PROPERTY AND REINSURANCE 2015 REVIEW - Ince … PROPERTY AND REINSURANCE 2015 REVIEW CONTENTS...

PROPERTY AND REINSURANCE 2015 REVIEW

02 PROPERTY AND REINSURANCE2015 REVIEW

CONTENTSWELCOME 3

UK DEVELOPMENTSThe 2015 UK floods – when it’s not good to be #trending 4Take your time – stretching out the hours clause 6

TIANJINTianjin six months on 7China Insurance Association guidelines and reinsurance issues 8Tianjin – how we can help you 9

2015 CASE LAWRing the alarm again 10Coverage defences unwound 11Inducement – the hardest hurdle to cross? 13


WELCOME TO OUR PROPERTY AND REINSURANCE REVIEW 2015Welcome to our review of the key legal developments of 2015, which will continue to have implications for the Reinsurance and Property markets in 2016.

Market estimates of the insured losses from the Tianjin explosion of August 2015 vary significantly, ranging from US$2 billion to US$3.5 billion, and there is little consistency as to the basis upon which the estimates are calculated. What is certain, however, is that Tianjin will be a very significant loss event for the London and international markets. This Review includes a special feature examining the claims and legal issues arising and likely to arise in future, at both a direct insurance and reinsurance level. It has been produced in conjunction with our Beijing based, Mandarin speaking colleagues, who have been extensively involved in dealing with Tianjin related issues on the ground.

Closer to home, 2015 saw the wettest UK December on record. Widespread flooding from Storms Desmond, Eva and Frank is estimated to cost the insurance market US$1.3 billion, with economic losses of US$2.5 billion. This is likely to give rise to thorny issues as to how Business Interruption insurance policies respond – or do not respond – to losses arising from ‘wide area damage’. In this Review we consider the key judicial authority in this area and consider how it might apply to recent severe weather events.

2015 was another busy year in the Courts. We examine the decisions in Milton Furniture v Brit, which provides helpful guidance on the meaning of “attended” in the context of a property policy, Western Trading v Great Lakes Reinsurance, in which a number of coverage defences were determined, and Axa v Arab Insurance Group, which highlights the difficulty of proving inducement in a reinsurance context.

We hope that you will find this digest of the key Property and Reinsurance developments and cases of 2015 helpful and would welcome any feedback you have on this edition or suggestions for future publications.

Best regards

Kiran SoarPartner, London

[email protected]+44 (0) 20 7481 0010

“...Tianjin will be a very significant loss event for the London and international markets.”


The 2015 UK floods – when it’s not good to be #trending

For many parts of the UK, December 2015 was the wettest on record. Over 5,200 homes were flooded in Cumbria and Lancashire, where thousands were left without power. Denial of access to homes and businesses was also significant: around 40 bridges were damaged or closed and the local rail networks were hugely disrupted (readers that commute by train might reflect that it doesn’t take much to cause disruption on the railways).

Severe weather events affecting a wide area can create serious challenges for individuals and the authorities but they can also create significant complications for insurers and their insureds. We understand that, despite the ABI’s estimate that claims could reach £1.3 billion, many insurers are keeping the December

2015 losses ‘net’ and not passing them on to their reinsurers. This will avoid one potential reinsurance problem of allocation, which arises where an event (such as flooding) occurring in a later policy year adds to the damage to property which occurred in a previous policy year. A further well-documented problem relates to properties and businesses simply becoming uninsurable against flood risk, a problem the Government and the insurance industry has sought to resolve with the conception of Flood Re.

A third problem that is less well documented is the issue arising from the way that business interruption (BI) insurance responds to wide area damage. The 2010 case of Orient Express Hotels Limited v Generali created a storm in the market; a storm that rises and falls with wide area damage events but which is never entirely silenced. The case arose from the disruption caused by hurricanes Katrina and Rita, two of the worst natural disasters of recent times. The insured owned the Windsor Court Hotel (the Hotel), situated in the central business district of New Orleans. The Hotel suffered significant physical damage but its business was also affected and it made claims against its insurers for BI losses as well as for loss of attraction. The loss of attraction cover was subject to a significantly lower policy limit, so a key issue in the case was whether the insured could claim for losses on its BI cover.

