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misrepresentation in the draft slip which was material to a prudent underwriter
entitled reinsurers to avoid the reinsurance contract. There had also
been a breach of warranty from inception.
The Court
of Appeal dismissed Banco Vitalicio's ("the Reinsured") appeal
against the decision of Mr Justice Andrew Smith ([2003] EWHC 1102 (Comm)).
The Reinsured
had agreed to insure a Spanish football club in respect of economic
loss that might arise from the club's first team being relegated from
the first division of the Spanish Professional Football League. Prior
to placement of the risk the Reinsured obtained indications of the availability
of reinsurance on the terms of a draft slip. The description of the
interest reinsured was identical to the terms of the reinsurance slip
policy effected shortly after insurers provided the underlying policy
to the club. The interest was described as an insurance which indemnified
the club for the net ascertained loss of contracted television rights
arising directly as a consequence of relegation, with a limit of Pts
2.9bn. 98% of the risk was reinsured. Toomey ("the Reinsurers")
led the London market proportion. The Reinsurers were not shown the
underlying policy issued to the club prior to placement of the reinsurance.
The club
was relegated and made a claim against the Reinsured. This claim was
settled for Pts 2.7bn. However, the Reinsurers refused to pay the Reinsured's
claim and commenced proceedings for rescission and for declarations
that the reinsurance had no binding effect and that they had validly
avoided the policy.
Reinsurers
argued that the Reinsured had made a material misrepresentation in the
draft slip as to the nature of the underlying policy in that it was
in fact a valued policy and not as represented an unvalued policy indemnifying
the club for net ascertained loss subject to a limit. Reinsurers also
argued that the description of the underlying policy in the slip was
a warranty and that there had been a breach. Reinsurers succeeded at
first instance. On appeal the Reinsured contended that the judge was
wrong in deciding that the representation was material and that there
had been a breach of warranty.
The party-appointed
experts agreed that if the underlying policy was a valued policy for
Pts 2.9bn then it was material for an underwriter to know if, at the
time when the reinsurance was placed, there was a realistic possibility
that the net ascertained loss in the event of relegation might be less
than Pts 2.9bn. The Court of Appeal agreed with the Judge that on the
facts of the case this was a realistic possibility.
The Reinsured
raised a further argument before the Court of Appeal to the effect that
it did not matter that the Reinsured was obliged to pay the club an
agreed amount, as Reinsurers could only be liable to indemnify the Reinsured
for the loss actually suffered by the club. The Court of Appeal rejected
this argument. The interest clause misdescribed the underlying policy.
This was material as Reinsurers were entering into a policy where they
had been misled as to the nature of the underlying contract which, given
the proportional nature of the reinsurance, determined their obligation
to pay.
Reinsurers
also argued that the term in the slip as to the description of the interest
was to be construed as a warranty, which had been breached from inception.
Both parties agreed that the approach to this question was conveniently
summarised in the judgment of Rix LJ in HIH Casualty and General Insurance
Ltd v New Hampshire Insurance Co [2001] EWCA (Civ) 735.
The Court of Appeal concluded that the term in question was a warranty.
Underwriters had entered into the reinsurance without sight of the policy,
the term as to the description went to the root of the transaction and
was descriptive of and bore materially to the risk. Reinsurers' obligation
was to provide proportional reinsurance of the risk insured under the
underlying policy. They were therefore entitled to treat the description
of the underlying policy as a warranty, as it provided the description
of the risk they had agreed to reinsure. Furthermore the court said
that the fact that a breach discharges the entire reinsurance was not
a draconian remedy, as the terms of the underlying contract were of
such importance in relation to what the Reinsurers thought they were
reinsuring.
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