Misrepresentation, Non-Disclosure and Breach ... - Law Commission

Proving that an action was deliberate or reckless
5.95 As we explained in relation to consumer insurance, at common law the standard
of proof for fraud remains the balance of probabilities. The same rule applies in
business insurance cases. The insurer should not have to prove fraud “beyond
reasonable doubt” before it has the right to avoid the policy.
5.96 The point has been made that where the insured is a company it can be
particularly difficult to prove a state of mind. It is difficult to pin down who knew
what at which stage, or to impute knowledge to the controlling mind of the
organisation. Given that the courts take a particularly cautious approach where
allegations of dishonesty are involved, the task may be extremely difficult.
5.97 Earlier we said that under section 18(1) of the 1906 Act, the insured is
deemed to know every circumstance which, in the ordinary course of
business, ought to be known by him.
We explained that if, as we suggest in this section, the insurer should be entitled
to avoid as of right only in cases of fraud, this irrebuttable presumption should no
longer apply. A proposer would not be treated as making a deliberate nondisclosure
of a fact he did not know merely because in the ordinary course of
business he ought to have known it.
5.98 Normally it will be for the insurer to prove fraud on the balance of probabilities.
Should there be a rebuttable statutory presumption that the insured knows what
in the ordinary course of business it ought to know, in order to make it easier to
prove fraud? The advantage is that it would reinforce the need for organisations
to investigate safety issues properly. Suppose, for example, that a company
failed to mention that its building contained crumbling ceiling tiles made of
asbestos, and the court comes to the view that the company should have known
this, and should have known that an insurer would want to know about it. Clearly,
the company has not acted reasonably. Under the scheme we are considering,
the question would be whether it acted “negligently” or acted “deliberately or
recklessly”. The effect of the presumption would be to place the onus on the
company directors to show that they were merely negligent, by proving first that
they did not know about the asbestos, and secondly that they did not suspect
asbestos and deliberately fail to enquire about it. It would clearly be open to the
company to produce evidence to this effect, but we imagine that in some
circumstances it might be quite difficult.
5.99 However, as we pointed out when we discussed proof of fraud in the consumer
context, if it is shown that the matter was one that the insured would normally be
expected to know, there will be an evidential presumption that the insured did
know about it. This may make a statutory presumption unnecessary. We would
welcome views.
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