The following article reviews the main points of the Paul Toomey of Syndicate 2021 v. Vitalicio de Espana SA de Seguras y Reaseguros case:
In 1996, the Spanish Football Club, Atletico de Madrid, assigned broadcasting rights in respect of its home games to a Spanish Company, Gestora de Medios Audio Visuales SA. The rights were subsequently transferred to Audio Visual Sport SL ("Audio Visual"). By the start of the 1999-2000 season, Atletico de Madrid were entitled to receive from Audio Visual, in respect of the broadcasting rights, a guaranteed minimum of 3 billion Spanish Pesetas. The Club was, however, obliged to repay 500 million Spanish Pesetas in the event that it failed to qualify for European competition.
Under the arrangements with the Club, Audio Visual was required to produce a bank guarantee in an amount equal to what was outstanding from the Club to the Bank, with any payments made by Audio Visual under the guarantee being offset against the sum due from Audio Visual to the Club. Accordingly, in advance of the 1999-2000 season, Audio Visual issued promissory notes reflecting in amount and date sums payable to Atletico de Madrid for the broadcasting rights.
Audio Visual was potentially exposed under these arrangements and required insurance to be taken out in the event of the Club's relegation from the Spanish First Division. The insurance was obtained with Vitalicio. The insurance policy, which was subject to Spanish law, indicated that the sum insured of 2.9 billion Spanish Pesetas had been "assessed by mutual consent" and was "not subject to revision or subsequent valuation".
Vitalicio only retained 2% of the risk, reinsuring the balance in the Continental and London markets. 49% of the facultative coverage was obtained in the London market, the leaders being the Goshawk Syndicates at Lloyds.
The facultative reinsurance slip identified the "interest" reinsured as follows:
"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 1st Division of the Professional Spanish Football League.
Limit: Pts 2.900.000.000"
The "Conditions" section of the slip referred to "Full Reinsurance Clause" and contained the provision "all other terms as original policy".
At the end of the 1999-2000 season, Atletico de Madrid was relegated from the Spanish First Division, giving rise to a claim under the original insurance. Vitalicio appointed loss adjusters, Revenga, who suggested, as a commercial solution, that Vitalicio might offer Atletico de Madrid and Audio Visual 2.29 billion Spanish Pesetas in settlement, this being the amount outstanding on the bank loan and accordingly the amount that the Bank might accept for the release of Audio Visual's promissory notes. This proposal, however, was not acceptable either to the Club or Audio Visual, the claim ultimately being settled at 2.7 billion Spanish Pesetas. Thereafter, Vitalicio claimed under its reinsurance.
The Continental market and a small proportion of the London market agreed to pay under the reinsurance. The balance of the London market, accounting for one third of the reinsurance capacity, refused to pay, however, contending that there had been material misrepresentation in the broking of the risk, alternatively breach of warranty. The Reinsurers concerned commenced proceedings in the London Commercial Court, first, to secure jurisdiction and, second, to obtain appropriate declarations.
The Commercial Court's Findings
Having heard the evidence of the Spanish law experts, the Court concluded that the sum insured under the original insurance was expressed to be as an agreed value. There was no dispute between the parties that it would have been a material fact for a prudent underwriter to know that the original insurance was for an agreed value of 2.9 billion Spanish Pesetas if, when the reinsurance was placed, there was a realistic possibility that the loss on an indemnity basis (namely the net ascertained loss) might be less than that amount.
As regards Atletico de Madrid's potential loss, the Court concluded that, if the Club had remained in the Spanish First Division for the 2000-2001 season, it would have been paid (taking into account indexation) some 3.139 billion Spanish Pesetas in respect of television broadcasting rights, but would have been entitled to keep only 2.639 billion Spanish Pesetas unless it qualified for European competition. There was accordingly a potentially significant difference between the sum insured on an agreed value basis and on an indemnity basis. That difference was material.
