This case note is based on an Article in the May 2005 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website.

Background
This was a claim by a reinsurer for a declaration of non-liability in respect of claims made upon it by the original insurer, Combined Insurance, under a reinsurance of certain Business Travel Risks.

Various AON companies leased office space in the South Tower of the World Trade Center in downtown Manhattan in New York. Because the South Tower was the second to be struck in the terrorist outrages of 11 September 2001, many AON employees were able to evacuate the building and the lives of about 400 were saved. 176, however, were killed either by the second attack, by falling debris or by the collapse of the tower itself.

Combined Insurance provided Life, Accidental Death and Dismemberment ("AD&D") and Business Travel Accident ("BTA") insurance to the AON Group of companies. The BTA insurance, which was governed by the law of Illinois, provided "24 Hour All Risk Hazard" cover for employees while on an authorised business trip. An authorised business trip was defined as a trip that AON authorised the employee "to take for the purposes of furthering its business (excluding daily commuting to or from work, vacations and leaves of absence)". The policy also included "Terrorism Hazard" cover, which covered bodily injury caused by an act of terrorism.

There was no dispute that the deaths of the 176 AON employees were caused by a terrorism hazard, as defined in the insurance, and Combined Insurance paid the amounts due under the policy to the families of all the victims of the attacks.

The problem arose at reinsurance level. Reinsurers sought to avoid the contract for material misrepresentation and non-disclosure concerning the number of business travel days AON employees were expected to take.

In addition, there was a coverage issue. Combined Insurance did not reinsure its exposure to Terrorism Hazard, so the reinsurance only covered exposure under the 24 Hour All Risk cover. Of the 176 employees who died in the incident, 7 were visiting AON's offices at the World Trade Center from other AON offices. Reinsurers accepted that the reinsured could recover in respect of those 7 employees, because they had been on an authorised business trip, as defined by the underlying policy. But, they argued, the remaining 169 fatalities did not fall within that section of the underlying cover and so did not fall within the terms of the reinsurance.

Travel days
AON's "Request for Proposal" document for BTA insurance, presented to various prospective insurers in January/February 2000, did not include any historical data quantifying the amount of travel employees had undertaken, although insurers were supplied with two floppy disks containing spreadsheets of the categories of AON Group employees.

The underwriting agent for Combined Insurance noted there was no travel data and so made an estimate of the likely amount of travel based on employee salaries, coming up with figure of 154,850 travel days. This figure was rounded up in a fax sent to prospective reinsurers on 19 February 2000, which stated "estimated days of travel for class 1 is 160,000". The fax did not explain how this figure had been calculated and the brokers did not provide the lead underwriter with any further information about travel days. Nor did he ask for any.

Reinsurers alleged that the information presented to the underwriter suggested (and was reasonably understood as representing) an estimate that had been made on reasonable grounds. Alternatively, reinsurers argued, there had been a failure to disclose that the number of travel days had been estimated on the basis of assumptions. The underwriter's evidence was that he had believed the figure was based on AON's historical travel data. Had he known the figure was based on assumptions, he would have asked for details of the method and the underlying information used and then applied his own assessment.

Expectation or belief
The crucial issue was the nature of the representation. Section 20(1) of the Marine Insurance Act 1906 provides that every material representation made by the insured or its agent to the insurer must be true. Under section 20(3) "a representation may be either a representation as to a matter of fact, or as to a matter of expectation or belief". Section 20(5) provides "a representation as to a matter of expectation or belief is true if it be made in good faith".

The question was whether the representation relied on by reinsurers was to be treated as only a representation of expectation or belief (under section 20(5)) or whether, as reinsurers alleged, it involved an implicit representation of fact that there were reasonable grounds for that expectation or belief, in which case the representation must be true (under section 20(1)).

Combined Insurance argued that a representation as to a matter of expectation or belief cannot involve such an implied representation. In any event, by failing to ask how the estimate had been reached, the underwriter had waived his right to that information.

The judge agreed. Section 20(5) of the Marine Insurance Act deems an honest representation as to a matter of expectation or belief to be true and this leaves no room for an implied representation that that there were reasonable grounds for that belief (Economides v Commercial Union [1998] Lloyd's Rep IR 9). There must, however, be some basis for the representation before it can be said to be made in good faith.

In the present case, it was not suggested by reinsurers that there was no basis for the representation. The number of anticipated employee travel days is the primary basis for underwriting business travel risks and the most reliable predictor is actual historical data from the insured. But where this is unavailable, experts called by both parties agreed that travel days can be (and often are) estimated on the basis of other information, such as the nature of the business. Salary data is a reasonable guide to the amount of travel employees may undertake, depending on the type of company.

Even if there had been scope for looking at whether there were reasonable grounds for the belief, therefore, the judge would have found that there were such grounds.

Waiver
The judge was also satisfied that, in respect of any non-disclosure, the underwriter had waived his right to the information. The Court of Appeal in Wise (Underwriting Agency) Ltd v Grupo Nacional Provincial [2004] Lloyd's Rep IR 764 held that disclosure of a material fact is waived by the insurer if the presentation of the risk is fair and contains information that would naturally lead a prudent insurer to make further enquiry, but no such enquiry is made.

In this case, the judge was satisfied that the presentation was fair because reinsurers were specifically informed that the number of travel days was estimated and no representation was made as to how that figure was calculated. A prudent underwriter would have realised that the estimate could have been arrived at in a number of ways and would have been prompted to make further enquiry which, if made, would have elicited how the estimate was calculated. Since no further enquiry was made, disclosure of the basis of the estimate was waived and reinsurers were not entitled to avoid.

Coverage issue
The coverage issue centred on whether "authorised business trip" in the underlying insurance policy included the evacuation of the building on 11 September.

Combined Insurance argued that the term referred to any journey the employee might make, however short, as long as it involved the employee leaving his or her residence or regular place of employment. The evacuation, which was clearly authorised, furthered AON's business circumstances because it protected AON's most vital asset - its employees. Reinsurers, however, argued that, on its natural and ordinary meaning, the phrase did not cover an emergency evacuation.

The insurance was governed by Illinois law, which applies generally similar rules of construction to English law. The judge was satisfied that, on their natural and ordinary meaning, the words "authorised business trip" did not cover the evacuation or attempted evacuation of a building. There was no ambiguity in the words used, nor was there anything to suggest the parties had intended the phrase to refer to an evacuation. "Trip", according to its dictionary definition, refers to a voyage or a journey and the policy itself used the word synonymously with "travel". "Business" in this context must mean some commercial or mercantile activity. Consequently, the 169 fatalities were not covered by the 24 Hour All Risk cover under the insurance and so fell outside the reinsurance.

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