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Insurance underwriters in the UK

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Title: Evaluate the extent to which the slip may serve to affect the practice of the London insurance market when it is not 100% subscribed by the underwriters, so as to determine how they can avoid issues that arise from insurance contracts on this basis, with a view to determining whether there is scope for reform. Abstract In this dissertation, the author will examine the various practical and legal mechanisms currently available to insurance underwriters in England and Wales to protect themselves from the risks associated with under-subscribed slips, i.e. slips which have not been 100% underwritten. Examining international examples of circumstances which have given rise to, or could potentially give rise to an increase in these risks, and evaluating the extent to which the current framework provides adequate mechanisms to protect insurance underwriters in these circumstances, the author will build a solid case for the reform of the law in this area. The primary methodology of this research dissertation will take the form of a literature review. Sources have been selected on the basis of their relevance to the issues at hand, and comprise both secondary sources, in particular journal articles from eminent authors in this area, and primary case law. The author has imposed no significantly rigid jurisdictional limits upon his source selection criteria, the circumstances giving rise to the problems resulting from under-subscribed slips, in the main, existing as international phenomena. It should be noted however that conclusions of this dissertation concern the London insurance market and the law of England only, and have no further external validity. Introduction The Insurance Process: An Overview The diagram overleaf represents an overview of the insurance process. The role of 'the slip' and the relationship between insured clients, Lloyd's brokers, the Lloyd's of London Insurance Market, the 'Leading Name' and the 'Names' of Lloyd's of London can all be derived from it. Marked in RED is where the problem of under-subscription may arise within the process. The unsigned slip is a paper prepared by the Lloyd's broker which describes the risk that their client wishes to have insured[1]. The slip is then passed to a leading underwriter of Lloyd's of London Insurance Market, selected by the broker usually on the basis of his particular area of expertise. The leading underwriter manages a syndicate of Lloyd's Names. Upon receiving the slip, the leading underwriter will decide whether or not to offer the risk to his syndicate. If he does decide to offer the risk, then he will take instructions from his Names as to the proportion of the risk that are each willing to underwrite, I.e. provide security against in return for a proportion of the premium paid by the insured client. If he is unable to persuade his Names to underwrite 100% of the slip, then he will pass the slip to other Lloyd's underwriters, who's respective Names may or may not choose to subscribe for all or part of the remaining risk. Again, if a Name does decide to subscribe he or she must complete the appropriate entries upon the slip and provide his or her signature, at which point he or she will be deemed to have entered into a contract with the leading underwriter to assume a defined proportion of the insurable risk described by the slip. There is no guarantee that 100% of the risk will be undersigned by Names of Lloyd's: In the case that, despite trying hard to acquire insurance, less than 100% of the slip is subscribed, the broker is likely to inform their client that it will not be possible to insure 100% of the risk. The client will then be in a position to decide whether or not to proceed with partial insurance[2]. There are some legal problems which can arise from this type of under subscription, although these relate to cancellation rights and are merely academic, it being customary practice to allow parties to walk away from any agreements before the slip is 100% subscribed[3]. The type of under subscription with which this research dissertation is primarily concerned actually results from over subscription by Lloyd's insurance brokers: It is common practice for brokers to oversubscribe their slips. For example, a broker may secure 200% of the potential capital provision via different underwriters. Before the insurance policy can be constituted, it is therefore necessary to sign-down the risk allocations/ capital provisions of the various insurers so that, in total, only 100% of the risk is insured. For example, if a broker allocates 200% of a risk from two underwriters in equal proportions, before the insurance policy can be drafted it will be necessary to reduce each of the underwriter's risk holdings by 50%, so that only 100% of the risk is insured in total. Insurers know that over subscription of slips by Lloyd's brokers is common practice and as a result, before making an offer to underwrite a part of the risk, they will usually ask the broker to confirm the likely sign-down percentage. In our example above, the broker should inform each underwriter that their offers are likely to be signed-down by 50%, and it will likely be for this reason that each underwriter then offers to insure 100% of the risk. In fact, by making an offer of 100% on the slip, the underwriters actually expect to only be liable for 50% of the risk. If a claim is made before the sign-down has occurred, then the slip is essentially under subscribed because, even if prima facie 100% of the risk described by the slip has been allocated, those insurers were not expecting to be bound to insure 100% of the risk between them, but rather a reduced 'signed-down' proportion of that risk. The problems arising from this situation and the available practical and legal solutions will form the subject-matter of this research dissertation. Another way that under subscription can effectively occur is when the client is not made aware of the correct terms of the insurance or reinsurance, e.g. where an insurance broker erroneously informs an insurer that reinsurance has been secured upon the same terms as the original insurance. In these