Co. Ltd., was held to be the directing mind of the latter company. Alternatively, Mr. Bartlett argues that a company can entrust all or a section of its business to an agent, in which case there is created an agent to know, the description used by Lord Halsbury L.C. in Blackburn, Low & Co. v. Vigors (1887) 12 App.Cas. 531, 537.

 

I do not accept either of those arguments. It seems to me that sections 18 and 19 are carefully framed so as to describe what must be disclosed. By section 18 the person seeking insurance must first disclose what is known to him. If he is a natural person, that means known to him personally; if a company, known to a director or employee at an appropriate level. Secondly, the person must disclose everything which in the ordinary course of business ought to be known to him. That is a quite sufficient test to deal with the knowledge of agents and others to whom [*1143] he may have entrusted all or part of the running of his business. There is no need to create some doctrine by which others become the company’s directing mind or will, or the agents of the company to know things. If it be thought that the draftsman had overlooked the topic of agents in listing what must be disclosed, one very soon discovers that he had not – see section 19.

 

A further point made by Mr. Bartlett is that section 18 deals with what, in the ordinary course of business, ought to be known by the assured – not what would be known by him. Factually that is correct. But I do not think that it leads to the conclusion that the assured is deemed to know of his agent’s dishonesty, because in the ordinary course of business the agent ought to reveal it to him. Rather one has to consider what an honest and competent agent would communicate to the assured in the ordinary course of business (cf. Proudfoot v. Montefiore (1867) L.R. 2 Q.B. 511, 522). The honest and competent agent would not have any dishonesty to reveal.

 

There is, however, potentially a problem when persons such as members of Lloyd’s carry on the business of insurance but entrust it wholly to agents who, in the ordinary course of business, tell them nothing whatever about how the business is conducted. There will then be nothing for the members to disclose when they seek reinsurance. One can imagine a scene which may not be wholly implausible. Several members of the same syndicate meet on a grouse moor in Yorkshire during the shooting season. They are concerned about their exposure to claims, and instruct a broker to place reinsurance on their behalf. When the proposed reinsurer asks for information, the broker has to say that neither he nor his clients have any information at all.

 

The solution in such a case is, I suppose, that the reinsurer would in practice decline the risk. He would send the broker away until such a time as he could acquire the appropriate degree of knowledge. Or if he did agree to take the risk he would know that he was doing so in the dark.

 

An alternative view might be that the ordinary course of business does not include the way business is done at Lloyd’s with the members being told nothing or very little; instead it should be assumed that they are told what other insurers are told by their agents (if that be different) – but not the fact that their agents were defrauding them. I do not see that this can ever be something which is communicated in the ordinary course of business.

 

The Hampshire Land principle

 

I have reached a conclusion on the construction of section 18 without reference to the law before the Marine Insurance Act 1906 was passed, or for that matter since. But we were much pressed with what was called the Hampshire Land principle (In re Hampshire Land Co. [1896] 2 Ch. 743), and I have in fact touched on it briefly without attribution. The modern formulation of the rule is to be found in the judgment of Buckley L.J. in Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250, 261-262:

 

“it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.” [*1144]

 

See also the judgment of Devlin J., one of the great judges of this century, in Kwei Tek Chao v. British Traders and Shippers Ltd. [1954] 2 Q.B. 459, 471-472:

 

“In those circumstances the principle which has to be applied is that which was first formulated by Vaughan Williams L.J. in In re Hampshire Land Co. [1896] 2 Ch. 743, and I take the statement of it from its incorporation in the speech of Lord Dunedin in J.C. Houghton and Co. v. Nothard, Lowe and Wills Ltd. [1928] A.C. 1, where it received the approval of the House of Lords. It is this: ‘If Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been knowledge of the society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. . . .’ “

 

The rule was recognised in an insurance case by Scrutton L.J. in Newsholme Bros. v. Road Transport and General Insurance Co. Ltd. [1929] 2 K.B. 356, 374, and by Dillon L.J. in Société Anonyme d’Intermediaries Luxembourgeois v. Farex Cie [1995] L.R.L.R. 116, 143, with specific reference to section 18.

