Limit No 2 v Axa Versicherung AG – misrepresentation as to the cedant’s policy concerning deductibles

[2007] EWHC 2321 (Comm)

This judgment offers some warnings to reinsureds concerning the risk of their brokers’ misrepresenting the risk, both on first presentation and on renewal. Limit Syndicate 1036 (the syndicate) was reinsured with Albingia (now Axa) on a first loss facultative/obligatory basis in respect of risks written under its energy construction account (the Syndicate could decide whether or not to cede a risk whereas the reinsurer had to accept the risk). Various points arise in the judgment: those concerning misrepresentation are discussed below.

In its first presentation in July 1996, the syndicate’s broker stated in a covering fax that as a matter of principle the syndicate “would not normally write construction risks unless the original deductibles were at least £500,000”. The judge held that this statement looked to the future as well as the present and the past. A statement of current intention or policy was a statement of fact, not one of expectation or belief. There was no reason to treat the cover-sheet as less important than the rest of the package and the representation could not be dismissed as “brokers’ waffle or puff”. The statement was a misrepresentation since by the time it was made the prevailing market conditions were such that the deductibles referred to could not be achieved. The reinsurer was induced to write the treaty by the misrepresentation and was entitled to avoid the treaty.

In 1998 the syndicate sought to renew for a further 12 months with the same reinsurer. One issue which arose was whether the 1996 misrepresentation was continuing. The judge held that the reinsurer was entitled to assume that the syndicate’s policy as to deductibles was being maintained and that it should have been told that this was not so. Accordingly the representation continued and induced the reinsurer to write the 1998 treaty.

A further point arose in relation to the 1998 treaty concerning non-disclosure of the deterioration in the syndicate’s claims position between presenting bordereaux providing loss statistics on the 1996 treaty and the reinsurer’s scratch five weeks later. During that interval, five new reserves were posted, the greatest of which were £89,000 and £54,000. The court held that these should have been disclosed since they doubled outstanding claims in the space of a month which went beyond an ordinary or routine development in the claims position.

Comment: there is concern about this decision, particularly with regard to the 1998 treaty. By 1998 it was widely known throughout the market that the deductibles referred to as the syndicate’s policy in 1996 could rarely be achieved, if at all. The judge’s response to this was to comment that whilst it could be expected to be generally aware of the conditions in the London energy market, the reinsurer which was based in Germany could not be expected to be knowledgeable about the details of the direct market. This could be read as placing a heavier burden on cedants dealing with foreign reinsurers than would apply where the reinsurer is well-established in the London market. The conclusion about the non-disclosure of new reserves following presentation for the 1998 treaty can also be seen as imposing an impracticable burden on cedants since they cannot know when the reinsurer is to make his scratch.