In a Judgment handed down on 12 November 2008 in Limit No. 2 Limited v Axa Versicherung AG [2008] EWCA Civ 1231 the Court of Appeal overturned in part the first instance decision and held that a representation as to present intention was not continuing after a lapse of 19 months.

Facts

Albingia (a German reinsurer, now Axa) sought to avoid first loss fac/oblig reinsurance treaties protecting the energy accounts of various Lloyd's syndicates, managed by Limit (the "syndicates"), for 12 months with effect from 1 July 1996 (the "1996 treaty"), later extended for 7 months to 31 January 1998 by endorsement (the "1997 endorsement") and then for 12 months with effect from 1 February 1998 (the "1998 treaty").

Prior to the agreement of the 1996 treaty the syndicates' broker sent a fax to Albingia which stated (on the fax cover sheet) that "[a]s a matter of principle [the syndicates] maintain high standards and would not normally write construction risks unless the original deductible were at least £500,000 and preferably £1,000,000". Albingia argued that the syndicates, through their broker, had represented falsely that the syndicates intended in July 1996 to write risks with deductibles of at least £500,000 and that the broker did nothing to correct or qualify the statement when extending the 1996 treaty or at the renewal of the treaty for 1998.

The first instance decision

Jonathan Hirst QC, sitting as a Deputy High Court Judge, held that Albingia was entitled to treat the broker's statement as a statement of fact as to the syndicates' "current policy as regards deductibles" which, in July 1996, was no longer correct. As such, the statement amounted to a misrepresentation entitling Albingia to avoid the 1996 treaty (including the 1997 endorsement which was found to depend upon and form part of the 1996 treaty and, thus, could not survive the avoidance of the 1996 treaty). The judge also found that, in spite of a change in market conditions, the syndicates owed a positive duty, prior to the inception of the 1998 treaty, to inform Albingia if the deductible policy had changed, which they failed to do. Accordingly, the misrepresentation made in July 1996 was found to remain operative in 1998 and, thus, Albingia was also entitled to avoid the 1998 treaty.

See our 4 March 2008 e-bulletin for more details of the first instance decision.

Court of Appeal decision

Four grounds of appeal were put forward on behalf of the syndicates as follows:

  1. The judge's decision that the broker's fax was a statement of the syndicates' "current policy" refers to the allegation (in the pleadings) of the syndicates' "current practice" regarding deductibles which had never been investigated at trial, since disclosure of the syndicates' underwriting before July 1996 had not been requested. Instead, the trial had focused on the syndicates' "current intention" as regards deductibles. Accordingly, the judge's conclusion that it was not the "current policy" of the syndicates in July 1996 to write the stated deductibles had been reached on an unfair basis and was wrong.  
  1. Even if the broker's fax did constitute a statement of the syndicates' intention in July 1996, it was no more than a statement of expectation or belief and, furthermore, was a statement by the brokers rather than the syndicates.  
  1. The judge was wrong to hold that the 1997 endorsement only amended the 1996 treaty. It was a separate contract and the same arguments applied to it as to the 1998 treaty.  
  1. The judge was wrong to hold that (at the inception of both the 1997 endorsement and 1998 treaty) the representations of the syndicates' "current policy" in July 1996 were continuing representations or that there was any obligation on the syndicates to disclose that their "policy" had changed.  

As to the first ground, the Court of Appeal held that, whilst it was unfortunate that the judge had used the phrase "current policy" which was less precise than either "intention" or "practice" (being the words used in the pleadings), the terms of the judgment show that the judge regarded "policy" and "intention" as synonymous concepts. On the evidence, the judge was entitled to come to the view that the syndicates' policy (or intention) to write the stated deductibles had been maintained before July 1996 but by July 1996 had evaporated and, thus, that the intention to continue to write risks with the stated deductibles did not exist by July 1996. Having regard to its findings in relation to the first ground of appeal, the Court of Appeal ruled that the second ground of appeal was not sustainable. It found that a statement of intention is a representation of existing fact and the fact that the statement was made by the brokers (who may not have personal knowledge of the syndicates' intent) was not relevant.

In relation to the third ground of appeal, the Court of Appeal found that the language of the 1997 endorsement was that of amendment (with the reference to "nineteen months" being substituted for "twelve months") and, thus, that it would be artificial to regard the endorsement as a new contract. Therefore, whilst a fresh duty of good faith arose prior to the agreement of the 1997 endorsement, the breach of which could, in theory, render the endorsement voidable without affecting the validity of the 1996 treaty, the 1997 endorsement could not survive the avoidance of the 1996 treaty.

Turning to the final ground of appeal, the Court of Appeal found that the representation as to the syndicates' intention was not continuing at the time of the 1998 treaty. Whilst the Court of Appeal did not identify the exact point at which the misrepresentation made in July 1996 ceased to be operative, it found that it was well in advance of the inception of the 1998 treaty. Longmore LJ, giving the leading judgment, stated that "[a] representation of intention cannot last forever; it only relates to the time when it is made; there must come a time when it is spent and, to my mind, that is well before the passage of 19 months." The Court of Appeal's ruling appears to have been based, in part at least, on the draconian nature of the remedy of avoidance. Longmore LJ explained as follows: "It must also be remembered how powerful the remedy of avoidance is in the hands of an insurer or reinsurer. The entirety of a contract can be avoided for a wholly innocent misrepresentation provided it is material to the risk in the eyes of a prudent underwriter. If the contract is for 12 months (or, as here, 19 months) that is a very stark remedy, I do not, for my part, consider that a court should struggle to hold that everything said at inception is to be impliedly repeated on renewal."

Finally, the Court of Appeal held that there was no duty upon the syndicates to disclose their change of intention in circumstances where the level of deductibles intended to be written by the syndicate was not a material fact to be disclosed (but for the syndicate's representation on this issue).

Comment

The Court of Appeal's decision highlights that representations will not necessarily be continuing upon renewal. Furthermore, the decision is arguably authority for the contention that representations as to intention cease to remain operative where there is silence at renewal (the Court of Appeal distinguished the case of Hill v Citadel [1997] Lloyd's Rep IR 167, relied upon by the judge at first instance, on the basis that statements made at renewal effectively constituted a repetition of the original misrepresentation).

The decision also emphasises the fact that policy endorsements extending the period of cover are likely to be rendered voidable, not only if they are entered into as a result of a misrepresentation and/or non-disclosure, but also if the original policy to which they relate is avoided as a result of a misrepresentation and/or non-disclosure.

As a result of the Court of Appeal's ruling, the syndicates succeeded in resisting the avoidance of the 1998 treaty on the ground of misrepresentation, whilst the avoidance of the 1996 treaty (including the 1997 endorsement) was upheld. However, certain aspects of the first instance decision that have been a source of concern were not considered on appeal. For example, the judge's finding at first instance that, as a reinsurer based in Germany, Albingia could not be expected to be knowledgeable about the details of the direct market, such as levels of deductibles available on particular risks, has given rise to uncertainty as to whether a cedant owes a higher duty of disclosure to foreign reinsurers than it might when placing business in the London market. In the absence of any clarification on the issue by the Court of Appeal, it appears that brokers and cedants need to take note of the location of a prospective reinsurer when determining what it can be expected to know about the prevailing conditions in a particular market.

It is understood that the case has been remitted to the trial judge for a hearing in relation to unresolved issues regarding the 1998 treaty.