In the recent decision in Limit No 2 v AXA Versicherung AG, the court concluded that misrepresentations made by a broker as to his reinsured’s policy on inwards deductibles could entitle the reinsurer to avoid the policy even though the reinsured was not aware that the representation had been made. The court also confirmed that avoidance of a policy would automatically avoid any extended policy period agreed by endorsement to that policy, although avoidance of the endorsement would not necessarily automatically involve avoidance of the original policy.
This case concerned first loss fac/oblig reinsurance treaties under which Limit’s energy accounts were reinsured by AXA. The reinsurance placing information was sent to AXA by fax dated 4 July 1996. In the covering sheet, the broker stated that Limit "maintain a high standard" and "would not normally write construction risks unless the original deductible were at least £500,000 and preferably £1,000,000."
Following this presentation, AXA agreed to write 100% of the reinsurance with a policy period of 12 months (the "1996 Policy"). The policy was then extended for 7 months by endorsement (the "extended Policy"). Thereafter, the policy was renewed for a further 12 months ("the 1998 Policy").
AXA sought to avoid the 1996 Policy, the extended Policy and the 1998 Policy for misrepresentation and non-disclosure. Amongst other things, the Judge held as follows.
1. The statement in the July 1996 fax that Limit "would not normally write construction risks unless the original deductible were at least £500,000 and preferably £1,000,000" was a representation as to Limit’s current policy on deductible levels on the underlying insurances. It was therefore a statement of fact. It was not simply broker’s puff. It was not a statement of the broker’s opinion of Limit’s policy on deductibles, which needed only to be made in good faith. Nor was it merely a statement of past practice. Further, it was not robbed of its meaning simply by adding the qualifier "normally". It was still a statement of present fact.
2. At the time the representation was made, Limit did not have a policy normally to write insurance risks only if the deductible was at least £500,000 and preferably £1,000,000. The statement was therefore incorrect. It was also material, and the insurer was induced, so AXA could avoid the 1996 Policy for misrepresentation.
3. The statement was made by the broker. Limit’s underwriter did not know that it had been made. Since the broker was Limit’s agent this did not matter: Limit was liable for his misrepresentation.
4. The Judge would not have allowed AXA to avoid for non-disclosure had no positive representation been made. Limit’s underwriting policy was not itself unusual and as such was not material. But the positive representation was material.
5. Limit was under separate duties of disclosure and not to make misrepresentations prior to conclusion of the extension by endorsement. But the endorsement was not a separate contract of reinsurance. Rather, it was part of, and an amendment to, the original reinsurance. As such:
a. if the endorsement alone was avoided, then the parties would revert to the original contractual position. In this case, this would mean that there was no extension;
b. if the original policy was avoided, then the endorsement would automatically be avoided, since it was dependent on the existence of the prior policy.
6. In contrast, the 1998 Policy was a separate policy of reinsurance, and could survive avoidance of the 1996 Policy. In this case, however, the representation as to the deductible policy was a continuing one, and was still incorrect at the time the 1998 Policy was concluded. AXA could therefore avoid the 1998 Policy as well.
This decision highlights the problems faced by (re)insureds where brokers make misrepresentations on their behalf. Further, whether the statement is made by the (re)insured or its broker, it should not be assumed that a statement as to current policy will be taken as a representation of future intention: clearly it can amount to a representation of present fact. The decision also confirms the law as far as policy endorsements are concerned. In particular, any endorsement which is not severable from the original policy will be avoided wherever that original policy is avoided. It will not be necessary to show a reiteration of the misrepresentation or non-disclosure prior to the conclusion of the endorsement.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 21/11/2007.
