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Avoidance of Cover: Waiver and Affirmation
During the night of 3rd/4th April 2001 a container including 8 boxes of (mostly) Rolex watches, worth just over US$700,000, was stolen near the popular tourist resort of Cancun in Mexico. The contents of the container, which had been imported from Miami, were owned by Perfumeria Ultra S.A. de C.V., whose retail outlet in Cancun specialised in the sale of luxury gift items, including jewellery, imported from the USA.
The property that was stolen had been insured with Grupo Nacional Provincial S.A. ("GNP"), one of Mexico's largest insurance companies. However, the dispute which led to this litigation arose in connection with the reinsurance of the Perfumeria cover, which GNP's brokers had effected with a group of Lloyd's syndicates for which W.I.S.E (Underwriting Agency) Ltd acted as underwriting agents. The facultative reinsurance had been placed with W.I.S.E on the basis of a slip presentation, which had been prepared in English by GNP's Mexican brokers. However, the presentation did not disclose that Perfumeria's trade included the importation of watches; neither did the presentation include the packaging section in the Spanish language version, which would have revealed that Perfumeria dealt in Rolex watches. In those circumstances the reinsurers sought to avoid the reinsurance, on the ground that GNP had failed to comply with their obligation to disclose material facts, and commenced proceedings against GNP seeking a declaration of non-liability: WISE (Underwriting Agency) Ltd & Ors -v- Grupo Nacional Provincial S.A..
At first instance Mr Justice Simon held that the intended carriage of high value brand-name watches was a material fact, which ought to have been disclosed, and that reinsurers had not waived their right to that disclosure, as GNP alleged. The judge further held that reinsurers had been induced to write the risk by the non-disclosure, and he dismissed GNP.s claim that reinsurers had affirmed the contract by their later conduct. Consequently, for the reasons summarised in more detail in the bulletin published on the Waltons & Morse website in October 2003, reinsurers were held to be entitled to avoid the contract of reinsurance.
GNP appealed - initially on the issues of materiality, waiver, inducement and affirmation. However, it subsequently dropped its appeal on the materiality issue. Only three issues, therefore, arose for consideration by a Court of Appeal comprising Lords Justices Peter Gibson, Rix and Longmore. In the event, only one of the three issues was resolved unanimously in the judgment recently handed down by the Court.
Waiver
The foundation of GNP's case on waiver was that they had made a fair presentation of the risk and that, had the W.I.S.E underwriter wanted more information, he could and should have asked the placing broker for it. The presentation showed that Perfumeria dealt in a wide range of high value giftware, and that they imported each year millions of dollars worth of "clocks" at an average cost of US$1,500 each, rising to US$18,000. GNP contended that, had the underwriter been concerned to ensure that Perfumeria did not require transit cover for watches (which, according to his evidence, he never knowingly insured), a simple enquiry would quickly have elicited that the reference in the presentation to "clocks." rather than "watches", was due to a mistranslation. No such enquiry had, however, been made. Therefore, in reliance on section 18(3)(c) of the Marine Insurance Act 1906, GNP submitted that reinsurers had waived their right to such disclosure.
That submission was rejected by the judge, and his decision in that regard was upheld by a majority of the Court of Appeal.