As is usual, the calculation of the insured’s BI losses were to be assessed by reference to previous gross revenue, to be revised by trends affecting the business. This principle is incorporated into the policy by way of a trends clause, which sets out the adjustments that are necessary to provide for the trend of the business and for variations and special circumstances affecting it, either before or after the incident (that is to say, to work out what the business would have earned

UK DEVELOPMENTS


had the property not been damaged, taking into account external influences). Whilst on the face of it, a trends provision provides a sensible way of establishing an insured’s BI loss (by hypothetically reinstating the business to its previous, undamaged state in order to calculate what profits it could have earned), where damage occurs over a wide area which would have significantly disrupted the insured’s business in any event (that is to say, even without the insured business’s property being damaged), the trends clause can have a hugely detrimental impact on the calculation of BI losses.

By way of example, the insurers in the Orient Express case determined that, to calculate BI losses, the trends provision operated in such a way so as to hypothetically put the Hotel back into a position where it was undamaged (following the ‘trend’ of the business before the damage). However, they also argued that the trends provision should also take into account variations and special circumstances that occurred in the surrounding area (such as the two significant hurricanes and the resulting wide area devastation), thus placing a hypothetical ‘undamaged Hotel into a damaged city’ for the calculation of BI loss. On this hypothesis, the profits the Hotel would have made following hurricanes Katrina and Rita were virtually non-existent because of the damage to the wider area (affecting access, attraction, other businesses and other services): put simply, no one was going to go on holiday or do business in New Orleans at that time. On appeal from a decision of a London arbitral tribunal, the English High Court agreed with insurers that on a correct interpretation of the trends clause, a damaged property should hypothetically be restored to the profit making potential it had before the incident, but that damage to a wider area must also affect that hypothetical property in the same way it would have affected it had the property itself not been damaged.

Of course, the impact of this decision and its interpretation of the trends clause so commonly used in BI policies, will also apply to flooding events. The floods

in Cumbria in 2009 disrupted over 2,000 properties and closed 25 bridges. In circumstances such as these (and escalated to even higher levels of disruption in the December 2015 floods), there will no doubt have been situations where a trends clause which hypothetically put a property back into its profit earning state prior to the incident would have had its BI losses limited by the fact that access (such as bridge closures); attraction (such tourist events being cancelled); other businesses being affected (such as business meetings and travel plans being cancelled) and services (such as imported supplies and exports being unable to get in or out) had also occurred. This does not mean to say that insurers have always taken or will take the Orient Express approach to BI claims. Indeed many will choose not to deny or reduce a claim on the basis of a strict trends clause interpretation. There remains, however, a potentially significant gap for insureds in their insurance coverage.

There are, of course, ways to remedy the issue, in particular to amend the trends clause to prevent this mischief, and there is a desire within the insurance industry to do so. However, like the trends clause itself, no remedy is likely to be perfect. If flooding continues to cause serious wide area damage in the UK every winter, however, it may well be the case that an imperfect solution is deemed better than the status quo.

There are initiatives involving insurers, reinsurers and brokers to seek to find solutions to the problems associated with BI claims arising from wide area damage. Should you wish to have more information please contact Kiran Soar or Franco D’Andrea, or your usual Ince & Co contact.

Kiran SoarPartner, [email protected]

Franco D’AndreaSolicitor, [email protected]


Take your time – stretching out the hours clauseThe round of reinsurance renewals earlier this year saw pressure not only on rates but also on policy terms, with reinsurers under constant pressure to broaden the scope of coverage. One such pressure point was the Hours Clause in Property Catastrophe Treaties.

As Areaders will be aware, the purpose of the Hours Clause is to enable a cedant to aggregate together losses from a particular peril occurring over an agreed period of time where the losses arise out of and are occasioned by one catastrophe. Recently, however, there has been increasing pressure on reinsurers to remove the requirement that the losses to be aggregated should arise from one catastrophe. The consequence of this change could be, for example, to enable a reinsured to aggregate together all its winter freeze and flood losses occurring during a certain period of time regardless of whether or not they arose from one catastrophe and regardless of where they occurred. One can see that this may have the potential to significantly change the basis of cover. Much of the discussion about this extension of the Hours Clause has centred on winter freeze and flood losses. It remains to be seen whether there are attempts to expand it to cover other perils as well.

