In Limit No 2 Ltd v Axa Versicherung AG – Butterworths Law Direct 17.10.07 the Defendant was an insurance and reinsurance company with its head office in Cologne. On 4.7.96 reinsurance brokers approached the Defendant by fax, proposing a first loss fac/oblig reinsurance treaty, protecting the energy accounts of two syndicates at Lloyd's for 12 months effective from 1.7.06. The fax cover sheet stated, inter alia, that 'As a matter of principle [the underwriters] maintain high standards and would not normally write construction risks unless the original deductibles were at least £500,000 and preferably £1,000,000'.

The Defendant entered into the (1996) treaty which was extended by an addendum, and also into a further treaty (1998). When it transpired that the deductibles were, in fact, typically in the range of £100,000 to £200,000 the Defendant sought to avoid the treaties and the endorsement on the basis of misrepresentation and non-disclosure of material facts, alleging that by the fax cover sheet the brokers had falsely represented on behalf of the syndicates that they intended to stick to their stated principle of writing risks with deductibles of at least £500,000, and that this misrepresentation had been continuing at the date of entry into the subsequent treaty.

The Commercial Court held that the fax cover sheet had misrepresented the syndicates' policy as regards deductibles. The level of deductibles written by the syndicates would have been highly material to a prudent reinsurer considering underwriting the treaty. The representation had been a real and substantial cause of the Defendant underwriting the business on terms which it would not have accepted if it had been appraised of the truth. Accordingly, the Defendant was entitled to avoid the 1996 treaty.

In the circumstances, the endorsement depended on and formed part of the 1996 treaty. It could not survive the avoidance of that treaty as a whole. It followed that the avoidance of the 1996 treaty necessarily involved avoidance of the endorsement.

The Defendant had been entitled to presume that the syndicates' policy as to deductibles was being maintained. It should have been told that that was not so. The continuing representation and non-disclosure had induced the Defendant to write the 1998 treaty. The defendant was therefore entitled to avoid the 1998 treaty.

Declarations would be granted that the Defendant was entitled to avoid both treaties and the endorsement.