HIH CASUALTY & GENERAL INSURANCE LTD v NEW HAMPSHIRE INSURANCE CO INDEPENDENT INSURANCE CO LTD

A term in insurance or reinsurance is a warranty where, on its construction, it goes to the root of the transaction, bears materially on the risk, and damages would be an inadequate remedy. A term requiring completion of a slate of films, and a term requiring reinsurers’ consent to material amendments of the underlying policy, met that description.

An anti-avoidance clause excluding defences based on non-disclosure or misrepresentation can extend to innocent and negligent conduct, including a claim under section 2(1) of the Misrepresentation Act 1967. Clear language is required. Such a clause does not ordinarily waive fraud, breach of warranty, or lack of cover.

General incorporation in facultative reinsurance may incorporate a germane clause in its unmanipulated form. It cannot be manipulated to waive a reinsurer’s separate defences against the reinsured.

HIH provided pecuniary-loss insurance supporting finance for two slates of made-for-television films. Axa, Independent and New Hampshire reinsured substantial proportions of HIH’s risk. After HIH paid claims exceeding US$31 million, it sought indemnity from the reinsurers.

On assumed facts, the reinsurers relied on alleged non-disclosure, misrepresentation, reduction in the number of films, and amendments to the original insurance. The Commercial Court determined preliminary issues concerning warranties, clause 8 of the policy wording, and its incorporation and effect in the reinsurance.

HIH appealed and the reinsurers cross-appealed. The central issues were the scope of clause 8, whether it was incorporated into the reinsurance, and whether the relevant film-completion and amendment terms were warranties.

1. The appeals and cross-appeals were dismissed save in the limited respects identified by Rix LJ. Rix LJ gave the leading judgment, with which Mummery and Peter Gibson LJJ agreed.

2. The requirements that the specified number of films be made were terms of both the underlying insurance and the reinsurance. They were warranties. The terms were fundamental to a film-finance risk based on the revenues of the whole slate. They bore directly on the risk of loss, and damages could not adequately measure the contribution of an omitted film.

3. The requirement that HIH obtain reinsurers’ agreement to material amendments of the original policy was also a warranty. It concerned the substance of the risk transferred, rather than the administration of claims. The result accorded with the common-law protection against a material variation of the head policy without a reinsurer’s consent.

4. Clause 8 waived defences based on non-disclosure and misrepresentation, whether innocent or negligent. It also excluded claims for damages arising from misrepresentation, including under section 2(1) of the Misrepresentation Act 1967, and set-off or counterclaim rights. It did not waive fraud, breach of warranty, or a defence that the claim fell outside the contractual cover. A warranty defines the continuing scope of cover; breach automatically discharges the insurer from liability from the date of breach.

5. The reference to a “Cancellation Clause” did not specifically incorporate clause 8. Clause 8 could, however, be incorporated by the general provision making the reinsurance subject to the original terms, subject to unresolved issues of notice, agreement and fair presentation. It was incorporated only in its unmanipulated form. It could not sensibly be rewritten to substitute reinsurer for insurer, since the resulting language concerning arrangements with Flashpoint would not work and would waive independent reinsurance defences.

6. When incorporated, clause 8 bound reinsurers where the relevant non-disclosure or misrepresentation was the same at the original-insurance and reinsurance levels. It did not waive a defence based on a separate and personal defect in HIH’s presentation of the reinsurance.

• Court of Appeal (Civil Division): HIH’s appeal and the reinsurers’ cross-appeals were dismissed except as to the limited qualifications identified by Rix LJ concerning specific incorporation, manipulation, notice and the effect of clause 8.
• Commercial Court: David Steel J determined preliminary issues concerning warranties and clause 8 in favour of the reinsurers on some issues and HIH on others. The Court of Appeal substantially upheld those answers but varied them in the limited respects stated.