Peter Rogan examines why the reinsurance market provides such good business for the legal profession
Over the past few years we have witnessed a huge increase in reinsurance disputes leading to many lengthy court cases and arbitrations. Questions are often asked whether this is sensible, is it really necessary, and what can be done about it. Reflecting on some 27 years of practice, most of which have involved the reinsurance market, I have a number of observations.
Firstly, there are those cases which determine points of principle. These are an important part of the evolution of the market as it is in the interest of the market that it operates within a framework of commercial certainty.
Market practice is fine as long as parties are 'playing the game' but unless tested and recognised by law, alleged market practices are often the source of uncertainty and hence major disputes. A few examples:
(1) In order to facilitate the placing of insurance, brokers often anticipate the reinsurance needs of the original underwriter and place the reinsurance contract first describing the reassured simply as a class of underwriters to be advised. The practice worked well until, of course, it suited an underwriter to dispute it following the total loss of the Zephyr. Fortunately, the matter came before Mr Justice Hobhouse (as he then was) one of the best Commercial Court judges who, on hearing the expert evidence, stated that the courts would not frustrate an established market practice on grounds of technical legal analysis. This case, Zephyr1, stands as authority for that proposition.
(2) The market practice of 'signing down' is another example of a practice which on ordinary principles is difficult to reconcile with legal analysis.
In essence, the assured contracts with the underwriter to pay a premium of X but market practice enables the broker, not a party to the contract and at his option, to oversubscribe the slip and sign down the participation of the underwriter proportionately, thereby reducing the amount of the premium which the underwriters had originally agreed. This practice had operated for hundreds of years but only received judicial recognition in General Re v Fennia2 in 1983.
(3) For many years there was great uncertainty as to the entitlement of underwriters to avoid for breach of the duty of good faith after inception of the contract. This uncertainty was the source of many disputes until it was finally put to rest in the Star Sea3, when the House of Lords decided against allowing an avoidance remedy for a post-contractual breach of the duty of good faith.
(4) Most of the major reinsurance disputes involve allegations of non-disclosure and misrepresentation and the entitlement of the reinsurer to avoid the contract ab initio. For years there was uncertainty as to whether, as a matter of law, it was necessary to show that a particular fact was material in the sense that it would impact on the judgment of a prudent underwriter and that the actual underwriter would have been induced to write the risk by virtue of the non-disclosure or misrepresentation. In CTI v Oceanus4 the Court of Appeal held that inducement of the actual underwriter was not a criterion, it being sufficient to show that the non-disclosure or misrepresentation would have impacted the judgment of a prudent underwriter.
This decision was much criticised and became known as the charter to encourage reinsurers to avoid contracts. The issue came up again for consideration in Pan Atlantic v Pine Top5, when the House of Lords held that inducement of the actual underwriter was a necessary ingredient of any avoidance case.
All these cases and many more have been instrumental in recognising the practices of the market and enabling the market to operate within a framework of legal certainty.
The second category of case that I have in mind generally arises out of mistakes brought on by incompetence on the part of either the broker or the underwriter. In my experience, placing procedures (or lack of them) give rise to the majority of reinsurance disputes. These disputes generally are destructive in that they seldom give rise to any points of principle and enormous costs are incurred to enable a judge or arbitrator to determine the outcome, which usually involves making findings of fact as to the credibility of the parties. It is these cases which cause people to question the enormous costs (both legal and executive time) involved but, given the vast sums of money involved and the need for the certainty that a binding legal decision gives, it is difficult to see any other alternative.
It is interesting to note that in a case in the eighteenth century, Pawson v Watson6, Lord Mattersfield stated: "And I have repeatedly at the Guildhall, cautioned and recommended it to the brokers, to enter all representations made by them in a book."
Over 200 years later, Mr Justice Cresswell in Aneco Re v Johnson & Higgins7 stated: "A number of points of general interest to the reinsurance market emerge from this case:
1. It is highly desirable that means be found of recording (in a form which precludes later dispute) what was said between broker and underwriters at the time of presentation of a risk.
2. It is highly desirable in the interests of justice (and of avoiding unnecessary cost and delay) that whenever practicable claims against brokers be heard at the same time and by the same tribunal that determines whether underwriters have validly avoided.
