Case No: 2000 Folio 00011
 
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 17th October 2001

B e f o r e :

THE HONOURABLE MR JUSTICE MOORE-BICK
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	ROGER OWEN JAMES		Claimant	
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	CGU INSURANCE PLC	First Defendant	
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	SUPREME AND ST ALBAN’S INSURANCE BROKERS	Second Defendant	

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Mr. Simon Brown Q.C. (instructed by Arnold Fooks Chadwick) for the claimant
Mr. Graham Eklund (instructed by Hill Dickinson) for the first defendant
The Second Defendant did not appear and was not represented.

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JUDGMENT

Pursuant to the Practice Statement issued by the Master of the Rolls on 9th July 1990 I hereby certify that the attached text records my judgment in this matter and direct that no further record or transcript of the same need be made.

The Hon. Mr. Justice Moore-Bick

Mr Justice Moore-Bick: 
		Background
1.	In September 1994 the claimant in this action, Mr. Roger James, traded as a motor dealer and repairer under the name Sovereign Motor Company from premises at Lawes Bridge, Hele Road, Torquay. The premises included a car showroom facing the main road, office accommodation and workshops at the rear. 
2.	At about 7:00 p.m. on 22nd September 1994 fire broke out in the reception area of the showroom. Although it was extinguished within a short period of time a substantial amount of damage was caused to the reception area, to the ceiling and roof of the showroom and to a number of motor cars that were in the showroom at the time. 
3.	Mr. James was insured in respect of the business by the first defendant, CGU Insurance Plc, then General Accident Fire and Life Assurance Corporation p.l.c., under a Motor Trader’s Combined Insurance Policy effected through the second defendant as brokers. Following the fire Mr. James presented a claim to the insurers, but after a period of investigation they purported to avoid the policy on 15th November 1994 on the grounds of non-disclosure and breach of certain policy conditions. This prompted further enquiries on the part of the insurers, but eventually on 6th February 1996 they reiterated their decision to avoid the policy for non-disclosure. They also rejected the claim on the grounds that Mr. James was himself responsible for the fire damage. In these circumstances Mr. James has brought this action to recover his loss from the insurers. He has joined his brokers as defendants in order to pursue a claim against them if the insurers succeed in establishing one of their grounds of non-disclosure.
4.	In June 2000 the court ordered that the issue of the insurers’ liability to Mr. James should be tried first, before any issues relating to the quantum of the claim and before any issues relating to the liability of the brokers. The matter now comes before me on the trial of the issues relating to the insurers’ liability to indemnify Mr. James under the policy. It was not disputed that a fire occurred at the insured premises during the currency of the policy or that Mr. James suffered a loss as a result, although the precise amount of the loss remains in issue. Mr. Eklund on behalf of the insurers rightly accepted, therefore, that the burden lay on his clients to establish the grounds upon which they sought to avoid liability. The insurers’ case falls into two quite separate and distinct parts: the allegation of arson on the part of Mr. James, and the various allegations of non-disclosure. Of these, the allegation that Mr. James was himself responsible for the fire is clearly by far the more serious and I shall therefore consider it first. 
The cause of the fire
5.	The insurers’ primary case is that Mr. James deliberately started the fire himself. Alternatively, they say that he became aware of its existence in the very early stages, well before it had caused any significant damage, and deliberately allowed it to spread before taking any steps to extinguish it himself or to call the fire brigade.

6.	Before I turn to examine the evidence relating to the origin and development of the fire it is necessary to say something about the burden and standard of proof in a case such as this. The first point to make is that there is a positive obligation on the insurers to establish their case on the balance of probabilities. This may seem obvious, and indeed was not in dispute, but Mr. Brown Q.C. on behalf of Mr. James quite properly reminded me of the speech of Lord Brandon in Rhesa Shipping Co. S.A. v Edmunds (The “Popi M”) [1985] 2 Lloyd’s Rep. 1 in which his Lordship pointed out that it is always open to a court to conclude, at the end of the day, that the proximate cause of the loss, even on a balance of probabilities, remains in doubt. The second concerns the standard of proof. An allegation that the insured set fire to his own property in order to make a claim on his insurers is in substance an allegation of fraud. The same is equally true of the alternative allegation that he deliberately allowed a small fire to develop to the point where it cause substantial damage. It has sometimes been suggested that an allegation of this kind must be proved to a higher standard than that of a balance of probabilities which ordinarily applies in civil cases. However, it is clear from a number of modern authorities that the standard of proof in such cases is the same as that which is generally applicable in civil proceedings, although the court will require cogent evidence commensurate with the seriousness of the allegation before it considers itself justified in finding the case proved. Mr. Eklund helpfully reminded me of a passage in National Justice Compania Naviera S.A. v Prudential Assurance Co. Ltd (The “Ikarian Reefer” [1995] 1 Lloyd’s Rep. 455 at page 459 where the court said that the burden of proof would not be discharged in relation to an allegation of scuttling if the evidence failed to exclude a substantial, as opposed to a fanciful or remote, possibility that the loss of the vessel was accidental.
7.	It was common ground in the present case that the fire began in a plastic waste bin in the reception area of the showroom. Viewed from the front the showroom was an open plan rectangular space approximately 26m by 10m which contained various motor vehicles, two desks for salesmen, armchairs for customers and three cylindrical plastic waste bins with metal ashtrays on top. In the rear right-hand corner there was a square reception area bounded by movable office units in the form of a continuous desk with a raised front. Within the reception area were various items of office equipment, chairs and other furnishings including, according to Mr. James, a square-sided plastic waste bin with a circular rim at the base. The reception area also contained a telephone. The main pedestrian access to the showroom was by way of a glass door at the front right-hand corner opposite the reception area. 
8.	To the right of the showroom the building contained a number of offices, a kitchen, storerooms and lavatories. Access to one of the offices could be gained only from the reception area; the remaining offices and other rooms could be entered only from the separate entrance lobby serving that part of the building. The section of the building housing the offices had its own external door at the front of the building opening into the entrance lobby. This was designed to be the main door to the premises, but at the time in question it was not used and was kept locked. However, access to the entrance lobby could also be gained from a passage leading off the right hand side of the showroom between the reception area and the external door. At the rear of the showroom and offices were workshops of the kind normally associated with motor repairers. These included areas for mechanical work, stores and also a body shop and paint shop. The buildings were surrounded on all sides by an area of concrete or tarmac suitable for parking and storing vehicles. The area to the front of the showroom was used as a display area, but because the site was separated from the main road by a low wall, there was no direct access from the main road towards which the showroom faced.

