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England and Wales High Court (Commercial Court) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> AXA Versicherung AG v Arab Insurance Group (B.S.C.) [2015] EWHC 1939 (Comm) (07 July 2015) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2015/1939.html Cite as: [2015] EWHC 1939 (Comm), [2015] CN 1271 |
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
AXA VERSICHERUNG AG |
Claimant |
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- and - |
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ARAB INSURANCE GROUP (B.S.C.) |
Defendant |
____________________
Mr Simon Bryan QC and Mr Guy Blackwood QC (instructed by Holman Fenwick Willan LLP) for the Defendant
Hearing dates: 3rd – 18th June 2015
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Crown Copyright ©
Mr Justice Males :
INTRODUCTION
"This issue is always a question of fact in all the circumstances and the materiality or otherwise of previous casualties will often be a function of the type of cover under consideration. Thus, previous casualties or other aspects of the assured's loss experience may be material for disclosure. In the case of reinsurance, the loss history will invariably be material."
"Details of the loss experience of the account to be reinsured have always been required by reinsurers when negotiating the terms for a new treaty..."
THE EVIDENCE
FIRST LOSS PROTECTION
"Under a quota share treaty, the insurer is obliged to cede to the treaty a fixed proportion of every risk which falls within the limits of the treaty. Under a fac/oblig treaty the insurer has a choice whether to cede any given risk to the treaty. He cannot cede it unless it falls within the limits of the treaty, but he is not obliged to cede it if it does. The reinsurer has no choice; he cannot insist on a risk being ceded, and cannot refuse to accept his share of a ceded risk … Fac/oblig treaties are naturally less attractive to reinsurers than quota share treaties. They are subject to the obvious risk that the insurer will retain good business for his own account and cede poor business to the treaty. There is, or at least is assumed to be, no obligation of good faith on the part of the ceding party when exercising his discretion whether to cede or retain a risk. The only constraint upon him is that he must exercise some restraint if he wishes to maintain a good reputation in the market and any hope of doing future business with existing and prospective reinsurers."
NARRATIVE
The parties
Arig's construction book between 1989 and 1995
u/w year | Risks written | Net premium to Arig (US $) | Losses incurred (US $) | No. of losses | Loss ratio |
1989 | 40 | 1,932,171 | 8,185,066 | 169 | 424% |
1990 | 39 | 2,889,026 | 6,503,736 | 168 | 225% |
1991 | 31 | 3,102,597 | 3,385,176 | 116 | 109% |
1992 | 23 | 2,072,450 | 1,353,153 | 42 | 65% |
1993 | 19 | 1,935,360 | 235,531 | 5 | 12% |
1994 | 1 | 116,244 | 0 | 0 | 0% |
1995 | 3 | 109,422 | 0 | 0 | 0% |
Arig's attempts to obtain first loss protection through Swire Fraser
U/w Year | Net premium | Paid claims | Reported losses | Total losses |
1989 | 1,784,086 | 6,185,793 | 1,732,845 | 7,918,638 |
1990 | 2,883,273 | 4,972,918 | 1,509,524 | 6,482,442 |
1991 | 3,102,597 | 2,159,882 | 1,272,926 | 3,432,808 |
1992 | 2,071,049 | 823,181 | 813,963 | 1,637,144 |
1993 | 1,936,220 | 102,557 | 139,653 | 242,210 |
Arig's 1996 quota share treaty
Albingia's experience of first loss treaties before the 1996 treaty with Arig
"I mean, the question of a high deductible of high involvement of a client in the first place was of absolute importance and distance ourselves from attritional losses and that is why the 500,000 or a million pounds was simply of utmost importance" … "the 500,000 threshold was an absolute essential feature of writing the business and distancing ourselves from attritional claims."
The conclusion of the 1996 first loss treaty
"First Loss Construction Treaty
…
The main reason for providing such facility is at first hand to provide a bottom line protection for construction risks where we are expecting to accept about 25-30 policies in 1996. The loss development on protected basis is expected to be poor. The main reason being insufficient deductibles as accepted by the market. This facility will however enable us to protect the exposed primary areas and thereby standing a good chance of making an overall profit.
