"As a matter of principle they [the Syndicates] maintain high standards and would not normally write construction risks unless the original deductible were at least £500,000 and preferably £1,000,000."

Albingia subsequently wrote the treaty, which was then extended by endorsement to 31 January 1998 and then renewed for a further 12 month period. Albingia became unhappy with the results of the treaty and the accounting by Syndicates and conducted an inspection in January 2005. In the course of the investigation Albingia became aware that the Syndicates typical deductibles were in the range of £100,000 to £200,000. Albingia sought to avoid the treaties for misrepresentation and non-disclosure of material facts.

1996 Treaty

(1) Representation: Mr Hirst QC found that the purpose of the brokers’ statement was to reassure Albingia and that a reinsurer considering the fax would be bound to take the statement seriously, and not as mere flannel. Mr Hirst QC did not accept that the sentence could be read as a statement of past practice or a statement of the broker’s opinion and found that it was a statement of current policy by the Syndicates which professed to maintain high standards.

(2) Falsity: The court heard evidence that it was not the Syndicates normal policy to write construction risks unless the original deductible was at least £500,000 and preferably at least £1,000,000 as the prevailing market conditions meant that this could not be achieved. Mr Hirst QC found that the fax cover sheet misrepresented the Syndicates’ policy as regard to deductibles.

(3) Materiality: As the treaty was a first loss fac/oblig treaty, the level of deductibles was highly material to a prudent reinsurer as the smaller the deductible, the more exposed the reinsurer would be to attritional losses.

(4) Inducement: The Court heard evidence on the importance of the high deductible to Albingia and held that "the representation was a real and substantial cause of Albingia underwriting the business on terms it would not have accepted if it had been appraised of the truth." Accordingly Albingia were entitled to avoid the treaty.

1997 Endorsement

Mr Hirst QC held that the endorsement depended on and formed part of the 1996 treaty and could not survive its avoidance. The effect of the endorsement was to replace the original 12 month period with a 19 month period. It was not a separate contract, rather it amended the original contract. By avoiding the 1996 treaty, the 1997 endorsement was also avoided.

1998 Treaty

Mr Hirst QC accepted expert opinion that when considering a renewal, a competent and conscientious underwriter would review the underwriting file including previous placing information. On the facts there was nothing in the material supplied in 1997 or 1998 that suggested that the Syndicates’ policy had changed and was wholly consistent with the Syndicates maintaining their high standards and deductibles policy.

Mr Hirst QC did not accept that the representation made about the Syndicates’ practice in 1996 had ceased to be material, or that the need to correct it had passed and found that the continuing representation and non-disclosure induced Albingia to write the 1998 treaty. Additionally, there was a sharp deterioration in the account which was not disclosed and was held to be material. This should have been disclosed and Albingia was found to have been induced to enter 1998 treaty by the non-disclosure.

Accordingly, Albingia was entitled to avoid the 1998 treaty for misrepresentation and non-disclosure of the change in deductibles and non-disclosure of the deterioration in the claims position.

The judgment also included Mr Hirst QC's brief ruling on cession issues raised under the treaties which ultimately were irrelevant as they depended on the treaties being valid.

Comment

This is an important Commercial Court decision as it clarifies that even statements made in a covering fax on placement can be material to the underwriter's decision as to whether to accept the risk. In this instance the fact that the statement about deductibles was made by the broker, rather than the proposer, did not save the reinsurance contract. This judgment again shows the importance of knowing what your broker says about the risk prior to placement.