The Test for Inducement in Contracts Prior to the Insurance Act 2015: Zurich Insurance PLC v Niramax Group Limited  EWCA Civ 590
In Zurich Insurance PLC v Niramax Group Limited, dealing with a contract…
In AXA Versicherung AG v Arab Insurance Group (BSC)  EWHC 1939 (Comm), the main issue which Males J had to determine was whether the claimant reinsurer was entitled to avoid two reinsurance treaties entered into with the defendant reinsured, and to recover the sum of about US$5.15 million paid under those treaties, for innocent non-disclosure or misrepresentation as to the existence of loss statistics relating to the defendant’s book of inwards marine energy construction risks. Males J’s decision is considered by Tom Asquith and Katherine Del Mar of 4 New Square.
The two treaties in question had been entered into by the claimant’s predecessor (P). The first treaty (1996 treaty) was a “first loss treaty”, covering the first US$500,000 of losses for any one accident or occurrence on the defendant’s book of inwards marine energy construction risks attaching from January 1996 to June 1997. On placement, the reinsured had stated that “This is a new Treaty for the Reassured and as such does not have a corresponding loss record”.
The second treaty was the 1997 renewal of the 1996 treaty (1997 treaty).
The claimant sought to avoid the 1996 treaty ab initio for non-disclosure of loss statistics relating to the defendant’s book of inwards marine energy construction risks written from 1989 to 1995, alternatively for misrepresentation on the basis that the statement made on placement constituted a representation to the effect that the defendant had no loss statistics for energy construction risks of the kind that would be declared to the 1996 treaty. It contended that the level of past losses was such that, had it been disclosed, P would not have written the treaty.
The claimant sought to avoid the 1997 treaty on the same grounds and, in addition, for non-disclosure of three incidents which either had resulted, or were likely to result, in claims under the 1996 treaty. It contended that the first of these incidents was material in its own right, and therefore ought to have been disclosed, as was the cumulative effect of all three incidents together. The claimant further argued that by reason of the first incident, the defendant had made a misrepresentation about the claims made under the 1996 treaty, which entitled the claimant to avoid the 1997 treaty.
The defendant argued that (1) no misrepresentation was made as to the non-existence of loss statistics – the statement made on placement meant no more than because the treaty was a new treaty (in contrast to the renewal of an existing treaty) the defendant had no records of losses incurred under the treaty in the previous years; (2) disclosure of its historic loss statistics would not have influenced the judgment of a prudent underwriter considering whether to write the 1996 or 1997 treaties, because energy construction risks were unique, and because in mid-1991 there had been a change of underwriter at P and the new underwriter adopted a much more rigorous approach to the selection of risks; (3) the disclosure of its past losses had been waived because P had failed to ask for them.; (4) the claimant had failed to prove that any non-disclosure or misrepresentation induced P’s underwriter to write the treaties in question; (5) as to the 1997 renewal, the three incidents separately or together were not material and the claimant had failed to prove its case on inducement.
Males J gave judgment for the defendant.
The claim of misrepresentation failed. Males J preferred the defendant’s case, reasoning that the claimant’s interpretation of the statement ignored the effect of the words “as such”.
As to the claim of non-disclosure, Males J noted that past loss statistics relating to insurance written by a proposed reinsured will generally be material as affecting the judgment of a prudent reinsurer deciding whether to accept the offered risks, or upon what terms to do so, and must therefore be disclosed. As to the length of time to which past loss records should extend, the judge held that the principle must be that the disclosure must be sufficient to constitute a fair presentation of the risk. In the present case, the defendant did not disclose any past loss records. It thus fell to be determined whether the presentation of the risk without any such disclosure was unfair.
Males J was not persuaded by the defendant’s suggestion that the disclosure of its historic loss statistics in the instant case would not have influenced the judgment of a prudent underwriter considering whether to write the 1996 or 1997 treaties: he had no doubt that past loss records of a prospective reinsured would influence the judgment of a prudent reinsurer in fixing the premium, or determining whether he will take the risk, and that this would be (a) in the case of reinsurance of energy construction risks and (b) notwithstanding a change in underwriter and/or underwriting strategy on the part of the reinsured. He concluded that the defendant’s past loss records were material, and therefore that there was a failure to disclose a material circumstance known to the assured.
Males J held that the defendant’s case on waiver failed. The defendant’s case was premised upon a finding that P knew or ought to have known that past loss records existed, and therefore ought to have asked for them if it wanted to see them before deciding whether to write the treaty. Males J accepted that if P had known that the defendant had been writing energy construction risks on any scale, it ought to have known that there would be losses (given the hazardous nature of the projects). However, he did not accept that P knew or had reason to know that the defendant had written such risks. It could not be said, therefore, that P should have known about past loss records.
The final issue in relation to the avoidance of the 1996 treaty was the issue of inducement: whether the claimant had discharged the burden of proving that if there had been a fair presentation of the risk, P would not have written the treaty or would have done so on different terms. On the evidence before him, Males J was not persuaded that it was more likely than not that P would have refused to write the treaty, or would have done so on different terms. P had an existing relationship with the defendant through a quota share reinsurance treaty on which it had offered to write a 35% line. That showed a willingness to follow the fortunes of the defendant’s energy underwriting. Also P was not told and never asked about the level of deductibles in the original insurance policies written by the defendant. There was also a cash flow benefit to P because the defendant had already written a number of risks which were to be ceded to the treaty, thus providing immediate premium. The judge therefore concluded that the claimant’s case for avoidance of the 1996 treaty must fail. On the basis that the claimant was not entitled to avoid the 1996 treaty by reason of the defendant’s failure to disclose its past loss statistics, it was not entitled to avoid the 1997 treaty on this ground either.
Males J further held that the claimant was not entitled to avoid the 1997 treaty for non-disclosure of the three incidents individually or cumulatively.
The claimant’s claim for recovery of a payment made under a mistake therefore failed. The defendant’s counterclaim in respect of claims made under the treaties succeeded in an amount to be determined if not agreed.
This case provides an example of material non-disclosure and misrepresentation arguments arising in the reinsurance context. Such arguments in future cases will have to adapt to the new legal terrain created by the entry into force of the Insurance Act 2015. The Act provides a range of proportionate remedies for breaches of a new duty to give a “fair presentation of the risk”, replacing the current remedy of avoidance ab initio. Under the Act, avoidance will still be available, but only where the (re)insurer can demonstrate that the material non-disclosure was “deliberate” or “reckless”, or where the (re)insurer can show that it would never have underwritten the risk had it been aware of an innocent, material non-disclosed or misrepresented fact. Furthermore, under the Act, the (re)insurer has – in addition to the argument that it would never have underwritten the risk – new remedies at its disposal; it can also argue that it would have charged a higher premium (which may lead to a proportionately lower sum being paid), and/or included different terms in the contract (which may lead to cover being excluded).
Editorial Note: on 28 February 2017 the Court of Appeal dismissed Axa’s appeal against the decision of Males J. The Court of Appeal’s decision is considered here.
In Zurich Insurance PLC v Niramax Group Limited, dealing with a contract…
In Niramax Group Limited v Zurich Insurance Plc  EWHC 535 (Comm)…