Facts
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.
Commentary
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.
