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.
First Instance Decision
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.
Court of Appeal Decision
Axa appealed the decision on two grounds:
- Males J applied the wrong test by deciding what Arig's re-insurance broker, NMB, could have said if the relevant loss statistics had been disclosed to encourage Axa to subscribe to the First Treaty. The correct test was what NMB would have said.
- The judge's findings on inducement were based on a "hypothetical broke" which had no basis. The judge's findings on inducement were erroneous. Axa also submitted that the judge's finding on inducement was a product of procedural unfairness.
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.
- The court's determination of what needed to be said for a presentation of a risk to be fair is an objective question: what should have been said to the reasonable and prudent underwriter? A fair presentation does not simply require revelation of the (undisclosed or misrepresented) negative information: it may be necessary to provide some positive qualification of these risks to prevent the hypothetical presentation from being unfairly prejudicial.
- The question when considering factors relevant to the underwriter's decision but not material to the risk is what the broker/insured would have said. What a broker could have said is irrelevant if he would not in fact have done so. The court would not presume that brokers would say everything good about the risk that could be said, "but the court may need little persuading that a competent broker would have endeavoured to say as many good things about it as were open to him".
- The court may need to determine what considerations would have played a part in the mind of the person to whom the risk was or would have been presented. The fact that the insurer could have been interested in something is irrelevant if he would not have been. The court will also consider what the underwriter already knew and had in his mind.
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:
- Mr Holzapfel had not inquired about the deductibles payable on claims made under risks ceded to the Treaties (which in other parts of his evidence he referred to as essential information). Axa also had an interest in cash flow from premiums paid on risks already written and to be ceded to the First Treaty. The judge was entitled to treat these as relevant factors when concluding that Axa would not have acted differently had the loss statistics been provided.
- The judge was entitled to conclude that Axa considered Arig a high quality reinsured, given that Axa was already participating on a quota share treaty with Arig, this would have been a relevant factor in Axa's decision if there had been a fair presentation.
- Although there was no direct evidence from NMB on the point, the judge was entitled to infer that the broker would on giving a fair presentation of the risk have explained that Arig had changed its underwriting philosophy since the period of the most negative loss statistics.
- Similarly, although there was no direct evidence from NMB or Mr Holzapfel that they were aware of bad market conditions in the period of the poor loss statistics, the judge was entitled to infer (based on expert evidence) that Mr Holzapfel would have known those years were unusually bad.
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.
- The question in determining whether there has been a fair presentation of risk is what information should have been provided.
- In assessing whether there was inducement, it is also necessary to have regard to any positive information which would have been provided in the hypothetical situation where fair presentation has been given. This is necessary to avoid the presentation of risks in an unfairly prejudicial light.
- The court will also consider other factors relevant to the (re)insurer's decision to accept the risk, including the parties' commercial relationship and wider commercial interests.
- The underwriter's evidence on inducement is critical. Insurers arguing that the provision or accuracy of certain information was essential will face an uphill struggle to establish inducement if they subscribed to similar risks without seeing such information.
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.