On 12th November the Court of Appeal handed down its judgment in Limit No. 2 Limited v AXA. AXA, who had taken over the reinsurers, a German company called Albingia, sought to avoid a claim for misrepresentation brought by the reassured, Limit No.2 Limited, who were syndicates at Lloyd's.
This case involved two treaties, one written on 1 July 1996, originally lasting 12 months but later extended by an endorsement dated 20 June 1997 for a further 7 months to 31 January 2008, and a 12 month treaty written in February 1998. Prior to agreeing the 1996 treaty the reinsured's brokers, Newman Martin and Buchan Ltd (NMB), attached a front cover to the draft slip and information sheet provided by the syndicates for the purpose of placing the reinsurances. On 4 July 1996 NMB faxed a bundle including the front cover to the reinsurers stating that the reinsured did not intend to write business "unless the original deductible was at least £500,000 and preferably £1,000,000". This statement was not however repeated when the 1997 endorsement was made, nor when the 1998 treaty was agreed. Whilst the reinsured had written reinsurance with the stated deductibles before July 1996, the intention to continue to write such reinsurance had evaporated by July 1996 when the treaty was written. Accordingly the judge at first instance held that the statement was a misrepresentation of intention and that the reinsurers could therefore avoid both contracts.
The Court of Appeal outlined the requirements for a finding of misrepresentation: (1) there must have been a representation, in this case the statement by the syndicate that they intended to write business with the stated deductibles; (2) the representation must have been untrue when the first contract was written and (3) the misrepresentation must have been material, however in this case materiality was not a point of appeal. The court held that it was an "inexorable conclusion" on a fair reading of the evidence, that the representation was untrue; on examination it transpired that it was only the broker that had made the representation and it was contrary to the intention of his client Mr O'Farrell. The Court of Appeal were satisfied that the statement was a misrepresentation and for this reason they held that the first contract had fallen away.
The court then considered whether the representation of intention was continuing such that it was still in effect when the 1997 endorsement was made and when the 1998 treaty was agreed. The court viewed the endorsement as part of the first contract and suggested it would be "artificial" to view it as a new contract because it was an agreement between the parties to amend the period clause in the first contract. Accordingly the endorsement was viewed to have fallen away with the 1996 Treaty. At the time the 1998 Treaty was made the representation was not repeated and Longmore LJ commented that "A representation of intention cannot last for ever; it only relates to the time when it is made". Moreover, Longmore LJ refused to put such "weight on a representation of intention … to say that it must be taken to be still operative after a lapse of 19 months". Mindful of how powerful the remedy of avoidance can be in the hands of an insurer or reinsurer, he added that such a ruling could permit a contract to be avoided for a wholly innocent misrepresentation about anything material to the risk in the eyes of a prudent underwriter. Moreover to allow an insurer or reinsurer to avoid the entirety of a twelve, or as in this case, a nineteen month contract would provide a very stark remedy indeed. He concluded that "a court should not struggle to hold that everything said at inception is to be impliedly repeated on renewal".
This judgement is expected to have significant insurance and reinsurance implications - not all representations will be continuing on renewal but extension endorsements are likely to be set aside if they are procured by non-disclosure or misrepresentation or if the contracts they extend are so procured.