Insurance: Co-insurance and the defence of utmost good faith

The Plaintiff (formerly known as Dixons Stores Limited) operated two promotions under which free flights were given to customers.

The promotions were operated by a firm of Travel Agents, JSI.

The agreement between Dixons and JSI provided that Dixons would pay JSI a fee of £7 per customer. In return, JSI would provide the free flights. JSI hoped to cover the cost of the flights by earning commission on accommodation and car hire.

Dixons agreed to pay for "over-redemption" insurance; JSI agreed to comply with its conditions and indemnify Dixons against any losses caused by their failure to do so.

JSI and Dixons were named as the Insured in the slip, which provided that Dixons could only take over the Insured's rights under the policy should JSI be unable to continue to run the promotions. JSI went into liquidation; Dixons took over and claimed approximately £1 million under the over-redemption insurance.

Underwriters refused to pay on the grounds of material misrepresentation, non-disclosure and/or breach of warranty in the proposal forms and the placing documentation.

The over-redemption cover related to two promotions:

• The first promotion was in November/December 1992. The sum insured was £500,000 in excess of £15,000. Dixons estimated that there would 15,000 eligible purchases. In answer to a question on the proposal form, JSI estimated the cost of providing free flights would be £41,850, as against an estimated fee income of £105,000. JSI's figures were based on its own previous experience of a similar promotion which they handled for Hoover.
• The second promotion was in March 1993. The sum insured was £800,000 in excess of £40,000. Based upon Dixon's estimate of 29,000 eligible purchasers, JSI stated that their costs were likely to be £76,038, as against estimated income of £203,000. In other words, the risk of any loss appeared slight.

In these proceedings, the Judge decided a number of preliminary issues and did not therefore need to determine Underwriters' defences on their merits. The most important preliminary issue was whether any misrepresentation by JSI affected Dixons' claim under the insurance.

Held:

The effect of any misrepresentation by JSI on Dixons' claim involved determining the true nature of the insurance contracts. If there had been joint insurance, any defence against JSI would also have succeeded against Dixons.

By contrast, Dixons argued that the insurance was composite. In other words, Dixons and JSI were different insureds insuring different interests. Thus a breach of the duty of utmost good faith by one insured would not affect the other. On the facts, the interest of JSI was in losses it might suffer in operating the two promotions; the interest of Dixons, however, was the loss it might suffer if JSI was unable to run the promotions. Thus, Dixons' risk was that JSI would fail and not that the promotion would make a loss.

Underwriters argued that the insurance was neither joint nor composite.

• the insurance was not joint as the slip provided that Dixons could only take over the insured's rights under the policy should JSI be unable to continue to run the promotions. Accordingly, the parties could not recover jointly; either JSI or Dixons could recover;
• the insurance was not composite because only one risk was insured: the risk that the promotion would result in a loss. That loss was calculated in the same way whether JSI or Dixons was the claimant.

Underwriters therefore argued that the insurance fell into a third category. Dixons' rights under the insurance were contingent. If JSI was unable to continue to run the promotions, Dixons acquired whatever rights JSI had and, if those rights were avoidable for non-disclosure, so were Dixons'. The position was similar to an assignment and Dixons, as an assignee, could have no better rights than JSI.

The Judge accepted underwriters' argument. The risk insured was that the promotion would result in a loss. JSI and Dixons had the same insurable interest. Accordingly, any breach of the duty of utmost good faith by JSI affected Dixons' claim under the insurance contracts.

Note:

• Cameron McKenna acted for the Defendant Underwriters (DSG Retail Limited -v- QBE International Insurance Limited & Others, QBD: Judgment 20th November 1997).