circumstances, one might argue that even though all parties to the insurance policy may believe that the slip is 100% subscribed, due to a failure of the broker to ensure that all parties know that the terms of the reinsurance are different to those of the original insurance, there is a marked discrepancy between the level of insurance expected, and the level of reinsurance actually provided. For example, in the case of Youell v Bland Welch & Co Ltd (No 2) (The "Superhulls Cover" case) [1990] 2 Lloyd's Rep 431 the brokers were asked to obtain reinsurance in respect of construction risks on three new building vessels via Lloyd's of London upon the same terms as the original insurance. The brokers contacted the insurers and informed them that they had found an underwriter willing to provide reinsurance 'as original'. However, as it transpired, the brokers had made an error- the terms of the reinsurance were very different to the original terms of insurance, containing a 48 month cut-off clause. The insurers argued, quite reasonably, that had they known of the terms of the reinsurance, they would not have chosen to accept it. In this case, Phillips J, who handed down the leading judgement, held that the brokers had breached their duty of care towards their client, both in contract and also in tort. He declared that, in such cases, the level of damages available can be calculated as: “the difference between the amount for which the insurers became liable on the original insurance, and the amount for which they would have been liable if they had written reduced lines.[4]” As we will see in chapter 1 of this paper, the law pertaining to when an insurer may avoid a policy due to a misrepresentation having been made is highly complex and has recently been subject to judicial reform. The Structure of This Paper The remainder of this paper will be structured according to the following headings. Under each heading is provided a short summary of the purpose of that section: Chapter 1 – The Law's Development In this chapter we will perform an historical analysis of the development of the law in regard to the regulation of the behaviour of the parties to insurance slips and insurance contracts, and their respective rights and liabilities under such agreements. This analysis will be limited to the law relevant to insurance contracts where the relevant slips have not been 100% subscribed, either because the broker has not managed to secure his desired level of subscription or because insurers decide to un-subscribe due to a misrepresentation either made to them directly or made to the leading underwriter but followed by them. Chapter 2 – Problems for Parties to Insurance Contracts In this chapter we will examine the problems for parties to insurance contracts which may arise as a result of under-subscribed slips. In this chapter, the legal analysis discussed in the preceding chapter will be referred to in order to evaluate the extent to which the current legal regime is capable of mitigating the problems identified. In this Chapter we will also analyse the role of the Financial Ombudsman Service in enforcing insurance slips. Chapter 3 – Recommendations & Reflections on Scope for Reforms Building upon the conclusions reached in the previous chapter in regards to the adequacy of the existing regulatory regime to mitigate the problems associated with under-subscribed slips, in this chapter, we will assess to what extent reform of the current legal framework is (i) necessary, and (ii) desirable. Throughout this chapter, impact-assessments will be performed in regards to the likely effects, both positive and negative, of implementing any suggested reforms. Conclusion – Summary of Discussion In this section, we will draw together the conclusions from chapters 1, 2 and 3 and provide a summary of the overall conclusions of this research dissertation. Each conclusion will be accompanied by key recommendations for reform, where appropriate. Within this section, we will also evaluate the scope for further research into any of the issues raised within this paper or any other relevant issues. Chapter 1: The Law's Development Historically, Lloyd's brokers, underwriters and Names were regulated by the Lloyd's Acts of 1871, 1888 and 1925 and the Lloyd's Signal Stations Act of 1988. However, these Acts have since been repealed. The current regulatory framework is provided by the Financial Services Authority, which was given full competence in this regard by the Financial Services and Markets Act 2000. However, the majority of insurance related disputes which reach the Courts are decided either on the basis of contract law, where a contract exists between the aggrieved parties and the terms of that contract are relevant to the dispute in question or, on a tortious basis, where one party alleges that loss has been suffered as a result of a breach of the duty of care of the other party. Often, claims will be brought initially on both bases, although claimants notoriously prefer to rely upon contractual arguments, as the rules pertaining to remoteness of damage are less stringent. Within the context of under subscribed slips, the Courts have held that brokers may be deemed to owe a contractual duty to certain parties even though, strictly speaking, no contractual agreement between these parties was ever constituted. One such example is the case of London Borough of Bromley v Ellis [1977] 1 Lloyd's Rep 97 (“The London Borough of Bromley case”). In brief, the facts of this case were as follows:
  1. An insurance agent agreed to arrange the transfer of an insurance policy to Mr. Ellis, free of charge.
  2. In this respect no contract can be deemed to have existed between the insurance agent and Mr. Ellis, for lack of valuable consideration.
  3. Mr. Ellis presumed that the insurance had been transferred by the insurance agent, but in fact it had not been.
  4. Upon making a claim with the insurers, Mr. Ellis discovered that the insurance agent had failed to transfer the insurance policy into his name.
  5. Mr. Ellis brought an indemnity claim against the insurance agent.
  6. The Court of Appeal acknowledged that no contractual agreement existed between the insurance agent and Mr. Ellis but, nevertheless, awarded reliance damages in favour of Mr. Ellis.
