“36 …appear to have begun in about February 1995 when Mr Masoud Bader, an underwriter in Mr Hylander’s department, indicated the broad scope of the cover which Arig was seeking in a fax to Mr Tony Rowe, a director of the reinsurance broker Swire Fraser. Arig was seeking a 12-month cover on a risks attaching basis for “primary/ground-up” offshore construction risks, with a limit of US$5 million . This limit was expressed to be the limit for 100% of the risk, though it was contemplated that Arig’s line would generally be for a lesser proportion and could be limited to a maximum of US$2 million . This could no doubt have been subject to negotiation if matters had proceeded further. Mr Bader indicated that the estimated annual premium income to Arig would be about US$500,000 to US$750,000 . There is no evidence of what, if anything, Swire Fraser did in response to this request until late October 1995 when it was discussed by Mr Bader and Mr Rowe at a meeting in London of which no record survives. Mr Bader gave evidence, but had no recollection of this meeting. However, on31 October 1995 Mr Rowe wrote to Mr Bader identifying the information which Swire Fraser would require in order to market such reinsurance cover. The list included “triangulated figures on the overall account”, which is another way of referring to loss statistics on Arig’s existing book of inwards energy construction risks.”
“69 The fax included a draft reinsurance slip including a rating scale, additional clauses applicable to the treaty, a rating scale graph, the schedule of proposed excess of loss reinsurances and a list of 15 energy risks already written and intended to be ceded to the proposed treaty, setting out the name of the project, inception, expiry, and Arig's exposure and premium. The offered treaty was a reinsurance declaration treaty protecting Arig for "Construction, Installation, Commissioning and Maintenance, plus Operating Exposures as advised". The draft slip did not expressly refer to energy construction but the covering fax and excess of loss order form made it clear that the proposal related to energy construction business written by Arig. It was proposed to cover losses occurring on risks attaching during the period of 18 months from1 January 1996 , thus having retroactive effect back to the start of the 1996 year but subject to the qualification that there were "no known or reported losses at date of order". The draft provided for a maximum original policy period of "36 months, plus discovery/maintenance period": in other words, the direct insurance was to cover projects with a construction period of three years, together with a further period after completion in which defects might be discovered. The limit of the treaty was "US$500,000 any one unit and/or item and/or structure or currency equivalent each and every loss, any one accident or occurrence" and the offered treaty was a first loss treaty, meaning that Albingia would pay the first US$500,000 of each and every covered loss suffered by Arig. No information was provided about the level of deductibles already written or expected to be written by Arig and thus the level at which losses would begin to be suffered by Arig. There was no disclosure of any loss statistics for energy risks previously written by Arig.”
“74 On3 September 1996 , Mr Stephenson of NMB sent a fax to Ms Jerabek [at Albingia] including a revised slip and order for excess of loss reinsurance for US$350,000 in excess of US$150,000 . He confirmed that the other 50% of the treaty had been placed with Rhine Re. There is no surviving documentation or evidence about the way in which the business was broked to Rhine Re. The slip was signed by Ms Jerabek on4 September 1996 confirming Albingia's 50% line. She also signed the order for excess of loss protection. She probably did so without needing to consult further with Mr Holzapfel, who was in London at the time.”
“91 As time went by, losses continued to mount. Between26 February 1998 and6 November 2006 , Albingia and subsequently Axa paid total claims to Arig of over US$2.5 million under the 1996 treaty and over US$3.2 million under the 1997 treaty. As losses continued, Axa began to question entries and figures in Arig's treaty statements and made various requests for information and clarification relating to claims for which payment was sought. The process of obtaining information proved extremely slow, mainly due to delays by Arig in responding to Axa's requests. It is unnecessary for the purpose of this judgment to recite the detail. Axa's principal concern was that certain claims made by Arig under the treaties appeared to relate to risks which had not been ceded to the treaties prior to notification of the loss. It had no suspicion or grounds for suspicion at this time that there might have been a failure to disclose material facts or misrepresentation at the time when the treaties had been concluded.”
“This is a new Treaty for the Reassured and as such does not have a corresponding loss record”
“158 Accordingly, the relevant question on the issue of inducement is whether Albingia has discharged the burden of proving that if the 1995 loss statistics going back to 1989 as set out in the table at [32] above had been disclosed, together with whatever fair explanation would also have been given of those figures, Mr Holzapfel would not have written the 1996 treaty or would have done so on different terms. 159 Mr Kimmins submitted on behalf of Axa that, if the 1989 and 1990 figures had to be disclosed, Albingia would certainly not have written the 1996 treaty. It would be, in his words, "game over". I do not accept, however, that this is a fair reflection of the evidence. I begin by examining what Mr Holzapfel said about this and then consider some of the other factors which would or might have had a bearing on this question”
"Let me guess, without having gone through that, he would only have written the risks with the best performance and ceded them to the first loss treaty, is that right?"
