QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| PAUL TOOMEY OF SYNDICATE 2021
|- and -
|BANCO VITALICIO De ESPANA SA
De SEGUROS Y REASEGUROS
(instructed by CMS Cameron McKenna) for the Claimant
Anthony Boswood Q.C. and David Edwards
(instructed by Thomas Cooper & Stibbard) for the Respondent
Hearing dates : 4, 5, 10, 11 March 2003.
Crown Copyright ©
Mr Justice Andrew Smith:
"Type: Facultative reinsurance slip
Form: J(A)NMA 1779 slip policy.
Assured: Atletico de Madrid
Reassured: Vitalicio Seguros
Period: 22nd August 1999 until the end of tournaments detailed hereafter nominally 22nd August 2000
Interest: A) 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
B) To indemnify the assured in respect of the contracted bonuses to be paid to the squad in the event of obtaining the following classifications in different tournaments:
(1st division) pts 1,000,000,000
Conditions: Full reinsurance clause.
Claims control clause (as attached)
Proof of interest and sight of contracts
Legal clause (as attached)
In the event of the assured being relegated to the 2nd division, there will not be any indemnity in respect of the section B)
All other terms as original policy.
Order hereon: 49%
Premium: Pts 158,000,000 in full
Information: At. Madrid last 25 years best results:
1. First division league titles: 1976, 1995
2. Copa del Rey titles: 1985, 1991, 1992, 1996
3. UEFA Cup titles: nil
At. Madrid historically has never been in the 2nd division.
New acquisitions: …"
… VITALICIO …
POLICY HOLDER AND INSURED
Policy Holder: … ATLETICO …
Insured: The same.
POLICY NUMBER, EFFECTIVE TERM AND AGENT
Effective term of policy: from: 00.00am, August 22, 1999
until: 00.00am, August 22, 2000
RISKS AND POLICY COVERAGE
To indemnify AUDIOVISUAL…, for economic loss which may arise from the fact of ATLETICO… losing its status as member of the first division…, all of it, due to items linked to the assignment of T.V. and audio-visual rights entered into with AUDIOVISUAL … for the exploitation of static and dynamic advertising rights and others, which has been assessed, by mutual consent and not subject to any review or subsequent valuation, in Pesetas 2,900,000,000 …
Scope of the coverage provided for in this section one is limited to the losing of such status which arises only and exclusively from strictly sport reasons.
To indemnify the amount of the bonuses agreed between … ATLETICO and the players, trainers, doctors, mates, masseurs, etc. of the first team squad should it achieve any of the aims set forth hereinbelow:
1. CHAMPION of the First Division Professional Football League. Insured amount: Pesetas 1,000,000,000…
2. CHAMPION of the King's Cup (Copa del Rey). Insured amount: Pesetas 500,000,000…
INSURANCE NET PREMIUM
It amounts to Pesetas 158,000,000… for all the options covered as a whole…Such amount shall be paid by the Insured Company on the following dates…
1. This insurance shall not cover …
12. Loss arising from financial reasons of any kind whatsoever including, but not limited to: financial loss, insolvency, breach or violation of any legal provisions in force, changes of currency exchange or stability."
In setting out these provisions, I have corrected the translation of the provision about the premium: the translation refers to payment by "the Insurance Company", a clear mistranslation of "la Entidad Asegurada". Although the Additional Clauses are not grammatical, it is clear and uncontroversial that Additional Clause 12 was by way of an exception from the cover.
At clause 1, which was headed "People intervening in the Contract",:
"1.1 The Taker of the insurance, who has requested and contracted the policy.
1.2 The Insured, that is to say, the person who has an economic interest in the asset covered by the insurance. He may if he is interested, fulfil the duties and obligations which in principle, correspond to the Taker of the Insurance, Transferring, unless a different Beneficiary has been designated, the rights deriving from the contract.
1.3 The Company, which is the Insurer, the fundamental aim of which is to offer insurance. "
At clause 2.2, under the heading "Documentation of the Contract",:
"Subsequent to its formalization, the policy may be amended by agreement with the Taker of the Insurance, by means of annexes, numbered correlatively, as many times as necessary."
