The recent decision in the Nissan case which, like the trial, has generated much market and legal interest may well be the last chapter in the Weavers' litigation history, write Roger Enock and Robert McGregor.

In the early 1990s London United Investments (LUI) and its subsidiaries that formed part of the underwriting agency administered by HS Weavers (Underwriting) Agencies Limited (Weavers) collapsed under the pressure of mounting US insurance liabilities. At the time it was the largest insurance insolvency in the world with the liabilities of the LUI companies running to many billions of dollars.

Weavers acted as an underwriting agent in the London market between 1963 and 1990. Weavers mainly underwrote US casualty business and, as with many Lloyd's syndicates, incurred enormous losses due to APH claims. The companies for whom Weavers acted during that period were collectively known as the “Weavers Agency” or the “Weavers Pool”.

An insurance insolvency creates many unique problems and typically results in very careful scrutiny by reinsurers of any potential grounds for avoidance. The collapse of LUI due to, as it turned out to be, the disastrous long tail US casualty liabilities, has generated in the past a large amount of litigation some of which has set important precedents in the insurance/agency context. The recent decision in the Nissan case which, like the trial, has generated much market and legal interest may well be the last chapter in the Weavers' litigation history.

In this Commercial Court case, the Honourable Mr Justice Moore-Bick ordered Nissan Fire and Marine Insurance Company (Nissan) to meet its obligations to the stamp companies of the Weavers Agency under two quota share reinsurance agreements. In a trial confined to liability, the Judge held that the reinsurance agreements known as facility quota share agreements (FQS) were valid and enforceable. Nissan had raised a variety of defences and counterclaims seeking either to avoid the FQS or reduce its liability under the FQS. Nissan's defences and counterclaims were rejected in their totality.

The FQS were for an indefinite period subject to termination by notice by either party. There was no provision in them requiring Weavers to notify Nissan when new insurance companies joined the Weavers Agency.

Overriding commission
Nissan sought to avoid the FQS on the grounds of misrepresentation/non disclosure relating to the treatment by Weavers (or certain directors of Weavers) of overriding commission received from reinsurers including Nissan. The background to Nissan's claim was an allegation that certain Weavers' directors (including Peter Wilson who gave evidence at trial) had siphoned off the overriding commission for their own use. These allegations are considered in detail in the DTI report prepared following the collapse of LUI. No criminal prosecutions have ever been brought against the implicated directors.

Nissan's original case regarding overriding commission was based on an alleged moral hazard. As the Honourable Mr Justice Lloyd said in CTI v Oceanus [1982] 2 LR 178 at page 198: “The essence of the matter is this; the insurer is entitled to know all facts which throw doubt on the business integrity of the assured at the time the insurance is placed. If the conviction was trivial, or unconnected with the subject matter of the insurance, or if the crime was committed long ago, or in the case of a company by a relatively junior employee, it will generally be regarded as immaterial.” The key question was whether the alleged dishonesty of certain directors of Weavers could be imputed to the stamp companies and should therefore have been disclosed.

The Court of Appeal in Group Josi Re v Walbrook Insurance Co Ltd and others [1996] 1 WLR 1152 (in which Freshfields successfully acted on behalf of Walbrook and others) which also involved the Weavers Agency and the alleged diversion of the overriding commission answered this question in the negative. In that case the Court held that the knowledge of an agent of a reinsured about a fraud the agent was committing against the reinsured was not to be imputed to the reinsured. Consequently, in this case as the claimants were unaware of the alleged fraud, they could not be expected to disclose it to Nissan. Questions of materiality and inducement did not even have to be considered.

In an alternative argument to moral hazard, Nissan relied on certain statements made to it by Weavers such as “5% (overriding commission) to reinsured” in support of their case that the overriding commission had to be paid/used by the reinsured for a particular use. The Court rejected this completely and held that the use to which the overrider was put was a matter between the reinsured and Weavers (who administered the business) and not something about which a reinsurer could complain. The alleged diversion could only ever have been to the detriment of Weavers/the reinsured and not the reinsurers.

