A decision by the English Court of Appeal involving a reinsurance broker has potentially increased the liability of a wider variety of professionals and as a result their insurers and reinsurers. Peter Schwartz summarises the implications.
By a majority, the Court of Appeal has reversed in part the decision of Mr Justice Cresswell in Aneco Reinsurance Underwriting Ltd (in liquidation) v. Johnson & Higgins Ltd (1999).
The reinsurance of certain of Aneco's marine risks placed by J&H wassuccessfully avoided on the grounds of misrepresentation and non-disclosure, principally relating to the nature of the treaty (whether facultative/obligatory or quota share) and the figures given for the estimated premium income. Aneco successfully alleged breaches of contract and negligence against the brokers.It was clear from the underwriting witnesses that fac/oblig was far riskier than quota share. Even though one expert witness said: “Over the years one has got quite used to fac/obligs being dressed up to appear to be something they are not”, the lead underwriter explained they are more risky: the reinsurer has no control over the risk ceded and there is a tendency for cedents to use such contracts as a dumping ground for high risk or inferior quality business. Other underwriters stated clearly that they would not have wished to participate in such arrangement. These findings clearly conformed with the inducement test introduced by the House of Lords in Pan Atlantic v. Pine Top (1994), thus allowing avoidance.
In the light of these findings, the brokers' liability was clear. The main issue on appeal was the extent of the damages to be awarded against them. Aneco argued that it was entitled to damages for all losses suffered, including those on the primary cover together with those on the excess of loss reinsurance that had now been avoided. The alternative, and thus lesser claim, was for the excess of loss reinsurance only.To support the larger claim, Aneco had to show that if the brokers had acted with professional skill and care, then it should have been told the requisite reinsurance was either not available or only at a rate it would have found unacceptable. Either of these pieces of information would have led Aneco not to participate in the original market.
If Aneco could show that the broker's advice was negligent in relation to the availability of reinsurance based on the lead underwriter's quotation, the burden of proof passed to the broker to show that there were alternative underwriters who would have quoted comparable terms. If the brokers could show this, then only the excess of loss was lost by their negligence and they would not, in addition, be liable for the primary loss.
Would alternative cover have been available in the market? Mr Justice Cresswell decided on the evidence that such a market could have been found. It was on this important point that the Court of Appeal disagreed, thus moving the damages from the lesser to the larger sum of the two alternative claims.It is not possible to comment on the reasons for this disagreement at the time of writing because the appeal judgment has not yet been released. However, the decision greatly increased the exposure of the defendants and, thus, of their professional indemnity insurers.
If this is correct, it may well apply to a range of professional advisers. The trial judge referred to Lord Hoffman's judgment in South Australia Asset Management v. York Montague Ltd , the Banque Bruxelles case, in which he stated that it would be wrong to hold a defendant liable for wrongful advice where that advice had not caused that particular loss. Thus, in that case the surveyors were not liable for the losses caused by the fall in property prices, but only for their negligent over-valuations.
While Mr Justice Cresswell decided that the brokers had not assumed a duty to advise the plaintiff as to whether to enter into the original insurances and thus could not be liable for those losses, the Court of Appeal appears to have decided, by a majority, that if the brokers had properly advised that no reinsurance would have been rapidly available, then the plaintiff would not have insured in the first place and would be facing no losses. The facts in this case were, however, unusual and that, together with a possible appeal to the House of Lords, may alleviate some despondency in the professional indemnity market.Whatever the final outcome of this case, the opening remarks of Mr Justice Cresswell are salutary words with which to conclude. He said that it was highly desirable that means be found for recording what was said between brokers and underwriters in a way that precludes later disagreement and that the parties should state clearly what they intend. It is advice that could also be applied to professionals and their insurers.
Peter Schwartz is a partner in Baker & McKenzie.
Tel: 0171 919 1000.
Fax: 0171 919 1999.