 

Mr. Bartlett did what he could to cast doubt on the Hampshire Landprinciple; but in my opinion he made no headway at all in that respect. He also argued that it must, in the present case at any rate, yield to the sentiment of Lord Mansfield C.J. in Fitzherbert v. Mather (1785) 1 Durn. & E. 12, which was echoed by Cockburn C.J. in Proudfoot v. Montefiore,L.R. 2 Q.B. 511, 522:

 

“where a loss must fall on one of two innocent parties through the fraud or negligence of a third, it ought to be borne by the party by whom the person guilty of the fraud or negligence has been trusted or employed.”

 

That is no doubt a sound guideline by which to judge a proposed rule of law; but I am not sure that it is a rule of law in itself. And, if it is, it must yield to the more specific rule in the Hampshire Land case [1896] 2 Ch. 743.

 

There is a hint in the judgment of Phillips J. that a judge may be entitled to choose between the two in a given case; and he preferred the Hampshire Land rule. I do not think that there is any choice. Where the Hampshire Land rule applies the judge is bound to apply it, and not Fitzherbert v. Mather.

 

For my part I prefer to reach a conclusion on the meaning of section 18 from the words which it uses: “the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him.” It is in my view impossible to say that the dishonesty of people at P.C.W. Ltd. ought in the ordinary course of business to have been known to the P.C.W. insurers; and that is the end of it. But if one prefers to call that part of section 18(1) a deeming provision, a rule of law that attributes or imputes knowledge or treats knowledge as being in someone’s possession when it is not, and then having given the words of the statute that label if one applies the Hampshire Land principle, the result is the same. [*1145]

 

Section 19

 

This provides what “the agent must disclose to the insurer.” But the section does not, as it seems to me, impose an obligation or duty owed by the agent to the insurer, which could be enforced by an order for specific performance or give rise to a remedy in damages for a breach. In effect it provides that, if the agent does not disclose what he should, the insurer may avoid the contract. I need not pause to consider whether the section itself would afford a remedy for the principal if the agent did not comply with it, or whether that would depend upon breach of a common law duty of care.

 

We have had an elaborate argument from Mr. Beloff to show that section 19 does not proceed by the route of attributing, imputing, deeming, treating the knowledge of one person as knowledge of another. Instead it provides that the agent must himself disclose – and, if he does not, that the policy can be avoided. To achieve that result we were referred at length to the law before the Act, and in particular to Blackburn, Low & Co. v. Vigors (1886) 17 Q.B.D. 553; (1887) 12 App.Cas. 531. Lord Macnaghten in that case plainly took the view that the knowledge of an agent who is employed to effect an insurance was not to be imputed to his principal; it was to be communicated by the agent to the insurer; and if that was not done the insurance would be vitiated.

 

It is not clear to me whether other members of the Appellate Committee took the same view. Phillips J. concluded that they did not; Dillon and Hoffmann L.JJ. in the Société Anonyme d’Intermediaries case [1995] L.R.L.R. 116 thought that Lord Macnaghten was right, as Hoffmann L.J. had done earlier in El Ajou v. Dollar Land Holdings Plc. [1994] 2 All E.R. 685; see also Judge Diamond Q.C. in Simner v. New India Assurance Co. Ltd. [1995] L.R.L.R. 240, 255. What in my judgment is clear is that section 19 enacted Lord Macnaghten’s view. Since in the present case it is agreed that the Act has the same effect as the common law, we are presumably entitled to conclude that Lord Macnaghten’s view was the common law.

 

Once it is established that section 19 does not proceed by the route of imputing, attributing, deeming the knowledge of the agent to be the knowledge of the principal, it is said that the Hampshire Land principle no longer applies; an agent to insure must disclose every material circumstance that he knows, and that includes his own dishonesty.

 

That would create a remarkable difference between section 18 and section 19, and I can see no warrant for it. If the dishonesty of an agent is not something which in the ordinary course of business ought to be known to the principal (section 18), why should it be held against the principal merely because the agent is an agent to insure (section 19)? It is equally absurd in either case to suppose that the agent will in fact disclose his dishonesty, whether to his principal or to the proposed reinsurer.