This case was another example of the reinsurers of the Weavers Agency seeking to rely in part on the conclusions of the DTI report to avoid their obligations under reinsurance arrangements with the Weavers' stamp companies. All similar attempts have been unsuccessful in the past and this judgment does not give any encouragement to reinsurers to try it in the future.

Nissan also sought to avoid the FQS on the grounds of misrepresentation/non disclosure relating to the existence of certain whole account quota share reinsurance (WAQS reinsurance) and the Weavers Agency excess of loss (XL) reinsurance programme which protected all of the claimants. The Weavers Agency, like many at the time (including agencies of which Nissan was a member), consisted of stamp companies who appeared on the underwriting stamp placed on the insurance policies issued by the agency and WAQS reinsurers behind some of the stamp companies.

Article 1 of the FQS provided:
“The Reinsured will retain 50% of not exceeding their 80% participation of the policies as herein defined for their own account.” Nissan argued that “retain... for their own account” was a representation that the “Reinsured” would not take out any additional proportional or excess of loss reinsurance. Also, Nissan argued that the “Reinsured” meant the stamp companies alone and not their WAQS reinsurers and therefore there was a misrepresentation because of the existence of the WAQS reinsurers.

Excess of loss reinsurance
The Court construed Article 1 in the context of the nature of the treaties, the market background against which they were concluded and in accordance with the principles laid down by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1WLR 896 at page 912.

The Court held that Article 1 did not prohibit XL reinsurance and consequently there was no breach of the FQS. The Court relied in particular on the fact that XL reinsurance was conceptually different from quota share reinsurance (the evidence from both parties' experts supported this finding) and that in the context of the nature and volume of risks being written such reinsurance would have been normal by market standards. The evidence of Nissan's expert supported the conclusion that XL reinsurance was to be expected for an account of this size. A similar finding was made in Great Atlantic Insurance Co v Home Insurance Co [1981] 2 Lloyd's Rep 219. Consequently, there was no misrepresentation in Article 1.

In relation to the XL non-disclosure case, the Court found that due to Nissan's involvement in Weavers XL reinsurance programme, Nissan knew or ought to have known that business which was the subject of the FQS was protected by XL reinsurance and therefore no additional disclosure was necessary by the claimants (or Weavers).

The Court would also have found against Nissan on materiality and inducement as:
(1) the Court did not think the existence of the XL reinsurance was material because it would be usual for an insurer writing that type of business to protect his account by such reinsurance;
(2) the evidence indicated that Nissan would not have been influenced and therefore induced by the existence of the XL reinsurance.

WAQS reinsurance
The Court held that “Companies underwritten [for] by Weavers...” (in Article 1) included the WAQS reinsurers as well as the stamp companies and consequently, there was not a breach of Article 1.

Again the Court construed the FQS in the commercial context in which they were made. The background matters of particular importance were that:
(1) before the Insurance Companies Act 1974, the stamp companies and the WAQS reinsurers each had agency agreements with Weavers. After this Act was passed, the internal arrangements of the Weavers Agency were changed and the WAQS reinsurers entered into formal reinsurance agreements with certain of the stamp companies. This change was one of form and not substance and made no real difference to reinsurers such as Nissan;
(2)the word “underwrite” was and is often used in a broad sense and does not just mean the placing down of the insurers' name on the slip but could also encompass participation in the underwriting fortunes of an agency by WAQS reinsurance of its stamp companies;
(3) even if reinsurers knew little if anything about the formal structure of the Weavers Agency they should be taken as knowing that the Agency was likely to include non-stamp companies; and
(4) the purpose of the FQS was to obtain a share of the business written by Weavers on behalf of its pool. Reinsurers including Nissan were not interested in the composition or structure of the Weavers Agency but rather in obtaining a share of the business being written which was perceived to be very lucrative. As with the XL reinsurance programme, the Court found that Nissan's argument based on the existence of the WAQS reinsurers was also bad on the grounds of lack of materiality as the identity of the individual members of the Weavers Agency was not a matter of any interest to Nissan and that it was the retention of the Agency as a whole that was significant not the retention of the individual companies. Implicitly this argument by Nissan would also have failed due to lack of inducement.

