The Court of Appeal's judgment in Limit No. 2 Limited v AXA Versicherung AG dismissed three grounds of appeal from the first instance decision. One ground of appeal was allowed, and it is of significance to all insurers, reinsurers and brokers - can a misrepresentation as to a reassureds' present intention at placing persist until and beyond renewal, or does it relate only to the time at which it was made?
The representation that caused the dispute was in a broker's fax. It was sent to reinsurers before the 1996 inception of a 12 month energy excess of loss reinsurance treaty. The fax said that "as a matter of principle [the reassureds] maintain high standards and would not normally write construction unless the original deductible were at least £500,000 ($745,000), preferably £1m". The broker thereby represented that the reassureds intended only to underwrite energy risks with high deductibles. This was inaccurate because high deductible energy business was no longer available due the prevailing market conditions. Reinsurers were therefore entitled to avoid the 1996 treaty for misrepresentation.
The 1996 treaty was extended by endorsement for 7 months. Despite the reassureds' arguments to the contrary, the endorsement was held to be an amendment to the 1996 treaty rather than a separate contract, so reinsurers avoided 19 months of cover.
The treaty was renewed in 1998. This was a new contract. The Court of Appeal considered whether the representation made by the brokers in 1996 continued to be effective, or whether the reassured was obliged to inform reinsurers that its policy on deductibles was not as previously advertised.
Longmore L.J noted that a 'representation of intention' was an elusive concept because a person's intentions are always subject to change. He held that "A representation of intention cannot last for ever; it only relates to the time when it is made; there must come a time when it is spent, and to my mind, that is well before the passage of 19 months". Accordingly, reinsurers were entitled to avoid the extended 1996 treaty but not the 1998 renewal.
This case has clarified the effect of misrepresentations of intent when it comes to renewal but it does not say how much time must pass before a representation of intention becomes 'spent'. This will no doubt depend on the circumstances, but one may infer from the judgment that the potential harshness of the remedy of avoidance was a factor which affected the weight that Longmore L.J. was willing to put on a representation of intent that was made 19 months earlier. This judgment applies to annual treaties. Where a continuous treaty is concerned, the same considerations may not apply.
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