Limit No 2 Ltd v AXA Versicherung AG

A material representation about an insurer’s current underwriting policy is a statement of fact. It may be actionable even where made in good faith. In a first-loss fac/oblig reinsurance treaty, the level of underlying deductibles is highly material because the reinsurer bears frequent lower-level losses.

Where placing information is relied on at renewal, a continuing representation or duty of disclosure may arise if circumstances have changed. An assured must correct a material representation which no longer remains true. An endorsement extending a treaty period forms part of the original treaty and cannot survive avoidance of that treaty as a whole.

The claimant represented Lloyd’s syndicates which had entered into first-loss fac/oblig energy reinsurance treaties with the defendant for periods beginning in 1996 and 1998. The defendant sought to avoid the treaties for misrepresentation and non-disclosure concerning the syndicates’ alleged policy of writing construction risks with substantial deductibles.

The 1996 treaty was extended by a 1997 endorsement. The 1998 treaty was a separate contract. The court also considered whether later claims and incidents should have been disclosed on the 1998 placement, and determined subsidiary issues concerning risk attachment and late notification of cessions.

1. 1996 treaty. The placing documents had to be read as a whole and in their commercial context. Nevertheless, the brokers’ statement that the syndicates would not normally write construction risks unless the original deductible was at least £500,000, preferably £1 million, was a statement of the syndicates’ current policy. The word “normally” allowed limited flexibility but did not deprive the statement of meaning. It was a statement of fact, not opinion (paras [43]-[47]).
2. The statement was false. The syndicates were not following that policy. The level of deductible was highly material to a prudent reinsurer, particularly because the treaty was first loss, fac/oblig and concerned construction risks. The defendant’s underwriter relied on the representation and it was a real and substantial cause of the treaty being written. The defendant was therefore entitled to avoid the 1996 treaty (paras [48]-[62]).
3. 1997 endorsement. The endorsement amended the original treaty period and was not a separate contract. Although it could itself be avoided for a failure to present the varied risk fairly, it formed part of the treaty and could not survive avoidance of the treaty as a whole. The avoidance of the 1996 treaty therefore necessarily avoided the endorsement (paras [63]-[69]).
4. 1998 treaty. The 1998 treaty was separate. The original representation remained relevant on renewal. The placing information did not correct it and instead suggested that high underwriting standards continued. The syndicates should have disclosed that their deductible policy had changed. The defendant was entitled to rely on the continuing representation and was induced to renew on terms it would not otherwise have accepted (paras [70]-[88]).
5. The six unreserved incidents were routine and immaterial. However, the later claims caused a sharp deterioration in the account, approximately doubling outstanding claims within a month. The two substantial Petro Canada claims were material and should have been disclosed. Their non-disclosure also induced the defendant to write the 1998 treaty (paras [89]-[103]).
6. An open cover was a facility under which individual risks were later declared. It was not itself a risk attaching during the treaty period. Risks declared after expiry were not validly ceded. A quarterly bordereaux requirement did not make notification a condition subsequent or permit de-cession for late notification. The risks were ceded when the syndicates coded them for cession. The defendant had also waived any right to decline them by accepting premiums without complaint (paras [104]-[111]).
7. The defendant was entitled to a declaration that it could avoid the 1996 treaty, including the 1997 endorsement, and the 1998 treaty. Claims paid were to be refunded and premiums returned (para [113]).