In regard to this decision, Kortmann (2001) at V.4.2 writes: “The Court of Appeal held that even though there was no contractual relationship between Mr Ellis and the insurance agent, the latter's undertaking gave rise to a duty to arrange the transfer with reasonable care. If this duty were merely to take care that his undertaking did not end up putting Mr Ellis in a worse position than he was before the undertaking was made, one would have expected the average charge of an insurance agent to be a reducing factor in the assessment of damages. However, nothing in the case report indicates that such reduction was made.” It would therefore seem that the Courts are willing to offer contractual remedies against insurance agents even where no contract has in fact been entered into. This conclusion is supported by the case of General Accident Fire and Life Assurance Corporation and Others v Tanter and Others (“The Zephyr case"). In this case, an insurance broker was asked, by a shipowner, to provide an all risks policy to insure a ship which he wished to purchase. Because insurers of all risks usually wish to reinsure some of the total loss risk, the broker approached several all risk underwriters (to provide the shipowner with insurance cover) and also some total loss underwriters (to provide the prospective all risk insurers with total loss insurance cover). For present purposes, the particulars of the dispute which arose in this case are irrelevant[5]. What is relevant is Court's interpretation of the relationship between the broker and the client, the broker and the primary (all risk) underwriters and the broker and the secondary (total loss risk) underwriters. An eloquent summary of the final decision of the Court of Appeal is provided by Westgarth (1985) pp 42-3: “It was held that the broker was agent for the insured in respect of the primary insurance and agent for certain underwriters of the primary insurance in respect of the reinsurance. He was not the agent of the reinsurance underwriters. [Despite this relational analysis]... [i]t was held by Hobhouse J that the broker was liable to the reinsurance underwriters notwithstanding that he was not their agent.” It would seem that the Courts are willing to infer a duty of care between parties to the insurance process, even where, strictly speaking, no contractual duty can be said to exist, although as we shall see shortly, this decision was overturned by the Court of Appeal[6]. With this in mind, let us now turn to examine how the Courts have traditionally dealt with the problems arising from under-subscribed slips: In the Zephyr case, within a fortnight of the underwriters signing the slip, the insured ship became damaged in a weather storm and was declared a write-off. The insured client submitted a claim with the primary all risk underwriters who in turn submitted an indemnity claim to the secondary total loss underwriters. However, the total loss underwriters repudiated the claim on the basis that they claimed to have been given a representation by the broker that the slip would be signed-down and in any event, had been led to believe through previous dealing with the broker in question that this would be the case, him being renowned for over subscribing his slips. In other words, the total loss insurers had never been prepared to be liable to the full extent of their written line. Hobhouse J provided an eloquent solution to the problem, one which would allow the insured shipowner to recover his losses immediately, and the total loss insurers to reclaim that part of the settlement which they had never expected to be liable for: He held that the all risk insurers were liable to the insured shipowner, but that they were entitled to be indemnified in full by the total loss insurers who were liable to the full extent of their written line. However, he declared that the total loss insurers were entitled to bring an action against the broker to recover damages on the grounds that the broker was in breach of an assumpsit duty which arose as a result of the signing-down indication. As we have seen earlier in this chapter, even though Hobhouse J conceded that the broker was not an agent of the reinsurers (the total loss insurers), he held that the broker owed a duty of care to these insurers. The rationale for this decision was as follows: Because the broker, either expressly by direct representation or impliedly through previous trading behaviour, had led the reinsurers to believe that the slip would be over-subscribed and therefore subject to a signing-down process, the broker had a duty to exercise all professional skill in ensuring that he managed to over subscribe the slip, so as it would be possible to sign-down by the indicated proportion. The brokers appealed this decision, arguing that they did not owe the total loss insurers any duty of care as they were not in fact agents of these insurers and they had not in fact made any representations that the reinsurance slip would be signed down. They conceded that they had made such a representation to the leading underwriter of the all risk insurance, but argued vehemently that the secondary total loss underwriters should not have thought to infer from this indirect representation that the reinsurance slip would also be signed-down. Mustill JL agreed that the signing indication made to the primary underwriter and his syndicate should be deemed to form part of the contractual bargain. However, he found nothing within terms of that indication to suggest that anyone other than the primary all risk underwriter and his syndicate of Names could also rely upon that representation. Oliver and Brown LLJ agreed with the reasoning of Mustill LJ in this matter, and as such the original decision of Hobhouse J was set-aside. The broker won the appeal and as such the total loss insurers were not entitled to recover damages. On top of this, the Court of Appeal refused leave for the reinsurers to appeal. Under this reasoning, unless a broker makes a signing indication to the secondary underwriters directly, then the secondary underwriters will not be able to rely upon such a representation even when they know that such a representation has been made to other underwriters involved in the insurance in question. This decision was heavily criticized for failing to take account of the fact that, in practice, secondary underwriters often make their decisions to insure based upon the fact that a particular lead underwriter has accepted the insurance. As Longmore (2001) at 19 writes: “[T]here is the difficulty that the requirement of inducement can be a little inconvenient if there is a long list of insurers on, for example, the slip. The reality is that later subscribers to the slip will have been induced not so much by the non-disclosure or misrepresentation as such but by the fact that one or more leading underwriters have written the risk, themselves no doubt induced by the non-disclosure or misrepresentation as the case may be. Here there may well be scope for a useful reform of the law to say that a following underwriter will be presumed to be induced by any non-disclosure or misrepresentation made to a leading underwriter.” While Longmore's criticism is logically sound, one might argue that reform is unnecessary because the law of contractual misrepresentation already provides a remedy to a 3rd party who has been induced into a contract by an indirect misrepresentation: For example, in the case of Pilmore v Hood (1838) 5 Bing NC 97 as recently affirmed by the Court of Appeal in the case of Clef Aquitaine SARL v. Laporte Materials (Barrow) Ltd [2000] 2 All ER 493 it was held that where A makes a misrepresentation to B, knowing that C is likely to be privy to the terms of this misrepresentation and also be induced by it, then A may be liable to C if C does in fact rely upon the misrepresentation as a material inducement. One might ask, if this remedy already exists, why it was not applied by Mustill LJ in the appeal of the Zephyr case. The answer is that there was no indication in this case that the broker's representation to the primary underwriter was of a kind which could be relied upon by any other party. If the misrepresentation has concerned a fact regarding the state of repair of the insured ship, then no doubt the Court would have allowed the reinsurers to claim against the broker. However, the