Avoidance of policies for misrepresentation by brokers

In a recent decision, the Court of Appeal held that misrepresentations as to the intention of the reinsured, made by the broker and unknown to the reinsured, nevertheless entitled the reinsurer to avoid the policy. This automatically included an endorsement varying the policy period. The Court did not, however, consider that the representation was implicitly reiterated at renewal and the reinsurer was not entitled to avoid the renewal policy.

The case concerned first loss fac/oblig reinsurance treaties under which the reinsured’s energy accounts were reinsured by the reinsurer. In the fax covering sheet to the reinsurance placing information, the broker stated that Limit “would not normally write construction risks unless the original deductible were [sic] at least £500,000 and preferably £1,000,000”.

On the back of the presentation, a reinsurance policy was agreed with a policy period of 12 months (the “1996 Policy”). The 1996 Policy was then extended for 7 months by endorsement (the “Extended Policy”). Thereafter, the policy was renewed for a further 12 months (the “1998 Policy”). The reinsurer sought to avoid each of these for misrepresentation.

The Court of Appeal held:

1. The statement in the covering fax to the presentation was a statement of present intention. Whether or not the reinsured actually held that intention was, however, a statement of fact. It was not simply a statement of expectation or belief which needed only be made in good faith (under section 20(5) of the Marine Insurance Act 1906). Since it was a statement of fact, it needed to be correct. In reality, the reinsured did not, when the statement was made, intend to write insurance policies covering construction risks with deductibles of “at least £500,000 and preferably £1,000,000”. There was therefore a misrepresentation.

2. It did not matter that the statement was made by the reinsured’s broker who might be said to have had no knowledge of the reinsured’s intention. Nor that the reinsured was not aware of the representation.

3. The materiality of the statement and inducement were not challenged. Therefore, the reinsured was entitled to avoid the 1996 Policy.

4. A fresh duty of disclosure and not to make misrepresentation arose prior to the conclusion of the endorsement which extended the policy period. But it was not a new contract. Rather it was an amendment to an existing contract, the 1996 Policy. This meant that when the 1996 Policy was avoided, so, automatically, was the Extended Policy.

5. In contrast, the 1998 Policy was a separate reinsurance policy. As such, it could survive the avoidance of the 1996 Policy and the Extended Policy. To avoid the 1998 Policy, it was necessary to show that the representation made prior to conclusion of the 1996 Policy was a continuing one. The Court held that a representation of intention cannot last forever, and a statement of intention in 1996 was irrelevant by 1998. Indeed, the Court concluded that courts should not “struggle to hold that everything said at inception is to be impliedly repeated on renewal”. Since it was not suggested that deductible levels on underlying insurance was material to be disclosed, the reinsurers could not avoid the 1998 Policy.

This decision is particularly important because the Court was clearly keen to place limits on the applicability of a misrepresentation of intention made prior to conclusion of one policy to renewals of that policy. It is often thought that as soon as the Insurer can establish a misrepresentation prior to the start of a programme of insurance, this automatically allows the Insurer to avoid all subsequent renewals. This decision highlights the fact that this is not the case. The Insurer must establish that the misrepresentation was reiterated, either explicitly or implicitly (and continued to be material and to induce the underwriter) prior to each renewal.

Further reading: see Limit No 2 Ltd v AXA Versicherung AG [2008] EWCA Civ 1231