Limit No. 2 Limited v AXA Versicherung AG
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In July 1996, the claimant was seeking reinsurance cover for construction and operating risks relating to oil rigs.
During the negotiations, the claimant's broker faxed a bundle of documents to reinsurers to which he added a fax cover sheet which stated:
"As a matter of principle they maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000."
Reinsurers accepted the risk and the result was a facultative/obligatory ("fac/oblig") treaty which originally ran for 12 months from 1st July 1996. This was extended by an endorsement for 7 months to 31st January 1998, when the treaty was renewed for a further year.
Under a fac/oblig treaty, the reinsured can choose what risks to pass on to the reinsurer (provided they fall within the scope of the treaty), but the reinsurer has no choice but to accept them.
Things did not go well. In 2005, reinsurers inspected the reinsured's records and found that most of the relevant risks ceded to them had deductibles much lower than £500,000.
The treaties themselves did not specify any particular deductible. Reinsurers, however, sought to avoid on the grounds that the broker's statement represented (wrongly) that it was the reinsured's practice to write risks with the stated deductibles and that it intended to continue to do so in the future. At the very least, the deductibles were an indication of future underwriting practice.
In fact, the evidence showed that in July 1996 the reinsured had no intention to maintain deductibles at these levels and had never said it had. In the prevailing market conditions, such deductibles could not have been achieved in any event.
For a representation to have legal effect, it must be a representation of existing fact, not of future fact or opinion. In insurance law, a representation as to expectation or belief is true if made in good faith. There was no suggestion of any bad faith in this case.
The issue boiled down to what had actually been represented and for how long that representation was effective.
The High Court deputy judge found that the statement was a statement of the reinsured's current policy. This was a material misrepresentation of fact that had induced reinsurers to write the business on the terms they did. Reinsurers were entitled to avoid the initial treaty and the endorsement that extended it for seven months.
He also found that the representation made in July 1996 continued to be effective when the treaty was renewed in February 1998, so the second treaty could also be avoided. The reinsured appealed.
Court of Appeal judgment
The Court of Appeal unanimously agreed that reinsurers were entitled to avoid the first treaty and the endorsement that extended it for seven months.
The fax cover sheet represented that the reinsured intended to write construction business with those deductibles. This was a statement of fact, not merely a statement of opinion, belief or expectation. Unfortunately for the reinsured, although the statement originated with the broker, any representation made by a broker will be attributed in law to his client.
The representation still applied when the original treaty was extended because the endorsement merely amended the original contract. It was not a brand new contract giving rise to a fresh duty of utmost good faith. The duty to disclose and not misrepresent material facts at that point was limited to facts relevant to the extension.
Reinsurers were not, however, entitled to avoid the second treaty. The 1998 renewal was clearly a new contract, bringing with it new obligations of good faith. The statement of intention made in 1996 no longer applied.
Lord Justice Longmore commented: "A representation of intention cannot last forever; it only relates to the time when it is made; there must come a time when it is spent and, to my mind, that is well before the passage of 19 months." Whatever the reinsured's intention as to deductibles was in July 1996, it had become irrelevant by February 1998.
Statements of intention can be tricky things. Intentions can easily change. This judgment is a reminder that such representations should be made with care. But it confirms that a representation made in relation to one contract will not, without more, apply to the new contract created on renewal.
Lord Justice Longmore called attention to the "very stark remedy" of avoidance that insurance law currently applies to all material misrepresentations, even when they are made innocently or inadvertently. "I do not, for my part, consider that a court should struggle to hold that everything said at inception is impliedly repeated on renewal."
Should the syndicates have disclosed that their intention had changed? Lord Justice Longmore thought this merely put forward the same argument in a different form. He said it might be different if it had been shown that reinsureds are under a general duty to disclose the level of deductible they intend to write. But it was not suggested that any such general duty exists.