QUEENS BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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Peter Malcolm Brotherton & 4 others |
Claimant |
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- and - |
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Aseguradora Colseguros SA & 1 other |
Defendant |
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Mr R Millett QC (instructed by Clyde & Co) for the Defendant
Hearing dates : 18 27 June 2003
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Crown Copyright ©
Mr Justice Morison :
Background
"3. The reinsurers, Peter Malcolm Brotherton and other London insurers, are claimants in the proceedings. They seek declarations that they have validly avoided primary and excess layer reinsurances made in late November 1997 incepting 7th November 1997 [sic] and extended in late November 1998 until 31st January 1999. The reinsureds, Aseguradora Colseguros S.A. and La Previsora S.A., Compania de Seguros, are Columbian insurance companies. They issued bankers blanket bond and professional indemnity insurance policies to a Columbian state-owned bank, Caja de Credito Agraria Industrial y Minero ("Caja Agraria"). The policies covered, among other matters, losses caused by dishonest or fraudulent acts of bank employees, subject to qualifications which it is not here necessary to examine. Caja Agraria's president until his suspension in early November 1997 was S. Benjamin Medina.
4. Between 28th January 1997 and late November 1997 seven news bulletins and fifteen newspaper articles (including six in El Tiempo said to be Columbia's largest circulation newspaper) carried reports of allegations of misconduct and related investigations involving Caja Agraria's business and S. Medina's conduct thereof. These culminated with reference to his suspension for 90 days in early November 1997. In January and February 1998 there were further reports of such investigations, including disciplinary charges by then formulated against S. Medina and other bank officers.
5. Reinsurers plead (in paragraph 6 of the claim) that as a result of such reports both reinsureds, prior to entering into the contracts, knew or ought to have known that serious allegations of corruption and embezzlement of public funds had been made against S. Medina and other serious allegations against other officers; that these included allegations of irregular loans; that such loans were being investigated by the Contraloria General; that S. Medina's involvement was being investigated by the Procurador General de la Nacion; that the Procurador General had ordered S. Medina's suspension on or about 4th November 1997; and that in early November 1997 he had been served with an arrest warrant by the police to comply with a court order to produce evidence in a criminal investigation by the Fiscalia General de la Nacion into corruption or embezzlement of public funds within Caja Agraria. As from February 1998 reinsurers also allege that the reinsureds knew or ought to have known that the Procurador General had brought disciplinary charges against S. Medina and other bank officers. Further, they allege that, at the time of placement (presumably also including the extensions) the reinsureds had no knowledge and no means of proving to reinsurers' satisfaction that the allegations were untrue, or that claims would not arise out of the allegedly irregular loan transactions.
6. Reinsurers' case is that the reports alone, and all the more the reports coupled with the fact of the investigations, were material to be disclosed, firstly as constituting circumstances which might give rise to claims under the reinsurances, and secondly as suggesting moral hazard. For completeness, I note that the lead reinsurance syndicate also asserts that positive misrepresentations were made to it in November 1997 as to the reasons for S. Medina's non-attendance at a meeting in London and for his suspension.
7. The reinsureds in their defence admit the reports (although not the accuracy of the summary in paragraph 6 of the claim). They also admit the investigations, including the arrest and charges. It is not their case that the reports were as reports false. They make no admission that they knew or ought to have known of the reports or other matters which reinsurers allege should have been disclosed. But they admit that they could not at placement have demonstrated unequivocally that there was no proper basis for the investigations (a word which I will in this judgment use to include the arrest and later the charges), although they assert that they could have demonstrated their political motivation and that their mere fact was not a reliable basis for any views about S. Medina's veracity or the regularity or otherwise of the loan transactions. They also assert that the lead reinsurance syndicate (through Mr Satterford) knew or ought to have known of the allegations (although they do not suggest that any such knowledge on its part would fall to be attributed to following reinsurers).