misrepresentation in the Zephyr case was an indication that the broker would sign-down the all risk insurance- no reasonable person would consider the terms of this representation to extend to a different insurance slip automatically. Therefore, if Sir Longmore's suggestion of reform was adopted, it might serve to undermine hundreds of years of carefully considered and incrementally developed jurisprudence! This is not the only reason why reform of the law here might be considered unnecessary- there are simple practical ways in which underwriters could avoid this problem: For example, the problem could be avoided if underwriters, regardless of their position within the insurance chain, consistently made a concerted effort to include, within the terms of their insurance offers to brokers, a clause stating that their offers are made upon the understanding that any representations made by the broker to any other underwriters will be deemed applicable to them also. Likewise, underwriters could simply ask brokers to confirm likely sign-down rates before they subscribe to the slip[7]. The author understands that the insurance trading floor is a high pressured environment where quick decisions must be made, but he can see no reason why introducing these simple practical initiatives would significantly undermine the efficiency of the overall process, taking into account the benefits that such a reform would bring. We will address these suggestions for reform in more detail within chapter 3 of this paper, where we will also assess the possibility of introducing a reform which precludes brokers from over subscribing insurance slips in the first place! Before we move on to discuss other case law decisions relevant to this 'problem', let us consider how the doctrine of misrepresentation by conduct might be relevant: It has been settled at law that representations inferred from a person's conduct can amount to actionable misrepresentations. For example, in the case of Spice Girls Ltd v Aprilia World Service Bv [2002] EWCA Civ 1 5 it was deemed that the Spice Girls had made a misrepresentation that Geri Halliwell would be remaining with the group for the foreseeable future by allowing her to appear in promotional material even though they all knew that she was about to leave the group. The question is whether or not this principle can be invoked where a particular broker is known in the industry to always engage in over subscription of insurance slips, I.e. can an insurer rely upon a broker's previous conduct to bring a claim against a broker who fails to sign-down on a particular occasion. While Hobhouse J in the Zephyr case argued that the reinsurers were entitled to bring a claim for damages on this basis, if one takes a strict contractual viewpoint it is very difficult to argue that this is the case, unless the broker always over subscribed his slips by the same amount. This was not the case in the Zephyr case: “It was well known to the market and well known to the particular underwriter that the broker's method of broking was to procure a heavy over subscription of the slips, often three or four times oversubscribed, so that they signed down. Also, he found that the identity of the particular underwriter and his syndicate that had signed the slip prior to him enabled him to assume that an indication of not more than one-third had been given to the preceding underwriter.” One might argue that because of the circumstances surrounding the insurance in this case and also the previous conduct of the particular broker in question, the reinsurers were led to believe (i) that the broker would sign-down the slips to some degree; and (ii) that he would not sign-down by more than one-third, and therefore that they should be entitled to reclaim some of their losses from the broker for failing to sign-down the slip at all. However, this author would argue that the terms of this indirect representation are so uncertain that no reasonable person should have allowed themselves to be induced by it. It is also difficult to argue that such a representation could be a 'material[8]' inducement- it is unlikely that an underwriter's decision to underwrite a slip would ever be based materially upon the brokers agreement to sign-down, even where such an agreement has been expressly made. While it may be true that courts have narrowed the definition of materiality and expanded the concept of inducement[9], within this context, I would still argue that the misrepresentation by conduct route to remedy is a weak one, unless it can be shown that the broker always over-subscribes by the same percentage and that this is common market knowledge. In England, this debate is now somewhat academic. After all, in the recent cases of Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [1998] 1 Lloyd's Rep. 565 and International Lottery Management Ltd v Dumas [2002] Lloyd's Rep IR 237 it has been made clear that the Courts may be prepared to find that a misrepresentation made by a broker to a leading underwriter is also a misrepresentation made by the broker to the 'following' underwriters, even where there was no direct representation made by the broker to these insurers. In both of these cases, the Courts held that following underwriters were entitled to avoid policies on the basis of misrepresentations which were made to the leading underwriters only. Merkin (2006) provides a useful summary of the two schools of reasoning which have been proferred to justify this somewhat artificial position: “The reasoning [is]... variously that it was understood by the market that the followers would rely on the leader or that if a false statement is made to the leader there is an obligation to disclose it to the followers.[10]” Merkin (2006) has criticized the latter of these two arguments on the basis that it can only apply where the broker making the false statement knew that his statement was false: “An argument which can be right only if the broker making the false statement was aware that he had done so, given that a broker is not required to disclose what he does not know.[11]” In the next Chapter of this paper, we will examine the problems for parties to insurance contracts which may arise as a result of under-subscribed slips. In order to gauge the full extent of these problems it is first important to examine how the Courts have decided which measure of damages will be utilized to determine the extent of a broker's liability when he has either failed to fully subscribe a slip or has made a misrepresentation causing the slip to become under-subscribed. A key case for consideration on this point is that of Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [2001] UKHL 51. This case is highly complex, and for this reason the facts will be presented in numerical point form: Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [2001] UKHL 51
  1. Mr. Bullen was an underwriter of four 'marine insurance' syndicates at Lloyd's of London, specializing in providing loss protection insurance to other marine insurers.
  2. Mr. Bullen asked Mr Forster, an insurance broker, to draft a treaty for the proportional reinsurance of his syndicates' excess of loss account.
  3. Mr Forster drafted this treaty and approached Aneco Reinsurance Underwriting Ltd asking whether it would be prepared to take a share of this treaty.
  4. In a meeting held at Lloyd's of London, Aneco Reinsurance Underwriting Ltd's underwriter, Mr. Crawley, agreed to subscribe to between 3 and 3.5 units of the Bullen treaty on the condition that Mr. Forster was able to obtain appropriate excess of loss insurance for Aneco.
  5. In December 1988, Mr. Forster, acting on behalf of Aneco Reinsurance Underwriting Ltd contacted a leading Lloyd's underwriter, Mr. King, to obtain quotations from the marine excess loss market. The slip in question was divided into 6 layers.
  6. After some negotiation, Mr. King made an offer for reinsurance which was acceptable to Mr. Forster's client. Mr. Forster therefore instructed Mr. King to go ahead and obtain the quoted reinsurance.
  7. Mr. Forster then proceeded to contact Mr. Crawley, informing him that, in total, he had managed to acquire 100% of subscriptions for three of the layers of the insurance, and was very close to securing 100% subscription for the other three layers. On the basis of this information, Mr. Crawley agreed to underwrite the policy.