9.	On 24th September, two days after the fire, Mr. James Calleja, a forensic scientist with particular expertise in investigating fires and explosions, visited the premises to inspect the damage on behalf of Robins West, the loss adjusters appointed by the insurers. He was accompanied by Mr. James who provided such help as he could with his enquiries. The furniture making up the reception area had been removed in the course of extinguishing the fire, but with Mr. James’s help Mr. Calleja was able to reconstruct that part of the showroom sufficiently to enable him to identify as the seat of the fire a plastic waste bin under one of the desk units forming the boundary of the reception area. The waste bin had melted in the heat, but the underneath of the circular base had been protected by the carpet on which it had been standing. From his inspection of the premises Mr. Calleja was satisfied that there were no additional seats of fire and that there was no evidence that any accelerant had been used. 
10.	Mr. Michael Pullin, the forensic expert called by Mr. James, did not have the advantage of inspecting the premises immediately after the fire, but he had access to the report made by Mr. Calleja following his visit and to the many photographs Mr. Calleja had taken on that occasion. In his original report made for the purposes of these proceedings Mr. Pullin identified as possible causes of the fire an electrical fault in the general area of the reception area and the ignition of the contents of the waste bin. Of these he regarded ignition of the contents of the waste bin as the more probable cause. As a result of a meeting at which they were able to consider Mr. Calleja’s notes and photographs in detail the experts were able to agree that the patterns of damage could only be explained by the fire’s having originated in the plastic waste bin under the desk of the reception area. That left open, however, the important question of how the contents of the waste bin came to be ignited in the first place.
11.	Both experts recognised that carelessly discarded smoker’s materials are a common cause of fires in waste paper bins. These might take various forms such as a smouldering match, smouldering tobacco knocked out of a pipe, a carelessly extinguished cigarette, and so on. The experts agreed that smoker’s materials would initially result in a smouldering fire which might typically continue for between 20 minutes and 2 hours, although shorter and longer periods are not unusual. They also agreed that if a smouldering fire makes the transition to a flaming fire there is a tendency to produce increased smoke and smell shortly before the development of flames which should be noticeable to a person in close proximity to the fire. In the light of this evidence it is necessary to consider with particular care what was going on at the premises in the period immediately leading up to the fire.
12.	In this case certain of the events surrounding the outbreak of the fire can be timed with unusual accuracy. By his own account Mr. James made a telephone call from the reception area shortly before he left the premises. He said that after he had completed his call he checked that the premises, including the showroom and the offices, were empty and secured before leaving by way of the glass door opposite the reception area.  The telephone bill shows that a call was indeed made that evening from the premises of Sovereign Motors which ended at between 6.50 and 6.51 p.m. Mr. James estimated that he left the premises a few minutes later, perhaps at about 6.54 p.m., but there is no independent evidence to support that part of his account. He said that he returned to the premises after about 5 or 6 minutes to check whether he had set the video surveillance system and found the reception area on fire. Again, there is no independent evidence to support his account of his movements, but his call to the emergency services was timed at 7.02 p.m. and the arrival of the fire brigade was logged at 7.09 p.m. Neither side suggested that any of these recorded times were wrong and I can see no grounds for doubting their accuracy.
13.	Evidence of the circumstances leading up to the fire came from a number of sources, but principally from Mr. James himself. In November 1994 he had made a written statement for the benefit of the loss adjusters following a lengthy interview with their representative, Mr. John Baldock. He adopted the contents of that statement, with various additions, for the purposes of these proceedings. Mr. James said that he had been out to lunch that day, returning to the garage at about 3.45 p.m. At that time Mr. Paul Vincent, whose wife ran a limousine hire business and sometimes kept a car at the garage, was there preparing one of the cars for use. Mr. James said that Mr. Vincent smoked cigars and he recalled that Mr. Vincent was smoking on that occasion, but he did not see what he did with his cigar butts. He could not recall at what time Mr. Vincent left the garage.
14.	At about 5.00 p.m. or a little later two of Mr. James’s employees, Mr. Richards and Mr. Arrowsmith, came to the reception area to collect their pay cheques. They had to wait some time because Mr. James was busy and was interrupted by a number of telephone calls. The sales manager, Mr. Morris, who occupied one of the desks in the showroom left as usual just before 6.00 p.m. Mr. Richards and Mr. Arrowsmith left shortly afterwards. At about 6.30 p.m. when Mr. James was on the telephone a customer came into the showroom wanting to discuss one of the cars parked in the display area. He occupied Mr. James for about 15 minutes. Mr. James then made the telephone call which was timed as ending between 6.50 and 6.51 p.m.
15.	Mr. James said that he wanted to leave before 7.00 p.m. that evening because he and his wife were meeting friends, so immediately he finished his telephone call he checked the premises and left. He thought that he had checked the showroom doors first and then the offices before leaving by the showroom door which he locked behind him. At no time did he did notice any smoke or smell burning. Having left the building he went to his car and left by way of the exit at the rear of the site. He said that after he had driven a short distance it occurred to him that he might not have re-set the video security camera so he turned round and drove back to the garage. He estimated that he was away from the premises for about six minutes. As he was opening the showroom door he noticed that it seemed darker than usual inside and as he went inside he saw flames and a lot of black smoke in the reception area. He picked up a fire extinguisher, but the smoke was too dense for him to use it and by that time he had also begun to feel the heat of the flames. He therefore returned to his car and telephoned the emergency services. That was the call which was timed at 7.02 p.m. Mr. James said that once the fire brigade had arrived they would not allow him near the showroom for fear of a flashback.
16.	Mr. Paul Vincent confirmed that on 22nd September he had been at the garage preparing his wife’s limousine for use. He said he had smoked a couple of cigars while he was at the garage, but had extinguished them outside the showroom. He had taken the second one away to finish it later. He said that he had left the garage at about 3.15 p.m. and did not remember speaking to Mr. James that afternoon. (This part of his evidence was at variance with a statement which he made to the loss adjusters in October 1994 in which he said that he remembered speaking to Mr. James at the garage that afternoon and had left at about 3.45 p.m.). Mr. Vincent said that shortly after 7.00 p.m. that evening while attending an Air Cadets parade he had learned that there had been a fire at the garage and immediately went to see for himself what had happened. He said that he arrived between 7.15 and 7.20 p.m. He said that Mr. James was normally immaculately dressed but on this occasion he found him in a dirty and dishevelled state. He was not wearing a tie and his face and shirt were blackened as if by smoke.
17.	Mrs. Vincent also heard during the evening that there was a fire at Sovereign Motors and being unable to contact her husband she went to see the extent of the damage. She said that she arrived at the garage between 7.20 and 7.30 p.m. She also noticed that Mr. James was dirty and dishevelled and that his face and clothes appeared to be stained with soot. She also noticed that he appeared to be quite calm.
18.	The officer in charge of the fire brigade unit which attended the fire, Mr. Dowell, said in a written statement that he did not take too much notice of Mr. James’s appearance, but that if he had been into the building while it was on fire he would have expected him to be in a somewhat dirtier state than he was. He confirmed that he had been concerned about the risk of a flash-over.
19.	Mr. Peter Morris, the sales manager, confirmed that he had left the garage at about 6.00 p.m. on the evening of the fire. He recalled that Mr. James was then sitting behind the reception desk in the showroom with Mr. Richards and Mr. Arrowsmith standing in front. Mr. Morris said that when he left Mr. James was smoking a large cigar; Mr. Richards may also have been smoking a cigarette, but he was less sure about that. He also recalled that there was an ashtray on the reception desk which had been taken off the top of one of the tall plastic waste bins. He did not recall where the waste bins were, although he said that there was normally one under the reception desk.
20.	The office manager at Sovereign Motors, Mr. Robert Passmore, also said that he remembered Mr. James smoking during the afternoon of the fire. He said that he had been in the reception area when Mr. James returned at around 5.00 p.m. Mr. Passmore described Mr. James as being in a jovial mood and smoking a cigar. Mr. Passmore said that he had left the garage at about 5.20 p.m. to deliver a customer’s car.
21.	Before considering the weight to be attached to Mr. James’s evidence on this aspect of the case it is necessary to deal with Mr. Eklund’s submission that Mr. James showed himself to be a wholly unreliable witness generally. This submission was based both on the way in which Mr. James behaved during the subsequent inquiry into the fire and on the evidence he gave during the course of the trial.
22.	During October and November 1994 Mr. James became involved in increasingly bitter exchanges with Robins West and the insurers in an attempt to persuade them to accept liability for the loss. There had been a certain amount of discussion between Mr. James and Mr. Calleja about the cause of the fire when Mr. Calleja came to inspect the damage on 24th September. I do not accept that Mr. Calleja told Mr. James on that occasion that he was satisfied that the fire was accidental or that he said anything in terms to indicate that there would be no delay in settling the claim. However, Mr. Calleja agreed that he did give Mr. James an assurance that the preparation of his report would not hold things up and I think it likely that he also told Mr. James that he had found nothing to suggest that the fire had been started deliberately. In these circumstances I have no doubt that Mr. James came away from that meeting confident in his own mind that the claim would be accepted and paid without delay. That, however, proved not to be the case.

23.	On 28th September Robins West wrote to Mr. James informing him that the indications were that the cause of the fire was the ignition of the contents of the waste paper bin underneath one of the desks in the reception area. They authorised Mr. James to undertake a certain amount of cleaning and inspection work, but the insurers made it clear to his brokers the next day that they were not willing to make any interim payment at that stage. On 7th October Robins West invited Mr. James to send them the invoices for equipment he had replaced, but without prejudice to insurers’ liability under the policy. I mention this mainly because Mr. James insisted at various points during his evidence that the insurers had agreed to make an interim payment. In my view they did not.
24.	On 7th October Robins West wrote to the insurers reporting on their investigations. They had by then received Mr. Calleja’s report and drew attention to the fact that the fire had originated in a waste bin under the desk in the reception area, all other possible causes having been eliminated. They also drew attention to the fact that they had found no evidence that the fire had been started deliberately and said that they did not think there were sufficient grounds to repudiate the claim. Accordingly they recommended that the claim be dealt with under the policy, but the insurers decided that further enquiries should be made and Mr. James was informed of that fact by Robins West on 12th October.
25.	Mr. James’s reaction to this news was one of dismay and irritation. He told Robins West that he considered that he had given the insurers all the information he could and was not willing to discuss the matter any further. He threatened to sue them and obtain as much publicity as possible. This was no doubt an intemperate and unwise reaction on the part of Mr. James, but not one which casts doubt on the reliability of his evidence. In the event he agreed to meet Mr. Baldock in Torquay on 17th October to answer further questions.
26.	The interview conducted by Mr. Baldock on 17th October was not limited to investigating the cause of the fire or the circumstances surrounding it. In effect he took the opportunity to question Mr. James about all aspects of his business and the history of the cover. (In due course the information obtained by Mr. Baldock was used to justify the insurers’ avoidance of the policy.) A couple of days later Mr. James began to press for an interim payment through his brokers. His patience was clearly beginning to wear thin because the brokers’ letter speaks of legal action and of Mr. James’s intention to publicise his grievance if steps were not taken to settle his claim. Through his brokers Mr. James asked to see a copy of Mr. Calleja’s report, but the insurers declined to allow him to do so.
27.	On 20th October a draft statement based on the interview with Mr. Baldock was sent to Mr. James for his consideration. His immediate reaction was that it was “a pack of lies”, but it seems unlikely that he had considered it in detail when he expressed that view on 21st October. A few days later he expressed the view to the insurers’ customer relations manager at head office, Mr. McArthur, that the statement was “only 30% accurate with the truth twisted”. In due course he did make a number of additions and alterations to the draft, but not so many as would justify comments of that kind. No doubt this was again an intemperate reaction, but it reflected an increasing sense of frustration on his part. It is necessary to remember that from his own perspective Mr. James had co-operated fully with the insurers but had still received neither confirmation that they accepted his claim nor any explanation for the delay in doing so.

