UK: Limit No. 2 Ltd V AXA Versicherung Ag. [2008] EWCA Civ. 1231 - Court Of Appeal Decision On Misrepresentation By Broker In Reinsurance Case

This case involved Lloyd's Syndicates who were reinsured by the predecessor to AXA under first loss reinsurance contracts relating to construction and operating risks in connection with oil rigs. As the reinsurance was facultative / obligatory, the Syndicates had the option of whether or not to cede the risk to the reinsurance, whilst the cessions remained obligatory for the reinsurer.

The first treaty was for 12 months from 1^st July 1996. It was subsequently extended by endorsement for a further 7 months to 31^st January 1998. The second treaty was written for 12 months thereafter up to 31^st January 1999.

The Syndicates' brokers sent the reinsurance placing information by fax to reinsurers on 4^th July 1996 and in the covering sheet stated that as a matter of principle, the Syndicates "maintain high standards and would not normally write construction risks unless the original deductibles were at least £500,000 and preferably £1,000,000".

Reinsurers suffered heavy losses on these treaties and in 2005, they appointed a representative to inspect the Syndicates' records. It turned out that most of the relevant risks ceded by the Syndicates had deductibles considerably lower than stated in the brokers' fax. Consequently, the reinsurers sought to avoid the treaties on the grounds of misrepresentation.

First instance decision

The common law rule of misrepresentation is that to have legal effect, it must be a representation of existing fact not of future fact or opinion. As regards insurance law, no representation as to expectation or belief is actionable if it is made in good faith - see section 20(5) Marine Insurance Act 1906, which states that "a representation as to a matter of expectation and belief is true if it be made in good faith".

At first instance, the Commercial Court judge held that the brokers' statement in their fax of 4^th July 1996 was a statement of the Syndicates' policy regarding deductibles as at 4^th July 1996 and that it was incorrect. Accordingly, there was a misrepresentation and that misrepresentation was material and had induced the 1996 treaty. Consequently, that treaty could be avoided. The endorsement extending the treaty could also be avoided as the representation continued to be effective as at July 1997. The second treaty could also be avoided as the representation continued to be effective as at 1^st February 1998. Whilst the Syndicates had acted in good faith in that their underwriter had not seen the brokers' fax cover sheet with its reference to deductibles, this did not matter as the brokers were held to be the Syndicates' agents.

Appeal decision

The Court of Appeal has upheld the first instance decision insofar as the 1996 treaty and its endorsement are concerned. However, it has set aside the deputy judge's decision so far as the 1998 treaty is concerned. Their reasoning was as follows.

Statement of opinion or expectation?

On the evidence given at trial, the court concluded that the reinsured underwriter did not at July 1996 intend that his future writing would be on terms that there would be deductibles of at least £500,000. The reinsured Syndicates had no policy or intention normally to write construction risks with the stated deductibles.

However, this is what brokers said in the fax of 4^th July 1996. The representation in the brokers' fax cover sheet was a statement of existing fact. It was not a statement of opinion or belief or expectation. It was irrelevant that the brokers might not have had personal knowledge of the underwriter's intent because the brokers were the Syndicates' agents in presenting the risk. The statement was thereby attributed to the Syndicates and they could not disavow it.

1997 Endorsement – amendment or new contract?

This was held to be an amendment not a new contract. Therefore, the contract as amended was voidable for misrepresentation.

The 1998 renewal

This was a new contract involving new obligations of good faith. There were two issues: firstly, did brokers' representation of 4^th July 1996 continue to be effective in 1998; secondly, were the Syndicates obliged to disclose that their policy or intention as to deductibles had changed?

Lord Justice Longmore, who gave the leading judgment in the Court of Appeal, said that a representation of intention was an artificial and elusive one because a person's intentions are always subject to change. A statement of intention would be intended to be operative when the risk began and would continue up to that time but it did not follow that it would be operative on renewal. His view was that it would put too much weight on a representation of intention relating to deductibles to say that it must be taken to be still operative after 19 months. He referred to the dictum of Ferrris J in "WPP Group Plc v Reichmann" (unreported, 23^rd August 2000) who said, inter alia, that

The Court of Appeal judge rejected the reinsurers' argument that the Syndicates should have disclosed that their intention had changed because their case had always been put on the basis of a misrepresentation of intention or non-disclosure of a change of intention rather than on any general duty to disclose the level of deductibles.

Interestingly, Lord Justice Longmore drew attention to "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 eyes of a prudent underwriter". For his part, therefore, he did not think a court should struggle to hold that everything said at inception was to be impliedly repeated on renewal.

Consequently, therefore, the judge held that the Syndicates' representation of their intention was not a continuing one and accordingly that the 1998 cover could not be avoided for misrepresentation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.