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8/4 M97/February 2018 Reinsurance

Example 8.1
By way of general illustration, the following facts have been held by the courts in reinsurance cases to be material:
• Nature of the risks underwritten.
–In WISE (Underwriting Agency) Limited v. Grupo Nacional Provincial (2004), the high value watches used in
a shipment to be reinsured were mistranslated as ‘clocks’ in the original Spanish policy. This was held to be a
breach of the duty of disclosure.
– Similarly, in Aneco Reinsurance Underwriting v. Johnson & Higgins (2002) the broker described the
underlying risk as a proportional quota share contract, when it was in fact a facultative obligatory treaty. This
was judged as being a material misrepresentation.

• Arbitrage underwriting.
–In Sphere Drake Insurance v. Euro International Underwriting (2003), reinsurance was sought for a US
workers’ compensation ‘carve-out’ business in the expectation that it would be loss making on a gross basis,
but profitable on a net basis. The court considered that, while this practice was disproved of by many, it was
neither objectively nor subjectively dishonest but should have been disclosed.

• The reinsured who is not an individual knows only what is known to one or more individuals who are
part of the reinsured’s senior management, or responsible for the reinsured’s reinsurance (for
example, the risk manager or broker). As to what the reinsured ought to know, it is that which ‘should
reasonably have been revealed by a reasonable search of information available to the (re)insured’, the
Act having introduced the concept of a ‘reasonable search’. This includes information held within the
reinsured’s organisation or by any other person, for instance, the reinsured’s agent.
The second aspect to the duty of disclosure is a fallback position in the event that the reinsured fails to
fulfil the primary duty of disclosure. The reinsured must give the reinsurer ‘sufficient information to put a
prudent (re)insurer on notice that it needs to make further enquiries for the purpose of revealing those
material circumstances.’

So, the duty of disclosure may be positively satisfied by the reinsured giving something less than full
disclosure of all material information, provided what has been disclosed is enough to put the reinsurer
on notice that it needs to ask further questions. Being unduly cryptic in referring to a material matter, for Reference copy for CII Face to Face Training
example, may not satisfy the duty on the basis that ‘sufficient information’ had not been provided to put
the reinsurer on notice to make further enquiries.
It remains to be seen how the courts will deal with any deliberate failures to disclose information even
when sufficient ‘signposts’ have been left to put the reinsurer on notice. As the reinsurance contract
remains one of utmost good faith, it may be that such conduct will be held to amount to deliberate
breach of the over-arching duty to make a fair presentation.
Excluded from the disclosure obligation are circumstances which diminish the risk, which are known,
ought to be known or presumed to be known by the reinsurer, and facts waived by the reinsurer, all in
the absence of enquiry.

8 Presentation
Chapter The manner of the presentation of the risk is also prescribed by the Act. Disclosure must be made in a
manner which is ‘reasonably clear and accessible to a prudent (re)insurer’. It is not acceptable, for
example, to ‘data-dump’ a vast amount of unordered, indigestible data in an attempt to avoid
inadvertent non-disclosures.
Under the Act, a material representation is fair if:
• as to a matter of fact, it is substantially correct; and
• as to a matter of expectation or belief, it is made in good faith.
For example, in Pan Atlantic v. Pine Top (1994), a broker made available full loss information to an
underwriter but, at the same time, showed summary loss statistics which were inaccurate. The House of
Lords held that this was not a fair presentation .

Question 8.1
How may the disclosure of an inaccurate loss record not constitute a material non-disclosure?

Remedy
The remedy for breach of the obligation to make a fair presentation depends upon the reinsurer being
able to demonstrate that, but for the breach, it would not have entered into the contract at all, or would
have done so only on different terms.