28.	On 26th October Mr. James and his tax adviser, Mr. Taylor, had a meeting with Mr. Creed and Mr. Martin of Robins West. In the course of their discussions Mr. James said that he thought that Mr. Calleja’s report had been altered because at the time of their meeting Mr. Calleja had told him that there was nothing suspicious about the fire, and if that were so he could not understand why the insurers were unwilling to accept his claim. As I have already said, I am unable to accept that Mr. Calleja had said that, but I can see how Mr. James might have misunderstood their conversation in that way. Mr. James made a  number of other rather extravagant comments in the course of the meeting which, to judge from the note made by Mr. Creed, became rather heated. 
29.	Mr. James’s next step was to approach the insurers’ general manager for the U.K., Mr. Scott. On 28th October he requested a meeting, but before one could be arranged he spoke to Mr. Scott by telephone on 31st October and poured out all his grievances against Robins West over the way in which, as he saw it, they had mishandled his claim. The insurers produced a transcript of that telephone call from which one can see that Mr. James made a number of extravagant allegations mainly directed to the statement produced by Mr. Baldock. Mr. Scott listened patiently to what Mr. James had to say before suggesting that he sign a transcript of his interview which the insurers would accept as his statement. When he gave evidence Mr. James suggested that he had not in fact spoken to Mr. Scott on that occasion, but to Mr. McArthur who had been impersonating Mr. Scott. However, the tenor of the conversation and the surrounding material (including the transcript of an earlier telephone conversation the same day between the broker, Mr. Luckhurst, and Mr. Scott) show that to be an absurd suggestion.
30.	On 3rd November Mr. James made an unannounced visit to the insurers’ head office in Perth in order to deliver a copy of his revised statement and to speak directly to Mr. Scott. As it happened, Mr. Scott was unavailable, but Mr. James was able to see Mr. McArthur. Nothing much came of that meeting apart from the fact that Mr. McArthur agreed to look into Mr. James’s allegation that Robins West had agreed that there should be an interim payment. Mr. McArthur then referred the matter to Mr. Christie, the manager responsible for motor trade claims. He wrote a conciliatory letter to Mr. James in which he sought permission to approach the security company which looked after the premises, but Mr. James could not see what was to be gained by that since the security firm did not visit the premises until after 8.00 p.m. Unfortunately, he also saw this request as another attempt to delay a decision on the claim. Thereafter little of any note occurred before 15th November when Mr. Christie wrote to Mr. James avoiding the policy.  
31.	I have described the exchanges between Mr. James, Robins West and the insurers during this period at some length, both because of the importance which Mr. Eklund sought to attach to them as shedding light on Mr. James’s credibility and because I think it important to view them in the round. It is unfortunate that the relationship between Mr. James and Robins West broke down at quite an early stage, mainly, in my view, because Mr. James had unrealistic expectations about the way in which a substantial claim of this kind would be handled. On the other hand, the manner in which the investigations were conducted served to increase his sense of frustration which in turn led to more extravagant behaviour on his part. Although he did not lose his composure at any time during the trial, despite quite a lengthy cross-examination, the exchanges recorded in the documents make it clear that Mr. James can quickly become inflamed when he thinks that someone is trying to take advantage of him. Given the context in which they occurred, in particular the fact that there was a delay in dealing with the claim arising from the fact that the insurers, though unwilling to accept the claim, had difficulty in finding grounds for rejecting it, I do not think that these exchanges fatally undermine his credibility in general, though no doubt they have to be borne in mind when considering certain parts of his evidence.
32.	At this point I can resume consideration of the circumstances in which the fire started. Mr. Brown submitted that there was a very real possibility that Mr. James had started the fire accidentally by discarding his cigar butt in the waste paper bin. Although Mr. Eklund did directly confront Mr. James with the suggestion that he had started the fire himself by deliberately setting fire to the contents of the waste bin, he did not challenge Mr. James’s account of the events of the evening of 22nd September in any detail. Moreover, Mr. Morris and Mr. Passmore were witnesses called by the insurers whose evidence on this matter was entirely in accordance with their written statements. Mr. Eklund did, however, lay some emphasis both in cross-examination and in his submissions, on the fact that Mr. James himself had never suggested the possibility that he might himself have accidentally discarded a cigar butt in the waste bin. That, he submitted, was sufficient to demonstrate that Mr. James had done nothing of the kind, or at least suggested that he had something to hide.
33.	It is certainly true that if Mr. James had been smoking a cigar during the early evening of 22nd September, there were a number of occasions on which he might have mentioned the fact. His first account of the circumstances leading up to the fire was given to Mr. Calleja when he visited the garage on 24th September, only two days after the fire. On that occasion Mr. James did mention that he had smoked a cigar that day, but he said that it was earlier during the afternoon and he said nothing about smoking in the reception area between 6.00 and 7.00 p.m. In his note of the conversation Mr. Calleja recorded Mr. James as saying that he was certain that he had stamped his cigar out on the forecourt, although Mr. James doubted whether he had in fact said that. At any rate, it is clear that Mr. James said nothing on that occasion to suggest that he might absent-mindedly have discarded his cigar butt in the waste bin shortly before going home.
34.	In his interview with Mr. Baldock in October 1994 Mr. James said nothing to suggest that he was, or even might have been, smoking a cigar just before he left the building, even though he was aware by then that the insurers thought that the fire had started in the waste bin and that discarded smoker’s materials might be to blame. Following the interview Mr. James was sent a draft statement to consider which he amended in some respects. A comparison of the draft statement with the statement he eventually signed shows that he considered it carefully, making many minor as well as some more significant amendments. One paragraph in the draft statement which he approved specifically referred to the fact that the fire appeared to have started in a waste bin under the reception desk and Mr. James himself added a paragraph which referred to the manner in which a fire might develop in a waste bin from a discarded cigar butt. He said nothing in that statement, however, to suggest that he was in fact smoking a cigar in the reception area that evening and went on to say that he was unaware of any person’s having put a cigarette or cigar butt in the bin. In the witness statement he made specifically for the purposes of these proceedings Mr. James said nothing about the matter and even in his evidence in chief he could only say that he could not remember if he was smoking at the end of the day. He said that he could remember having smoked a cigar that day, but thought he had put it out. That is very similar to what he had said to Mr. Calleja shortly after the fire.
 
35.	Mr. James’s response to this point when it was put to him in cross-examination was to insist that he had been assured that the fire was accidental and that he understood the fire to have been caused by an electrical fault, implying that in either case the question of smoking was irrelevant. Neither of these explanations strikes me as very persuasive, but it is right to bear in mind that there was no suggestion at that time that the claim would not be accepted and Mr. James had no reason to think that the precise cause of the fire would come under such close scrutiny. His failure to tell Mr. Calleja or Mr. Baldock that he had been smoking in the showroom during the latter part of the afternoon of 22nd September might be explained in a number of ways. For example, he may simply have forgotten what he had been doing, or he may not have wished to admit to having done something which may inadvertently have led to the fire. In my view the most likely explanation is the one he gave in court, namely, that he remembered smoking a cigar that day but did not remember exactly when that was. I think he did tell Mr. Calleja that he was confident he had stamped it out on the forecourt, but that was either the result of a simple error of recollection or an attempt to distance himself from any connection with the fire. I agree with Mr. Eklund that Mr. James’s evidence on its own does not provide a basis for finding that he was smoking a cigar in the reception area on the evening of the fire. On the other hand, for the reasons I have given I am unable to accept that his failure to state that he was smoking is positive evidence the other way. The fact is, however, that Mr. James’s evidence does not stand alone because there is the positive evidence of Mr. Morris and Mr. Passmore, each of whom said that he saw Mr. James smoking a cigar in the reception area on the afternoon in question. In the light of the evidence as a whole I am satisfied that Mr. James probably was smoking a cigar when he returned to the garage that afternoon and that he was still smoking it at 6.00 p.m. when Mr. Morris went home.
36.	The insurers’ allegation of arson on the part of Mr. James is based mainly on the evidence of the forensic experts concerning the manner in which fires of the kind in question develop and the likely duration of the fire once it had reached the flaming stage. Since it was common ground that the fire started in the waste bin, the evidence relating to the waste bin itself and its contents is perhaps as good a place as any to begin. There was, in fact, no evidence of what was in the waste bin at the time in question. The contents, including the source of ignition, were destroyed in the fire and none of those who gave evidence was able to say what it had contained. Mr. James did not employ outside cleaners and there is some evidence that the waste bins were not emptied every day. In the nature of things it is likely that the bin contained a certain amount of waste paper of one kind or another, but it is impossible to say how much or of what kind.
37.	There is also some uncertainty about the size and shape of the bin itself. When Mr. James helped Mr. Calleja to reconstruct the reception area on 24th September he also helped to draw a plan on which various pieces of furniture were identified. The original version of that plan showed two “ashtray bins” standing in the showroom area, one near the reception desk and another near the seating provided for customers. The ashtray bin is drawn as a cylindrical plastic bin with a metal ashtray covering the top and with two slots in the side for waste paper. Underneath the desk Mr. James drew a square plastic waste bin, but that was later crossed out. At some point Mr. Calleja drew in a round plastic waste bin in a position which approximates to the place where the bin was standing in which the fire started. I think this must have been intended to reflect the melted plastic bin with the circular base which he was able to identify when the carpet was replaced. The remains of this bin found by Mr. Calleja suggest that it may have been one of the cylindrical ashtray waste bins rather than a bin with a square base. Despite that, both Mr. Calleja, Mr. Pullin and even Mr. James himself carried out experiments to test the ease of setting fire to waste paper with a discarded cigar butt using the conventional kind of open waste bin with lower, sloping sides. It was not until May of this year that Mr. James suggested that the bin in which the fire had started was of a different kind.
38.	If Mr. James had originally thought that the bin in question was of the ashtray kind, I should have expected him to have said as much to Mr. Calleja and in due course to Mr. Pullin. Even with the ashtray top removed, one might have thought that the difference in shape and height between the two kinds of bin could affect both the ease with which a fire could be started and the nature of its development. On the other hand, it is fair to say that the alterations to the plan made on 24th September suggest that both Mr. James and Mr. Calleja recognised that the fire had not started in a square waste bin of the kind that he said was kept in the reception area. Mr. James said in evidence that there were three ashtray bins in the showroom altogether and that the staff would sometimes take one behind the reception desk. According to Mr. Morris there was an ashtray from one of the astray bins on the reception desk at the end of the afternoon. I think it likely on balance that the waste bin in which the fire started was one of the ashtray bins from which the ashtray itself had been removed. Its position can be identified with reasonable precision from the remains identified by Mr. Calleja. It was beneath the desk towards the rear left hand side of the reception area in the position marked on the plan made on 24th September.
39.	 Mr. Calleja, Mr. Pullin and Mr. James himself carried out experiments to ascertain the ease with which the contents of a waste paper bin can be ignited by a casually discarded cigar butt and the manner in which a fire generated in that way is likely to develop. One thing which became clear from these experiments is that ignition depends very much on three main factors: how strongly the butt is burning when it is discarded, the precise nature of the material against which it comes to rest, and the angle of the burning tip in relation to the material against which it is resting. As I have said, there is no evidence about the second of these factors and the third is entirely a matter of chance. As far as the first is concerned, all that can be said is that ordinary experience suggests that it is not uncommon for a smoker to take a last pull at a cigarette or cigar, thereby causing the butt to glow more strongly, before finally disposing of it. It is not impossible, therefore, for a fire of this kind to have been started by a casually discarded cigar butt, as indeed Mr. Calleja acknowledged in his first report.
40.	It was common ground between Mr. Calleja and Mr. Pullin that a fire started in this manner would initially be of a smouldering nature, that is, one producing heat and smoke, but no visible flame, before eventually going out or making the transition to a flaming fire. It was also common ground that the volume of smoke and other combustion products would increase as the point of transition to flaming fire approached. In a memorandum setting out the matters on which they agreed the experts put it this way:
“If the smouldering fire makes the transition to a flaming fire, which is not always the case, then shortly prior to development into a flaming fire, smouldering fires tend to produce increased smoke and smell which should be noticeable to a person in close proximity.”

