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18 July 2017
The Court of Appeal has upheld the decision of the Commercial Court that a reinsurer failed to establish that material non-disclosure of past loss statistics induced it to enter into two reinsurance contracts: Axa Versicherung AG v Arab Insurance Group  EWCA Civ 96
Axa Versicherung AG ("Axa") entered into two "first loss" facultative/obligatory reinsurance treaties with Arab Insurance Group ("Arig") (the "Treaties"). The first treaty covered the first US$500,000 of losses for any one accident or occurrence on Arig's book of inwards marine energy construction risks attaching between 1 January 1996 and 30 June 1997 (the "First Treaty"). The second treaty was a renewal of the First Treaty and covered risks attaching between 1 July 1997 and 30 June 1998 (the "Second Treaty").
Axa sought to avoid the Treaties on the basis that Arig did not disclose, and misrepresented that there were no loss statistics relating to its book of inwards marine energy construction risks written between 1989 and 1995. Axa also sought to avoid the Second Treaty for Arig's alleged non-disclosure of its claims experience under the First Treaty.
Males J held that Arig had not made a misrepresentation as to the existence of the earlier loss statistics, but had failed to disclose the statistics relating to its losses under the First Treaty. Axa had however failed to establish that Arig's non-disclosure induced it to enter into the Treaties and was therefore not entitled to avoid the Treaties. If the broker had disclosed the loss statistics, they would also have explained the statistics and put them into context. For example, the broker would have pointed to a change in underwriting strategy since the earlier unfavourable loss statistics. There were also commercial reasons for Axa to subscribe to the risk, even if the loss statistics had been disclosed. Finally, the underwriter's evidence on what information would have been essential was not safe. For more information on the first instance decision, see our e-bulletin here.
Axa appealed the decision on two grounds:
The appeal was dismissed on both grounds.
Would have, could have, should have?
In considering inducement, Males J found that, if the loss statistics had been disclosed to Axa, NMB "would have been able to make some play" of Axa's participation on an earlier quota share treaty as an indication of Axa's trust of Arig's ability to write construction risks. He also found that NMB would have been able to point to the fact that Arig had already written several risks which were to be ceded to the First Treaty and would therefore provide immediate premium to Axa under the First Treaty. The judge considered these would have been relevant to Axa's decision to enter into the First Treaty. In other parts of his judgment, however, the judge said NMB "could have referred to particular factors"; in others the judge expressly distinguished between "could" and "would".
Axa argued that the judge had applied the wrong test: the correct question was whether NMB would have relied on these factors to encourage Axa to subscribe to the Treaties.
The Court of Appeal rejected the suggestion that the incorrect test had been applied. People, including judges, do not always distinguish precisely between "would", "should", and "could". There were three situations in which the distinction between "could" and "would" may be relevant for the court's analysis of an unfair presentation of the risk.
Males J had, in refusing Axa's application for permission to appeal, clarified his intended meaning (as he was entitled to do). References in the judgment to what "could" have happened were to be treated as references to what "would" have happened.
The basis of the judge's findings on inducement
At first instance, Mr Holzapfel, the underwriter who decided to enter into the Treaties on behalf of Axa, gave evidence on inducement. At the end of Arig's cross-examination of Mr Holzapfel, Males J asked a series of questions based on what he would have considered to be a fair presentation of the risk (the "hypothetical broke"). Mr Holzapfel stated in response that he did not think he would have entered into the First Treaty. Males J nonetheless considered that Axa had not established inducement on the balance of probabilities.
Axa did not challenge the judge's findings of primary fact, but argued that he was not entitled to draw the conclusions he did from these findings. The Court of Appeal also rejected this argument concluding that Males J had correctly taken into account a number of factors when reaching his decision on inducement. For example:
It was therefore open to the judge to consider that Axa had not proved that Arig's failure to disclose the loss statistics induced it to subscribe to the Treaties.
Alleged procedural unfairness
Axa also challenged Males J's decision on the basis of a number of alleged procedural irregularities. For example, the judge had not accepted parts of Mr Holzapfel's witness statement even though those aspects of his evidence were not formally challenged by Arig. The Court of Appeal, however, concluded that the procedure had not gone so awry that Males J's judgment must be set aside.
In a postscript to its judgment, the Court of Appeal stressed that the burden was on insurers to prove inducement where there had been a material non-disclosure or misrepresentation by the insured. In assessing whether there has been inducement, however, one must consider what additional matters might have been raised if the hypothetical fair presentation had been given. The evidential burden will be on the insured. The Court highlighted that it was undesirable for such points to be made for the first time at trial, rather than at an earlier stage, such as in the pleadings or witness evidence.
The Court of Appeal refused the appeal.
This decision illustrates several important points.
Although the reinsurance contracts at issue predated the Insurance Act 2015, the judgment is also of relevance to insurance and reinsurance contracts governed by the new Act. The new proportionate remedies for breach of the duty of fair presentation will only be available if the (re)insurer is able to demonstrate inducement.
For further information on this topic please contact David Reston at Herbert Smith Freehills LLP by telephone (+44 20 7374 8000) or email (firstname.lastname@example.org). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.
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