A fair presentation of the risk?

Construction silhouette
In Axa Versicherung Ag v Arab Insurance Group the Court of Appeal upheld the judgment of Males J in the Commercial Court in which he had held that Axa was not entitled to avoid a first loss reinsurance of ARIG covering energy construction losses. The Court found that in failing to disclose certain statistics pertaining to the reinsurance, ARIG had breached its duty to make a fair presentation of the risk to Axa at placement. On the evidence, however, both the Judge at first instance and the Court of Appeal found that the Axa underwriter was not induced to write the risk on the terms which he did because of ARIG’s breach of duty; accordingly, the test for avoidance under the Marine Insurance Act 1906 – which was applicable to this risk – was not met. 

As with many cases on avoidance, much turns on the particular facts of the case. There were, however, a couple of points of general interest which emerged.

First, the Court of Appeal accepted that in considering the issue of inducement it was appropriate to consider not only what the underwriter’s response to the non-disclosed statistics would have been but, also, how the statistics are likely to have been presented, what explanation would have accompanied them and how the underwriter would have responded in those circumstances. The impact of the statistics cannot be considered in isolation.

Secondly, in a postscript to his judgment, Christopher Clarke LJ set out some important guidance on how cases of this nature should be determined. First, he confirmed that it is for the insurer (or the reinsurer in this case) to prove that its underwriter was induced to write the risk on the terms which it did by the breach of duty. In considering this issue, he noted that the Court needed to conduct an objective exercise to establish what a fair presentation would require to be disclosed, but it should also consider “… what additional matters the insured or his broker would have urged upon the insurer as reasons for writing the business”. He went on to say:-

The dividing line between what a fair presentation required and what additional matters the broker would have urged may be difficult to determine and might be important since in determining the issue of inducement it’s necessary to assume a fair presentation and ask what would have happened in the light of it, whereas in relation to additional matters which would have been raised by the brokers there would, as it seems to me, be at least an evidential burden on the insured to show that they would probably have been raised on the hypothetical broke.

Importantly, Christopher Clarke LLJ went on to say that it would be “undesirable” for the insurer/reinsurer not to have prior notice, either in the pleadings or in the witness statements of what the insureds/reinsured said would have been the issues raised in any broke in which the information which constituted the material non-disclosure relied on was in fact disclosed.

It is clear that the Court was uncomfortable with the fact that these issues were raised with the insurers’ underwriter for the first time on cross-examination. Although on this occasion they rejected the reinsurers’ appeal on the grounds of procedural error, it seems likely that Courts will take a tougher line in future in light of Christopher Clarke LJ’s postscript comments.

These issues are likely to become particularly important under the new regime of proportionate remedies set out in the Insurance Act 2015 which applies to all contracts agreed on or after 12 August 2016. Under the terms of the Act, an underwriter will not only have to demonstrate that he or she would not have written the risks on the terms which they did had a fair presentation been made, they will also have to prove whether they would have declined the risk altogether or whether they would have accepted it on different terms either as a premium or otherwise. If they would have accepted it on different terms, they will have to prove what those terms would have been. This is likely to require an even closer scrutiny of how the risk should properly have been presented, what comments and explanations would have been offered by broker during the placing process and what the response of the underwriter would have been than has been required in the past under the Marine Insurance Act regime.