This is an important aspect of the matter because the insurers argued that if a fire had been accidentally started in the waste bin, Mr. James could not have failed to see smoke, or at any rate to detect a smell of burning, before he left the premises. One should note, however, in this passage the use of the words “in close proximity”.
41.	One of the difficulties surrounding this aspect of the case is that the rate at which a smouldering fire can be expected to develop to a flaming fire is very variable. The experts were agreed that 
“While it is difficult to predict smouldering times, depending on the materials involved, a time period of between 20 minutes and about two hours would not be inconsistent with such ignition, although shorter and longer time periods than the two given are not unusual.”
Given the brief period which elapsed between the end of the telephone call at 6.50 p.m. and the call to the emergency services at 7.02 p.m. (by which time a flaming fire was in progress) attention was inevitably focused on the minimum time in which transition from a smouldering to a flaming fire could take place and upon the minimum period during which a flaming fire would have to have been burning in order to produce the damage eventually caused to the building. 
42.	The damage to the building is a solid reference point from which to work. The fire started in the waste bin under the desk and spread first to the desk itself, then to adjacent furniture and then on to the ceiling of the reception area. In his report Mr. Calleja, who visited the premises two days after the fire, expressed the view that a flaming fire must have been in progress for about 10 to 15 minutes in order to produce the degree of damage that he observed. That formed the basis for the agreement between the experts that 
“the fire must have been making the transition to a flaming fire at about 18.54 hours.”
That, of course, is just about the time Mr. James said he was leaving the premises. When he gave evidence Mr. Calleja suggested that a flaming fire could not have started later than 6.54 p.m. and might have started earlier, but he did not explain how that conclusion could be reconciled with his estimate that a flaming fire must have been in progress for about 10 to 15 minutes. 
43.	 According to the fire report the fire brigade reached the scene at 7.09 p.m. and began to apply water to the fire at 7.12 p.m. The fire was extinguished within a few minutes. Even if one takes 7.12 p.m. as the time at which the damage was arrested, Mr. Calleja’s estimate of 10‑15 minutes duration would suggest that flaming fire broke out at the latest between 6.57 p.m. and 7.02 p.m. As I have said, the experts agreed that if there had previously been a smouldering fire the transition to a flaming fire must have occurred at “about 18.54 hours”. One must, of course, give full weight to their agreement on a matter of this kind, but having said that, it is clear that the experts themselves do not claim to be able to establish the time with precision and that their agreement allows some degree of latitude either way. In my view, taking the evidence as a whole, there is a real possibility that a flaming fire did not break out until 6.57 p.m., or even a little later.

44.	The insurers contended, however, that if a fire had been started accidentally in the waste bin early enough to enable flaming fire to break out by 6.57 p.m., Mr. James could not have failed to notice it. That depends on the manner and speed with which a smouldering fire can develop into a flaming fire. There are two aspects to this: the time required to make the transition, and the manner in which the production of smoke and other combustion products which can be detected visually and by smell develops during that period.
45.	I have already referred to the way in which the experts dealt with the time required for this process to occur. It is clear that the range of smouldering times is very wide, and indeed in his report Mr. Calleja stated that in his view it was not possible to estimate the time of smouldering because of the variable factors involved. In one experiment conducted by Mr. James a flaming fire was produced in just under two minutes from putting a cigar butt into a bin containing what was said to be typical office waste. However, in that case the transition from smouldering to flaming coincided with his opening the door to the room in which the experiment was being conducted and may have been caused partly by the draught. Mr. Calleja was surprised that a flaming fire had been produced in such a short space of time, but he accepted that the test seemed to be fair. I am satisfied that given the right circumstances a flaming fire could have been produced within minutes by the tossing of a cigar butt into a waste bin containing light paper materials. 
46.	There remains, however, the question of smoke and smell. It was common ground that a smouldering fire produces smoke and combustion products which create the typical smell of burning and that the volume of these products generally increases as the fire nears the point of transition to flaming. However, just as the time from ignition to flaming fire is very variable, so is the rate at which smoke and other combustion products are generated. The timed photographs of experiments conducted by Mr. Pullin show that there may be quite a lengthy period during which only small amounts of smoke are produced before the volume increases substantially as the temperature rises towards the point of flaming. Just before flaming occurs copious amounts of smoke are often produced, but there is no set pattern and in a case where the transition to flaming fire occurs more quickly the total volume of smoke produced may be less substantial than in the case where smouldering continues for longer. One can see from the video recording of Mr. James’s experiments that on the first occasion a small amount of wispy light grey smoke was first produced which increased in volume, though without ever becoming very dense, up to the point at which a flame first appeared. Mr. Calleja’s evidence, which I accept, was that the waste bin had been located entirely underneath the desk. I think it likely, therefore, that smoke would have been dissipated to some extent underneath the desk top, although some would inevitably have spilled out from the open side into the reception area.
47.	I have already found that Mr. James was smoking a cigar at about 6.00 p.m. on the evening in question. Is it possible that he absent-mindedly threw his cigar butt into the waste bin as he got up from the desk and before he went round to close up for the night? I think it is. Of course he should not have done so, but people do act in absent-minded ways on occasions and carelessly discarded smoker’s materials are a recognised cause of fires. After he finished his telephone call Mr. James went round the showroom and offices before leaving to go home. It is likely that that took about three minutes. Leaving the offices by the passage from the entrance lobby into the showroom the front door would have been on his immediate left and the reception area a little way away to his right. It is possible in my view that the volume of smoke and other combustion products produced by that time was not so great as to be immediately noticeable to someone leaving the passage and turning left to leave by the showroom door, particularly if a cigar had recently been smoked in the immediate vicinity. Transition to flaming fire could have occurred quite soon after. It could have been triggered by the opening of the door, although that seems less likely in view of the height of the bin and its position under the desk. For these reasons the forensic evidence does not in my view enable one to exclude the possibility that Mr. James started the fire by accident.
48.	There is other evidence, however, which must also be taken into account. In the first place, as Mr. Calleja said from the outset, there was no positive evidence that the fire was started deliberately. Of course, most arsonists want to make the fire appear accidental, but even so, I cannot help thinking that if Mr. James had intended to set fire to the building he would have gone about it in a less haphazard way than by setting fire to the waste paper bin. But the matter does not end there, because there is evidence that Mr. James left the garage and returned a few minutes later when he discovered the fire and rang the fire brigade. In that context there was a lively dispute between Mr. James and the insurers about whether the glass door to the showroom was locked when the fire brigade arrived. The fire officer said in his statement that it was and that he had had to ask Mr. James for the key in order to gain entry to the showroom, but I did not have the benefit of seeing him as a witness or hearing him cross-examined. Mr. James said he had left the door unlocked when he was driven out of the showroom by the smoke and heat and that it remained unlocked. He thought that the fire officer was confusing the showroom door with the door to the offices.
49.	Mr. James did not suggest that he had locked the door to the showroom before calling the fire brigade and it is difficult to see why he should have done so. If, therefore, the door was locked when the fire brigade arrived, it would seriously undermine that part of his evidence and his case generally. Mr. James’s account of entering the building is, however, supported by the unchallenged evidence of Mr. and Mrs. Vincent, each of whom said that when they saw him that evening he had a grimy and dishevelled appearance consistent with having been affected by smoke. Having regard to this evidence I think that there may indeed have been some confusion about which door was locked.
50.	Finally there remains the fact that Mr. James himself telephoned the fire brigade at 7.02 p.m. that evening. Although he might have done that simply to avert suspicion (though that was not in fact suggested to him), I find it very difficult to understand why, if he had deliberately set fire to the building, he should have telephoned the emergency services so quickly. It would have made more sense for him to have let the fire do its work for rather longer than five to ten minutes before intervening. In order to provide a motive for Mr. James to set fire to the premises the insurers set out to show that his business was in a parlous financial condition. It is certainly true that the business was not thriving and that Mr. James was in dispute with both the Customs and Excise over his VAT and the Inland Revenue over his income tax, but it is difficult to see quite how he was likely to benefit from a fire in the showroom. This was not a case where a large quantity of slow-moving or redundant stock could be turned into a valuable insurance claim. In my view the evidence as a whole tends to undermine the suggestion that Mr. James started the fire deliberately. It was suggested that he might have wished to destroy documents relating to the business, but that amounted to little more than speculation.