…
The treaty is backdated to 1st January 1996 and the main reason for this is that the exposures are expected to develop first in the second half of the year and continuously depending upon the length of the construction period. Consequently we do not expect any losses for the first half of the year but if the policies are not ceded to the treaty we will not be able to recover claims which we expect will happen at a later stage.
The number of policies written so far in 1996 is 15 with an overall premium to the treaty of about USD230,000.
I am convinced that the facility as proposed will provide an excellent bottom line protection on business we by experience know is highly exposed. When discussing the issue with other underwriters and brokers they all agree that we are very lucky if we will be able to get a facility like this. It is still very difficult to find treaty capacity for these exposures and the only alternative is facultative reinsurance which is both difficult to find and expensive to buy."
"We are very pleased to be able to offer you an opportunity to participate in the captioned new treaty.
This is a new Treaty for the Reassured and as such does not have a corresponding loss record.
Note that this is anticipated to be a small proportion of the Reassured's overall Energy Account Income and will comprise of approximately 30 to 40 risks. 15 have already been written since 1.1.96 and ARIG would like to attach this contract at 1.1.96 to include them. Obviously this is subject to no known or reported losses.
We have also included a schedule of benefiting XL reinsurances which leave Treaty Reinsurers with a manageable retention – currently these are only desk quotes.
Trust you find all in order and look forward to your advice."
The 1997 renewal
"There is only one claim at this stage, details of which are as follows:
Declaration : Clyde
Date of Loss : 1st September 1996
Claim Amount : US$55,283 to the facility.
Description : Pipeline damage by a fishing vessel."
Undisclosed incidents at renewal
"In the meantime, we suggest that a precautionary nett reserve of DFL 2,500,000 is adopted on the assumption that any adjusted cancellation/standby costs fall below the applicable policy deductible."
"Based upon our discussions with the Assured, we do not feel it appropriate at this stage to recommend Underwriters adopt a reserve against this loss. We shall however include our recommendations in respect of reserve in early course once we have clarified a number of issues including the notified costs associated with this incident and the application of appropriate deductibles."
"No loss reserve has been given, as it is difficult to estimate the potential loss at this stage, but expect that the loss is likely to exceed the policy deductible".
"At this stage it is very difficult to estimate the potential loss, but certainly it looks as through it will exceed the policy deductible of $250,000. Until we are aware of the scope of work necessary to rectify the damage it is very difficult to quantify (maybe up to US$ 1 million) but the Project see [sic.] confident of being able to raise the roof on 26th June which is only 15 days later than planned, and the Project was in any event ahead of schedule."
Albingia declines to renew the first loss treaty
Later events
THE ARIG CHANGE OF UNDERWRITING STRATEGY
"As you will see there has been a constant improvement in treaty results over the years. Partly due to the restriction imposed by the Marine Energy market in general but mainly due to changes in our portfolio structure and underwriting philosophy, we do not anticipate any major changes for 1995 in the energy market nor have we planned any material restructuring of the portfolio or underwriting guidelines.
As you are aware, we adopted a slightly different underwriting policy in 1993, in order to achieve an improved portfolio and a wider spread, by implementing the following:
a) With effect from Jan. 1993 we stopped underwriting liabilities for US based assureds except when forming an integral part of an exploration drilling or production programme.
b) With effect from 1st November 1993 we have limited our acceptance on construction risks to some areas, mainly Middle East and on excess levels in Europe, Africa and the Far East with maximum risk period of 3 years. You will see from the attached that in 1994 we accepted only one construction risk that runs for 15 months only.
Although the above philosophy has improved our results, they understandably had a negative effect on our premium income."
"To underwrite within the prescribed limits an Oil/Gas Offshore account including certain other Marine Energy related business applying a consistent underwriting approach aimed at making an underwriting profit.
To pursue a selective underwriting policy with a focus on maintaining and further developing a well spread and balanced book of business."
"The Marine Energy Department shall maintain a conservative underwriting philosophy and not support aggressive underwriting attitudes.
The Marine Energy Department should function and operate as a truly professional underwriting unit by providing absolutely first class service including prompt settlement of claims.
The Marine Energy Department will establish flexibility of approach and use it within the broad framework of this document."
"Let me guess, without having gone through that, he would only have written the risks with the best performance and ceded them to the first loss treaty, is that right?"