Vitalicio did not dispute that, in the description of the "interest" on the reinsurance slip, a representation had been made to Reinsurers about the underlying insurance. The Court accepted that the misrepresentation in question, being material, had induced Reinsurers into writing the contract. There was accordingly an entitlement to avoid from inception.
The Court also found that there had been a breach of warranty by Vitalicio. Reinsurers' argument was that, upon the proper interpretation of the slip, Vitalicio was to be regarded as undertaking that the original insurance was properly described in the statement of their interest and, in particular, as undertaking that the insurance indemnified Atletico de Madrid for its net ascertained loss in the event of relegation, subject to the limit of 2.9 billion Spanish Pesetas, and that these undertakings were by way of warranties.
The Court agreed, giving effect to the Court of Appeal Judgment in HIH Casualty & General v. New Hampshire Insurance Co and Others (2001 2Ll LR161). In the Court's view, the fact that the sum insured under the original insurance was on an agreed value basis had a direct bearing on the risk. Thus, the description of the sum insured in the "interest" section of the reinsurance slip amounted to a warranty, the breach of which discharged Reinsurers from inception.
The Court, however, rejected Reinsurers' alternative breach of warranty argument, based upon the "full reinsurance clause". It was agreed that such a clause usually incorporated the words "being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Reassured". The Court did not consider, however, that such words imported a warranty, following certain dicta in Vesta v. Butcher (1989 AC 852). The Court took the view that the full reinsurance clause had the effect of incorporating into the contract of reinsurance all those terms of the original insurance which regulated the scope of the cover. By agreeing to it, the insurer accepted that all the relevant and applicable terms of the original contract of insurance became terms of the reinsurance, and in return the Reinsurer agreed to accept and to follow the settlements made by the Insurer.
The Court of Appeal’s findings
Vitalicio appealed, contending that:
(i) Any misrepresentation was not material.
(ii) By the terms of the slip, Reinsurers’ obligation was limited to the amount necessary to indemnify Atletico de Madrid for its loss up to an overall limit of 2.9 billion Spanish Pesetas. It did not matter, therefore, that Vitalicio was obliged to pay Atletico Madrid under the underlying policy an agreed amount, as Reinsurers could only be liable to indemnify Vitalicio for the loss actually suffered by the club.
(iii) The description of the underlying insurance in the interest section of the slip did not amount to a warranty.
The Court of Appeal rejected all Vitalicio’s arguments,
finding as follows:
(i) There was at the very least a realistic possibility at the time the reinsurance was placed that the net ascertained loss could have been less than 2.9 billion Spanish Pesetas. The difference in question was material and thus entitled Reinsurers to avoid on grounds of misrepresentation.
(ii) The reinsurance was a proportional reinsurance and the obligation of Reinsurers to pay was therefore proportional to the actual liability under the underlying policy. The interest clause in the slip described the underlying policy but was not determinative of the obligation to pay. Although the formal words of the slip stated that the Reinsurers were reinsuring the interest as set out in the slip, this assumed that the interest was correctly described, as the obligation was to pay a proportionate amount of the underlying liability. As the interest clause misdescribed the underlying policy, then that misdescription was material, as Reinsurers were entering into a contract where they had been misled.
(iii) Reinsurers had entered into the reinsurance without sight of the underlying policy. The term as to the description went to the root of the transaction and was descriptive of and bore materially on the risk. Reinsurers’ obligation was to provide proportional reinsurance of the risk insured under the underlying policy. They were therefore entitled to treat the description of the underlying policy as a warranty, as it provided the description of the risk they had agreed to reinsure. Breach, therefore, discharged the entire reinsurance.
By cross appeal, Reinsurers contended that the full reinsurance clause imported a warranty and that the Commercial Court had been wrong to find otherwise. The Court of Appeal agreed that this was a difficult issue, but took the view that it was not necessary to express any view. Such an issue should remain for decision in a case in which it actually arose for decision.
For further information, please contact John Hall or Anna McCullagh on +44 (0)20 7367 3000 or by email at john.hall@cms-cmck.com or anna.mccullagh@cms-cmck.com
