AXA Versicherung AG v Arab Insurance Group (BSC)  EWCA Civ 96
In AXA Versicherung AG v Arab Insurance Group (BSC)  EWCA Civ 96, the Court of Appeal considered an appeal by a claimant reinsurer that it had been 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. The decision of Christopher Clarke LJ (with whom Lewison LJ and Arden LJ agreed) is considered by Tom Asquith and Katherine Del Mar of 4 New Square. An analysis of Males J’s first instance decision can be found here.
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) for risks attaching from July 1997 to June 1998.
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.
THE DECISION AT FIRST INSTANCE
Males J gave judgment for the defendant. In summary (and expanded on in the fuller analysis of the first instance decision found here):
- The claim of misrepresentation failed.
- As to the claim of non-disclosure, Males J 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.
- The defendant’s case on waiver failed.
- As to inducement, 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.
- 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.
THE APPEAL TO THE COURT OF APPEAL
The first ground of appeal was that the judge had applied the wrong test by deciding what could have been said if the 1989-95 statistics had been produced, rather than what would have happened.
The Court of Appeal rejected this ground because, as the judge clarified when refusing permission to appeal, he had applied the test of “would” rather than “could”. He was entitled to clarify his intended meaning, even after the order had been drawn up.
Nevertheless, Christopher Clarke LJ took the opportunity to restate the relevance of modal verbs in this context:
- As to what constituted a fair presentation, the question was what should (objectively) have been said by an insured.
- In considering whether the unfair presentation induced the underwriter to write the risk, the court may have to consider, in the hypothetical situation that there had been a fair presentation, what an insured or broker would (subjectively) have said (further to what should have been said) in order to encourage the insurer to write the risk. It is irrelevant that the broker could have said something in this context if in fact he would not have done so.
- Thirdly, the Court may also need to examine what considerations would (subjectively) have played a part in the mind of underwriters, since what mattered to them would likely affect their response to a presentation.
The second ground of appeal was that there was no proper basis for the judge’s hypothetical broke and (separately) that the judge’s findings on inducement were erroneous. It was also contended that the judge’s finding was a product of procedural unfairness because the hypothetical broke was not pleaded, evidenced or part of Arig’s case.
The Court of Appeal also rejected the second ground of appeal. The judge had been entitled to reach the conclusions he had on the evidence before him and he was not precluded from doing so because of the way Arig had conducted its case. The reasoning is detailed and fact specific. Of more general application, Christopher Clarke J stated the following principles applicable to what needed to be pleaded or put in evidence in inducement cases:
- Usually the insurer/reinsurer will plead material non-disclosure; that he was induced to enter into the insurance as a result; and that he has validly avoided it. The insured will not admit the inducement.
- The burden of proof is on the insurer/reinsurer to prove inducement. That will be determined by reference to what a fair presentation would require (objectively) to be disclosed (which may be more than the non-disclosure complained of by the insurer/reinsurer). The question is what a reasonably prudent underwriter would think needed to be disclosed in order to give a fair presentation of the risk.
- Further, matters which the insured or his broker would have raised (subjectively) with the insurer as reasons for writing the business need also to be considered. In this regard, there is at least an evidential burden on the insured to show that these matters would probably have been raised on the hypothetical broke.
- It is undesirable for an insurer/reinsurer to face at trial, without prior notice in a pleading or witness statement, what the insured says, in the alternative, would have been the content of a fair presentation or would have been raised by the insured or his broker in a hypothetical broke.
This case provides helpful guidance in relation to the test of inducement and how to prepare and respond to an inducement case in terms of both pleading and evidence. When considering a hypothetical placement, it is important for the parties to consider holistically what a fair presentation should have been (and not confine themselves merely to the alleged non-disclosure) and to consider what else would have in fact been presented as part of that fair presentation (irrespective of whether it would have been required as part of a fair presentation). Their cases should be set out clearly prior to trial, so that questions of procedural unfairness do not arise.