Toomey v Banco Vitalicio De Espana SA De Seguros Y Reaseguros

A full reinsurance clause ordinarily makes the reinsurance back-to-back with the underlying insurance. It incorporates the relevant terms governing the scope of cover and requires the reinsurer to follow properly made settlements. It does not ordinarily create a separate warranty that the underlying terms were disclosed to the reinsurer.

A material description of the insured interest in a reinsurance slip may itself be a contractual term and warranty. Whether it is a warranty depends on its importance to the risk, its bearing on the risk of loss and the adequacy of damages. A misrepresentation induces a contract where the underwriter would not have subscribed on the same terms without it.

The claimant represented reinsurers who had subscribed to facultative reinsurance of insurance written by the defendant in respect of losses connected with Atlético Madrid’s possible relegation from the Spanish first division.

The underlying policy insured Atlético’s economic loss connected with television rights, but described the amount payable on relegation as an agreed value of 2.9 billion pesetas and provided for payment to Audiovisual Sport. The reinsurance slip described the interest as Atlético’s net ascertained loss, subject to a limit of 2.9 billion pesetas.

After Atlético was relegated, the defendant settled the underlying claim. The reinsurers sought a declaration that they were not liable, alleging misrepresentation and breach of warranty. The defendant counterclaimed for declarations and payment. The central issues were the construction of the underlying policy, the effect of the full reinsurance clause, and whether the description on the slip was a material representation or warranty.

1. Construction of the underlying policy. Under Spanish law the policy was a valued policy. Its wording expressly fixed the amount payable on relegation at 2.9 billion pesetas. The court accepted that the policy wording was sufficiently clear that article 1282 of the Spanish Civil Code did not permit subsequent conduct to displace it. The acts of the parties were relevant to identifying the insured, however, because the policy was less clear on that issue. Atlético, rather than Audiovisual, was the insured; Audiovisual was the intended recipient of the insurance money.
2. Misrepresentation. The description of the insurance as an indemnity for Atlético’s net ascertained loss was a representation about the underlying cover. The representation was material because the distinction between an indemnity policy and a valued policy affected underwriting decisions. Each reinsurer was induced by the misrepresentation to subscribe on the terms of the slip. The court applied the requirement that, but for the representation, the underwriter would not have agreed to the same contract on the same terms.
3. Measure of loss. There was a realistic possibility that Atlético’s actual economic loss would be less than 2.9 billion pesetas. The potential repayment of 500 million pesetas where Atlético failed to qualify for European competition had to be taken into account. The economic loss was the Club’s loss, and included the consequences of the automatic relegation of the second team. There was no sufficient basis for assuming that Atlético could renegotiate the value of the second-division broadcasting rights.
4. Full reinsurance clause. The clause incorporated the relevant terms of the underlying insurance and required the reinsurance to be back-to-back with it. The court rejected the submission that it created a warranty merely that the underlying policy had been written on terms disclosed to the reinsurers. The observations of Lord Griffiths in Vesta v Butcher were not accepted on that point.
5. Warranty arising from the interest description. The statement of interest was not merely descriptive. It materially affected the risk, was stated as part of the definition of the insured interest, and was sufficiently important to amount to a warranty. Vitalicio was therefore in breach of warranty because the underlying insurance was a valued policy rather than an indemnity of net ascertained loss.
6. The claimant succeeded. The counterclaim failed. The court directed that submissions be made on the appropriate order.

First-instance decision in the High Court (Commercial Court). No prior appellate decision is stated in the judgment.