The recent Commercial Court Judgment in Axa Versicherung AG v Arab Insurance Group B.S.Cconcerned two reinsurance treaties entered into in 1996 and 1997 between the claimant reinsurer (Axa) and the defendant reinsured (Arab). Axa sought to avoid both treaties ab initio for material non-disclosure of loss statistics relating to Arab's existing book of inward marine energy construction risks, or alternatively for the material misrepresentation that there were no such statistics.
The Court's conclusion
The Judge, Mr Justice Males, held that there had not been a 'fair presentation of the risk' to Axa, because the loss statistics were a material circumstance and should have been disclosed. He concluded, however, after a careful review of the witness evidence, that Axa was not entitled to avoid the reinsurance treaties because it had not shown that the underwriter in question would have refused to write the treaty or would have done so on different terms. In other words the underwriter had not been induced by the non-disclosure to enter into the treaties.
Although rare, this case shows that material non-disclosure/misrepresentation arguments do still arise in a reinsurance context.
It is possible that once the new Insurance Act 2015 comes into force in August 2016, these types of non-disclosure/misrepresentation arguments will become a more common feature of reinsurance disputes. This is because there are a range of proportionate remedies available under the new Act for breaches of the new duty to give a 'fair presentation of the risk', replacing the current all or nothing remedy of avoidance ab initio.
Under the new Act, avoidance will still be available where the (re)insurer can show that the material non-disclosure/misrepresentation was 'deliberate' or 'reckless'. It will also still be available where the (re)insurer can show that it would never have underwritten the risk had it been aware of an innocent, material non-disclosed/misrepresented fact. There are, however, further remedies available:
- Where the (re)insurer can show that it would have underwritten the risk, but on different terms, the contract may be treated as if it contained those different terms; and
- Where the (re)insurer can show that it would have charged a higher premium, claims may be proportionately reduced to reflect that higher premium.
As a consequence of the introduction of these new remedies, (re)insurers will essentially get another bite at the cherry; as well as arguing that they would never have underwritten the risk, they will be able to argue, in the alternative, that a higher premium would have been charged or more stringent terms included. Although it is impossible to know for certain, it is entirely possible that had Axa v Arab been determined under the new Insurance Act, the Court would have reached a different conclusion.