Reinsurance E-Alert

Premium Warranties and Section 53 of the Marine Insurance Act 1906: the end of the legal fiction

Allianz Insurance Company Egypt v Aigaion Insurance Company SA [2008] EWCH 1127 (Comm)

In a recent decision the Commercial Court considered the application of section 53(1) of the Marine Insurance Act 1906 (the “MIA”) and, more importantly, the antiquated legal fiction the section was meant to enshrine.

Section 53(1) of the MIA provides: “Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insured for the premium.” It was argued this section aimed to codify the common law assumption that the broker is deemed to have been paid the premium by the insured, and to have forwarded it to the insurer, who then loans it back to the broker.

Whether the legal fiction is of any relevance to the interpretation of section 53 becomes critical when one has to consider premium warranties. Under such warranties, failure to make timely payments of the premium discharges insurers from liability. However if, as per the legal fiction, such payment is deemed to have occurred through the broker, premium warranties are bound to become ineffective.

Background

Allianz Insurance Company Egypt (“Allianz”) had sought to obtain reinsurance (the “Reinsurance”) from Aigaion Insurance Company S.A. (Aigaion) through a broker, Chedid & Associates Ltd (“Chedid”). When a loss potentially covered by the reinsurance materialised, Aigaion declined to pay and argued, inter alia, that the reinsurance had automatically terminated because of failure by Allianz to pay premium instalments timely. Aigaion’s stance was based on the assumption that a premium warranty requiring monthly instalments with full payment within two months of inception was incorporated into the reinsurance (the “Warranty”). In fact, premium instalments had been sent by Allianz to Chedid, but Chedid had failed to forward them to Aigaion because it believed premium payments were to be paid quarterly, with the first instalment due only 45 days after inception.

On the facts, the Court found that the Reinsurance did not incorporate the Warranty. This was because the Reinsurance had been entered into prior to Aigaion supplying the Warranty wording, and the Reinsurance already contained a clause governing premium payments (which provided for “deferred premium”). In the circumstances, there was no automatic discharge for Aigaion, and thus Aigaion should have sent a cancellation notice to Allianz to terminate the Reinsurance, which they had not done.

These findings were sufficient to determine the issues put before the Court. However, the Court decided to address arguments put forward concerning section 53(1) of the MIA.

Section 53(1) of the MIA

Allianz argued that if the Reinsurance did incorporate the Warranty, it was ineffective because of the combining features of section 53(1) and the legal fiction as set out above. Allianz contended that because the broker was deemed to have paid the premium under the fiction, the reinsured was necessarily discharged of its duty to pay the premium to the reinsurer.

The Court disagreed that the legal fiction was of any relevance to the interpretation of section 53(1). It held the statutory provision only aimed to allow the insurer /reinsurer to seek payment of the premium from the broker, and no further inference could or should be drawn from the wording of the section. In the Judge’s own words: “I cannot imagine that an intelligent member of Lloyd’s marine insurance market looking at the [MIA] could have been expected to read the fiction into the section with the consequence that, not only could an insurer obtain the premium from the broker but, without more, no policy could ever be treated as invalid for non-payment of the premium because the assured was always to be treated as having paid it.”

Comments

It is reassuring to see a Court take the common sense approach by refusing to apply an archaic legal fiction to today’s market practices. The decision also clarifies the position when section 53(1) applies to a reinsurance containing a premium warranty. The section only allows insurers to look to the broker for payment of the premium, but no more. In the absence of “deemed” payments from the broker, a premium warranty should operate as intended i.e. failure to comply automatically discharges insurers from liability.