Simon CooperPartner, [email protected]


Tianjin six months onDirect insurance issuesMarket estimates of the insured losses flowing from the Tianjin Explosion vary significantly, ranging from US$2 billion to US$3.5 billion and there is little consistency as to the basis upon which the estimates are calculated. It is certain, however, that Tianjin will be a very significant loss event.

Many of the initial insurance claims will fall on policies issued locally but the explosion is already reverberating in the London market, which is exposed to claims under a wide range of different policies, from cargo, property and ports and terminals insurance through to product liability and contingent business interruption. Inevitably, the London market will also be exposed to claims in the reinsurance context, on both a facultative and a treaty basis, and those particular issues are explored in further detail below.

The direct insurance issues are complex and range from the correct policy under which a claim should be made (marine cargo or property damage, depending on the storage circumstances and cover in place), to factual questions as whether the insured property has actually been damaged.

In the commentary below, we focus on claims for goods in transit to illustrate the intricate web of issues and potential claims that arise in respect of each loss. It is likely that at least some of these issues will affect many of the claims in the London market.

Has the relevant property actually been destroyed or damaged?

In order to have a recovery an insured will have to prove on the balance of probabilities that its property has been damaged or destroyed. While an insured may reasonably suspect that any of its containers within the 3km exclusion zone

around the epicentre of the explosion is irretrievably destroyed, under English law insurers may wish to consider investigating whether all the property in all the relevant containers have been damaged. Equally, while many of the 54,000 vehicles within the exclusion zone are likely to have been completely destroyed, many others may have suffered much less drastic and more repairable damage.

Who has suffered a loss?

Typically in transit policies only the person with risk in the goods at the time of the loss can make a claim on the insurance. Insurers will therefore need to check the INCOTERMS applicable to the sale contract as risk passes at different points depending on those terms.

Does the policy respond?

While fire and explosion are insured perils under all the standard Institute Clauses for cargo insurance, there may well be uncertainty as to whether the particular policy was on risk at the time of the explosion. Under an FOB contract, for example, the buyer will only obtain the insurance interest at the point that the goods are on board the relevant vessel.

Issues of subrogation

Subrogation issues, together with issues of contribution examined below in relation to Tianjin, are also complex.

An insurer of goods in transit, for example, may have subrogated claims in contract against the shipowner or charterer (if the carrier of the goods on a “through-transport” basis); a claim in contract or bailment against the storage yard; in tort against the manufacturers of the goods that caused the fire; the owners of the goods that started the fire; the warehouse where the fire started;

TIANJIN


or even the Port Authority. Each of those defendants will likely have their own liability insurers, leading to further complexity and further impact on the London market.

In the end, it is likely that only one or two parties are likely to be held to be to ‘blame’ for the explosion and the crucial point for subrogated claims will be to maximise the return to insurers while avoiding directing aim at an effectively insolvent party that is extremely unlikely to have insurance cover in place to deal with a loss in the $billions.

Double insurance and contribution

Under English law, where more than one policy provides cover to the same insured for the same subject matter, the insured can recover the full amount of its loss from whichever insurer it chooses. The insurer that pays will be entitled to a contribution from the other insurers.

Whether two policies actually cover the same subject matter will be a mixed question of law and fact to be examined in detail in each case. As many readers will know, several types of clauses designed to avoid contribution claims (including ‘notification of alternative policy’ clauses, ‘rateable proportion’ clauses, ‘escape’ clauses and ‘excess’ clauses) are routinely included in policies. However, the interaction between the relevant policies where they each include such a clause is complicated and requires detailed analysis in each case.

China Insurance Association guidelines and reinsurance issuesRecent guidelines issued by the China Insurance Association to local insurers on how the claims should be dealt with strongly suggest that Chinese insurers and foreign insurers with a licence to write business in China will be under intense pressure to pay claims as quickly as possible and, among other things, without reference to contamination which officially is not an issue.

There is a real danger in these circumstances that claims which are not fully within the scope of the applicable insurance are settled or compromised. Clearly, this will be of concern to reinsurers and it will be important to be aware of the differing obligations on reinsurers to follow their cedant’s settlement imposed by different forms of reinsurance contract wording.

