12th Nov 2008
On 12th November 2008, the Court of Appeal handed down its judgment in Limit No. 2 Limited v AXA Versicherung AG. This decision has significant implications for insurance and reinsurance contracts and contracts generally.
In this case, the reinsurers avoided two treaties of energy reinsurance. One treaty was written in 1996 for 12 months and was extended for a further 7 months by endorsement. The other treaty was written in 1998 for 12 months. Prior to the agreement of the 1996 treaty, the reassured’s broker sent a fax stating that “As a matter of principle they maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000.” The Court construed this statement to mean that the reassured did not intend to write energy construction business unless the deductibles were generally above £500,000. The broker’s statement was made only once in July 1996. It was not expressly repeated when the 1997 extension endorsement was agreed or when the 1998 treaty was agreed.
A number of issues arose in this case. The issues of material interest to the insurance and reinsurance community are as follows.
First, was the representation of intention a continuing representation in the sense that it was deemed to have been repeated when the 1997 extension endorsement or the 1998 treaty were agreed? Longmore L.J., who delivered the principal judgment, accepted the reinsured’s argument and held that the representation of intention was not continuing, adding “it puts altogether too much weight on a representation of intention relating to deductibles to say that it must be taken to be still operative after a lapse of 19 months”. In addition, Longmore L.J. explained the consequences of this decision for the remedy of avoidance for breach of the duty of utmost good faith in the following terms:
“It must also be remembered how powerful the remedy of avoidance is in the hands of an insurer or reinsurer. The entirety of a contract can be avoided for a wholly innocent misrepresentation provided it is material to the risk in the eyes of a prudent underwriter. If the contract is for 12 months (or, as here, 19 months) that is a very stark remedy. I do not, for my part, consider that a court should struggle to hold that everything said at inception is to be impliedly repeated on renewal.”
The second issue of interest was the Court’s characterisation of the 1997 extension endorsement, which amended the policy period of the 1996 treaty from 12 months to 19 months. On the Court’s finding, there was a misrepresentation of intention in 1996, which – following its decision that the representation was not continuing – meant that the presentation of the risk for the extension of the treaty was entirely fair. Notwithstanding, the Court held that if the 1996 treaty could be avoided, so could the 1997 extension endorsement. Longmore L.J. said that the endorsement “operates as an amendment to an existing contract not a new contract”, with the result that the endorsement survives or falls with the 1996 treaty.
The Court of Appeal’s decision in Limit v AXA is important because it demonstrates that not all representations will be continuing on renewal and further that extension endorsements are liable to be set aside, not only if they are procured by non-disclosure or misrepresentation, but also if the contracts they extend are so procured.