 

I would hold that the Hampshire Land principle is not confined to cases where the agent’s knowledge is by law to be imputed or attributed to the principal, or deemed to be the knowledge of the principal. The doctrine should extend to any case where the principal’s rights are affected if the agent does not make disclosure to a third party. Alternatively one can describe this as an allied doctrine. After all, sections 18 and 19 are both provisions that elaborate and explain section 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.” [*1146]

 

With that overall provision it would be strange that under section 18 the assured is not affected by knowledge of fraud of his servants or ordinary agents which has not actually reached him, and yet his rights are impaired if fraud by an agent to insure is not disclosed under section 19.

 

An alternative route to the same conclusion was that adopted by Waller J.:

 

“the obligation of an agent to insure to disclose arises out of the fact that he is acting as an agent, and there would be no obligation to disclose a fraud on his principal, since that knowledge he would not hold as agent.”

 

There are dicta which might be thought to militate against that reasoning. Thus Hoffmann L.J. in the Société Anonyme d’Intermediaries case [1995] L.R.L.R. 116, 149 said:

 

“It is true that the knowledge was acquired in a different capacity, namely as agent for Farex to obtain the retrocession cover. But the insured and his agent are under a duty to disclose ‘every material circumstance’ of which they have knowledge, irrespective of the way in which that knowledge was acquired: . . .”

 

Later, at p. 149, he referred to

 

“the agent’s duty to disclose material circumstances known to him in any capacity.” In the same case Saville L.J. said, at p. 157: “The argument here starts with the correct assertion that the duty on the agent is not confined to knowledge acquired from the assured but extends to knowledge otherwise acquired.”

 

In the El Ajou case [1994] 2 All E.R. 685, 702 Hoffmann L.J. said:

 

“an insurance policy may be avoided on account of the broker’s failure to disclose material facts within his knowledge, even though he did not obtain that knowledge in his capacity as agent for the insured.”

 

That, we were told, was derived from the pre-Act case of Blackburn, Low & Co. v. Haslam (1888) 21 Q.B.D. 144. In that case Mr. Murison was a partner in the firm of Messrs. Rose, Murison & Thompson who had been instructed to procure reinsurance on a vessel for the plaintiffs. Then he

 

“had an interview with the manager of the State Line Co., who owned the State of Florida, and he informed Mr. Murison in confidence that his directors in London had received intelligence that the City of Rome . . . had seen a vessel having on board some of the shipwrecked crew of the State of Florida:” see p. 145.

 

For my part I would say that the information was received by Mr. Murison in his capacity as agent for the plaintiffs. Hence it is not surprising that it was held that the information should have been disclosed.

 

In Blackburn, Low & Co. v. Vigors, 12 App.Cas. 531, 541 Lord Watson said that an insurer “transacts on the footing that the agent has disclosed every material circumstance within his personal knowledge, whether it be known to his principal or not; . . .” In Thames and Mersey Marine Insurance Co. Ltd. v. “Gunford” Ship Co. Ltd. [1911] A.C. 529 the manager of the agents who managed the ship and arranged insurance had also effected insurance for his own account. It was held, under section 19, that this information should have been disclosed. In Arnould, Law of [*1147]

 

Marine Insurance and Average, 16th ed. (1981), vol. 2, p. 485, para. 637 there is this passage:

 

“Thus an insurance broker or other agent who effects a policy is bound to communicate to the underwriter all the material facts within his knowledge, from whatever source he may have obtained his information. The Marine Insurance Act 1906 expressly provides that where an insurance is effected by an agent, the latter must disclose to the insurer ‘every material circumstance which is known to himself.’ Difficult problems sometimes arise, particularly in reinsurance contracts, concerning, for example, the extent of the broker’s duty to disclose his knowledge of claims pending on other policies of the same reassured. The courts have not yet been called on to consider any such cases, but it is submitted that in principle all such information that is or ought to be within the broker’s knowledge must be disclosed.”