  8. The Bullen treaty was a faculative/ obligatory treaty. What this means is that under the terms of the treaty, Mr. Bullen was entitled to choose which if any risks he would cede to the reinsurers, who were in turn obliged to accept any risks ceded. The proportion of the premium which would be payable to the reinsurers would therefore depend upon the amount of risk which had been ceded to them by Mr. Bullen, and was variable but proportional in this regard.
  9. However, Mr. Forster had failed to inform Mr. Crawford and Aneco's reinsurers that the treaty was a faculative/ obligatory treaty. Rather, they were led to believe that the treaty was a standard quota share treaty. Understandably, some of Aneco's reinsurers sought to avoid the policies, because their risk assessments had been made on the basis of them being entitled to reinsure a set proportion of every risk, rather than being only entitled to reinsure those risks which Mr. Bullen's syndicates did not want to insure.
  10. As Lord Steyn remarked (at 26): “[Under a fac/oblig treaty]... the reassured is able to put onto his reinsurer the least attractive pieces of qualifying business in his book, while keeping what he considers to be the best business for himself. A reinsurer will tend only to reinsure another underwriter on fac/oblig terms if he has considerable trust in the way that his reassured will use it. It is common ground, now, that Mr King would not have agreed to lead the reinsurance of a fac/oblig treaty, and that on a proper presentation of the risk, it would have been impossible to get enough underwriters to subscribe the reinsurance slip, so that the reinsurance that Mr Crawley desired was never available in the market.”
  11. Aneco Reinsurance Underwriting Ltd argued that if Mr. Forster had made all necessary enquiries and performed full disclosure he would have realized that Mr. Crawley's offer of reinsurance was not appropriate. As a result of Aneco's reinsurers avoiding the policies, $11million of Aneco's total loss under the Bullen treaty remained uninsured.
  12. In the High Court[12], Aneco sought damages in negligence for its actual losses of $11 million but also argued that it should be entitled to recover the $35 million, that sum being the full cost of its involvement in the Bullen Treaty.
  13. The commercial Court agreed that there had been material non-disclosure of facts amounting to negligence by Mr. Forster, and that Aneco was therefore entitled to recover its actual losses. The commercial court denied the claim for $35 million on the basis that, in its opinion, had Mr. Forster made all disclosures, it still would have been possible to secure reinsurance of those units of the treaty on similar terms.
  14. Aneco appealed this decision on the basis that the Commercial Court were wrong to hold that alternative reinsurance on similar terms would have been available had Mr. Forster performed his duties with the appropriate degree of care and skill[13]. While the Court of Appeal unanimously agreed that reinsurance upon similar terms would not have been possible if Mr. Forster had made full disclosure, there was still much debate over the correct measure of damages. Evans and Ward LJJ agreed that the correct measure was $35 million, whereas Aldous LJ believed that the duty of the brokers was too narrow to justify such an award being made.
  15. The case proceeded to the House of Lords, where the primary issue for determination was as follows: “Is the correct measure of damages all of Aneco's losses under the Bullen treaty or is the correct measure equal to the recovery which Aneco would have made under the reinsurance contracts but was unable to make to the extent that those have been avoided?[14]”
  16. Lord Steyn, providing the leading judgement in this case, commenced his dictum with an analysis of the decision in the case of SAAMCO [1997] AC 191[15]. He quoted Lord Hoffman from this earlier case: “"It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.” From this dicta, Lord Steyn derived a distinction between a duty to provide correct information and the duty to provide sound advice; where only the former duty exists, then the informant should not be liable for all resulting losses; where the latter duty exists, then the advisor may be liable for all resultant losses.
  17. Lord Steyn argued that, in this case, there was direct evidence from the brokers themselves which suggested that they had advised Mr. Crawford (Aneco's underwriter) on the correct course of action to take. On this basis, Lord Steyn rejected the appeal. Lord Slynn, Lord Browne-Wilkinson and Lord Lloyd of Berwick, concurred with the findings and ratio descendi of Lord Steyn.
What can be gleaned from this case is that where an underwriter has been negligent in performing his or her duties, with the result that damage has been caused to his or her client, in order to assess the correct measure of damages, I.e. whether the injured party is entitled to reclaim all monies paid in respect of that insurance or is only entitled to reclaim its actual losses, it is important to ascertain whether or not the duty of the broker in the case, taking into account all of the circumstances surrounding the client broker relationship (and evidence thereof), was merely to provide to the client information upon which that client could base his or her own decision as to the most appropriate course of action, or was to advise the client as to the most appropriate course of action. From the dictum of Lord Steyn in this case, it is clear that the Courts will likely allow for full recovery when the duty owed by the broker is considered to fall within the latter category, and will likely allow only for limited (actual loss) recovery when the duty owed by the broker is considered to fall within the former category. What is not clear is the extent to which the decision in the case of Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [2001] UKHL 51 that the broker was providing advice to Mr. Crawford (Aneco's underwriter) was based upon the fact that Mr. Forster, the brokering agent, admitted that he had provided Mr. Crawford with advice. For example, it is not clear whether or not, if this explicit evidence was lacking, the House would have come to the same conclusion. In some respects, one might argue that the evidence cited in this case was unreliable- there is a fine line between providing information and providing advice and it is not really fair to expect a broker to be an expert in making this distinction. In the opinion of this author, it was wrong for Lord Steyn to have placed so much emphasis on this piece of evidence. This author agrees with the dictum of Lord Hoffman in this case, who stated, (at 62), commenting upon his own information/advice distinction, as derived from the case of South Australia Asset Management v York Montague Ltd. [1997] AC 191: “Lord Hoffmann drew a distinction between "a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take." [1997] AC 191, 214 This has been widely misunderstood. Lord Hoffmann was not distinguishing between a duty to provide information and a duty to give advice. That is a distinction without a difference, for the terms are interchangeable. He was distinguishing between a duty to provide particular information or advice on request and a duty to advise generally when it is left to the adviser to decide what matters he should consider. Even where the defendant assumes responsibility