“161 In cross examination Mr Holzapfel was first asked some general questions about how he would have reacted if he had been told by Mr Stephen Card, a broker at NMB whom he knew well, that Mr Hylander had implemented a conservative underwriting approach. His response was that he would have wanted to know more about this new approach, how it differed from what had gone before, and what it was intended to achieve, but that he would have accepted what the broker had said. When he was asked to assume that he had been told that before Mr Hylander joined Arig its underwriting had been somewhat directionless but that Mr Hylander had taken over in mid 1991, Mr Holzapfel said that he would still have wanted to see the company's performance on its prior underwriting, but that such disclosure would have been the basis for a discussion ("put the facts on the table first, and then we can discuss how things will develop into a wonderful world going forward"). If he had been told that Mr Hylander was "focusing on" (not necessarily writing exclusively) shallow water risks, relatively benign weather areas, tested technology and narrow bore pipelines Mr Hylander gave evidence to that effect. , that was something on which he would have placed reliance. 162 He was next asked for his reaction to the Arig reconstruction, which he had not seen before, and which went back only to 1991. I have already recorded his initial reaction at [106] above. He remained sceptical about this kind of hindsight exercise. Subsequently, however, when asked to assume that as well as the actual figures going back to 1991 the NMB presentation had included information that Mr Hylander had only taken over in 1991 after which he had implemented a new strategy, which if applied to the 1991 and 1992 years would have resulted in loss ratios below 30% (as in the Arig reconstruction), Mr Holzapfel said that Albingia would probably have written the risk on the same terms which it did.”
“Conclusions on inducement. From all this material, I draw the following conclusions. First, despite his honesty as a witness, it is not safe to rely on Mr Holzapfel’s assertions as to whether or not he would have written the risk in the various scenarios about which he was asked. It is easy for an underwriter, focusing twenty years after the event on a single issue such as poor loss records and inevitably affected to some degree by hindsight, to express a genuine and firm opinion that if he had known about such records, he would never have written the business. However, the environment of a trial cannot faithfully recreate all the circumstances as they would actually have existed, at any rate when the trial takes place so long after the event that the underwriter in question has no recollection at all of the actual transaction. Second, Albingia did in fact write the treaty despite the absence of any information at all about one factor, namely Arig’s approach to the deductibles in its original policies, which both in this action and elsewhere Mr Holzapfel has described as an important consideration. It follows that even matters which in general he would regard as essential may in some circumstances not be so. Third, Mr Holzapfel regarded Arig as a high quality reinsured which in general he was keen to support. Whether or not he knew Mr Hylander (he said that he did not know of him, although that seems surprising) he must have satisfied himself that it was a well-managed company with competent underwriters when agreeing to write a substantial line of the quota share treaty. Fourth, Mr Holzapfel was a fair minded man who would have been willing to listen to whatever explanation of poor loss records the broker (with whom he had a good working relationship) provided and to consider it on its merits. Indeed, he had done precisely this in the case of the Copping first loss treaty where there were poor loss records but where Albingia nevertheless agreed to take a line of 50%: see [49] above. Fifth, NMB could (and would) fairly have explained that the poor results achieved by Arig were on risks written for the most part under a previous underwriter and that Mr Hylander, following his arrival in 1991, had adopted a more rigorous and selective approach and, moreover, an approach to energy risks in general which had satisfied Mr Holzapfel for the purpose of writing the quota share treaty. Sixth, in addition, NMB could have made the point made in evidence by Mr Outhwaite that the particularly bad results achieved in the 1989 and 1990 years reflected not only the premium driven strategy of the previous underwriter but the adverse market conditions and disastrous losses sustained on risks written during those years by the market in general, which were not comparable with the situation as it was believed to be in 1996. Seventh, although first loss reinsurance on energy construction risks was a particularly hazardous kind of reinsurance to write, and many underwriters were not willing to do so, Mr Holzapfel was not of their number. On the contrary, he wrote a number of such treaties and was not averse, therefore, to running such risks. In all those circumstances there is in my judgment real doubt as to what Mr Holzapfel would have done if a fair presentation of Arig’s past loss records going back to 1989 had been made to him, together with the explanatory points which Arig or NMB on its behalf could fairly have made. It is not a plain case in which the answer is obvious. In the end I am not persuaded that it is more likely than not that he would have refused to write the treaty, or would only have done so on different terms. It follows that Axa’s case for avoidance of the 1996 treaty must fail”
“1. I am going to refuse permission to appeal. So far as the first proposed ground is concerned, it is submitted that I wrongly based my assessment on what could have happened if the material loss statistics for 1989 to 1995 had been disclosed, not on what I concluded would have happened, which is said to be the correct test. It is perhaps not for me to try and construe my judgment, but my reading of the critical paragraphs at any rate, for what it is worth, is that I was indeed applying the test of what would have happened. I draw together my conclusions on inducement at paragraphs 171 to 179 and in paragraph 176 I introduce the fifth consideration by saying that NMB could and would fairly have explained et cetera. 2. I would read the succeeding paragraphs as dealing with the matter on the same basis. That was certainly my intention. So that what I concluded was applying the test which Mr Holmes wishes to submit is the correct test. Accordingly, if AXA wants to pursue that, it must do so by seeking permission from the Court of Appeal.”