Representations in draft contracts
Nissan's misrepresentation case was based almost solely on representations allegedly contained in the draft contractual documents. Although the Court rejected Nissan's interpretation of Article 1 so there could be no misrepresentations, the Court did consider in general what representations are made when a draft contract is sent to a potential contracting party.

The Court held that by simply offering to contract on certain terms, a person by implication represents that he intends to perform any contract made on those terms and believes that he is or will be able to do so. The representation is limited in most cases merely to the fact that he intends to perform the obligation to be imposed by the contract, as he understands it. The representation is one of honesty. A person does not represent that he intends to perform the contract in accordance with its true construction whatever that may be in due course.

Essentially, Nissan argued that by proposing to contract in accordance with the draft contract, representations in the form of each contractual obligation as interpreted by a Court were being made. Had Nissan's argument been accepted it would have dramatically changed the law of misrepresentation and given reinsurers the ability to avoid contracts when a Court ultimately construed the contract differently from the way in which the reinsured understood it (whereas previously their remedies would have been far more limited i.e. the remedies available upon a breach of a contract).

Even if the Court had accepted Nissan's interpretation of the FQS, the Court would still have found against Nissan as there was no misrepresentation because there was no evidence of dishonesty regarding the claimants' intention to comply with the relevant provisions of the FQS.

Parties to the FQS
Both FQS commenced in 1976 and one ended in 1983 and the other in 1984. Certain of the claimants were not stamp companies in 1976 but became stamp companies in later underwriting years.

The FQS described the “Reinsured” as “Walbrook and other companies underwritten by Weavers...”. Nissan argued that only the claimants who were members of the Weavers Agency in 1976 and not those that joined later were parties to the FQS. The claimants alleged that once they joined the Weavers Agency and were “underwritten for by Weavers” they became parties to the FQS with Nissan.

The Court found Nissan was aware (as any insurer would have been at the time) that the composition of the Weavers Agency was likely to change over time and that Nissan did not expect changes in the composition of the Agency to affect the share of business ceded to it. The evidence supported the fact that there was no need for any additional formalities.

The Court held that the FQS was to be construed as containing an offer on the part of the reinsurers (i.e. Nissan) to any new member of the Weavers Agency to enter into contractual relations on the terms of the FQS. Consequently, all the stamp companies were parties to the FQS from the time they became underwritten for by Weavers.

Nissan's difficulties in this case did not end with the above findings but with a finding that based on the evidence (assuming there had been misrepresentation/non-disclosure in relation to the WAQS reinsurers and the XL reinsurance) Nissan had affirmed the FQS.
Had it been necessary, this finding alone would have defeated Nissan's case in relation to these issues. Nissan is appealing from this decision. The appeal is scheduled to be heard in December 2000. In relation to the main issues there were numerous findings of fact based on the Court's assessment of the witnesses that will be difficult for Nissan to challenge on appeal. In most respects Nissan will require a complete victory on appeal to effect the result of the decision. There have been many Court decisions involving the Weavers Agency over the years in which a number of reinsurers have sought to avoid their liability to the companies in the Agency. In all of these the reinsurers have been unsuccessful. This case demonstrates the importance of clear contractual wording and the need for reinsurers of pools to understand the internal structure of the business entity they are reinsuring. It also demonstrates the difficulty reinsurers will have in attempting to avoid reinsurance arrangements based on the fraud of the agent of the reinsured as opposed to the reinsured itself.

Roger Enock is a partner in Freshfields Contentious Insurance Group and Robert McGregor is a manager in the same group. Both represent the claimants.The information and opinions which this article contains are not intended to be a comprehensive study, nor to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.