for advising generally "whether or not a course of action should be taken" it is still necessary to identify the particular course of action in question. Where the question is whether to enter into a particular transaction, it is necessary to identify the relevant transaction, for the defendant is not responsible for loss arising from any other transaction.” One would hope that future Courts pay homage to this useful and insightful contribution as obiter dictum, despite the fact that Lord Hoffman delivered a minority dissenting opinion in this case. Conclusions to Chapter 1: In this chapter we have examined how the Courts have traditionally dealt with liability for under subscription of insurance slips, whether by misrepresentation, negligence or otherwise. In particular we have examined how the Courts are increasingly willing to find duties of care between non-contracting parties to an insurance slip. Within the context of negligent disclosure or misrepresentation, we have seen how the Courts have started to move away from the principles laid down in the Zephyr case towards the position that following underwriters are entitled to avoid policies on the basis of misrepresentations which were made to leading underwriters only. We have presented various reasons for why this development may not have been necessary, but have disengaged with this debate on the basis that the law now appears to be settled in this regard. Finally, in this chapter, we examined Lord Hoffman's information/ advice distinction which was recently applied in the case of Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [2001] UKHL 51 and argued that, while this distinction has often been misunderstood and misapplied (perhaps even in the Aneco case itself), it does provide a workable basis for deciding which measure of damages will be the most appropriate in each case. Taking into account these conclusions, in the next Chapter of this paper we will identify each of the potential parties to an insurance policy and identify the various problems that each party may face as a result of an insurance slip being under subscribed. Chapter 2: Let us commence this Chapter by identifying the various parties which can be affected by an under-subscribed insurance slip: (1) The Insured Party: The insured party may be an individual consumer or an individual commercial body, either seeking insurance or reinsurance if that commercial body is itself an insurer. Alternatively, the insured party may be a group of individuals or even a syndicate of companies. In light of the fact that the Financial Ombudsman Service only has jurisdiction to mediate disputes between consumers and companies regulated by the Financial Services Authority, for the purposes of this chapter we will treat consumer insured parties separately from non-consumer insured parties. (2) The Broker: The broker is a professional agent acting on behalf of the insured party to acquire quotations for insurance or reinsurance of a particular risk. (3) The Leading Underwriter: A leading underwriter manages a syndicate of Names. He or she represents these names by finding risks, a proportion of which his or her Names may wish to insure or reinsure. A leading underwriter is generally one who has real influence within his or her particular market sector. It is to leading underwriters that brokers will first bring their business as they know that if they can persuade a leading underwriter to underwrite the risk, then it will be easier to find other underwriters (following underwriters) to underwrite that risk also. The leading underwriter will invariably maintain close working relationships with many experienced brokers, and will base his decisions on an assessment of the actual risk to be insured/ reinsured. (4) The Following Underwriter: Like a leading underwriter, a following underwriter also manages a syndicate of Names but rather than being approached by a broker with a clean slip, will likely only be approached once a leading underwriter has already subscribed a part of that slip. Rather than performing an assessment of the risk insurable risk itself, the following underwriter will often base his or her decision to subscribe to the slip on the sole basis that an experienced leading underwriter with specialist knowledge in the relevant market sector has subscribed to that slip. (5) The Insurer/ Reinsurer The insurer is the party who agrees to accept a proportion of the total liability of the insurable risk in return for a proportion of the total premium payable by the insured party. A reinsurer is an insurer who has agreed to underwrite part of the risk held by an insurer. For example, as we discussed previously in the case of General Accident Fire and Life Assurance Corporation and Others v Tanter and Others, the insurers of the Zephyr underwrote all of the risk, but the reinsurers underwrote the total loss risk on behalf of the insurers. Let us now examine the various problems which each of these parties may suffer as a result of an under subscribed slip, taking into account the current position of the law and/or the current approach of the Financial Ombudsman Service in dealing with such problems[16]: (1)(a) Consumer Insured Parties: A consumer insured party may not even know what a slip is, or that one exists in relation to their insurance policy. This is because consumers generally have not been educated on the intricate workings of the insurance market, unless they happen to work within this sector. In light of this, consumer insured parties are particularly vulnerable, being unaware of their legal rights and obligations under a slip and being unlikely to seek professional legal advice before selecting appropriate insurance brokers and entering into insurance agreements with leading underwriters. It is for this reason that the role of the Financial Ombudsman Service has been extended into the insurance sector. The Financial Ombudsman Service, upon receiving a complaint about an insurance company, is duty-bound to contact that company and inform it that a complaint has been made, setting out the grounds for that complaint in a clear and impartial way. The Financial Ombudsman Service will then give the company a chance to perform its own internal investigation and respond to the complaint. If the company is unable to settle the complaint, then the Financial Ombudsman who has been assigned to the case may take a more proactive role in mediating the dispute and helping both sides to reach an amicable settlement, although it insists that it always remains impartial throughout: “We are not a regulator ("watchdog") or a trade body or a consumer champion. Our role is to settle disputes, without taking sides. So when we look at a complaint, we give both sides a fair hearing. If a business isn't able to resolve a customer’s complaint on its own, we'll see if we can help settle the dispute. But the business must first have the chance to sort things out itself.” In the context of under subscribed slips, the problems faced by consumers are the same regardless of the reasons for the under subscription- the insurers will refuse to settle all or part of a claim made by them against their insurance policy for an insurable risk. As we have discussed throughout Chapter 1 of this paper, invariably the reason that an insurer will try to avoid liability in this way is because it believes either that it was misrepresented as to the nature or scope of the risk or as to the total proportion of the risk that it would be liable for, or that the insured or the insured's broker failed to disclose all relevant material facts prior to entering into its contract of insurance. A consumer who faces this problem can submit his or her complaint to the Financial Ombudsman Service. The first step in the approach that the Financial Ombudsman Service will adopt in deciding whether or not to support the insurer(s) in avoiding the policy is to ask the following two questions: “(1) When the customer sought insurance, did the insurer ask a clear question about the matter which is now under dispute? (2) Did the answer to that clear question induce the insurer; that is, did it influence the insurer’s decision to enter into the contract at all, or to do so under terms and conditions that it otherwise would not have accepted?