“the positive points made by Arig with a view to persuading prospective reinsurers that these historic results did not reflect the outcome which might be expected on the new risks for which Arig was seeking reinsurance had nothing to do with the fact that there was a new underwriter now in place and that a radically different underwriting strategy was now being followed. Instead Arig focused on the higher deductibles and higher premiums which it suggested could be achieved in 1995 market conditions”
“189. Had ARIG's relevant historic loss record as at31 December 1995 been included in the NMB offer fax17 July 1996 then I would probably have instructed Ms Jerabek to decline the offer. The only other possibility is that I would have instructed Ms Jerabek to request further information from NMB, including relevant "as if" calculations specific to the proposed treaty, to see how the limits and premium amounts associated with the 1996 First Loss Treaty as proposed, affected the performance of the construction account. These "as-ifs" would include the application of the proposed premium scale to the historical account, taking account of any deductions to premium under the First Loss Treaty, and limiting the individual losses to the US$500,000 proposed treaty limit. 190. Upon receipt of such "as-if" calculations (as set out in the table at 25A of AXA's Re-Re-Re-Amended Particulars of Claim), I would certainly have instructed Ms Jerabek to decline the 1996 First Loss Treaty or, if such figures were not provided until after my return to the office on29 July 1996 , I would have declined the offer myself.”
“28. Since NMB had provided Albingia with the information that would be needed to decide whether to underwrite the 1996 Treaty I would have been surprised if it had also asked for historical loss statistics - Albingia already knew how many risks to expect, how much premium to expect and how many risks there would be. Had it done so, however, I would have provided them together with a clear warning that they were not reflective of my underwriting intentions going forward, which accorded with the information contained in the slip”
"Had ARIG's relevant historic loss [history] as at 31 December been included in the NMB fax… I would probably have asked Ms Jerabek to decline the offer. The only other possibility is that I would have instructed Ms Jerabek to request further information from NMB including relevant 'as-if' calculations specific to the proposed treaty, to see how the limits and premium amounts associated with the 1996 first loss treaty as proposed, affected the performance of the construction account. These 'as-ifs' would include the application of the proposed premium scale to the historical account, taking into account deductions…"
“When asked about this apparently surprising omission, Mr Holzapfel said that he had to leave it to the ceding company to decide whether a risk was adequate in terms of pricing, conditions and deductibles. He added that with hindsight "it would have been nice" to have information about Arig's deductibles, but that "it was sort of a carte blanche to say, Yes, we want to support them" and was "a shot in the dark, insofar we had no, say, information about deductibles or whatever.”
“160 In his first witness statement Mr Holzapfel said that if Arig's historic loss record as at31 December 1995 had been included in the NMB offer fax of17 July 1996 , he would probably have instructed Ms Jerabek to decline the offer. That evidence is not difficult to accept in isolation, but it assumes that the figures were presented without explanation, which is not the relevant scenario. However, his witness statement went on to say that if Arig had told him that it had changed underwriter in 1991 and that the new underwriter wrote a different kind of book, this would not have made any difference: he would still have declined the treaty irrespective of this explanation. In his second statement Mr Holzapfel insisted that such an explanation would not have affected his usual approach to assessing risk, which "always involved a careful assessment, based on the documents presented to me by the broker, of the profitability of the account over time". This, however, was an over statement. While I accept that examination of loss statistics was Mr Holzapfel's usual practice, it was not invariably so. There is at least one case in evidence where he did not do so, which was a case where Albingia already had an existing relationship with the reinsured (AIG: see [51] above).”
“No. I don’t think so. Preparing statistics with the benefit of hindsight is not acceptable. I want to see the full picture and then we can go into details, but show the full picture first, please. Put facts on the table and then we can say what are they doing to implement, how are they going to do this, do another as if exercise and whatever but not on the basis of as if.”
“Mr Holzapfel's answer was that he did not think that he would have entered into a relationship with Arig on the first loss treaty, because Arig had demonstrated that it was not able to manage the business properly over time. The scenario was that there had been a period of poor underwriting decisions with an underwriter following what turned out to be a bad policy, but that the situation had been managed by the introduction of a new underwriter who was successfully implementing a more rigorous approach”