"MR JUSTICE MALES: Is what you are describing to me an exercise where the end result is a presentation to the insurer which says 'Well, yes, we have got these past statistics which, on the face of them, look pretty bad but actually when you apply the new strategy or whatever to them, it looks a lot more promising'?
A. Exactly.
MR JUSTICE MALES: As distinct from a case where you do the exercise and then decide not to pass any of that on to the reinsurer?
A. I think in that particular case the exercise would fail because it would be evident to the cedant and to the broker that the risk wasn't placeable."
NON-DISCLOSURE AND MISREPRESENTATION – THE LAW
Materiality
Waiver
"The assured must perform his duty of disclosure properly by making a fair presentation of the risk proposed for insurance. If the insurers thereby receive information from the assured or his agent which, taken on its own or in conjunction with other facts known to them or which they are presumed to know, would naturally prompt a reasonably careful insurer to make further enquiries, then, if they omit to make the appropriate check or enquiry, assuming it can be made simply, they will be held to have waived disclosure of the material fact which that enquiry would necessarily have revealed."
"Ultimately, it seems, the question is: Has the insurer been put fairly on inquiry about the existence of other material facts, which such inquiry would necessarily have revealed? The test has to be applied by reference to a reasonably careful insurer rather than the actual insurer, and not merely by reference to what such an insurer is told in the assured's actual presentation but also by reference to what he knows or ought to know, i.e. his s. 18(3)(b) knowledge. The reasonably careful underwriter is neither a detective on the one hand nor lacking in common-sense on the other hand. Mere possibilities will not put him on inquiry, and very little if anything can make up for non-disclosure of the unusual or special. Overriding all, however, is the notion of fairness, and that applies mutually to both parties, even if the presentation starts with the would-be assured."
Inducement
"59. It seems to me that the true position is that the misrepresentation must be an effective cause of the particular insurer or reinsurer entering into the contract but need not of course be the sole cause. If the insurer would have entered into the contract on the same terms in any event, the representation or non-disclosure will not, however material, be an effective cause of the making of the contract and the insurer or reinsurer will not be entitled to avoid the contract. …
60. Those principles seem to me to be consistent with the approach of this Court in St Paul Fire & Marine v McConnell: see per Evans LJ (with whom Rose and Nourse LJJ agreed) at pp 124-5, where he discussed the general principles, and at p 127, where he held that, if the three underwriters who gave evidence had been told the truth, on no view would they have underwritten the insurance at the same premium on terms which included subsidence risk. Evans LJ also considered the role played by presumption in this class of case. He did so in the context of a fourth underwriter who was not called to give evidence, no doubt because the trial took place before the decision of the House of Lords in Pan Atlantic.
61. Evans LJ put the position thus at p 127:
'The existence of such a presumption is recognised in the authorities; see Halsbury's Laws vol 31 par 1067 where the law is stated as follows:
Inducement cannot be inferred in law from proved materiality, although there may be cases where the materiality is so obvious as to justify an inference of fact that the representee was actually induced, but, even in such exceptional cases, the inference is only a prima facie one and may be rebutted by counter evidence.'
…
It appears to me that a presumption of this kind really amounts to no more than this. It simply operates where the evidence before the Court is enough to lead to the inference that the insurer or reinsurer was, as a matter of fact, induced to enter into the contract.
62. In all the circumstances I would summarise the relevant principles of inducement in this context in this way:
1. In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.
2. There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation.
3. The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence from evidence from him.
4. In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so."
"254. In evaluating the underwriters' evidence it is important to keep firmly in mind that all their evidence is necessarily hypothetical and that hypothetical evidence by its very nature lends itself to exaggeration and embellishment in the interests of the party on whose behalf it is given. It is very easy for an underwriter to convince himself that he would have declined a risk or imposed special terms if given certain information. For this reason, such evidence has to be rigorously tested by reference to logical self-consistency, and to such independent evidence as may be available.
255. Further, in a case such as this, where diffuse matters can be said to be material facts, it is unrealistic to evaluate the issue of inducement except on the hypothesis of the disclosure of all the facts found to be material facts as distinct from isolated material matters."
"Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after, and not before, he has discovered that the risk turns out to be a bad one; it leaves the insured without the protection which he thought he had contracted and paid for. Of course there are occasions where a dishonest insured meets his just deserts if his insurance is avoided; and the insurer is justly relieved of liability. I do not say that non-disclosure operates only in cases of dishonesty. But I do consider that there should be some restraint in the operation of the doctrine. Avoidance for honest non-disclosure should be confined to plain cases."