51.	The insurers set out to prove that Mr. James set fire to the building, or that he deliberately allowed the fire to develop, by seeking to eliminate the possibility that it could have occurred without his direct involvement. Having reminded myself of what Lord Brandon said in the Popi M and of the approach indicated by the Court of Appeal in the Ikarian Reefer, I am satisfied that there remains a substantial possibility that the fire did originate accidentally without the knowledge of Mr. James. An allegation of arson in a case of this kind, bearing as it does the stigma of dishonesty, must be supported by cogent evidence. In my judgment the evidence in this case is not sufficient to establish that Mr. James either started the fire deliberately or that, having started it accidentally, he deliberately allowed it to continue. Accordingly, this limb of the insurers’ case fails.
Non-disclosure
52.	It is trite law that before entering into a contract of insurance the potential insured is under a duty to disclose to the insurer all material facts known to him but unknown to the insurer. This is an aspect of the duty of utmost good faith which requires a person seeking insurance to make a fair presentation of the risk. The necessity for the person seeking insurance to decide what information must be disclosed in order to comply with this obligation was a powerful factor in leading the House of Lords in Pan Atlantic Insurance Ltd v Pine Top Ltd [1995] 1 A.C. 501 to reject the proposition that a material fact is one which would have had a decisive effect on the insurer’s decision to accept the risk at the premium actually agreed. As a result it is now established that a material fact is one which would have influenced the judgment of a prudent insurer, that is, one which he would have taken into account when assessing the risk: see per Evans L.J. in St Paul Fire & Marine Insurance Co. (UK) Ltd v McConnell Dowell Constructors [1995] 2 Lloyd’s Rep. 116, 124. One important consequence of this, as Mance J. noted in Insurance Corporation of the Channel Islands v The Royal Hotel Ltd [1998] Lloyd’s Rep I.R. 151 at 157, is that materiality does not depend on what in the practical world the ordinary insured would or would not be expected to disclose, but on what a prudent underwriter would take into account when assessing the risk.
53.	The decision in Pan Atlantic v Pine Top is also of importance, however, for the fact that their Lordships also held that there must be a causal connection between the non-disclosure and the making of the contract if the insurer is to be entitled to avoid the contract. In other words, the failure to disclose the fact in question must have induced the insurer to enter into the contract. Lord Mustill, with whom Lord Goff and Lord Slynn agreed, seems to have considered that on this issue the burden of proof falls on the insured – see his observations at page 551B‑D to the effect that there is ample material to suggest that there is a presumption in favour of a causative effect and that the insured is likely to have an uphill task in persuading the court that the withholding of circumstances satisfying the test of materiality made no difference. The existence of such a presumption is further supported by the judgment of the Court of Appeal in St Paul Fire & Marine v McConnell Dowell where it was treated as sufficient to discharge the burden of proof on the insurer in the absence of countervailing evidence.
54.	Two further matters must be mentioned at this point. The first is the Association of British Insurers’ Statement of General Insurance Practice. My attention was drawn to this by Mr. Christopher Williams, the underwriting expert called by Mr. James. The Statement contains a code of practice to which members of the Association (who include the insurers in this case) have agreed to adhere. One of its provisions requires insurers to include in their proposal forms clear questions about matters which insurers have found generally to be material. However, as the insurers’ expert, Mr. Peter Vale, pointed out, the Statement itself makes it clear that that does not abolish the insured’s duty of disclosure and that in any event it applies to “general insurance of policyholders resident in the UK and insured in their private capacity only”. Although it may have been applied more widely by some insurers, it was common ground that it has not formally been adopted by the Association in relation to commercial insurance. In these circumstances, despite the passing reference to the Statement in the paragraph in the policy headed “Your right to complain”, it is in my view of limited significance in the present case. 
55.	The second matter is the concept of moral hazard to which Mance J. drew attention in Insurance Corporation of the Channel Islands v The Royal Hotel Ltd. As he pointed out at page 156, when considering the question of non-disclosure
“It is important to realise what is embraced by “risk”. It is not simply the peril or possibility of loss or damage occurring within the scope of the policy. It embraces other matters which would, if known, be likely to influence a prudent underwriter’s decision. It includes what is known as “moral hazard”, which may merely increase the likelihood of it being made to appear (falsely) that loss or damage has occurred falling within the scope of the policy: see per Lord Mustill in Pan Atlantic at pp. 534D-E and 538E-F.”
By their very nature many matters which insurers would regard as relevant to moral hazard are unlikely to be the subject of questions in a proposal form and, being often embarrassing as well as potentially prejudicial, are equally unlikely to be volunteered by the potential insured. However, as I have already said, materiality does not depend on what the potential insured would in practice be expected to disclose, but on what a prudent underwriter would, if he knew of it, take into account when assessing the risk.
56.	Finally, it is important to bear in  mind that the duty of disclosure operates prior to, and at the time of, entering into the contract of insurance. The policy in the present case was originally entered into in 1983 at a time when Mr. James traded from other premises and had since been renewed annually. The policy in force at the time of the fire had been renewed in January 1994. I am concerned, therefore, only with such facts as were within the knowledge of Mr. James in January 1994 and had not previously been disclosed to the insurers.
57.	With these principles in mind I turn to consider the various allegations of non-disclosure pursued by the insurers in the present case. (Some of the matters raised in the defence were abandoned before or at the hearing and call for no further comment.) It is convenient to consider the evidence in relation to each of these separately, but before doing so it is necessary to make some general observations about the evidence given by the underwriter who wrote the policy on behalf of the insurers, Mr. Alan Moore. The renewal of this policy occurred over seven years ago in January 1994. It may well be difficult so long after the event for an underwriter in Mr. Moore’s position to say with confidence exactly how he would have reacted to the disclosure of a particular piece of information, especially when his erstwhile employers have already avoided the policy. He himself recognised that with the benefit of hindsight there is a danger of giving more importance to a matter now than he would have given it at the time. Certainly that is a factor which I have borne in mind when considering his evidence. He accepted that he was underwriting in a competitive market and that the company was keen to obtain the business. He also accepted that the fact that Mr. James had been insured by the company for a long time would have given him a degree of confidence when deciding whether to renew. All these factors would, I think, have weighed with him in favour of agreeing to renew the policy on the same terms as the previous year, even if there were one or two matters which gave him pause for thought. On the other hand, I do not think that they would have led him to disregarded matters of any real substance and if a number of matters had come to light which he thought ought previously to have been disclosed that would be likely to have made him more cautious. Another factor which I have borne in mind is that when he dealt with this renewal in 1994 Mr. Moore was a relatively junior underwriter. He is now a good deal more experienced and there is clearly a risk that that could affect his evidence. However, I think he recognised these dangers himself and my overall impression of him was that he was a fair and balanced witness who was doing his best to explain how he would have been affected at the time by disclosure of the various matters he was asked to consider.
(a) Skip hire business
58.	The insurers say that at renewal Mr. James failed to disclose the fact that he was carrying on a skip hire business from the garage premises or that skips were being stored at the garage in connection with such a business. They relied primarily on evidence from three witnesses who had been working for Mr. James at various times and also on a number of photographs taken shortly after the fire. The first of the witnesses was Mrs. Maria Lawrence who had worked for Mr. James as a secretary and personal assistant from July or August 1991 until August 1993. She said that a few months before she left his employment Mr. James together with a Mr. David Day had started a skip hire business which he ran from the garage. Skips and the two small trucks used to carry them were stored at the premises when not in use and the mechanics at the garage carried out maintenance and repairs on them as necessary. She said that she took the odd telephone call relating to the skip hire business which she passed immediately to Mr. James, but did not carry out any administrative work relating to the hiring of skips. In cross-examination, however, Mrs. Lawrence’s recollection of these matters seemed rather less clear. She was not sure who owned the skips and did not recall much about their condition. She agreed that the vehicles were in the garage because they were not roadworthy.
59.	 Mr. Morris also dealt with the matter of the skips, but very briefly. He had assumed at one time that Mr. James had been running a skip hire business, but when he was called to give evidence he made it clear that he now considered that assumption to have been wrong. He recalled on one occasion obtaining a tax disc for one of the skip trucks, and said that he believed at that time that Mr. James had arranged for the skip trucks to be insured under his Motor Trader’s policy. In cross-examination, however, he too was less confident than he had been in his statement. He said  that he did not know on whose behalf he had been asked to tax the vehicle and that he thought the skip hire business belonged to Mr. Day. He did not attach any precise date to any of these events.
60.	Mr. Passmore said that Mr. James had bought a skip hire business in April or May 1994 and that he had also taken over another skip hire business in which Mr. Day had an interest. He said that the skips were stored at the garage. Mr Passmore added little to that in cross-examination except to say that the skips had first arrived sometime in 1993, not 1994. He frankly stated that he had had nothing to do with the skips and that his knowledge of Mr. James’s involvement had been based on general talk in the garage, although that included comments made by Mr. James himself. Mr. Passmore confirmed that the lorries and many of the skips were in poor condition and that a lot of work had been done on them at the garage, but that no invoices had been issued for any of that work.
61.	Mr. Richard Johnson was employed by Mr. James as a mechanic. He said that at least 25 skips were stored at the back of the garage by the paint workshop. Sometimes skips were brought back to the garage containing rubbish; sometimes they were emptied before being brought back. He said that on one occasion Mr. James asked him to deliver some skips to a customer. These activities were going on when he started work at the garage in May 1993 and were still going on at the time of the fire.
62.	Mr. James denied that he had ever run a skip hire business. He said that the business belonged to Mr. David Day who had two trucks and a number of mini-skips. He had only repaired the lorries and skips which were left at the garage on a rotating basis. The skips and lorries were in poor condition and needed a lot of work to keep them going, more than could be done on one occasion. The ledgers kept at the garage for recording individual jobs do not reflect any work of that kind except for one entry in August 1993 which refers to the re-painting of skips. Mr. James described the work on the skips as a ‘hospital job’, something which the mechanics could fall back on when there was insufficient other work to keep them busy. He explained that the ledgers were based on information supplied by the workshop which recorded the work carried out on separate job cards, but that these had been destroyed in a second fire which occurred in 1995. He agreed that he had not invoiced Mr. Day for the work. He said that around the middle of 1993 he had produced a figure for what had been done, but Mr. Day had said that he was not making money out of the business and would find it difficult to pay. He told Mr. James to sell the skips to recoup what was owed. In the meantime Mr. James said that he allowed Mr. Day to make use of the skips as and when he needed them. Mr. James said that he had dealt with Mr. Day for some years. He had sold him a number of cars and had carried out repairs on his vehicles from time to time for which he had charged in the usual way.
63.	Mr. Day also gave evidence and he confirmed that he was the sole proprietor of the Abbot Skip Hire business which he operated from a grocery shop which he owned and ran in Kingsteignton. He said that he bought the business towards the end of 1993. The shop has a small forecourt at the front which is suitable for customer parking. It is not large enough to accommodate many skips, but Mr. Day said that they were generally out on jobs or loaded onto one of the trucks. The trucks used to handle the skips were quite small and occasionally he would park them on the forecourt of the shop. He said that the skips and lorries only went to the garage for the purposes of repairs and were not stored there. He said that one or other truck was in the garage most of the time, but he agreed that Mr. James never sent him a bill for the work. He confirmed that he had told Mr. James to sell the trucks and skips to recoup what he was owed.
64.	Despite certain differences of recollection among the witnesses, I am satisfied that Mr. James’s involvement with the skips began sometime around the middle of  1993. The arrangements between Mr. James and Mr. Day were clearly very informal, but the fact that skips and trucks were worked on as and when the opportunity arose without any formal invoicing for the work suggests that Mr. James was taking a closer interest in the business than merely providing a repair service. The fact that work was carried out on skips and trucks as and when it was convenient suggests that they were parked at the garage available for work for quite prolonged periods, but there is very little evidence to support the conclusion that Mr. James either ran the business or was personally interested in it in any formal sense. On the other hand, the evidence does indicate that the skips and trucks were not simply at the garage waiting for and undergoing repairs. Mr. James accepted that skips and trucks left the garage from time to time to enable the skip hire business to continue in operation and I am satisfied that in the period prior to January 1994 there were regular movements of skips in and out of the site both for the purposes of repairs and for purposes connected with the operation of the skip hire business. I am also satisfied on the basis of Mr. Johnson’s evidence that on some occasions skips containing rubbish were left at the site for short periods before being emptied. The skip hire business may have been running down at that time, but there is nothing to suggest that it had already ceased and indeed photographs taken shortly after the fire show a number of mini-skips bearing the name ‘Abbot’ still at the garage.
65.	Mr. Williams and Mr. Vale differed in their views as to whether the fact that a skip hire business was being operated from the garage was a material fact. To some extent this difference seemed to turn on differing perceptions of the nature of the operations. Mr. Vale took the view that frequent movement of skips and trucks into and out of the premises increased the risk of accidental damage to the buildings and other vehicles and that the storage of skips containing rubbish would increase the fire hazard. Mr. Williams did not think that there would be an increased risk of physical damage since it is common to have skips containing waste materials on commercial premises.
66.	The experts agreed that the repair of skips and small commercial vehicles is well within the ordinary scope of a business such as this, but in this case the skips were not simply being left for repairs. They were being left at the garage for extended periods and were being removed from time to time for use before being returned. Sometimes they came back containing waste material pending its disposal. In practical terms this comes close in my view to operating a skip hire business from the garage. As to the materiality of these arrangements, I prefer the evidence of Mr. Vale. Mr. Williams said that it would not be unusual for a business of that kind which was being operated from the same premises to be insured separately, but that does not seem to me to advance the matter if the nature of the operations may have a direct bearing on the risk being underwritten by these insurers. Indeed the experts were in agreement that it would be material for an insurer to know about other businesses occupying the same premises. Since the activities involved additional movements of trucks and skips, as well as the possibility for additional amounts of inflammable waste to be held on the premises from time to time, I accept Mr. Vale’s evidence that activities of this kind would be viewed as increasing the risk. I am satisfied, therefore, that a prudent underwriter would take them into account when assessing the risk.
67.	The way in which Mr. Moore dealt with this matter in his evidence in chief suggested that his concern would mainly have stemmed from the difficulty of disentangling Mr. James’s different business interests in the event of a loss. In cross-examination, however, he said that he would have been concerned about the increased risk involved in having skips operating from the garage premises. I think it unlikely that he would have accepted the risk on the same terms if he had been aware that skips would have been operated from the garage during the currency of the policy. Accordingly, I am satisfied that there was in this respect a failure to disclose a material fact which directly affected the underwriter’s decision.

