Paul Toomey v. Banco Vitalicio CofA
Paul Toomey of Syndicate 2021 v Banco Vitalicio De Espana
SA De Seguros y Reaseguros
George Leggat QC, instructed by CMS Cameron McKenna, for the respondent reinsurers, Paul Toomey
REINSURANCE: MISMATCH OF INSURED INTEREST: ORIGINAL INSURANCE A VALUED POLICY: REINSURANCE POLICY UNVALUED: MATERIALITY:: WARRANTY OF INSURED INTEREST: BREACH: FULL REINSURANCE CLAUSE
In this case, the Court of Appeal upheld the judgment at first instance in favour of reinsurers, in a dispute about the nature of the underlying policy insuring a Spanish football team against economic losses arising from relegation. The Court of Appeal held that the description of the Insured Interest was a material misrepresentation and a warranty, but refused to be drawn into deciding whether or not insurers had, by the full reinsurance clause, warranted that the underlying cover had been placed on the same terms as had been disclosed to reinsurers.
DMC Category Rating: Confirmed
This case note is based on an Article in the June 2004 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers,DLA. DLA is an International Contributor to this website.
The club had been required to enter into the policy under the terms of its agreement with a broadcasting company, Audiovisual. Under this agreement, Audiovisual agreed to pay the club Pts 3 billion for the right to broadcast its home matches. This comprised a guaranteed sum of Pts 2.625 billion (indexed) and a share of net profits of at least Pts 375 million. If the club were relegated, it would be paid only Pts 150 million for the broadcasting rights to all home games. In addition, if the club failed to qualify for European competition (which would happen if it failed to finish among the top seven teams in the first division or did not win the Copa del Rey) it had to repay Audiovisual Pts 500 million.
The policy was subject to Spanish law. Under Spanish law, this insurance was a valued policy, which meant that the insured would be entitled to a payment of the pre-agreed sum of Pts 2.9 billion, even if its actual loss were less than this.
This wording was repeated in the ensuing slip policy, which included under the heading "Conditions" "Full reinsurance clause…All other terms as original policy". Reinsurers did not see the underlying policy before accepting the risk.
Reinsurers' main argument was that there had been a misrepresentation in the draft slip as to the nature of the underlying policy. It was intended that the insurance and reinsurance would be back-to-back, but the draft slip suggested the underlying insurance was an indemnity policy with a limit of Pts 2.9 billion, rather than (as was the case) a valued policy in the sum of Pts 2.9 billion. This was a material misrepresentation that had induced the reinsurers to enter into the contract.
In March 2003 the court of first instance found in reinsurers' favour and held that they were entitled to avoid the policy from inception.
It was agreed that the misrepresentation would not have been material unless there was a realistic possibility that the net ascertained loss in the event of relegation would be less than Pts 2.9 billion. In those circumstances, insurers would have been bound to pay the club the agreed figure of Pts 2.9 billion (even if the actual loss was less) and would claim the full amount paid out from reinsurers. The judge held the misrepresentation was material. Insurers appealed.
Reinsurers claimed that, if the repayment of Pts 500 million were taken into account, there was a real possibility that the actual loss to the club would be less than Pts 2.9 billion. By their calculation, if the club were relegated and failed to qualify for European competition, its overall economic loss would be Pts 2.639 billion. Insurers argued that the Pts 500 million did not count because the risk insured was the relegation of the first team and loss of television rights as a result, not the obligation to repay Pts 500 million.
Although no longer strictly relevant, a further issue arose as to whether the description of the interest in the slip was a warranty. The Court of Appeal agreed with the judge that it was.
Where there is no express warranty, the court will have to determine the intention of the parties, bearing in mind that, if a warranty is breached, insurers will be discharged from liability as from the date of the breach. The factors to be taken into account were summarised by Rix LJ in HIH Casualty & General Insurance Limited v New Hampshire Insurance Co.  EWCA. 2 LLR 161: whether it is a term that goes to the root of the transaction, whether it is descriptive of or bears materially on the risk of loss and whether damages would be an unsatisfactory or inadequate remedy.
In this case, the term describing the interest went to the root of the transaction and bore materially on the risk reinsurers agreed to reinsure. They had not been given sight of the underlying policy so the terms of that policy as recorded in the slip were crucial to their knowing what they were reinsuring. Damages in such circumstances would have been difficult to quantify.
Another point concerned the full reinsurance clause which read "Full reinsurance clause…All other terms as original policy". Reinsurers claimed this introduced wording along the lines of "Being a reinsurance of and warranted the same gross rate, terms and conditions as to and to follow the settlements of the Reassured" and that this amounted to a warranty. In this, they relied on comments made by Lord Griffith in Vesta v Butcher  AC 852, who interpreted the phrase "warranted same gross rate terms and conditions" as a warranty by the insurer that it had placed the risk on the same terms as disclosed to reinsurers.
At first instance, the judge accepted that a full reinsurance clause is generally understood to incorporate into the reinsurance all those terms of the underlying insurance that regulate the scope of the cover. But he felt the wording of the clause was not clear enough to introduce a full-blown warranty about the terms of the underlying insurance. On appeal, however, the Court of Appeal declined to comment. It was not necessary to reach a decision on the point and it preferred to decide such a difficult issue in a case in which it actually arose.
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