NON-DISCLOSURE AND MISREPRESENTATION – LOSS STATISICS
Misrepresentation
"This is a new Treaty for the Reassured and as such does not have a corresponding loss record."
Materiality of the past loss statistics
"If an assured has a substantial loss experience and makes no mention of this fact to an insurer who must be taken to know that there is or is likely to be a loss experience, has there been a fair presentation of the risk? In my judgment the answer is "No" for the simple reason that, even if the insurer must be taken to be aware of the existence of a loss experience, he does not know how substantial that loss experience is. He is entitled to assume that there has been a fair presentation of the risk. A presentation which makes no reference to an existing loss experience can only be fair if the losses are modest or insignificant; a prudent underwriter will be entitled to assume that if losses exist, they are not such as to be worth mentioning. If the fact is that there is a history of substantial losses, there has not been a fair presentation. The fact that the insurer knows or is presumed to know that a loss experience exists says nothing about its size and, as I say, if nothing is disclosed about it to the insurer he is entitled to assume it is insignificant."
"In my view it was not material to the risk that Mr Holzapfel was presented with for ARIG to have disclosed energy construction loss statistics, for three reasons:
(a) Energy construction risks are unique risks and therefore loss statistics in relation to other risks written historically are simply not material from an actuarial point of view – every risk is, in a sense, 'one-off' and is written individually;
(b) Like is not being compared with like as there was a change in underwriting strategy and so the nature of risks written changed, coupled with the fact that Arig's underwriter, Lars Hylander ("LH"), had implemented a conservative underwriting policy which would have diminished the risk underwritten by Thomas Holzapfel; and
(c) Since LH implemented the conservative underwriting policy, LH has underwritten an insignificant number of risks, such that no meaningful conclusions could be drawn from them."
"106. But the reinsurer is not defenceless or at the mercy of his reinsured. As a market professional he is able to protect himself by way of pre-contract disclosure. Before he writes the reinsurance or on renewal he is entitled to a fair presentation of the risk which includes the type of business his reinsured proposes to write or has written and its history. The wordings should clearly define the nature of the risks reinsured and could permit the reinsurer to monitor the progress of the business if necessary. If he fails to protect himself in this way he should not be able to blame his reinsured.
107. The fact that the reinsurer does not exercise his own underwriting judgement about the individual risks to be reinsured is a feature, as we have said, of almost all reinsurance. The reinsurer exercises his underwriting judgement as to which underwriter he will reinsure and upon what terms."
Waiver and related issues
Inducement
Whose decision?
1989 and 1990 figures
Mr Holzapfel's evidence
The existing quota share treaty relationship with Arig
Deductibles
Cash flow
Conclusions on inducement.
Loss statistics on renewal
NON-DISCLOSURE AND MISREPRESENTATION – CLAIMS EXPERIENCE
The Clyde Petroleum incident
The NPCC and Ras Laffan incidents
The three incidents in combination
LOSS OF THE RIGHT TO AVOID
THE LAYERED CONTRACTS RESTRICTION
"INFORMATION: Schedule of current risks as attached. (N.L.O.W.) Rating scale graph seen and noted.
Average line US$4,500,000 - US$5,000,000 based on maximum exposure as entered in the Reassured's books.
Estimated Nett Premium Income:
Construction Account: US$330,000 - US$370,000
Operating-Account: US$ 40,000 - US$ 80,000
Anticipated Account will consist of 30 - 40 policies split:
USA based accounts - 20%
Middle East/Africa/Turkey - 35%
Asia including rest of the World - 45%
ARIG will not cede any layered contracts which represent less than 20% of the full contract value.
Details of 15 policies already written seen and noted."
ARIG'S COUNTERCLAIM
CONCLUSIONS
(1) Axa is not entitled to avoid either the 1996 or the 1997 first loss treaty. Its claim to recover the net sum of about US $5.15 million paid to Arig under those two treaties therefore fails and is dismissed.
(2) Axa's claim to recover the sum of some US $215,000 paid by it in respect of the Norsk Hydro claim fails and is dismissed.
(3) Arig's counterclaim succeeds in an amount to be determined if the parties are unable to agree the figure.