 

Bowstead on Agency, 15th ed. (1985), p. 414, on the other hand, allows that the situation may be different where “the agent was not acting for the principal when he received the information,” and cites two cases for that proposition. The first is Espin v. Pemberton (1859) 3 De G. & J. 547, 555, where Lord Chelmsford L.C. said:

 

“But I have already shown that imputed knowledge does not depend upon whether it is communicated or not, and therefore the presumption of non-communication does not seem to be the proper principle to apply. I would rather say that the commission of the fraud broke off the relation of principal and agent, or was beyond the scope of the authority, and therefore it prevented the possibility of imputing the knowledge of the agent to his principal.”

 

That was followed by Fry J. in Cave v. Cave (1880) 15 Ch.D. 639.

 

I do not find in the authorities any decision that an agent to insure is required by section 19 to disclose information which he has received otherwise than in the character of agent for the assured; and certainly none where the information was as to the agent’s own fraud on his principal. I would hold that he is not, whether it be by a branch of the Hampshire Land principle or because he is not an agent for that purpose. Accordingly I would agree with the conclusion of the judge to that effect.

 

That is sufficient to decide this case, and also the Group Josi Re case in so far as it raises the same point; and I would go no further. In particular I express no view on the question whether an intermediate agent can be regarded as an agent to insure within section 19. In Halsbury’s Laws of England, 1st ed., vol. 17 (1911), p. 407, para. 796 for which Mr. Arthur Cohen K.C. was responsible (and in all subsequent editions), there is this passage:

 

“Sometimes an agent employed to effect an insurance, instead of dealing direct with the underwriter, acts through an intermediate agent or agents, and in such cases the concealment of a material fact within the knowledge of any agent through whose agency, whether mediately or directly, the insurance has been effected, vitiates the policy.”

 

In Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co. Ltd. [1995] 1 A.C. 501, 569 Lord Lloyd of Berwick referred to Mr. Cohen as an eminent authority in this branch of the law. I do not find it possible to [*1148] attribute that passage to the duty to pass on information in section 19(b). It seems to me to be directed to the question who is an agent to insure in the first place. It does mean that section 19, when it requires an intermediate agent to disclose “to the insurer,” no doubt contemplates that the disclosure is very likely to be made through the last agent. But so too, in my opinion, section 18 contemplates that disclosure “to the insurer” may very well happen through an agent, when there is one involved. Hence it has never previously been suggested, so far as I am aware, that section 18 has no application when an agent is involved – though that would not matter much or at all, in the light of section 19(b).

 

Misrepresentation

 

This topic does not feature in the P.C.W. case. Although we heard argument on it at this stage, it only forms part of the Group Josi Re case. I shall deal with it there.

 

Like the judge-arbitrator, I would answer the preliminary issue “No,” and dismiss this appeal.

 

ROSE L.J. For the reasons given by Staughton L.J., I agree that, in construing both sections 18(1) and 19(a) of the Marine Insurance Act 1906, the dishonesty of his underwriting agent is not a circumstance which “in the ordinary course of business ought to be known” to an assured. I also agree that, for the reasons which he gives, the principle of In re Hampshire Land Co. [1896] 2 Ch. 743 in its modern formulation by Buckley L.J. in Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250, 261-262 applies in insurance cases and that there is nothing in section 19 which requires an agent to insure to disclose to a proposed reinsurer information, as to his own fraud on his principal or of any other kind, received otherwise than as agent for the assured.

 

I also agree with Saville L.J. that, for the reasons which he gives, the words “agent to insure” in section 19 apply only to those who actually deal with the insurers concerned and make the contract in question.

 

Accordingly, I too would dismiss this appeal.

 

SAVILLE L.J. In this matter P.C.W. Underwriting Agencies Ltd. were the managing agents for a number of Lloyd’s syndicates. As such this agency was responsible, among other things, for underwriting on behalf of these syndicates and for arranging and managing reinsurance for them. According to a D.T.I. report, individuals within the agency set about a fraudulent scheme to enrich themselves by diverting premium income of the syndicates, which should have been held in trust by the agency for various purposes including the benefit of syndicate members, to entities which they controlled and from which they personally benefited.

 

Certain reinsurers of the syndicates now contend that since the existence of this fraud was not disclosed to them, they are entitled to repudiate liability. Their case, as I understand it, is not (or not so much) that the alleged fraud had any direct effect on the risks they reinsured, but that the “moral hazard” of the fraud was a material circumstance that should have been disclosed.

