The UK Court of Appeals has entered a decision dealing with reinsurance avoidance issues which may be of interest to US practitioners due to the similarity of avoidance standards in the UK and the US. On October 31, 2007 we reported on a decision of the UK Commercial Court, Queen’s Bench Division, avoiding two facultative reinsurance agreements due to misrepresentations by the placing broker as to the amount of deductibles required for ceded risks. The UK Court of Appeals has agreed that the initial reinsurance agreement (covering risks from July 1, 1996 through June 30, 1997, extended by endorsement through January 31, 1998) should be avoided, but has decided that the second reinsurance agreement (covering risks from February 1, 1998 through January 31, 1999) should not be avoided. The representation at issue was made prior to the placement of the first reinsurance agreement, and stated that “[a]s a matter of principle they [the cedents] maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000.”

The Commercial Court characterized this statement as a statement of “current policy,” which continued to be effective through the placement of the second reinsurance agreement. There was testimony that this was the policy and practice of the cedents up to the placement of the first reinsurance agreement, but that due to market conditions it was not possible to continue this practice after July 1996. The Court of Appeals stated that the claim of avoidance was based upon an alleged misrepresentation, not upon an asserted failure to disclose, and that to be actionable: (1) a statement must be a representation of existing fact, not of future fact or opinion; and (2) that a representation as to expectation or belief is not actionable if it is made in good faith. The first point is similar to the elements of fraud claims in many US jurisdictions.

The Court of Appeal held that the alleged representation was a statement of intention that was a representation of existing fact prior to July 1996, and that it was a material misrepresentation. The Court found that since the extension of the first reinsurance agreement for an additional seven months was an amendment to an existing contract, rather than a new contract, the reinsurance was avoided through January 31, 1998. The Court stated that the representation was not continuing in nature 19 months after it had been made, rather that it “relates to the time when it is made ….” The Court therefore held that the alleged misrepresentation was not a basis to avoid the second reinsurance agreement. Although not stated, the fact that there was testimony that the market conditions made it impossible for the cedents to maintain a policy or practice of maintaining deductibles at the levels represented after July 1996 supports this conclusion. The Court of Appeals was careful to state that it had not been contended that the cedents were under an obligation to disclose the level of deductibles intended to be written with respect to the second reinsurance agreement, leaving open the question of whether avoidance could be based upon a failure to disclose as opposed to an affirmative misrepresentation. Limit No. 2 Limited v. Axa Versicherung AG [2008] EWCA 1231 (Ct.App. Nov. 12, 2008).