The Malta Independent 24 September 2021, Friday

Law report: Insurance policy – Annulled by the non-disclosure of a material fact

Ganado Advocates Wednesday, 25 August 2021, 07:50 Last update: about 30 days ago

Karl Grech Orr

The Court of Appeal, composed of Chief Justice Mark Chetcuti, Mr Justice Joseph R Micallef and Mr Justice Tonio Mallia, on June 30, 2021 in the case “Ambrose Mackay, Jessica Eddelston Mackay, and Doris Mackay vs Citadel Insurance plc” held, among other things, that that had there been a full disclosure of all material facts, in particular that its assured was inflicted by some terminal illness, Citadel Insurance would not have proceeded with the issuance of the life insurance policy. The insurance company was deceitfully led to believe that its assured was in good health.

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The facts in this case were as follows:

The applicants, Ambrose Mackay, Jessica Mackay and Doris Mackay were the heirs of Jesmond Mackay, who had passed away, at the age of 45 years on 26 August 2008.

Jesmond Mackay purchased a life insurance policy from Citadel Insurance, in order to guarantee a loan of 193,337 EUR from Bank of Valletta.

The insurance policy was signed on 6 February 2008, and effective from 12 January 2008.

Upon his death, the insurance company, however, refused to pay and claimed that the insurance policy was vitiated by a serious omission: the non-disclosure of a substantial and material fact by the assured, in breach of the utmost good faith principle, the uberrimae fidei.

The insurance company claimed that the deceased, Jesmond Mackay, had given false replies on its proposal form. He failed to inform them that he had been suffering from abdominal pain at the time.  Nor that he had consultation visits with his family doctor, and that he was referred to the general hospital and to a private clinic where a series of tests and an ultrasound of the abdomen were carried out to check for any serious illness. All this in the same period when Citadel Insurance was about to issue the life insurance policy.

Deceased Jesmond Mackay concealed the results of an ultrasound on his stomach, where he was later diagnosed of hepatic metastases.

His answers to certain questions on the insurance company’s proposal form as well as during his medical examination by Citadel’s doctor, turned out to be dishonest and incorrect.

The fact that initially, the family doctor did not suspect cancer but only intended to carry out further investigations and tests could not be considered as a justification, the insurance claimed

Faced with this situation, the applicants filed a lawsuit against Citadel Insurance, requesting the Court to condemn them to pay the amount, it liquidated as due under the insurance policy. They also asked the Court to hold the insurance company to be responsible for the damages, which they suffered, consisting of additional interests which accrued to the Bank of Valletta.

Applicants pleaded that Citadel Insurance should be ordered to pay such damages.

Allegedly, the insurance company should not be permitted to evade its responsibilities under the banner of the principle of utmost good faith which was required in insurance contracts.

The expression uberrimae fidei ‘has been too frequently and almost indiscriminately used by insurers and judges as an excuse for ignoring insurance claims”: re: Mario Mizzi nominee vs Mario Grech nomine (First Hall Civil Court, 3 October 2003)

Citadel Insurance, in reply, raised the preliminary plea that the applicants lacked legal interest to file this lawsuit and even if the Courts were to reject this plea, that their claims could not be made without the presence of Bank of Valletta in these proceedings.

The insurance company pleaded on the merits that the insurance policy was invalidated by the failure of its assured, Jesmond Mackay, to disclose material facts on its proposal form, which released it from any obligation to pay indemnity.

It said that the deceased, Jesmond MacKay, infringed one of the cardinal principles of insurance law: that of acting with the utmost good faith.

Citadel’s first two preliminary pleas were rejected by the First Court on 1 July 2011 and confirmed on appeal on 28 September 2012. The Insurance company was ordered to pay the costs in relation to these two pleas.

On the 18 May 2016, the Court of First Instance decided without hesitation that the life insurance policy was null and void on grounds of non-disclosure of a material fact by its assured.

It considered that the contract of insurance was based on the principle of utmost good faith. An applicant had to act honestly. He had to disclose all information which was relevant to the case: re: Paul Grech et vs Middlesea Insurance plc et dated 28 July 2014, reference was made to the case Rozanes vs Bowen, 1928, where the English Courts held “it has been for centuries in England the law in connection with insurance of all sorts , that as the underwriter knows nothing and the man who comes to him to insure knows everything, it is the duty of the assured, the man who desires to have a policy, to make a full disclosure to the underwriters, without being asked of all the material circumstances. That is expressed by saying that it is a contract of the utmost good faith ….it is the duty of the assured to inform the underwriter of everything that he has not taken as knowing, so that the contract may be entered with an equal footing”.

A ‘material’ fact was such that could influence the decision of a prudent insurer company whether to cover the risk. A misrepresentation of a material fact gave rise to the invalidity of the contract.

The Court of Appeal, in the ‘Paul Grech case’ also referred to the case ‘Arterial Carowners Ltd vs Yorkshire Insurance Co in 1973 (Chapman J), where the English Courts remarked: “the primary obligation was one of disclosure on the part of the insured, not of enquiry on the insurer.”

In the court’s opinion, a false reply amounted to a misrepresentation of a material fact which could invalidate the policy.

Our Courts of Justice also embraced this principle: Camilleri noe vs Bartolo dated 22 March 1982, First Hall Civil Court. An assured was duty bound to give a clear reply on the proposal form and make a full disclosure of all facts which he reasonably thought to be relevant even if not asked.

Aggrieved by the decision of the First Court Civil Hall, the applicants entered an appeal, calling for its revocation. The First Court failed to take into account, they submitted, the element of inducement, whether the insurance company was actually misled by its assured Jesmond MacKay and would  not have agreed to underwrite the risk in the circumstances.

Applicants also appealed against the award of the judicial costs.  A contract of insurance should not be annulled save for serious reasons in fact and law.

The Court of Appeal concurred with the decision of the First Hall Civil Court. Its assured, Jesmond Mackay did not act up to the standards of utmost good faith principle.

It was likely, opined the Court, that had there been a full disclosure of all material facts, in particular, that its assured was inflicted by some terminal illness, Citadel Insurance would not have proceeded with the issuance of the policy. The insurance company was deceitfully led to believe that its assured was in good health. This constituted ‘inducement’ in the Court’s opinion. The Insurance company’s consent to cover the risk was flawed, pointed out the Court of Appeal.

As regards the judicial costs, it was clear that when the First Court condemned appellants to bear these costs, but this did not include the determination of Citadel’s first two pleas. This matter had already become res judicata at the time, the First Hall Civil Court gave its decision.

For these reasons on 30 June 2021, the Court of Appeal decided by dismissing the appeal of the applicants, and by confirming the decision of the First Hall Civil Court with costs.

Karl Grech Orr is a Partner at Ganado Advocates

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