The Court of Appeal has upheld a first instance decision that, although there had been material non-disclosure in the placing of reinsurance risks, the reinsurer had not established that its underwriter had been induced by the non-disclosure. The decision is a reminder that an insurer that alleges that it did not receive a fair presentation, will bear the burden of proving inducement.
Axa sought a declaration that it was entitled to avoid reinsurance treaties entered into with Arig, on the grounds that Arig had failed to disclose poor historic loss statistics relating to energy construction risks. Axa argued that, had it been aware of the true position, its underwriter would not have accepted the risks and that this was “game over”.
At first instance, the judge accepted that there had not been a fair presentation of the risk. A fair presentation would have included disclosure that Arig had written a number of energy construction risks in the past, loss records for those risks and an explanation that, although the loss figures for some years were very bad, there had been a change of underwriter and the new underwriter was adopting a more rigorous and selective approach to the risks he was prepared to write. On the question whether the underwriter had been induced by the non-disclosure, the judge said that this was not a clear case where the answer was obvious. It was, however, more likely than not that, if a fair presentation had been made and the loss statistics disclosed with the explanation that Arig’s new underwriter was following a different strategy, the reinsurer would have written the risk.
Court of Appeal decision
The Court of Appeal found that the judge had been entitled to reach the conclusion that, on balance, the reinsurer would have written the risk if a fair presentation had been made.
The Court noted that the case raised the question of what needs to be proved, and by whom, in inducement cases.
- It is for the insurer to prove inducement. This has to be determined by reference to what a fair presentation would have been. The question is an objective one, and should be considered from the perspective of the reasonably prudent underwriter.
- Additional matters that the insured or its broker would have urged on the underwriter to persuade them to write the risk also need to be considered. It may be difficult to determine where the dividing line between what a fair presentation requires and what additional matters the broker would have urged, falls. Lord Justice Christopher Clarke commented that it is nevertheless important as the evidential burden will be on the insured to show what additional matters would probably have been raised.
While each case will turn on its facts, this decision is a reminder that it is for the (re)insurer to prove inducement. The courts will look for evidence of what would have been done if a fair presentation had been made. In this case the judge took into consideration such factors as the underwriter’s approach to other risks that he wrote, his general view of Arig as a high quality reinsured that he was keen to support, the explanations available for the poor loss statistics and that the underwriter had on other occasions been willing to write high risk first loss reinsurance on energy construction risks.
The decision concerns reinsurance treaties written before the Insurance Act 2015 came into force. Inducement remains, however, a requirement in order to establish a remedy for breach of the duty of fair presentation under the Act. The Court of Appeal’s observations will continue to be relevant when courts are faced with similar arguments on inducement under the new regime.