The application of the follow the settlements clauseWhere there is no follow the settlements clause, or similar language, in the reinsurance agreement, reinsurers do not have to pay any claim which the reinsured cannot prove, on the balance of probabilities, falls within the terms and conditions of the insurance and that quantum has been correctly assessed. Clearly, in many circumstances this would place an unacceptable burden on the reinsured and it is common, therefore, for both facultative and treaty reinsurances to contain a form of follow the settlement clause. These clauses significantly ease the burden on the reinsured by requiring reinsurers to follow the settlement subject to a limited number of provisos.

The wording of these clauses takes many different forms but there are some general principles which are of wide application.

The ‘Full Reinsurance Clause’The ‘Full Reinsurance Clause’ is widely used, particularly in facultative reinsurance but it may also be found in treaties. In general terms, it will provide that the reinsurance is to be on the same terms and conditions as the underlying risk and that the reinsurer will follow the settlements of the reinsured. Where clauses of this

Wai Yue LohPartner, Beijing, [email protected]


Roderic JonesSolicitor, [email protected]


nature apply, the reinsurer is bound by the reinsured’s settlement if the reinsured has settled the claim in a bona fide and business-like manner and provided that the claim as settled is within the terms of the reinsurance. The burden of proof will be on the reinsurer if it wishes to contend that the settlement is not bona fide and business-like (which will be a matter of fact) or that the loss as settled is not within the reinsurance (which will be a question of law).

Where the insurance and reinsurance are in all material respects ‘back-to-back’, the reinsurer must follow the reinsured’s settlement as long as the claim as settled is arguably within the scope of the reinsurance regardless of whether, on a full analysis, a court would find that the settlement was in fact outside the scope of the cover.

Qualified clauseIn treaty reinsurance, qualified follow clauses are also common. These will provide, for example, that the reinsurer will be bound to follow the reinsured’s settlements provided that they are “within the terms and conditions of the original policies and within the terms and conditions of [the reinsurance]”.

‘Original policies’ in this context should be seen as a reference to immediately underlying policies. This means of course that where there is a long chain of reinsurance and retrocessions the obligation on the cedant is not to prove that the loss fell within each of the proceeding policies. Further, the reinsured may establish that the loss fell within the terms of the immediately underlying policy by relying upon the best available evidence – as long as it is sufficient to discharge the burden of proof.

The issue with claims of this nature, therefore, will be whether the reinsured can establish on the balance of probabilities that the claims as settled by it were arguably within the terms of the insurance and of the reinsurance.

Tianjin – how we can help youWhether you are facing payment demands from your cedant, seeking to recover payments already deducted, or suffering reduced or minimal claims oversight, our lawyers on the ground in Beijing supported by our international insurance and reinsurance team can help you with any issues arising out of this major incident.

Our extensive factual knowledge of this event and long experience of handling major catastrophes across the world allows us to provide you with expert, commercial and time-sensitive advice across all classes of your insurance and reinsurance liabilities. In particular, we can offer:

> On the ground investigations > Chinese Court procedure and liability advice > Defence of claims > Cross border recovery > Advice on reinsurance issues including follow the settlements and claims control

We believe that our Beijing based, Mandarin speaking lawyers will add great value when resolving your legal issues. Our local connections are further enhanced with a member of our senior team residing in Tianjin and being very familiar with Chinese business operation.


Wai Yue LohPartner, Beijing, [email protected]


Xu GuoConsultant, [email protected]


2015 CASE LAW

Ring the alarm againThe Court of Appeal has confirmed Mr Justice Jay’s judgment in Milton Furniture Ltd v Brit Insurance Ltd. In doing so, the Court opined on both the approach to take to construing clauses that cover similar grounds in the same document and what “attended” means in the context of a property policy.

The factsIn April 2005 a fire destroyed most of the furniture in the Claimant’s warehouse.

Milton submitted a claim under its Commercial Combined Insurance policy taken out with Brit Insurance Ltd. The policy contained two terms that came under particular scrutiny: Protection Warranty 1 (PW1) and General Condition 7 (GC7).

