DMC Category Rating: Confirmed

Background
The dispute concerned a facultative reinsurance of Banco Vitalicio, who insured the Spanish football club Atlètico de Madrid. The underlying policy provided cover against lost income from broadcasting rights if the club's first team were relegated from the first to the second division of the Spanish Professional Football League or failed to qualify for European competition.

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 insurance
The insurance policy paid out for:
"…economic loss which may arise from the fact of [the club] losing its status as a member of the first division of the Spanish Professional Football League, all of it, due to items linked to the assignment of TV and audiovisual rights entered into with Audiovisual…,which has been assessed, by mutual consent and not subject to any review or subsequent valuation, in Pesetas 2,900,000,000".

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.

The reinsurance
Vitalicio reinsured 90% of the risk in London and the European markets on the basis of a draft slip which, under the heading "Interest" stated:
"This insurance to indemnify the assured for their net ascertained loss of contracted television rights arising directly as a consequence of the relegation of the assured from the first division of the Professional Spanish Football League: Limit: PTS 2.900.000.000".

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.

Relegation
In May 2000, at the end of the 1999/2000 season, the club's first team was relegated to the second division. The club claimed, and insurers settled the claim for Pts 2.7 billion. Insurers then claimed against the reinsurers, but they sought to avoid the policy and issued these proceedings for a declaration that they were not liable.

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.

Materiality
The appeal proceeded on a very narrow point. The findings that there had been a misrepresentation and that it had induced the contract were not challenged. What was in issue was whether the misrepresentation would have been material to a prudent underwriter - and this boiled down to a question of mathematics.

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.

Judgment
The Court of Appeal upheld the judge's decision in favour of reinsurers. It was true that the contingency of not qualifying for European competition was not an insured risk, but this was irrelevant because qualification for the European competition was an integral part of the scheme for payment by Audiovisual for the broadcasting rights. It had to be assumed that the prudent underwriter would have considered the contract with Audiovisual. The refund was a significant part of the calculation of the club's earning under that contract. It was clear on the figures that there was, at the very least, a realistic possibility at the time the reinsurance was placed that the net ascertained loss could be less than Pts 2.9 billion. Consequently, the misrepresentation was material to a prudent underwriter and re-insurers were entitled to avoid.

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. [2001] 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 [1989] 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.