At clause 13.1, "…the laws of Spain shall apply to this Contract".
i) Did Vitalicio give a warranty to the reinsurers that the interest insured was an obligation to indemnify Atletico for their net ascertained loss of contracted television rights resulting from relegation?
ii) If so, were Vitalicio in breach of their warranty (a) because the underlying insurance policy, being for an agreed value in the sum of pts 2.9bn, was not for an indemnity of ascertained loss, and/or (b) because the policy provided an indemnity for Audiovisual's loss, and not for that of Atletico?
iii) Did Vitalicio misrepresent the underlying insurance policy in these respects?
iv) If so, (a) was the representation material, and (b) were the reinsurers thereby led to enter into the reinsurance contract?
When the trial before me started, Vitalicio also asserted that the reinsurers were prevented (by a waiver or an estoppel or an affirmation) from asserting that the reinsurance contract was discharged or avoided, but Mr A Boswood QC, who appeared for Vitalicio, did not pursue this argument, in my judgment rightly.
"B).- For each of the seasons during the in force period of this Agreement where [Atletico] fails to be classified amongst the first four of the Official Championship League, [Atletico] will be obliged to return to [Audiovisual] the sum of FIVE HUNDRED MILLION PESETAS … plus the corresponding VAT charge, before the start of the following season or failing that, to authorise [Audiovisual] to deduct the same sum from the amounts due in respect of the following season."
"… it is indicated that in the issued policy given under interest of the assured: "to indemnify Audiovisual … with figure… for the financial losses to which you will be subjected… which have been estimated by common agreement as a fixed quantity and are not subject to revision or later evaluation at ptas. 2,900,000,000 while in the cover note it is not indicated that the amount is fixed and therefore not subject to revision."
"Notwithstanding the above, we are pleased to confirm our firm commitment to cover the entire 2.7 billion pesetas…, agreed with you as full indemnity for the financial loss experienced by [Atletico] as a result of its relegation to the second division, for reasons linked to licensing of television and audiovisual rights to Audiovisual…
"Considering that Audiovisual … had advanced the Club the sum of such rights for season 2000/2001 and that relegation to the second division compels the Club to return this, which is why Audiovisual Sport was included as beneficiary, payment of the ... indemnity will be direct to Audiovisual …, after deducting the sums paid on account (12,000,000,000 pesetas), on 29 December 2000."
"We wish to confirm that in relation to policy…we understood at the time of taking the policy and subsequently that the interest covered by the policy was the net ascertained loss which our Club might suffer from loss of television and audiovisual rights as contracted with Audiovisual … up to a limit of cover of Pesetas 2,900,000,000, which in view of the fact that these loss of rights were established in our contracts with Audiovisual … in that sum of, at least, Pesetas 2,900,000,000, were predetermined under the policy in that amount. Any claim made under the Policy was to be paid to Audiovisual …".
The insurance contract
"Article 1281: If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its clauses shall be relied upon. If the words appear to contradict the evident intention of the contracting parties, the latter will prevail over the former.
"Article 1282: In order to judge the intention of the contracting parties, regard must be had principally to the acts of the parties, both those contemporaneous and subsequent to the contract."
"Notwithstanding what is provided for in Article 26, the parties, by common agreement, may set out in the policy, or subsequent to the conclusion of the contract, the value of the insured interest that will have to be taken into consideration when calculating the indemnity.
It will be understood that the policy is agreed when the insurer and insured have expressly accepted in the policy the value allocated to the insured interest.
The insurer may only challenge the agreed value where the acceptance of the same may have been induced by violence, intimidation or fraud, or when by mistake the estimation may be substantially higher than the real value at the moment of loss, as determined by experts."
If the contract of insurance is to be interpreted without regard to the acts of the parties upon which Vitalicio rely, it falls under article 28.
"When from what is claimed and proven in the proceedings doubts arise based on the true intention of the contracting parties, the legal authority cannot rely on the mere literality of the terms of the contract, however clear they may be, without having the duty to investigate what is truly wanted or the clear intention of the contracting parties, using for this the other legal means covered in the legislation, one of which is to address the contemporary and later actions of the contracting parties, in accordance with article 1282 of the Civil Code."
"Section 1281 of the Civil Code is a rule of construction of a psychological or subjective type and that tries to avoid an absolutely clear declaration of intent being altered on the pretext of an act of interpretation.
In other words, as, for all purposes, it affirms the judgments of this Division of the 12th of June 1990 that, as the terms of the contractual clause are clear, without offering rational doubt of the parties' intention, we have to follow its literal meaning, without it being acceptable to apply another rule of construction, nor other interpretational arguments that distort the expressions clearly revealing the intention of the parties who contracted."