 

The matter is presently being dealt with by way of a preliminary issue on certain sets of assumed facts, and the central issue between the parties, at this stage at least, is whether, assuming the existence of this fraud and that it was a circumstance material to be disclosed to the reinsurers, the effect of section 19 of the Marine Insurance Act 1906 was to require [*1149] disclosure, notwithstanding the further assumption that the vast majority of the Names who were members of the syndicates (i.e. those other than the alleged fraudsters) did not actually know of the fraud at the material time. In both this case and the next in our list, all parties were content to proceed on the basis that the relevant parts of this Act can be considered as setting out the non-marine as well as the marine position.

 

Sections 17 to 19 of the Marine Insurance Act 1906 provide as follows:

 

“Insurance is uberrimae fidei. 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.

 

“Disclosure by assured. 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. (3) 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 matters which an insurer in the ordinary course of his business, as such, ought to know; (c) any circumstance as to which information is waived by the insurer; (d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty. (4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact. (5) The term ‘circumstance’ includes any communication made to, or information received by, the assured.

 

“Disclosure by agent effecting insurance. 19. Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer – (a) every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and (b) every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.”

 

By agreement between the parties, the matter came before Waller J. sitting as a judge-arbitrator.

 

The starting point for the reinsurers’ argument is that the reinsurances were effected for the syndicates by the agency, who accordingly fall within the provisions of section 19. Waller J. decided against the reinsurers on this point, and the reinsurers now appeal against that decision.

 

I agree with the conclusion reached by Waller J. It seems to me, both from a reading of the words used in section 19, and from an examination of the authorities upon which that section was based, that the “agent to insure” only encompasses those who actually deal with the insurers concerned and make the contract in question. In the present case, the [*1150] agency itself did not actually deal with the reinsuring underwriters nor made the contracts in question, for the reinsurances were placed through brokers, who it is accepted were in no way privy to the alleged fraud.

 

It is obvious that section 19 is intended to add to the duty of disclosure imposed by section 18, for otherwise there would be no point in the provision. Section 18 stipulates what the assured must disclose to the insurer. Section 19 stipulates what the agent effecting the insurance must disclose to the insurer. Section 19(b) makes clear that the agent must disclose what under section 18 the assured must disclose, but in addition material circumstances known to the agent or which in the ordinary course of business the agent ought to know or have communicated to him. Such circumstances could well include matters which the assured neither knew nor ought to have known. What I find lacking in the words of the statute is any suggestion that section 19 is intended to encompass not only those who actually effect the insurance, but also those who instruct others to effect the insurance. What I also find lacking is any good reason for extending section 19 to include the latter.

 

As to the words used in section 19 I can find nothing to indicate that it was intended to cover what can be described as intermediate agents. Indeed it would to my mind be very odd if the section were to be read as including those who do not actually effect the insurance. The section stipulates that the agent to insure must disclose to the insurer the material circumstances specified. An intermediate agent, by the very fact that such an agent is an intermediary, does not and is not expected to do this. What an intermediate agent does and is expected to do is to pass information etc., not to the insurers, but either to further intermediaries or to those actually dealing with the insurers. It is only the agent who actually deals with the insurers who, as a matter of practical politics, is going to provide the insurers with information relating to the proposed insurance.

 

In addition there seems no good reason to include intermediate agents within the ambit of section 19. The agent to insure must, up to the moment the contract is made, disclose every material circumstance which he knows, or which in the ordinary course of business ought to be known or communicated to him, as well as every circumstance that the assured is bound to disclose, subject only to a minor and irrelevant exception. Thus if intermediaries have information which in the ordinary course of business ought to be communicated to the agent to insure, or which the agent ought to know, it matters not that the intermediaries are not themselves agents to insure. If on the other hand the information is such that it would not fall into these categories, and is not information which the assured is bound to disclose, then it seems to me that the section does not require its disclosure.

