In Swiss Reinsurance Co. v. Camarin Ltd. 2012 BCSC 1006, the B.C. Supreme Court denied an application by Swiss Reinsurance Co. to rescind five insurance contracts issued to Weyerhaeuser Company Limited’s captive insurer, Camarin Limited, on the basis that Camarin did not make misrepresentations or fail to disclose material information regarding claims arising from defective roofing tiles manufactured by a Weyerhaeuser subsidiary.
Weyerhaeuser was insured under primary and excess umbrella liability policies through AIG. Camarin Ltd. (Weyerhaeuser’s “captive” insurer) was responsible for 50% of the umbrella layer of insurance, which it in turn reinsured with Swiss Re.
The dispute concerned problems with roof tiles manufactured by a subsidiary of MacMillan Bloedel, American Cemwood, which had been purchased by Weyerhaeuser as part of its takeover of MacMillan Bloedel in the 1990s. A number of internal reports concerning the problems with the tiles were tendered into evidence, including a February 1, 1993 report which stated that it was likely that the tiles would not last more than ten years in service and that product claims against American Cemwood would amount to 2.5% of sales, or $648,000. None of the reports were disclosed to Swiss Re as part of Camarin’s application for reinsurance.
The decision of Mr. Justice Burnyeat in this case provides a useful study of how the principles of rescission operate in the context of reinsurance involving large multinational companies.
The reasons for judgment begin with a recitation of the test for rescission as it applies to an insurance contract. In sum, an insurer seeking to rescind a policy of insurance on the ground of misrepresentation or non-disclosure must show that: (a) material information was in possession of the insured; and (b) that there were misrepresentations made or information not disclosed which, on an objective standard, were material to the risk being assumed. Despite arguments from Camarin to the contrary, the Court accepted as a proposition of law that it was not necessary for an insurer seeking rescission to show that the misrepresentation or non-disclosure was subjectively material, in the sense that proper disclosure would have actually resulted in a different underwriting decision, either in terms of assuming the risk insured or setting the appropriate premium. Accordingly, the Court affirmed that an insurer seeking rescission need only show on a balance of probabilities that there were misrepresentations made or information not disclosed which were material to an objective evaluation of the risk.
In determining whether the non-disclosure of the problems with the roof tiles amounted to a material misrepresentation, the Court considered, among other things, the wording of the questions posed to Camarin on the reinsurance application form. One of the questions on the form asked Camarin to: “Fully describe any material changes to the business or operations of the Applicants since the last Application.” Although Weyerhaeuser’s predecessor, MacMillan Bloedel, had purchased American Cemwood prior to the Application, the Court did not consider the non-disclosure of this fact to be material, finding that “the addition of American Cemwood was not a material change in the business of MBL but represented a very small percentage of the total business of MBL and its subsidiaries.” The Court further found that “the projection of warrant[y] claims being somewhere between 2-1/2% to 4% of the sales of American Cemwood was not material to American Cemwood or to MBL.” This finding, surprising on its face, is likely a function of the peculiar dynamics of this case, involving large multinational companies and multiple layers of insurance coverage with significant limits. In such a context, the acquisition of a subsidiary whose product was found to be defective with projected warranty claims of $650,000, might not warrant disclosure as a material fact. Although the test for materiality is an objective one, the factual matrix of each case is relevant and operates as the frame of reference through which the test is applied. In this sense, the existence of multiple layers of insurance and significant policy limits was important to the outcome.
The case also addressed the question of whether Swiss Re’s failure to return the premiums paid to Camarin after it discovered the misrepresentations meant that Swiss Re had, in effect, affirmed the insurance contract. Camarin, relying on the Alberta case of Abbi v. Klippert (1969), 68 W.W.R. 426 (Alta. S.C.) argued for such a result, claiming that Swiss Re’s retention of the premium meant that it could no longer declare the policy void ab initio. The Court distinguished the Abbi case on its facts and held that since the Swiss Re policy had expired prior to litigation and Swiss Re had made its intentions known from the commencement of the proceedings, there was no suggestion of a representation that Swiss Re intended to affirm the contract. It is only in the case where the policy continues in force that the non-return of the insurance premiums will amount to an affirmation of the policy, disentitling the insurer from seeking rescission.
Prepared by former Associate, Scott Twining