The car hire business
68.	The insurers say that Mr. James failed to disclose the fact that he was involved in a car hire business operated from the garage in conjunction with Mr. and Mrs. Vincent and that Mr. Vincent held a key to the premises. In the end the facts were not seriously in dispute. Mrs. Vincent was the proprietor of a car hire business called Torbay Luxury Limousines which was run from her home address. She owned a Dorchester limousine and a Daimler Sovereign and from time to time was allowed to make use of a white Rolls Royce belonging to Mr. James. The Dorchester limousine was in use nearly every day and was usually parked overnight in her own garage. From time to time it was kept in the showroom of Sovereign Motors, but not usually for more than two to three days at a time. Mr. Vincent had no formal involvement in the business, but, as one would expect, he gave his wife a certain amount of practical assistance.
69.	I am quite satisfied that Mr. James was not a partner, formal or informal, in Mrs. Vincent’s business. I think he probably allowed the Vincents to use the showroom and the occasional use of his car out of friendship and perhaps also because he thought that his association with them was of some benefit to his own business. His Rolls Royce and the Dorchester Limousine were sometimes to be seen together in the showroom carrying ‘For Hire’ signs. Mr. James confirmed that Mr. Vincent had a key to the front door of the offices to enable him to obtain access to the showroom when the garage was shut. Without it the Vincents could not have obtained access to the showroom when they needed to use the cars for weddings or other functions at week-ends. These arrangements had been in place since some time in 1992. 
70.	Since Mrs. Vincent’s business was not being run from the garage, no question arises of shared occupation of the premises. Mr. Vale regarded the use of the showroom to garage two of Mrs. Vincent’s cars as a material factor, but it is clear that that was mainly due to the fact that Mr. Vincent had a key to the premises and could therefore gain access to them at all times. He agreed that an insured can be expected to give a key to the premises from time to time to someone connected with the business, but he drew a clear distinction between an occasional instance of giving a key to an employee at one end of the scale and leaving a key permanently in the hands of a third party unconnected with the business at the other. The fact that Mr. Vincent was a serving police officer did not detract from that. He considered that a prudent underwriter would regard it as a factor tending to increase the risk. Whether any particular arrangement is material no doubt depends on its nature and the circumstances of the case, but in this case the memorandum setting out areas of agreement between the two experts showed that there was little real disagreement on this. They both thought that Mr. James should have disclosed this arrangement, although Mr. Williams doubted whether a prudent insurer would in fact have insisted on different terms. In the light of their evidence I am satisfied that the existence of a permanent arrangement under which a third party holds a key to the premises is a matter which a prudent insurer would take into account as a potentially adverse factor when assessing the risk. Whether that would have led him to alter the terms of cover is not the point. I am satisfied, therefore, that the arrangements under which Mr. Vincent held the key to the front door of the offices was a material fact and should have been disclosed. 

