In a case involving non-disclosure of loss statistics, the Commercial Court has held that the underwriter had failed to convince the Court that he would not have underwritten the reinsurance treaties in any event and that the reinsurer was not therefore entitled to avoid the treaties.
The recent decision in AXA Versicherung AG v Arab Insurance Group is in many ways a throwback to reinsurance disputes of previous decades. The treaty was placed in the mid-1990s, the reinsurers sought to avoid ab initio, and underwriters familiar from the Lloyd’s of the late 1980s and early 1990s appeared as experts.
In this case, the judge determined that the claimant reinsurer (Axa) was not entitled to avoid two reinsurance treaties it had entered into with defendant reinsured (ARIG) in 1996 and 1997 for non-disclosure of and/or misrepresentation as to ARIG’s loss statistics for its existing book of inwards risks that was the subject of the reinsurances.
While the judge agreed with Axa that there had not been a fair presentation of the risk to reinsurers because the loss statistics were a material fact that should have been disclosed to Axa (or its predecessor), he concluded that, even if there had been a fair presentation of the risk and the loss statistics had been disclosed, Axa’s underwriter would have entered into the reinsurance treaties in any event and so there had been no inducement.
The judge also rejected Axa’s arguments that there had been a misrepresentation of the fact that there were loss statistics available, and that there had been inducement by failure to disclose some small claims information in the presentation.
Would the case have been decided differently under the new Insurance Act 2015, which will come into force in August 2016? It is interesting to speculate what parties to a dispute may argue in order to take advantage of the new provisions, and whether the outcome of this particular case would be any different under the new legislation.
Axa pleaded that there had been an unfair presentation, and that it would not have participated in the reinsurance at all had it known the true situation. It therefore sought to avoid the reinsurance treaties ab initio (the traditional all or nothing remedy available to underwriters since before the Marine Insurance Act 1906).
Under the Insurance Act, insurers will only be able to avoid a policy where the misrepresentation or non-disclosure was reckless or deliberate. If the non-disclosure is negligent or innocent (as in this case) the following proportionate remedies could apply:
- If the (re)insurer would not have entered into the contract at all, it will be able to avoid the contract and return the premium;
- If the (re)insurer would have entered into the contract on different terms, it will be able to require that the contract is treated as if those different terms were applicable; and
- If the (re)insurer would have charged a higher premium, any claim payment may be reduced proportionately.
Therefore, in a similar case under the new legislation, it may be advisable for a reinsurer in Axa’s position to plead its case differently to allow the court to apply one of the ‘proportionate remedies’. For example, rather than taking the all or nothing approach, under the Insurance Act a reinsurer might prefer to plead alternative cases. Its primary case would still be that it would not have participated in the reinsurance treaties at all, but, alternatively it might say that it would have insisted on harsher substitute terms (such as minimum deductibles to be applied to the risks attaching to the reinsurance treaties), or that it would have charged an increased premium.
It will still be difficult, under the Insurance Act, to determine what an underwriter would have done if presented with different information. The test will remain entirely subjective and the judge in this case clearly considered the witness evidence of the underwriter making the decision to be key. However, the witness evidence of Axa’s underwriter (that he would not have entered into the reinsurance treaties at all) was not in this case supported by all the other evidence and surrounding circumstances, for example, by his decision to underwrite other similar risks without sight of loss statistics.
This case deals with a presentation made over twenty years ago and the judge points out in his judgement that hindsight is always available when considering what an underwriter would have done so “a healthy scepticism is therefore appropriate in evaluating such evidence.” Going forward, in an era of more detailed electronic records, the onus may be on the underwriter to show by reference to his own systems and controls that a fair presentation would have led to a different outcome. It will be of increasing importance therefore, for the underwriter to actually record his reasons for agreeing to write the risk on the basis of the presentation he has been given, including reference to underwriting guidelines, any written calculations and his thought processes. This may help to counter some of the “scepticism” of a judge looking at the underwriting file in twenty years’ time.