PW1 provided:

“It is a condition precedent to the liability of the Underwriters in respect of loss caused by Theft and/or attempted Theft that the Burglar Alarm shall have been put into full and proper operation whenever the premises...are left unattended and that such alarm system shall have been maintained in good order throughout the currency of this insurance policy under a maintenance contract with a member of NACOSS” [emphasis added].

GC7 stated:

“The whole of the protections including any Burglar Alarm provided for the safety of the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended and such protections shall not be withdrawn or varied to the detriment of the interests of Underwriters without their prior consent” [emphasis added].

On the night of the fire, two individuals were sleeping at the premises. The burglar alarm, which had been monitored by SECOM until February 2005 when monitoring ceased due to non-payment of invoices, was not set. Brit rejected Milton’s claim on the basis that it had failed to comply with GC7, which Brit claimed was a condition precedent.

Interaction between PW1 and GC7Milton argued that PW1 (which did not itself apply as the damage in question was not caused by “Theft and/or attempted Theft”) was an individually agreed special condition and, as such, GC7, which was a standard policy term, must be subordinate to it.

On this question, the Court of Appeal confirmed that when there are two contractual provisions which cover similar ground, the task of the court is to give effect to each, save insofar as they are actually inconsistent. The burglar alarm served two purposes: to reduce the risk of theft and also to protect against the risk of an intruder who could damage the property by fire. Since the loss was caused by fire and not theft, it was clear that the requirements of GC7 applied.

Breach of GC7The Court held that Milton was in breach of both requirements in GC7. Business hours ended at 20.30 on the evening of the fire but the fire alarm was not set in the part of the complex that suffered the fire. The fact that two people were sleeping in different, but linked, parts of the complex did not prevent Milton from setting the alarm in the part where the fire occurred, as was its duty under the policy and as Milton had done in the past.

The Court went on to hold that although two people were sleeping at the premises, the premises were in fact “unattended”. It refused to follow Jay J’s construction at first instance that “unattended” was broadly akin to “unoccupied”. Instead, it held that “attended” was akin to “under observation” and thus the two sleepers could not in any meaningful sense be held to be “attending” at the building.


Milton was also held to be in breach of the second limb of GC7. By failing to pay SECOM’s invoices and permitting the monitoring service to end, apparently without Milton’s knowledge, Milton was in breach of a strict obligation to avoid the withdrawal or variation of a protection that benefitted underwriters.

CommentThe Court of Appeal took a strict approach to the construction of the relevant terms and found against Milton on every point, including those where Jay J had found for it. There was no hint of Jay J’s reluctance at the decision he came to at first instance that recovery under the policy was not possible. In commercial insurance at least, insurers can continue to rely on the protections they design for themselves in their policies as long as those protections are clear.

The Court of Appeal’s comments on the meaning of “attended” are of general application to property insurance and will be welcomed by insurers.

Would the case have been decided differently under the Insurance Act 2015? We do not think that it would. Section 11 of the Act prevents an insurer from relying on the insured’s breach of any contractual provision (including conditions precedent) which is intended to reduce the risk of a loss of a particular kind or at a particular time or place if the insured can prove that its breach could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred. In this case, Milton may well have sought to argue that its breaches of the alarm warranty could not have increased the risk of loss by fire. In response, Brit would no doubt have pointed out that while the cause of the fire was unknown, it was thought to have been started by an intruder and that the breach of the burglar alarm condition precedent could have increased the risk of loss because, if the alarm had been working, the arsonist may have been detected at an early stage.

Coverage defences unwoundJudge Mackie QC’s decision in Western Trading v Great Lakes Reinsurance [2015] EWHC 103 (QB) illustrates the pitfalls to look out for when running certain coverage defences, including lack of insurable interest and misrepresentation/non-disclosure.

The Facts The insured, Western Trading Limited (WTL), was a company incorporated by Mr Singh for the management of his property investment portfolio. WTL would lease property from Mr Singh and be responsible for its management and upkeep. In return, the company was entitled to sub-let the properties and enjoy any rent received.

WTL submitted a claim following a fire in July 2012 that destroyed two neighbouring buildings in Central Walsall, including the Boak Building, a listed local landmark. Insurers resisted payment on a number of grounds, including a lack of insurable interest and misrepresentation/non-disclosure at placement.