71.	In his witness statement Mr. Moore said that if he had been told about the arrangement with Mr. and Mrs. Vincent he would have required the inclusion of a clause in the policy limiting the insurers’ liability in respect of burglary to cases where there were visible signs of forcible entry. In his evidence-in-chief he said that his view of the matter would not have been affected by the fact that Mr. Vincent was a policeman and that he would have been even more concerned if he had been told that Mrs. Vincent’s drivers had access to the premises by the key. In cross-examination, however, he said that he would not have been worried if the key were in the hands of a policeman and his wife.
72.	The evidence shows that Mrs. Vincent’s cars were garaged in the showroom for short periods but at fairly frequent intervals. Mrs. Vincent employed three drivers, so it was likely that from time to time one of them would require the key in order to remove or return one of the cars. The fact that Mr. Vincent was a policeman would, I think, have been treated by Mr. Moore as a positive factor, but even so, given the number of drivers involved and the regularity of use of the showroom, I think it unlikely that he would have agreed to write the policy without the inclusion of a clause limiting the insurers’ liability in cases of burglary to cases of violent and forcible entry. In this case too, therefore, I am satisfied that there was a failure on the part of Mr. James to disclose a material fact which directly affected the underwriter’s decision.
Theft by an employee
73.	In May 1990 Mr. James employed a Mr. Martin Rossman as a manager at Sovereign Motors which was then at Kingsteignton. He continued to work for Mr. James after the business moved to Torquay. In July 1993 Mr. Rossman pleaded guilty to the theft from Mr. James of £214.75. He was ordered to perform 60 hours community service, to pay compensation to Mr. James and a sum of £400 towards the costs of the prosecution. Mr. James insisted throughout his evidence that the sum stolen by Mr. Rossman was in fact much larger than that in respect of which he was convicted. He put it as high as £130,000, although he acknowledged that no precise figure had ever been calculated. That remains the position. Whatever suspicions Mr. James or anyone else may have had, there is no firm evidence before me pointing to a loss of that magnitude. Nonetheless, Mr. James appears to have been confident that the sum involved was of that order.  
74.	The memorandum setting out the points of agreement and disagreement between Mr. Williams and Mr. Vale serves to emphasise what may be an important distinction between the amount actually stolen by Mr. Rossman and the amount Mr. James thought had been stolen. As far as the actual loss is concerned, Mr. Williams was of the opinion that it was not in any event material to an underwriter’s assessment of any of the risks covered under the present policy, and especially not if the amount involved was only a few hundred pounds. His opinion was based in part on the fact that the insurers had not asked any questions in their proposal form about the insured’s financial standing. In general Mr. Vale took a similar view (though not for all the same reasons), although in his view if the loss were as large as £130,000 it would be material both because it would have put the financial viability of the business in jeopardy and because it would call into question Mr. James’s management control.
75.	As I have said, there is no evidence before me that the amount actually stolen by Mr. Rossman was any more than the sum of £214.75 he was ordered to pay in compensation. It follows, therefore, that the actual loss was not of such a magnitude as to be material in the view of either expert. Mr. Vale, however, considered that Mr. James should have disclosed the fact that he thought the loss was of the order of £130,000 because it was relevant to the financial health of the business which was itself a material factor. I find it difficult to accept that the insured’s belief about a matter of this kind is material to the financial health of the business, but I can understand that when assessing moral hazard it is a matter which in some circumstances an underwriter might wish to take into account.  However, neither expert dealt with the matter on that basis and Mr. Moore was not asked to deal with this particular question either. In the circumstances there is simply insufficient evidence to support the conclusion that this provides grounds for avoiding the policy. 
Previous break-ins
76.	In the course of his interview Mr. Baldock asked Mr. James about previous incidents at the garage. Mr. James mentioned the following: an incident in which a brick was thrown through a workshop window; the forcing of doors; one incident of forcible entry through a side door; and a series of break‑ins leading to no loss. This information was relied on by the insurers as providing additional grounds for avoiding the contract.
77.	There was no evidence relating to any of these incidents other than that given by Mr. James himself and what he said was lacking in detail. Police records covering the period from September 1992 to January 1994 indicate that during that period seven incidents were reported: three involving cars parked on the forecourt, one involving a dishonoured cheque, a burglary in September 1992 in which entry appeared to have been gained by a key and exit by forcing some rear doors, another burglary in August 1993 in which entry was gained by removing roofing panels and a minor assault. The first burglary resulted in a loss of £40 in respect of physical damage and a further £400 by way of the cost of replacing locks. A claim was made on the insurers and was paid. The second burglary gave rise to a loss of £60 in respect of physical damage. Mr. James did not report it to the insurers because it fell below the excess charge. 
78.	In cross-examination Mr. James also referred to a couple of break-ins in the cleaning shop next to the MOT bay, and to an attempted break-in through the old ventilation system. He said that there had been two or three such incidents in addition to those which led to claims on the insurers. He said that both incidents of doors being forced were reported. Mr. James also said that the security company had contacted him on about ten occasions in the course of the three years he had used them to report seeing people on the premises, though not necessarily in the course of attempting to gain entry.
79.	Although some incidents were reported to the insurers, it seems clear that others were not, either because they were considered to be too trivial, or because any loss suffered fell below the excess charge. Apart from the incidents logged by the police, the evidence is not sufficiently detailed or precise to enable a firm finding to be made as to the number of incidents which occurred, their nature or the period over which they were spread.
80.	The experts agreed that if the incidents notified to the police had been disclosed they would not have led a prudent underwriter to alter the terms on which he accepted the risk. That is not quite the same thing as saying that a prudent underwriter would not have taken them into account when assessing the risk, but in this instance it comes quite close to it. In the course of their evidence both experts and the underwriter, Mr. Moore, laid some emphasis on the significance of a number of small losses which, though not individually of interest to an insurer, would be material if they disclosed a pattern of events which might give rise to a substantial loss or indicated a higher than normal risk. I do not think that the incidents reported to the police were of a type or number to be material. Nor do I think that Mr. Moore would have declined to write the policy on the same terms or at the same premium if he had been aware of those incidents occurring prior to the date of renewal which were not disclosed. The insurers have therefore failed to make out this part of their case.
Disputes with the Customs and the Inland Revenue
81.	In January 1994 Mr. James was embroiled in disputes with the Customs & Excise over his VAT returns and with the Inland Revenue over the taxation of his business profits. The insurers contended that the existence of each of these disputes should have been disclosed.
82.	Mr. James’s dispute with the Inland Revenue related to various assessments dating back to October 1985. The inspector considered that Mr. James had not declared all his receipts and had included in his accounts various expenses which did not properly qualify as deductible items. The amounts being claimed included sums in respect of National Insurance contributions and income tax deducted from employees pay under the P.A.Y.E. system for which the inspector considered Mr. James had not fully accounted.
83.	Mr. James admitted that in January 1994 he was withholding money deducted from his employees, but he said that he was only doing so because the Inland Revenue was refusing to give him credit for payments he had already made. That was all part of the continuing dispute. From May 1994 a tax consultant, Mr. Stephen Taylor, who was already acting on behalf of Mr. James in connection with his VAT affairs, started to act for him in relation to his income tax affairs as well. Mr. James’s accountant had previously handled these matters and had been in negotiations with the Inland Revenue, but those negotiations had not led to a settlement. (A few months later the Inland Revenue issued a statutory demand for over £85,000, but Mr. James managed to have that set aside.) It is apparent from the documents that subsequent negotiations led to proposals under which Mr. James would have paid a little under £40,000, but in the event it was not possible to settle the dispute. Mr. Eklund submitted that Mr. James had deliberately and dishonestly understated his receipts and overstated his expenses when making returns to the Inland Revenue. However, the circumstances in which the disputed items came to be omitted or included (as the case may be) in the first instance was not investigated in any great detail, nor was it put to  Mr. James in cross-examination that he had acted dishonestly in relation to them. In my view the evidence is not sufficient to support a finding of dishonesty in relation to these matters.
84.	The dispute over VAT related to the two years ending 31st August 1990 and 31st August 1991, but because of the rather desultory steps taken by the relevant VAT officer an assessment of additional amounts due in the sum of over £38,000 including interest was not made until September 1993. First Mr. James and then Mr. Taylor entered into negotiations with the local VAT office, but these proved unsuccessful and a formal appeal against the assessment was lodged in May 1994.
85.	According to Mr. Williams it has not generally been the practice of insurers to ask about the financial position of a potential insured except in the case of financial guarantee bonds. The insurers in the present case were no exception and this led him to the conclusion that they had waived disclosure of information bearing on Mr. James’s financial position. With all respect to him I cannot accept that. It has long been established that it is the duty of the insured to disclose all material facts of which he is aware. The insurer does not waive disclosure by failing to ask questions or by asking questions about other matters: see per Scrutton L.J. in Greenhill v Federal Insurance Co. Ltd [1927] 1 K.B. 65, 85 and per May J. in March Cabaret Club & Casino Ltd v The London Assurance [1975] 1 Lloyd’s Rep. 169, 176. Mr. Vale said that he would not normally regard disputes with the Customs & Excise over VAT or with the Inland Revenue over income tax as material, but he considered the financial viability of the business to be a material factor when considering whether to write property insurance and business interruption cover. In his view the scale of the disputes in this case, both in amount and in the length of time over which they had been continuing, was such as to render them material because they had a bearing on the financial viability of the business.  This was one issue on which Mr. Williams and Mr. Vale were unable to reach agreement.
86.	Since fraudulent claims for fire damage are often linked to the insured’s financial circumstances, it would be entirely understandable if property insurers regarded facts bearing on the financial status of the insured as material. Mr. Williams recognised the force of that, but said that the market did not in fact treat such information as disclosable. Mr. Vale did not agree. He acknowledged that insurers do not normally ask questions about the proposer’s financial position (unless they have some particular reason to do so), but he said that it is something which the underwriter would take into account if he were aware of it. I prefer the evidence of Mr. Vale on this issue. There is little to support the conclusion that the market has generally decided to ignore the significance of the insured’s financial position and in my view his explanation is more consistent with the established approach towards underwriting which includes the assessment of factors relating to moral hazard as well as factors relating directly to the risk insured.
87.	Mr. Moore said that he would not have renewed the policy if he had been aware that Mr. James was involved in longstanding disputes with the Customs & Excise and the Inland Revenue. At the very least he would have viewed them as an indication that Mr. James did not keep adequate business records. That, he said, would have caused him concern given that the policy covered business interruption losses since the insurers would want to see accurate records if a claim were made. The existence of substantial disputes of that kind would also have indicated to him that the business was in financial difficulty and in his eyes would have affected the general moral hazard. I am satisfied that he probably would not have renewed on the same terms, if at all, had he been aware of these disputes. For these reasons I am satisfied that there was in this respect also a failure to disclose a material fact which directly affected the underwriter’s decision.
Withholding sums due in respect of  National Insurance contributions and P.A.Y.E. income tax
88.	I have already mentioned that in the context of his dispute with the Inland Revenue Mr. James admitted withholding money due in respect of National Insurance contributions and income tax deducted from his employees’ pay. Mrs. Lawrence said that Mr. James stopped making monthly payments to the Revenue in respect of these a few months before she left Sovereign Motors in August 1993.
89.	In my view this withholding of payments really forms part and parcel of Mr. James’s dispute with the Inland Revenue and I doubt whether it can really be viewed as a separate matter calling for disclosure in its own right. However, I have no doubt that it is a factor which would increase the importance which a prudent underwriter would attach to the existence of the dispute. Viewed in that light it only serves to reinforce my conclusion that the existence and nature of the disputes ought to have been disclosed and if disclosed would have led Mr. Moore to decline the renewal on the same terms, if he had accepted it at all. 
Employee’s disqualification from driving
90.	Section H of the policy provided cover in respect of road risks, that is, in respect of liability incurred by Mr. James or any of his employees as a result of death or injury to any person or loss of or damage to property caused by a vehicle in his custody or control. It therefore provided cover in respect of customers’ cars being driven on the road by Mr. James’s employees. This section of the policy was not by its terms limited to specific employees, but at each renewal Mr. James was asked to give particulars of the vehicles and drivers to whom the cover was expected to apply. The proposal form in use at renewal in 1994 specifically asked whether he or anyone else who might drive had been convicted of any motoring offence in the last five years or had been disqualified from driving in the last ten years. 
91.	In May 1993 Mr. James took Mr. Johnson on as a mechanic. In March 1992 Mr. Johnson had been disqualified from driving for a period of six months. When he completed the proposal form in January 1994 Mr. James did not include Mr. Johnson among the list of likely drivers. The insurers say that he was a person who normally drove cars on the road in the course of his employment, or might be asked to do so. He should therefore have been included in the list of drivers and details of his disqualification should have been given. Mr. Williams and Mr. Vale agreed that if Mr. Johnson was likely to drive in the course of his employment, that was a material fact which should have been disclosed together with details of any relevant disqualification.
92.	There is no doubt about the disqualification, but  Mr. James said that he thought Mr. Johnson only had a motorcycle licence and for that reason was not allowed to drive company cars. Mr. Johnson, however, said that Mr. James had asked to see his licence when he was taken on and that was not challenged in cross-examination. He said that he regularly drove customers’ vehicles, both to collect and redeliver them in connection with servicing and repairs and to carry out road tests. He said that he was regularly instructed to carry out road tests by Mr. Passmore, who was responsible for the mechanics’ work, and by Mr. James himself. Mr. James, however, flatly denied that he had ever instructed Mr. Johnson to carry out road tests and he pointed out that the buildings were grouped in the middle of the site leaving room all round in which to test drive vehicles. He said that Mr. Passmore was responsible for the mechanics’ work and that he hardly ever saw them. Unfortunately, no one asked Mr. Passmore about any of these matters.
93.	The real question for present purposes is not so much whether Mr. James instructed Mr. Johnson to drive from time to time as whether in January 1994 he knew that Mr. Johnson would or might be asked to drive customers’ cars on the road as part of his job. Given the nature of the work, I should have expected Mr. James to ask Mr. Johnson whether he held a driving licence when he was considering whether to offer him a job. Moreover, given that Mr. Johnson was employed as a mechanic and held a full driving licence, I think he could be expected to drive customers’ cars from time to time unless steps were taken to ensure that he was not allowed to do so.