In view of GNP's concession that the information that had not been disclosed was material, Longmore and Peter Gibson LJJ concluded that there was no fair presentation of the risk. That being so, it became necessary to ascertain whether the facts that had been disclosed in the presentation would naturally have prompted a reasonably careful underwriter to make further enquiries (since an omission in those circumstances to make such an enquiry could lead to a finding that disclosure of the fact which the enquiry would reveal had been waived: CTI -v- Oceanus Mutual Underwriting Association (1984)). The Court was agreed that in the normal case an underwriter dealing with a broker in the London market should be able to accept at face value a description of the goods to be insured. It was further agreed that, in the present case, the underwriter was entitled to assume that the presentation disclosed the items of particular value that were to be shipped. The judge had held that the use of the mistranslated word "clocks" should not have raised suspicion in the mind of the reasonable insurer that there were other circumstances which would or might vitiate the presentation. Longmore LJ and Peter Gibson LJ agreed that that was a conclusion which the judge was entitled to reach on the evidence and, bearing in mind that an assured who seeks to rely on waiver must show a "clear case", neither was convinced that the judge was wrong
However, Rix LJ disagreed. In his dissenting judgment he emphasised that the doctrine of waiver is ultimately founded on the concept of fairness and that, but for an error in the translation from Spanish of a single word, no issue of non-disclosure would have arisen. The essential question was whether, having seen the presentation, a prudent insurer would have been fairly put on enquiry. The judge had held that there was no clear case of waiver. However, that was not a conclusion that Rix LJ could accept. In his judgment the presentation was fair, and it would be unfair to allow reinsurers to take advantage of an error of translation in a case where, on the evidence, an exclusion of watches would have solved the underwriter's problem. He did not believe that the judge's conclusion reflected the demands of commercial common-sense and fairness on these particular facts. He would, therefore, have allowed the appeal on this aspect of the matter.
Nevertheless, by a 2:1 majority, GNP's appeal on this issue was dismissed.
Inducement
The trial judge had found that, had the W.I.S.E underwriter been informed that Perfumeria traded in high value brand-name watches shipped from Miami to Mexico, he would not have agreed to the reinsurance. That was a finding of fact based on the evidence that the underwriter had given at the trial. The Court of Appeal was agreed that such a finding should not be changed without the best of reasons, and GNP.s appeal on this issue was rejected unanimously.
Affirmation
Nevertheless, whilst it was also an issue of fact, the Court reached a different conclusion regarding the last of the issues that arose on the appeal. At the original trial GNP had asserted that reinsurers had lost their right to avoid the reinsurance contract, alleging that the W.I.S.E underwriter had given an oral notice to cancel the reinsurance contract at a meeting with the placing broker which took place after the claim was presented. The judge had accepted that a notice of cancellation can amount to affirmation of the contract, provided it is given at a time when the insurer is aware of its right to avoid the contract (Mint Security -v- Blair (1982)). However, on the evidence, he had concluded that the underwriter had not given an unequivocal notice of cancellation to the broker.
In the Court of Appeal Rix LJ reviewed the evidence that had been given at the trial by the underwriter and the placing broker respectively. Having done so, he was satisfied that a contractual notice of cancellation was in fact given. Whilst also reluctant to interfere with a finding of fact made by the trial judge, Peter Gibson LJ considered that the judge's failure to take account of the evidence that the underwriter took a copy of, and filed, an e-mail sent by the broker to his principals referring to the notice of cancellation, without saying anything to the broker about it, undermined the validity of the judge's conclusion. Both, therefore, allowed GNP's appeal on this issue.
Longmore LJ could not, however, agree. The judge had been faced with a confident assertion by the underwriter that he had not given notice of cancellation, countered by an assertion by the broker that oral notice had been given. He had referred to the absence of a written cancellation notice, together with the broker's frank acceptance when giving evidence that a misunderstanding may have occurred, and had recognised that such difficulties presented an obstacle to concluding that a reasonable person in the position of GNP would have interpreted what the underwriter had said as an affirmation of the contract. Longmore LJ could detect no error in that reasoning. The judge had decided that GNP had failed to discharge the burden of proving affirmation. Longmore LJ stated that he would have reached the same conclusion and he would dismiss the appeal.
However, as the majority of the Court of Appeal allowed GNP's appeal on the affirmation issue, the outcome was that reinsurers' claim for a declaration that they were entitled to avoid the reinsurance contract was unsuccessful. As a result, judgment was given for GNP on its counterclaim for an indemnity under the reinsurance policy.
If you have any queries concerning the above, please do not hesitate to contact Christopher Dunn, Christopher Chatfield or Ian Charles-Jones.
July 2004
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