[17]” If the answer to either question is 'no', then the Financial Ombudsman Service will not support the insurer. Some commentators have argued that this first-stage enquiry effectively eliminates the duty of disclosure on consumers: “Since a question is required before a policy can be avoided, this seems effectively to remove the duty of disclosure.[18]” If the answers to both of the questions are 'yes', then the Financial Ombudsman Service will perform an assessment of whether the consumer policyholder misled the insurer deliberately, recklessly, inadvertently or innocently. The definition of 'innocent' within this context is non-contentious: “Customers act in good faith if their non-disclosure is made innocently. This may happen because the question is unclear or ambiguous, or because the relevant information is not something that they should reasonably know. In these cases, the insurer will not be able to ‘avoid’ the contract and (subject to the policy terms and conditions) should pay the claim in full.[19]” In regard to 'reckless' and 'inadvertent' non-disclosure: The Financial Ombusdsman Services states: “[T]he most difficult cases to determine... involve distinguishing between behaviour that is merely careless [I.e. 'inadvertent'] and that which amounts to recklessness. Both are forms of negligence. Inadvertence occurs when the customer unintentionally misleads the insurer. This can occur just by failing to read and check the questions and answers thoroughly enough. When this happens there is no breach of the duty of utmost good faith...Customers will find it more difficult to prove that they acted inadvertently if they answered several questions badly. To get one or two questions wrong may be regarded as inadvertent; to get several wrong starts to look like recklessness...An example of recklessness might be where a customer signs a blank proposal form and leaves it to be filled out by someone else. The customer has signed a declaration that ‘the above answers are true to the best of my knowledge and belief’, but does not know what those answers will be.[20]” While the task of distinguishing between 'negligence by inadvertent non-disclosure' and 'negligence by recklessness' is simply a matter of degree, the latter category being reserved only for the more serious incidences of negligence, the remedies available to a consumer within each category are very different. The remedy for inadvertent non-disclosure is a described by the Financial Ombudsman Service in the following terms: “Where there has been inadvertent non-disclosure or misrepresentation, we expect insurers to rewrite the insurance. This should be done on the terms they would originally have offered if they had been aware of all the information. In some cases this may result in a proportionate payment; in others it may result in no payment at all. This is because the inadvertently-withheld information would, if disclosed, have led to the firm declining the application altogether.[21]” However, there is no remedy available to a consumer for reckless non-disclosure, because the Financial Ombudsman Service considers this type of conduct to constitute a breach of duty of good faith. The fourth and final category of non-disclosure is 'deliberate' non-disclosure, and in cases where the Financial Ombudsman Service believes a consumer deliberately misled an insurer through non-disclosure, it will allow the insurer to avoid the policy and may even support it in withholding the insurance premium: “[T]his is... a fraud and – strictly speaking – the insurance premium does not have to be returned.[22]” The first thing which is striking about this four-category approach is that it is heavily stacked in favour of the consumer, even allowing consumers a remedy in cases where they have been minorly negligent. It should be noted that if the insured is not happy with the outcome of the Ombudsman process, he or she is entitled to escalate the claim to the County Court. This process will be outlined in more detail in the following section of this chapter, which pertains to non-consumer insured parties. It should be noted that where the insurance agreement contains a warranty clause under which the insured warrants that all of the information provided is 100% accurate, then if it later transpires that any of the information provided was incorrect, the insured will not be able to enforce the insurance policy. The problem for consumers is that there is a real risk that they will be unaware of this fact, not being expected to understand the differences in legal consequence between a warranty, a condition and any other clause. This means that insurers can use the warranty as a devise to try to avoid settling valid claims when they arise, by finding the most minute of discrepancies and arguing that a breach of warranty has occurred. This point will be discussed in greater length later in this chapter when we turn to discuss the practical ways that insurers can avoid insurance policies where there has been a misrepresentation or a breach of disclosure duty and also in Chapter 3 when we proffer proposals for reform. On one final point, it should be noted that s19 of the Marine Insurance Act 1906 states: “Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer-- (a) Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him...” In practice this means that where a broker fails to relay all of the material information provided by his client to the insurers, then the insurers can avoid the insurance policy to the detriment of the insured, even though the insured may be wholly innocent of any wrongdoing. (1)(b) Non-Consumer Insured Parties: Non-consumer insured parties may not utilize the Financial Ombudsman Service in order to avoid the problems of under-subscribed slips. Rather, this group must rely upon the law to bring a claim in negligence against the party or parties responsible for the under-subscription. The insured party will only be able to mount a successful claim where the risk in question is an insurable risk, and it did not misrepresent the insurer or breach its duty of disclosure prior to entering into the insurance contract. As we have discussed previously in this paper, the burden of proof is on the insurer to show that, on the balance of probabilities, the insured party did mislead it by misrepresentation or non-disclosure. Where the insured party is wholly innocent, then the law will either prevent the insurers from avoiding the policy (as in the final hearing of the Zephyr case) or, if the reason for the avoidance is due to a misrepresentation or breach of duty having been