94.	If Mr. James was aware that Mr. Johnson held a current driving licence I think he must have been aware that he might be asked to drive in the course of his employment. Despite that, he must have deliberately omitted any reference to him when completing the renewal proposal in January 1994. Yet he did declare that in 1988 he had himself been disqualified from driving for one month for speeding. It is difficult to see why in those circumstances Mr. James should have omitted any reference to Mr. Johnson. Disclosure might well have led to some modification in the terms of the cover, but there is nothing to suggest that it was likely to have been of a drastic nature, whereas a failure to disclose him altogether as a potential driver could well have serious consequences. Not without some hesitation I have come to the conclusion that I should accept  Mr. James’s evidence on this point and find that as far as he was aware Mr. Johnson was not normally asked to drive cars in the course of his employment. Whether he was asked to drive a skip lorry on any occasion seems to me to be beside the point since there is no evidence that the vehicle in question was being driven on the road while it was in the custody or control of Mr. James in connection with his business.   
Breakdown warranties
95.	It was the practice of Sovereign Motors to provide guarantees in the form of mechanical breakdown warranties to purchasers of second-hand vehicles. Most of these warranties were underwritten by a Lloyd’s syndicate and administered through MBI Administration (London) Ltd (“MBIA”). Motor traders dealing in second-hand cars could purchase warranties from MBIA with authority to issue them to purchasers. It was common ground that the effect of issuing a warranty to a purchaser was to bring about a contract of insurance between the purchaser and the syndicate. It was the responsibility of the dealer to send one copy of the documentation to MBIA for registration and also to remit the premium. The insurers say that Mr. James failed to disclose the fact that in many cases he failed to inform MBIA that a warranty had been issued and failed to account for the premium.
96.	Both Mr. James and the sales manager Mr. Morris said that it was the practice to include the warranty in the overall price of the vehicle; if necessary it might be thrown in as a ‘sweetener’ to clinch the deal. Formally, however, the warranty was treated as a separate item in the transaction, £500 for one year and £800 for two, and shown separately in the invoice. Similarly, if road fund tax were included in the overall price, that would be shown separately. Two witnesses, Mrs. Lawrence and Mr. Morris, said that at some point during 1992 Mr. James stopped sending all the warranty documents to MBIA. They were allowed to accumulate in a drawer in his office, although from time to time some were sent off to MBIA with a cheque for the corresponding premiums or handed to its representative when he called at the garage. In their statements each of them said that at one time there were as many as forty warranties in the drawer.
97.	Mr. James agreed that he was supposed to send the premiums and the paperwork to MBIA, but he also agreed that from some time during 1993 he had stopped doing so in all cases. He insisted that he would always honour any warranty personally, whether MBIA accepted the claim or not. To that extent, he suggested, he always ensured that the customers got what they paid for. MBIA was wound up in October 1994. Mr. James said that for some time before that the company had stopped paying warranty claims and so he had decided to retain premiums to fund the work himself. He doubted whether there were as many as forty instances in which he had done that.

98.	Mr. David Pearson is the run-off manager for the Lloyd’s syndicate which wrote the mechanical breakdown insurance issued by MBIA. He said that instead of remitting all the premiums it received to the syndicate, it had been the practice of MBIA to retain a pool of premiums out of which it paid claims. A similar practice had developed among the motor dealers who issued the warranties. In effect they operated a system of contra-accounting. However, there is a significant distinction in my view between retaining both the paperwork and the premiums (in which case the underwriters remain ignorant of the existence of the policy) and simply retaining the premiums for which credit is given against claims. In the latter case the dealer does inform the underwriters of the existence of the contract and can be said to account for the premiums even if they are not directly remitted to the underwriter. This is not an academic point, even from the customer’s point of view, as the experience of one of Mr. James’s customers, Mr. Stickwood, shows. He had a problem with a car bought from Sovereign Motors. He  took it back for repairs, but they failed to cure the defect so he took it to another garage. When he tried to claim on the warranty he was unable to do so because it had not been registered.
99.	This was another issue on which there was a considerable divergence of opinion between Mr. Williams and Mr. Vale. They did agree that any dishonesty on the part of Mr. James in dealing with the warranties was material and ought to have been disclosed, but beyond that they were unable to reach any agreement. Mr. Williams considered that there was incompetent financial management in the present case, as much on the part of the underwriters and MBIA as on the part of Mr. James, and laid some emphasis on the fact that the purchaser could claim under the warranty even if the premium had not been remitted to the underwriter. He considered that the way in which Mr. James dealt with the warranties would be regarded by a prudent underwriter in much the same way as his financial standing: it was not something which he would expect to be disclosed. Mr. Vale, on the other hand, considered that the manner in which Mr. James had dealt with the paperwork as well as the premiums showed that he was not accounting properly to the underwriter and this he regarded as essentially dishonest. As such he considered it to be relevant to moral hazard and therefore material.
100.	On this issue I prefer the evidence of Mr. Vale. Once one accepts that matters not directly relevant to the operation of the insured perils may be material because they have a bearing on moral hazard, any matters which a prudent underwriter would take into consideration when assessing the risk are material. The fact that both experts accept that dishonesty in the handling of the warranties would be material seems to me only to emphasise the point. Mere incompetence in the administration of the warranties would not in my view be material. What is more disturbing about the present case, however, is that Mr. James deliberately failed to process many of the warranties altogether, despite the fact that a representative from MBIA called from time to time to collect the paperwork and premiums. This had a number of consequences. It made it difficult for a customer to make an effective claim, even though he may have been entitled to do so, as the experience of Mr. Stickwood shows. It also meant that MBIA and the underwriters were prevented from keeping accurate records. Withholding premiums did not necessarily deprive them of money to which they were entitled, but it was impossible for a proper system of contra-accounting to be maintained if MBIA did not know how much was due in respect of premiums. It is  difficult to see how they could have known what had been earned if the documents were not returned. In my view it was material for insurers to know that Mr. James had not been accounting to MBIA for all warranties sold to customers. Mr. Moore said that he would not have accepted the renewal if he had been aware of these matters and I see no reason to doubt his evidence. 

The structure of the policy
101.	 The policy in the present case is described as a ‘combined’ policy, that is, it contains a number of different sections dealing with different types of risks which could have been the subject of separate policies but which have for convenience been combined into one policy. Mr. Brown submitted that each section is to be treated as an independent contract so that a failure to disclose facts which are material to the risks insured under one section does not entitle the insurers to avoid the cover provided under other sections. Mr. Williams and Mr. Vale supported that view, but, as they both acknowledged, this raises a question of the construction of the policy and as such is a matter for the court to decide.
102.	In his report Mr. Williams described the commercial background to the development of combined policies. They were devised as a means of providing businesses with a number of different types of cover in a convenient form. A single proposal form is used and a single policy document is issued, but each section of the cover is underwritten and rated separately and is subject to its own terms and conditions. In addition the policy usually incorporates a number of general terms and conditions which apply to all sections. Policies of this kind are convenient for the businessman because they enable him to select the particular kinds of cover he needs and to obtain them in a single policy. They also have advantages for insurers because they generate business which might not otherwise be placed with them and reduce administration and processing costs.  Mr. Williams considered that each section should be treated as a separate policy to prevent the insured from being placed at a disadvantage in the event of a breach of condition or non-disclosure in relation to one section which has no bearing on other sections. Mr. Vale did not disagree with the explanation of the commercial background given by Mr. Williams and agreed that the policy in the present case should be construed as a collection of separate insurances.
103.	The policy wording is printed in the form of a booklet. At the beginning are provisions which are clearly intended to apply to the contract as a whole: a general insuring provision, General Conditions, General Exceptions and Definitions. These are followed by separate sections dealing with specific types of cover, each of which contains what are described as ‘standard clauses’ and other clauses variously described as ‘special clauses’, ‘special conditions’, ‘definitions’ and ‘endorsements’ which apply to the cover provided by that section to the extent indicated by the schedule of insurance. The booklet is designed to be read in conjunction with a schedule which identifies those sections under which the insured is covered and the particular terms applicable in each case.
104.	Clause 1 of the General Conditions provides that the policy and the schedule are to be read together as one contract and it is clear from the nature and terms of these Conditions that they and the General Exceptions, are, with certain exceptions, intended to apply to the policy as a whole. In some of the clauses, however, a distinction is drawn between the policy as a whole and individual sections. For example, clause 16 of the General Conditions dealing with index-linking refers only to sections A and B and clause 17 dealing with long term agreements contemplates that such an agreement may be made in relation to some sections and not others. It cannot be said, therefore, that when the draftsman of the General Conditions used the word “policy” he intended to refer to individual sections. Similarly, in clause 3 of the General Conditions there is provision for avoidance of part of the policy where there has been an alteration in the scope of cover. This tends to reinforce the conclusion that when the draftsman used the word “policy” without qualification he intended to refer to the policy as a whole.
105.	This point is of particular importance in the present case because of clause 2 of the General Conditions which reads as follows 
“2  Policy Voidable
This Policy shall be voidable in the event of mis-representation misdescription or non-disclosure in any material particular.”
If Mr. Brown’s submission were correct, each section of the policy would fall to be treated as a separate contract for the purposes of disclosure so that a failure to make full disclosure in respect of one section would not render the contract voidable in relation to others. Whether or not the commercial background as described by Mr. Williams might otherwise have pointed to that conclusion, it is impossible in my view to construe the present policy in that way in the face of this provision. Nor is there anything in the schedule that would lead to the contrary conclusion.
106.	I am grateful to Mr. Brown for drawing to my attention the case of Printpak v AGF Insurance Ltd. [1999]  Lloyd’s Rep. I.R. 542. That case concerned a policy of a very similar kind, although the term in issue in that case was a warranty. The Court of Appeal upheld the judge’s conclusion that the policy was a single contract but that the warranty in question was intended only to apply to the section into which it had been incorporated. The fact that the policy was a single contract did not prevent the parties from agreeing that the application of the warranty was limited and that a breach of it did not therefore invalidate the cover provided under other sections. This decision tends to support the conclusion that a combined policy of the present kind is a single contract but that individual sections may be treated as separate contracts if the parties so choose. Whether they have so chosen depends on the terms of the policy. In the present case clause 2 of the General Conditions makes the position clear: the insurers are entitled to avoid the policy as a whole if there has been a material non-disclosure in relation to any one section. Since, as I have held, there was a failure on the part of Mr. James to disclose a number of material matters which, had they been disclosed, would have led Mr. Moore to decline to renew the policy on the same terms, the insurers are entitled to avoid the policy as a whole.
107.	However, even if it were possible to treat individual sections as separate contracts for the purposes of non-disclosure, that would not assist Mr. James in the present case. No doubt some of the matters which he failed to disclose were relevant to only one section of the policy, but others, in particular the financial matters and the mishandling of the breakdown warranties, were relevant to the policy as a whole. They were relevant to the moral hazard and, had they been disclosed, Mr. Moore would not have written the renewal on the same terms, if at all. In these circumstances it would not have been possible to restrict the insurers’ right to avoid to certain sections and not others.
108.	For these reasons I am satisfied that the insurers are entitled to avoid the policy for non-disclosure and that this claim must fail.