Paul Toomey Of Syndicate 2021 v Banco Vitalicio De Espana SA De Seguros Y Reasseguros

In proportional reinsurance, the reinsurer’s liability is proportionate to the liability under the underlying policy. A material misdescription of that policy may entitle the reinsurer to avoid the reinsurance where it affects the risk undertaken. Whether a misrepresentation is material depends on whether it would be material to a prudent underwriter, ordinarily assessed by expert evidence. In assessing an insured economic loss, the court must examine the contractual arrangements as a whole and bring into account contingent liabilities that affect the insured’s actual financial position. A term describing the underlying risk may be construed as a warranty where it goes to the root of the transaction and materially bears on the risk, particularly where the reinsurer entered without seeing the underlying policy. The court expressed no view on the construction of the full reinsurance clause.

Spanish insurers insured Club Atlético de Madrid SAD against economic loss arising from relegation from the first division, in connection with television-rights arrangements with Audiovisual Sport SL. The insurers then obtained proportional reinsurance in the London market. The reinsurers had not seen the underlying policy when they accepted the risk.

After relegation, the insurers settled the Club’s claim and paid Audiovisual. The reinsurers refused to pay and obtained declarations at trial that they were discharged from liability from inception, on grounds including misrepresentation and breach of warranty. The insurers appealed from the judgment of Andrew Smith J, [2003] EWHC 1102 (Comm). The appeal concerned whether the underlying policy had been materially misdescribed, whether the description was a warranty, and, on a cross-appeal, the scope of the full reinsurance clause.

1. Appeal dismissed. The reinsurers were entitled to avoid the reinsurance for material misrepresentation.
2. Materiality required proof that the representation would have been material to a prudent underwriter, in addition to inducement. The agreed expert evidence made the issue whether there was a realistic possibility that the net ascertained loss on relegation would be less than Pts 2.9bn.
3. The relevant loss was the difference between what the Club would have earned in the first division in the 2000/01 season and what it would have earned in the second division. The contractual obligation to repay Pts 500m if the Club failed to qualify for European competition had to be included. Although that contingency was not itself an insured risk, it formed an integral part of the television-rights payment scheme and materially affected the Club’s earnings. It made no difference that the payment was structured as repayment rather than as a bonus.
4. The repayment obligation was capable of valuation. There was therefore at least a realistic possibility that the net ascertained loss would be below the reinsurance limit, making the misrepresentation material.
5. The proportional nature of the reinsurance meant that the reinsurers’ obligation was proportionate to the actual liability under the underlying policy. The misdescription was material because it misled the reinsurers as to the underlying contract that determined their payment obligation. The description in the slip was therefore also a warranty. It went to the root of the transaction and materially bore on the risk, and the reinsurers had accepted the risk without seeing the underlying policy.
6. The issue concerning the full reinsurance clause arose only on the cross-appeal and did not affect the result. The court expressed no view on its construction or on the trial judge’s view of the market understanding of the clause.

• Court of Appeal (Civil Division) — Appeal dismissed; the declaration that the reinsurers were discharged from liability under the slip policy from inception was upheld. The court did not determine the cross-appeal concerning the full reinsurance clause.
• Commercial Court — Andrew Smith J made the declaration following the trial in March 2003: [2003] EWHC 1102 (Comm).