"A misrepresentation or non-disclosure which did not make any difference, in the sense that the underwriter would have agreed to the same contract on the same terms if it had never been made, cannot be an inducement. …. in my view, causation cannot in law exist when even the "but for" test is not satisfied."
See too para 59 per Clarke LJ.
i) Mr Burns of Goshawk Syndicate Management Limited ("Goshawk"), led the slip and wrote a line of 2.79% for Lloyd's Syndicate 2021 and a line of 1.86% for Lloyd's Syndicate 102. He told me that the underwriting policy of Goshawk was not to cover risks of this kind if they were written on an agreed value basis, the reasons being, as he understood it, a perceived risk of moral hazard and a belief that the insurers (rather than the insured) should benefit from any savings that were made. It became apparent during cross-examination that the agency had no such written policy and that he had never been given formal instructions to adopt such a policy. I am not persuaded that Goshawk had anything that could properly be described as a "policy" of this sort. I do, however, accept that it was Mr Burns' own underwriting practice and the practice of the Goshawk as a whole not to reinsure risks of this kind if the insurance was on an agreed value basis. Mr Burns said that he had never written a relegation cover that was an agreed value policy, and I accept that he would not have underwritten this risk if he had known that Atletico were insured under a valued policy.
ii) Mr Phillips wrote a line of 1.22% for the Tyche Consortium. Like Mr Burns, he stated in his witness statement that the Tyche Consortium had a rule against underwriting contractual bonus risks on an agreed value basis. He was cross-examined about a cover note that appeared on its face to suggest that he had in fact written such a risk in respect of the Club Racing de Santander for the 1999/2000 season. This clearly perplexed him, and his evidence became confused. However, later in the trial through a further witness statement he presented documents that demonstrated that, when the risk in respect of Club Racing de Santander was broked to him, it was not broked on the basis that the underlying insurance was a valued policy. Certainly, after he had accepted the risk Mr Phillips was sent a cover note that showed that the insurance was a valued policy and certainly he scratched insurance wording that indicated that he approved the insurance being on an agreed value basis. However, Mr Phillips' evidence in his second witness statement was that he did not appreciate that the cover note and the wording did not faithfully reflect the risk broked to him and he did not appreciate its significance. Mr Boswood did not wish Mr Phillips to be recalled for cross-examination about his second witness statement, and I accept this evidence. I conclude that Mr Phillips would not have subscribed to the reinsurance of Vitalicio had he been told that the insurance was on an agreed value basis.
iii) Mr Gorman wrote a line of 4.23% for Lexington, a part of the AIG Group. His evidence was that, if he had been told that the insurance was written on an agreed value basis, he would have wanted to be satisfied that the agreed value was a reasonable quantification of the likely loss of Atletico in the event of relegation; and therefore he would have required sight of the contract between Atletico and Audiovisual. It was not the normal policy of Lexington to subscribe to agreed value cover without proof of valuation.
iv) Mr Stubbs wrote a line of 1.06% for Lloyd's Syndicate 2020. His evidence was that he had limited experience of this class of business, and that he was relying heavily upon the leading underwriter. In cross-examination he said that, if he had known that Vitalicio had underwritten Atletico on an agreed value basis, he would still have subscribed to the reinsurance of the risk provided, first, it was led by Mr Burns and, secondly, he was satisfied that the agreed value was a reasonable quantification of the loss that Atletico would suffer as a result of relegation.
v) Mr Rivington, who wrote a line of 4.6% for Lloyd's Syndicate 1069. He said in his witness statement that he had on occasions written valued policies, but generally he preferred not to do so. If he had known that Atletico were insured on an agreed value basis, he would certainly not have written so large a line on the reinsurance, if indeed he had subscribed at all. He would have subscribed a smaller line only if he had himself been satisfied that the agreed value was a reasonable measure of the likely loss of Atletico in the event of relegation of their first team, or if the leading underwriter had been so satisfied.
vi) Mr Knight wrote a line of 0.74% for Lloyd's Syndicate 994. In his witness statement Mr Knight said that he would not have subscribed to the reinsurance at the same rate if he had known that Vitalicio had insured Atletico on an agreed value basis. However, I understood him to modify this in his evidence at trial. He would have underwritten on the same terms if he had been satisfied that the agreed value was the loss which Atletico would suffer in the event of relegation.
vii) Mr Jackson, who wrote a line of 3.18% for Lloyd's Syndicate 1243. His evidence was that he would have declined to subscribe to the reinsurance at all, or at least he would have underwritten a smaller line, if he had known that the underlying risk was written on an agreed value basis.
