AXA v ARIG: Court of Appeal considers inducement argument in a reinsurance dispute
The reinsurer sought to avoid two reinsurance treaties entered into with the defendant reinsured on the basis that the reinsured had failed to disclose loss statistics and three incidents likely to result in claims. The reinsured accepted that the past loss statistics were material. However, the judge at first instance accepted the reinsured's argument that the particular underwriter had not been induced by the non-disclosure. The reinsurer appealed and the Court of Appeal has now rejected that appeal.
Much of the case turns on the particular facts, but the Court of Appeal made some general observations about proving inducement:
(1) It was acknowledged that a presentation must be judged objectively in order to determine whether it was fair (the Court of Appeal referred to a fair presentation in this case, even though the treaties were entered into before the Insurance Act 2015 came into force).
(2) In considering whether a presentation is fair, the court must decide what the insured or broker would have said in addition to that which was necessary to make the presentation fair, in order to encourage the insurer to write the risk. That is a subjective test and was relevant here because, had the loss statistics been disclosed, it was argued that the broker would also have told the reinsurer that a change of underwriter at the reinsured would result in a more rigorous approach to the selection of risks going forward. The Court of Appeal clarified that although the insurer must prove inducement, the insured or broker must prove that it would have raised additional matters had a fair presentation been made.
Although the Court of Appeal rejected the argument that there should be a presumption that the broker would have said everything good about the risk that could be said, it did accept that "the court may need little persuading that a competent broker would have endeavoured to say as many good things about it as were open to him".
Despite the test being subjective, Clarke LJ held that "I do not regard the judge as disabled from reaching a conclusion as to what would be a fair presentation (an objective question) by the absence of direct evidence from the broker about what he would have said or disabled from inferring what the broker would have said (in hypothetical circumstances) in the absence of such evidence. An inference can be drawn from surrounding circumstances. Further, evidence of what the broker did not say when making an unfair presentation is not necessarily a reliable guide to what he would have said or added when making a fair one". The judge had been entitled to conclude that the loss statistics would have been accompanied by a reference to the change of underwriting policy. The reinsurer's underwriter had agreed at trial that he would have written the treaty on the same terms in light of the explanation about the underwriting policy.
(3) Inducement is a subjective test: the fact that the reinsurer "could have been interested in something is irrelevant if in fact he would not have been".
Despite the use of "could" and not "would" in some of the passages of the first instance judgment, it was held that the judge had adopted the correct approach: "People, including judges, do not always speak with the precision in the use of modal verbs to which the submissions on this point have been directed, particularly when what is under consideration is a hypothetical situation".
However, the Court of Appeal, in a postscript to the judgment gave this warning about proving inducement at trial: "What seems to me undesirable is that the insurer /reinsurer should be faced at trial, without prior notice either in a pleading or in any witness statement, of what the insured/reinsured, if wrong in contending that there was no non-disclosure, says, in the alternative, would have been the content of a fair presentation or would have been raised by the insured/reinsured or his brokers in any broke in which the matter which constituted the material non-disclosure relied on was in fact disclosed. If the matter is raised for the first time in cross examination (“If this statistic had been revealed and you had been told this, you would have written the risk, wouldn’t you?)” it may provide a good example of cross examination as an art form. But it involves the insurer/reinsurer coming to trial without notice of the hypothetical factual case that he has to meet and being required to answer on the hoof a question which on a presentation in the real world would not require so instant a response".
COMMENT: Although this case concerned policies written before the Insurance Act came into force, under the new Act (re)insurers must prove inducement in order to claim a remedy for the breach of the duty of fair presentation. That test of inducement appears to be a subjective one and so the above principles will still apply to policies written after the Act. The Court of Appeal's focus on what it called "the hypothetical broke" is of interest because it takes into account not just material facts which should have been disclosed at the time of placement but also additional factors which might have influenced the underwriter's decision, had a fair presentation been made. Underwriters will be concerned that insureds or brokers might use those additional factors effectively as a justification (perhaps years later) for not having made a fair presentation at the correct time. Instead, it should be up to underwriters to decide at the time of placement whether they would still write a risk (and if so on what terms), having been given a fair presentation.