Insurable Interest Insurers noted that WTL did not own the buildings in question and disputed the existence both of any rental agreement in respect of the buildings between WTL and Mr Singh and of any third party tenancies generating an income for WTL. Insurers claimed the property had been empty and unused (not even for storage) for over a decade and that WTL’s sole interest lay in the insurance contract itself, described as “no more than a disinterested wager on whether or not the Boak would burn down”.

Judge Mackie QC did not share insurers’ view and resisted criticism of the business arrangements entered into, which were said to be commonplace in the property arena.

“...no more than a disinterested wager on whether or not the Boak would burn down.”


Roderic JonesSolicitor, [email protected]


He decided on the facts that leases entered into between WTL and various third parties did exist, that the terms of those leases were agreed in good faith and that the buildings were in fact occupied under those leases. The rationale behind the requirement that an insured must have an insurable interest, to preclude the possibility of gambling, therefore had no application.

Misrepresentation/Non-DisclosureInsurers also ran a misrepresentation/non-disclosure case, based on a statement in the Proposal Form completed by WTL for the 2010/2011 year of account, that the buildings were subject to three tenancies. Insurers argued that this statement formed the basis of the 2012/2013 policy year in which the fire occurred. In fact, insurers said, the building was either completely unoccupied, which for the reasons set out above the Judge did not agree with, or only two tenancies had been in place at the time of the representation.

This defence did not find favour with Judge Mackie either. He held that, to the limited extent to which anything was actually misrepresented by the insured, the statement regarding tenancies having been made in a Proposal Form submitted to different insurers for a different policy year, it was neither material nor relied upon.

Both parties’ underwriting experts agreed that if there was no difference in the level or nature of activity or occupation, the number of actual tenants was immaterial. Further, the underwriter of the risk admitted in cross examination that she had not been involved in or even seen insurers’ Defence, which set out the case that she had been induced to write the cover by the alleged misrepresentations, did not agree with key assertions within it and accepted that statements in her witness statement in relation to reliance were “a bit misleading”. As such, the Court did not place any reliance on the parts of her statement that were not merely factual.

Reinstatement The policy provided that WTL was entitled to the cost of reinstatement of the property provided that such reinstatement took place “with reasonable dispatch...”. WTL accordingly sought a declaration that it was entitled to the cost of reinstatement up to the policy limit of £2,121,800.

Insurers ran an (unsuccessful) argument that WTL was not technically entitled to the remedy of a declaration, only (in circumstances where insurers had avoided the policy) damages for breach of contract. However, they also resisted the declaration on the basis that reinstatement of the buildings had not taken place at all, let alone with reasonable dispatch, and claimed that Mr Singh had no intention of reinstating the building, planning instead to dispose of the site for its redevelopment as a residential plot.

Once again, Judge Mackie found in the insured’s favour. In circumstances where insurers have denied cover, a requirement that reinstatement be carried out, and with reasonable dispatch, cannot arise. The Court therefore granted the declaration, which it felt would assist both insured and insurers by removing insurers’ concern about whether Mr Singh intended to reinstate (as the obligation to indemnify would not arise until reinstatement took place).

CommentThis case highlights some of the difficulties which can be encountered when running an insurable interest or misrepresentation/non-disclosure defence. Judge Mackie restated previous case law, describing the former as a “technical defence”, and reiterated the duty of the court to lean (where possible) in favour of an insurable interest, underwriters after all having received the premium. In relation to misrepresentation and non-disclosure, the case illustrates that the importance of the evidence of the underwriter in establishing reliance/inducement should not be underestimated (and this requirement will only be increased when the proportionate remedies set out in the Insurance Act 2015 come into force in August 2016). Finally, the sections of the judgment dealing with reinstatement contain useful guidance on the application of the policy in circumstances where cover has been denied by insurers.

Chris JefferisPartner, [email protected]

Jennifer KleiserSenior Associate, [email protected]


Inducement – the hardest hurdle to cross?A judgment was handed down in the Commercial Court by Mr Justice Males in the case of AXA Versicherung AG v Arab Insurance Group that has drawn into sharp focus the difficulties of proving inducement in a reinsurance context.

The question before the Court was whether AXA was entitled to avoid two reinsurance treaties entered into with Arab Insurance Group (ARIG) and, consequently, recover approximately US$5 million already paid to ARIG under those treaties.