viii) Mr Gaunt wrote a line of 4.66% for Lloyd's Syndicate 1239. Mr Stewart wrote a line of 2.12% the risk for Reliance. Their witness statements were to similar effect. If they had known that the underlying policy was written on an agreed value basis, they would have asked further questions about quantum and might well have required a different rate. I infer that both would have subscribed to the reinsurance at the same rate if satisfied that the agreed value was a reasonable quantification of the loss that Atletico would suffer as a result of relegation, but that otherwise they would not have underwritten on the same terms.
i) Four of the underwriters, Messrs Burns, Phillips, Rivington and Jackson, would not have subscribed to the risk if they had known that the underlying policy was written on an agreed value basis. I am satisfied that these underwriters subscribed to the cover because they understood from the slip presented to them that Atletico was insured on an indemnity basis subject to a limit of pts 2.9 bn, and they would not have subscribed to the reinsurance with the same line (if at all) if they had known that Atletico were insured on an agreed value basis.
ii) The other five underwriters, Messrs Gorman, Stubbs, Knight, Gaunt and Stewart, would not have subscribed to the reinsurance if they had known that Vitalicio had written the risk on an agreed value basis unless they were satisfied (either through their own assessment or through that of the leading underwriter) that the agreed value represented a reasonable assessment of the loss that Atletico would sustain if the first team was relegated.
Breach of warranty
i) The expression "full reinsurance clause" when used in a contract of reinsurance is long-established and well-understood, and it introduces into the contract (at least) the following wording: "Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Reassured".
ii) The effect of including these words in the reinsurance agreement is that Vitalicio gave a warranty that the underlying insurance was on identical terms to those disclosed to the reinsurers.
iii) The insurance provided that (a) the insured interest was that of Audiovisual, and (b) the policy was a valued policy and not to indemnify net ascertained loss in the event of relegation.
iv) These terms were not disclosed to the reinsurers, the reinsurance slip being misleading in these respects.
v) Accordingly, Vitalicio were in breach of a warranty in the contract of reinsurance.
vi) Therefore the reinsurers are discharged from any liability to Vitalicio under the contract of reinsurance.
"In my judgment, once the six film term is established as a term of the insurance or reinsurance contract, the grounds for holding it to be a warranty are very strong. It is a question of construction, and the presence or absence of the word "warranty" or "warranted" is not conclusive. One test is whether it is a term which goes to the root of the transaction; a second, whether it is descriptive of or bears materially on the risk of loss; a third, whether damages would be an unsatisfactory or inadequate remedy. Lord Justice Bowen said in Barnard v Faber,  Q.B. 340 at p. 344: "A term as regards the risk must be a condition." Otherwise the insurer is merely left to a cross-claim in a matter which goes to the risk itself, which is unbusinesslike …The very fact that the making of the six films lies under the "INTEREST" line emphasizes the importance of the term and its direct bearing on the risk."
"In short I accept [the claimant's] submission that all the terms should be treated as terms of the reinsurance, but that each term must then be considered in order to see whether it is applicable in the context of the reinsurance contract set out on the slip. Thus in general the references in the wordings to "the Underwriters" are references to the reinsurers and the references to "the Assured" are references to the reassured, namely Tranquilidade. In the slip, "reassured", "assured" and "insured" are defined. The words following "INTEREST", as I see it, are intended to describe Tranquilidade's insurable interest. There is no need to construe them as the reinsuring words because those are set out in the standard wordings which are terms of the reinsurance policy."
In marine policies there is a presumption that any statement of fact bearing upon the risks underwritten is, if introduced into the written policy, to be construed as a warranty. In Sceales v Scanlan, Lefroy B. was inclined to follow these early marine cases in a case of life assurance, so that the mere affirmation of a matter of fact which forms part of the contract by actual insertion or by reference to another instrument does make it a matter of warranty. In another Irish case, Quin v National Assurance Company which concerned the description of premises in a fire policy, Jay C.B. thought that a description of premises written in the policy must ipso facto be a warranty. The general tendency in English law, however, is to consider the relevance of the disputed term to the policy as a whole in order to determine the parties' intention in regard to it. Thus in HIH Casualty and General Insurance Ltd v New Hampshire Co, Rix LJ noted three tests which might be used in determining whether, as a matter of construction a term was to be construed as a warranty… He noted also, with approval, the views expressed in previous editions of this work that a description of the subject-matter of the insurance written into the policy and obviously material to the risk would be likely to be construed as a warranty."