How long does a misrepresentation affect the risk? Court of Appeal draws the line at first renewal 

Limit No2 Ltd v Axa Versicherung AG [2008] All ER (D) 115

It is established law that each renewal of an insurance or reinsurance contract is a new contract. Whilst the principle in itself causes no difficulties, this case illustrates how its application in practice can lead to peculiar results. The Court of Appeal ("CA") had to consider whether a misrepresentation made prior to inception was still operative at renewal. By contrast to the first instance judge, the CA took the view that the misrepresentation had elapsed prior to renewal, partly on the basis that it was a representation of intention, which is bound to be "a somewhat elusive [concept] because a person's intentions are always subject to change". This led to the CA finding that the original reinsurance could be avoided, but not its renewal.

Background

The dispute concerned two facultative obligatory reinsurance treaties provided by the German reinsurer Albingia (taken over by the Axa group) (the "Reinsurer") to a number of Lloyd's syndicates (the "Reinsured"). The treaties covered construction and operating risks in connection with oil rigs. The placement was procured by the brokers Newman Martin and Buchan Ltd ("NMB").

Information provided by NMB to the Reinsurer prior to placement included a cover fax with the following statement: "As a matter of principle [the Reinsured] maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000." The treaties themselves contained no clause imposing those deductibles on the ceded risks. The initial 12 months treaty, which incepted on 1st July 1996 was extended by endorsement to a further 7 months to 31 January 1998 (the "Reinsurance"). It was renewed for another 12 months to 31 January 1999 (the "Renewal").

The treaties turned out badly for the Reinsurer, who required an inspection of the relevant records, and discovered that most of the cede risks had deductibles well below £500,000. The Reinsurer sought to avoid both the Reinsurance and Renewal on grounds of misrepresentation.

Decision

Reinsurers are entitled to avoid a contract of reinsurance if a material representation of fact made prior to inception was untrue (section 20 of the Marine Insurance Act 1906 ("MIA")). The CA took the view that the statement on the cover fax was a representation of the Reinsured' intentions, but not necessarily their "practice" as at July 1996. This distinction was key, as the Reinsured argued it was indeed their practice not to write risks without the stated deductibles up to July 1996. Prevailing market conditions, however, prevented them from continuing to insist on such deductibles thereafter. The CA concluded that it was not the Reinsured' intention to continue asking for the stated deductibles, and thus the statement made by NMB was untrue.

The CA also rejected the contention that the cover fax only contained a statement of opinion or expectation. This was an important distinction, given that a misrepresentation as to a belief or expectation made in good faith is not actionable (section 20(5) of the MIA). Instead, the CA took the view that a statement of intention is a representation of existing fact. Since under English law brokers act as agents of the reinsured, the statement had to be attributed to the Reinsured. It was not simply a statement by the brokers on how they expected the Reinsured to behave, but a misrepresentation made by the Reinsured themselves about their intention.

Based on those findings, the CA could only conclude that the Reinsurer was entitled to avoid the initial Reinsurance. The Reinsured argued the endorsement to extend the initial treaty by 7 months was a separate contract. The CA disagreed, as the endorsement was clearly aimed to amend the Reinsurance by extending its term, even though the CA accepted that a new obligations of good faith did arise when the endorsement was signed.

The situation, however, was different for the Renewal. This was a separate contract, and the issue therefore was whether the representation could be said to have continued to renewal time. The CA felt that allowing a representation of intention to remain operative for 19 months would give it too much weight, particularly given that a person's intention are subject to change, and market conditions cannot be expected to remain stable over a long period of time. The CA also rejected the argument that the Reinsured should have disclosed the fact that their intention had changed, saying this was simply the same argument in a different form. The CA pointed out, however, that it had not been addressed on the issue whether the level of deductible (as opposed to the change of intention) was a material information that should have been disclosed. This is regrettable, as this would have been an interesting point to explore in the context of reinsurance. In the end, the CA concluded there had been no misrepresentation and the Renewal could not be avoided.

Comments

In its judgment, the CA noted "It must also be remembered how powerful the remedy of avoidance is in the hands of an insurer or reinsurer. The entirety of a contract can be avoided for a wholly innocent misrepresentation provided it is material to the risk in the eye of a prudent underwriter. If the contract is for 12 months (or, as here, 19 months) that is a very stark remedy." Comments such as these are not insignificant at a time when the Law Commission is considering changes to the law on disclosure.

The judgment also points out how "unfortunate" it was that the Reinsured had no idea the broker had added the deceptive cover fax to the presentation of the risk. Therefore, whilst the decision is wholly justified on legal grounds, it seems the CA was also seeking to avoid injustice for the Reinsured by denying them coverage for a mistake that was not their own (although in the case of the Reinsurance this outcome could not be avoided).