By way of background, AXA’s predecessor in title, Albingia Versicherungs-AG, entered into two reinsurance treaties with ARIG. The first was a facultative/obligatory ‘first loss treaty’ covering the first US$500,000 of losses for any one accident or occurrence on ARIG’s book of inwards marine energy construction risks attaching between 1 January 1996 and 30 June 1997; the second was a renewal of that treaty the following year for a further 12 months.

In 2012, AXA sought to avoid the treaties and recover what it had paid to ARIG under the treaties on the ground of non-disclosure of loss statistics for the risks in question for the years 1989 to 1995 or, alternatively, for misrepresentation that there were no losses. AXA contended that had it known of the loss statistics it would not have entered into the first treaty. AXA sought to avoid the renewal of the treaty on the same grounds and, in addition, for non-disclosure of three incidents which had resulted or were likely to result in a claim under the treaty.

JudgmentIt was held that AXA was not entitled to avoid the treaties. Mr Justice Males held that:

1. Whilst it is generally accepted that the disclosure of claims history/loss statistics pertinent to the risk(s) being underwritten are material and ought to be disclosed, AXA had failed to prove, on the balance of probabilities, that the non-disclosure of the loss statistics had induced the underwriter to write the treaty. Inducement aside, the Judge found there was a failure by ARIG to disclose a material circumstance.

2. AXA’s non-disclosure arguments in relation to the renewal of the treaty failed on the basis that once the original treaty was in place, the reinsurer would not expect to receive, upon renewal, the loss statistics in relation to the original treaty.

3. ARIG had not made the alleged representation (that there were no loss statistics for energy construction risks of the type that would be declared to the treaty) to AXA. ARIG’s case was preferred on the basis that the statement “This is a new Treaty for the Reassured and as such does not have a corresponding loss record” was in relation to the new treaty, not ARIG itself.


4. ARIG’s case on waiver (that AXA had waived disclosure of past loss statistics because it had not asked for them) failed on the facts. There can only be a waiver if there has been a fair presentation of the risk; Males J was of the view that “a reinsurer is not required to act as a detective”.

5. Having regard to all the circumstances, AXA’s case for avoidance failed. The Judge was not convinced that, even if there had been a fair presentation of ARIG’s loss statistics, the underwriter would have declined to write the treaty or would have done so on different terms – so there was no inducement.

CommentThis decision serves to highlight that despite there being a finding that particular information is considered to be material to the risk in question, it will not necessarily follow that the non-disclosure of such information induced the underwriter to enter into the contract.

In contrast to the objective nature of materiality, inducement is subjective to the particular underwriter. What is borne out by this judgment is that the underwriter’s failure to recall the placement, coupled with a lack of any documentary evidence to support his reasons for accepting the risk or to prove that he would not have written the risk with a fair presentation of the loss statistics, was the principal reason for AXA’s case on inducement failing.

In today’s underwriting world there are often a number of factors that sway an underwriter’s decision to write a risk and on what terms. This case brings to the fore, especially against the backdrop of the Insurance Act 2015 (and the focus there will be on understanding what an underwriter would have done differently), the importance of an underwriter maintaining a clear record of his/her decision making process based on the presentation of the risk that has been made. Just as now, it is not, in general, sufficient to rely on a presumption of inducement that where there has been a material non-disclosure or misrepresentation, the underwriter would not have written the risk or would have written it on different terms. Materiality and inducement do not always go hand in hand.

Johanna EwenPartner, [email protected]

Lorraine FernandesSolicitor, [email protected]

Ince & Co is a network of affiliated commercial law firms with offices in Beijing, Dubai, Hamburg, Hong Kong, Le Havre, London, Monaco, Paris, Piraeus, Shanghai and Singapore.

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LEGAL ADVICE TO BUSINESSES GLOBALLY FOR OVER 140 YEARSThe information and commentary herein do not and are not intended to amount to legal advice to any person on a specific matter. They are furnished for information purposes only and free of charge. Every reasonable effort is made to make them accurate and up-to-date but no responsibility for their accuracy or correctness, nor for any consequences of reliance on them, is assumed by the firm. Readers are firmly advised to obtain specific legal advice about any matter affecting them and are welcome to speak to their usual contact.

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