3. This case reflects inadequate standards of broking by the defendant brokers. One of the most telling comments in the case was made by a witness who observed "it is much better to say what you mean in business."
Last year, the Commercial Court was appalled at the manner in which the market had operated in a particular case. The case in question was Charman v Gordian Run-Off Ltd 8 and the following is an interchange during the hearing between Mr Justice Morison and Mark Templeman, counsel for one of the parties:
Morison J: "Whose fault is it that we have language in a contract of this sort which is causing grief and many hours spent in this court trying to work out what it is saying and the effect of NCAD (notice of cancellation at anniversary date)? Whose fault is it?"
Templeman: "My Lord, one could attribute blame either to the parties or the brokers."
Morison J: "I think it is rather a disgrace, myself. I sit in the commercial court. It seems to me that contracts of insurance, when they are written in this country, parties have a right to expect that they will mean something without having to carry out detailed investigations in a court. It is wrong that the insurance industry should behave like this."
Templeman: "My Lord, with respect, I do not think that the parties have had any difficulty as to how this works."
Morison J: "I hear what you say. You cannot agree between yourselves as to what the words "subject to renewal as agreed by all parties" means.
You cannot agree between yourselves as to what "TBA" means. You cannot agree between yourselves as to what the effect of a stamp "NCAD" on a contract of this sort is. That is bad enough before we even get into some of the other areas. It is not right, is it, that the insurance industry should work in this way, because people are entitled to know what their bargain is in plain, simple understandable language, and there is nothing complicated about it at all, although it is hedged around by peculiar words which are quite unnecessary."
Slip format solution
Those in responsible positions in the market fully appreciate the need to address such failings in the market and this would have been at the forefront of their minds when developing the London Market Principles (LMP). This led to the LMP slip format which, if adhered to, will undoubtedly minimise the potential for disputes in the future.
In summary, some of the litigation, although costly, is necessary to create the legal framework within which the market can continue to develop with an acceptable level of commercial certainty. That said, I would have to concede that the majority of cases develop into mindless wars of attrition brought about by incompetence (and sometimes fraud) involving sums that are so large that resolution is difficult other than by judgment or an award.
One last point; generally the reinsurance market adopts arbitration as a means of dispute resolution. The thinking is no doubt that the market wishes to have its disputes dealt with by commercial men rather than by lawyers. Indeed, many of the leading cases I have mentioned above only ended up in court by virtue of the fact that in the 1980s a reference to arbitration was seldom put on the slip with the result that if the dispute arose before the policy wording had been agreed (which could take many years), the parties were bound to litigate. Although I have nothing against arbitration, looking back over my practice it does have a number of shortcomings. Firstly, the market itself, despite preferring arbitration as a means of dispute resolution, will not make available current active underwriters or brokers to sit as arbitrators. This is illogical and undesirable.
Secondly, arbitrations are confidential and have no precedent value. In consequence, the same point is often arbitrated over and over again, as we have seen in the personal accident (PA) spiral cases. Thirdly, as the law currently stands, a third party such as the broker cannot be joined to an arbitration with the consequence, as highlighted in the Aneco case referred to previously, that after conclusion of the arbitration a separate action has to be brought against the broker and the issues decided by the arbitrator need to be retried before a judge.
Although many efforts are being made to address these issues, I suspect that the reinsurance market, assisted by the innovative approach of many brokers, will continue to be a fruitful source of business for reinsurance lawyers in years to come.
1 The Zephyr, General Accident Fire and Life Assurance Corp v Tanter  2 Lloyd's Rep 529
2 The Fennia Patria, General Reinsurance Corp v Forsikringsaktiebolaget Fennia Patria  2 Lloyd's Rep 287
3 The Star Sea  1 Lloyd's Rep 389
4 Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd  1 Lloyd's Rep 476
5 Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd  2
Lloyd's Rep 427
6 Pawson v Watson  98 ER 1361
7 Aneco v Johnson & Higgins  1 Lloyd's Rep 565
8 Charman v Gordian Run-off Ltd  1 Lloyd's Rep IR 333
Peter Rogan is the senior partner of Ince & Co, a London law firm involved in all of the leading cases referred to in this article which also advised the London market on many aspects of the LMP slip.