 

So far as the authorities on which the section was based are concerned, it seems to me that the leading case supports the meaning of agent to insure which I obtain from the words of the section. That case is Blackburn, Low & Co. v. Vigors (1887) 12 App.Cas. 531. The decision was concerned with the question whether an undisclosed material circumstance known only by an agent who neither effected nor played any part in arranging the insurance in question vitiated that contract. The House of Lords held that it did not. The speeches of Lord Watson and Lord Macnaghten in particular drew a clear distinction between agents of the assured whose function it is to keep the assured informed in the ordinary course of matters concerning the property to be insured and agents whose function it was to obtain the insurance. The underwriter is entitled to [*1151] contract on the basis that the “agent to inform” has in the ordinary course of business given the assured all relevant information and that the assured has in turn disclosed it. The “agent to insure” is not employed to provide information to the assured, so the insurer is not entitled to contract on this basis but upon the different basis that the person with whom he is dealing, being someone authorised by the assured so to act, has disclosed all facts within that person’s knowledge. That different basis would, ex hypothesi, be inapplicable to agents with whom the insurer was not dealing. Lord Watson, at p. 541, expressly limited this class of agent to the person who actually makes the contract on behalf of the assured and I can find nothing in the other speeches which indicates that this class is to be any wider. It is perhaps of some significance that Chalmers himself, in a footnote to section 19 in the second edition of his work on the Marine Insurance Act 1906 (a consolidating statute for which he was responsible), refers expressly to this page of Lord Watson’s speech: see Chalmers and Owen’s Marine Insurance Act, 2nd ed. (1913), p. 31.

 

Reliance was placed by the reinsurers upon the fact that in Blackburn, Low & Co. v. Haslam (1888) 21 Q.B.D. 144 the insurance was vitiated through the knowledge of an agent who was not the broker who actually effected the insurance, the latter being unaware of the circumstance in question. Pollock B. said, at p. 153:

 

“It is the negotiation that is tainted, and the contract is void because it is founded upon the negotiation, and through however many hands the offer of an insurance may pass, if there be a concealment by the assured or his agent, the policy is avoided.”

 

I do not read this passage, or indeed any other part of the judgment, as contradicting the speech of Lord Watson. In Haslam’s case (unlike Vigors’s case, 12 App.Cas. 531) the agents who knew formed part of the chain of agents negotiating the insurance in question. As section 19 now makes clear, the agents to insure are deemed to know every circumstance which in the ordinary course of business ought to be communicated to them, and there is no doubt that the agents who knew in Haslam’s case should have communicated that knowledge down the line to the brokers who actually effected the cover. Since they did not do so, the negotiation was indeed tainted in the way described by Pollock B. In short, it simply did not matter for the purposes of that case whether or not the agents who knew fell within the class described by Lord Watson. The same applies to Thames and Mersey Marine Insurance Co. Ltd. v. “Gunford” Ship Co. Ltd. [1911] A.C. 529, upon which the reinsurers also sought to place reliance. In neither case does it appear that any point was taken that the individual in question was not the agent to insure, doubtless because, as I have said, it would have made no difference.

 

Mr. Beloff, on behalf of the reinsurers in this case, did not seek to argue that the assured themselves knew or ought to have known of the assumed material circumstance so as to bring the case within section 18 of the Act of 1906, or that that circumstance ought to have been known by or communicated to the brokers so as to bring the case within the deemed knowledge provisions of section 19. For reasons given when considering the next case in the list, where other reinsurers have advanced these arguments, it seems to me that Mr. Beloff was wholly correct in deciding not to take this course. What Mr. Beloff did submit is that individuals within P.C.W. who were responsible for the decision to reinsure were also agents to insure, but for the same reasons as I have given, I cannot accept [*1152] that submission, even assuming (which I also do not accept) that such individuals could be treated as agents distinct from P.C.W. itself.

 

Since, as Mr. Beloff accepted, his entire argument rested upon what he described as his threshold proposition that the agency or individuals within the agency (or both) were agents to insure within the meaning of section 19, and since I do not accept that proposition, it follows that it is not necessary, in the context of this case, to deal with the further question whether the knowledge of those who perpetrated the alleged fraud is to be attributed to the agency, so that the latter is to be treated as knowing of the assumed material circumstance. It also follows that the appeal in this case must be dismissed.

 

Appeal dismissed with costs.