made by the insurance broker, will order the broker to pay damages to the insured. In this latter circumstance, whether or not the broker will be liable to repay the premium to the insured party, in full, will depend upon the nature of the relationship between the broker and the insured party. As we saw from our analysis of the case of Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [2001] UKHL 51 the appropriate test in these circumstances is that proffered by Lord Hoffman in the case of South Australia Asset Management v York Montague Ltd. [1997] AC 191; namely, the information/ advice distinction test. In essence, where the broker was responsible not merely for providing information but also for providing advice to the client as the the most appropriate course of action, then that broker may be found liable for all of the losses which resulted from that advice proving to be negligent. However, where the broker was only guilty of providing erroneous information, then as long as there is no direct causal link between that incidence of negligence and the total loss suffered, then the broker will only be liable to compensate the insured party the same amount of money which it lost as a result of an insurer (or multiple insurers) avoiding the policy. Where it can be proven on the balance of probabilities that the insured party misrepresented the insurer, either recklessly or fraudulently, then the insured party will have no remedy against an insurer seeking to avoid an insurance policy. Where it can be shown that on the balance of probabilities, the insured party negligently executed his disclosure duties, then there may be no remedy as the Courts may allow the insurer(s) to avoid the policy completely. However, a body of jurisprudence has been developed to set out the rules of when an insurer will be entitled to avoid a policy because of the non-disclosure of the insured party. One rule which applies to non-consumer insured parties only is that the duty of disclosure extends to disclosing all material facts, even where the insurer did not ask the insured any questions relevant to those facts. For example, section 18(1) of the Marine Insurance Act 1906 states: “[T]he assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.” This might be seen to impose an undue burden on non-consumer insured parties who, as Clarke (2005) notes: “may complete the form with scrupulous care, but still find that there was something else material to prudent insurers which, apparently, the particular insurer did not think to ask about but which, nonetheless, the applicant was expected to think of and disclose.[23]” This having been said, it is now clear that the law is unprepared to allow insurers to avoid insurance policies either where the insurer knew that the facts provided by the insured were untrue at the time of agreeing to provide insurance[24], or where the insurers had failed to ask the right questions before entering into a policy agreement[25]. Some commentators have suggested that it may be appropriate in cases where both the insurer and the insured are in breach of their respective obligations to utilize the doctrine of contributory negligence to apportion the loss between the parties and reduce the settlement owed by the insurer to the insured accordingly. For example, in the North Star Shipping case, Lord Justice Longmore advocated such an approach, arguing that: “[While] it would, of course, lead to some uncertainty ... the concept of contributory negligence... is a concept that has worn the test of time very well. In these days when the incidence of costs in litigation may depend on well or ill informed guesses made by the litigant, at the time they are obliged to serve pre action protocols, uncertainty is endemic, yet the court, and litigants, are quite good at getting used to it.[26]” It should be noted however, that a breach of warranty will void the insurance policy, so where the insured has warranted that all information provided is correct, then it will not be able to enforce the insurance policy regardless of the reasons or motivations for that breach. The law pertaining to breach of warranties will be discussed in the following section of this chapter. (3) The Leading Underwriter and Insurers: The leading underwriter receives information directly from the insured party's broker and possibly also from the insured party directly, on behalf of his syndicate of insurers. Therefore, it is very important that the leading underwriter, on behalf of his syndicate, takes all reasonable steps to ensure that he meets his obligations to (i) make sure that none of the facts provided by the insured are known to be incorrect; and, (ii) ask of the insured all questions which will be relevant to making an accurate assessment of the insurable risk. In this way, the leading underwriter can protect his syndicate, as far as possible, from innocent non-disclosure by the insured. However, as we have seen from our earlier analysis, even in cases where an insured party recklessly fails to disclose material information, insurers may not be entitled to avoid their liabilities completely. With this concern in mind, one of the practical ways that a leading underwriter can ensure that his syndicate of insurers are able to avoid a policy, completely, if it later transpires that the insured misrepresented the relevant facts and/or did not disclose all material facts prior to entering into the insurance policy, is to employ warranty clauses within the insurance agreement. The definition of a warranty and the rule that a warranty must be complied with is provided by section 33 of the Marine Insurance Act 1906, which states: “A warranty... means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts....A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.” What this means is that if an underwriter includes a warranty clause into the insurance agreement on behalf of his insurer(s), stating that the insured warrants that he, she or it has accurately disclosed a particular piece or class of information, then if it later transpires that the insured failed to so disclose that information, the insurer will be able to avoid any liability under that insurance policy if a claim is made by the insured. By virtue of section 34(2) of the Marine Insurance Act 1906[27], this is true even if the insured manages to remedy the breach prior to making a claim, unless the insurer agrees to waive the warranty clause[28]. The strict application of this ancient rule can be seen in the case of De Hahn v Hartley (1786) 1 TR 343. In this case the insured provided a warranty that the ship in question would have 50 hands on board when it set sail from Liverpool. In fact, there were only 46 hands on board the ship during this journey. When the insured tried to settle a claim with the insurer the insurer avoided liability on the grounds that the insured had breached his warranty. It was irrelevant that there was no relationship between the damage being claimed for and the number of hands on board the ship[29]! The English and Scottish Law Commissions (2006) (at page 8) have criticized the law on warranties, providing a shocking example of how insurers have, in the past, used a breach of warranty to avoid liability: “[I]n Dawson Ltd v Bonnin [1922] 2 AC 413, the insured was asked where a lorry was garaged. They inadvertently gave the firm's place of business in centra
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