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9. The forthcoming trial will on any view have to address the following issues:
i) whether, as at the time of the placements in November 1997 (or, as the case may be, the extensions in November 1998), the reports (or the reports coupled with the fact of the investigations) were or ought to have been known either to the reinsureds or to all or any of the reinsurers;
ii) whether, at that time, their mere existence constituted a matter which a prudent reinsurer would have regarded it as material to know. On that issue expert underwriting evidence will, in accordance with modern practice, be admissible; the issue will raise for consideration whether the reports (or the reports and investigations) amounted to intelligence, or were mere "loose" or "idle" rumours;
iii) whether, if the actual reinsurers had known of the reports (or the reports and investigations) at that time, such knowledge would have induced all or any of them to act differently, either by not entering into (or extending) the reinsurances, or by only doing so on different terms (including a different rate); some light may be thrown on this by the answer to (ii), but the evidence of the actual reinsurers is likely to be more important."
"that Benjamin Medina had been suspended from Caja .. but said he was under suspension because he had been accused of having taken a single flight at Caja['s] expense, when he was travelling on family matters as opposed to travelling on Caja['s] business matters."
It is further alleged that Mr Brown told Mr Satterford that this was an isolated allegation against Benjamin Medina and that it was nothing more than stupidity on his part. Thus the lead syndicate say that the true reason why Mr Medina was unable to come was not revealed and the lead syndicate were led to the belief that the reason for the suspension was immaterial to the risk being placed and that the Reinsureds never disabused the underwriter of that belief at any subsequent stage "not even at the time when the extensions were being broked". Thus they say that they were misled by a material misrepresentation and induced to write the business and the extension by reason of it. They say that the reason why Mr Medina was suspended was to do with his alleged involvement in unauthorised irregular bank loans and not just because he had used the company aeroplane for his own personal use on one occasion. The reports referred to particular loans and particular beneficiaries involving named officers and named branches, which exposed the bank to losses of 11 billion pesos. Mr Medina was reported to have been subject to official investigations, suspended and arrested.
"orally at a broking meeting in London in early November 1997 at which Julio Arciniegas [of the producing broker] and Jairo Meija of the First Defendant [Colseguros] were present. The disclosure followed a request by Mr Satterford as to why Snr Medina had not travelled to London to attend the meeting personally."
"if the matters alleged were matters known to the Defendants or matters which ought in the ordinary course of business to have been known by them (which is not admitted) then these were matters which were either matters of common notoriety or knowledge or were matters which the Reinsurers ought in the ordinary course of their business to have known."
This averment is supported by particulars of the matters relied upon. I summarise them thus:
(1) Mr Satterford was one of the leading reinsurance underwriters of Colombian banking and financial risks in the London market; he frequently spoke to local producing brokers and had frequent contact with the main ceding companies;
(2) he frequently travelled to Colombia on business trips and met many banks, including Caja, who were the original assureds and he knew Mr Medina personally;
(3) Mr Satterford used a Bogota branch of a loss adjusting company; and employed the services of Risk Concepts Limited ['RCL'] to perform regular audits at various Colombian Banks, including Caja, and "it is to be inferred that [the local loss adjusters] and/or RCL knew the contents of the press reports relied upon ..";
(4) Mr Satterford's Agency subscribed to press materials from Latin America in order that they could keep abreast of events in the Colombian market and in particular they subscribed to Latin America Newsletter.
"There shall be no liability in respect of any claim:
(a) Arising out of any circumstance or occurrence which has been notified to the Insurer of any other Policy of Insurance effected prior to the inception of this Policy.
(b) Arising out of or in connection with any circumstances or occurrences known to the Assured prior to the inception hereof and that have not been informed to insurers at time of inception."
Mr Outhwaite, an underwriting expert retained by the Reinsureds, expressed the opinion that this clause "had the effect of narrowing the insured's disclosure obligations since information material to a claim known by the insured prior to inception is dealt with on a contractual basis instead".
"In the absence of inquiry the following circumstances need not be disclosed, namely:-
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(b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know."
(a) Were the reports contained in the media upon which the Reinsurers rely 'material' to be disclosed to the prudent underwriter?
(b) Were the 'facts', if known to the Reinsureds, also known to the Reinsurers under section 18(3) of the Act?
(c) Were the Reinsurers induced by any non-disclosure into writing the business?
(d) Was there any actionable misrepresentation?
(e) Can those underwriters who followed Mr Satterford avoid on the basis of the alleged non-disclosure and misrepresentation to Mr Satterford?
Mr Outhwaite put his opinion this way:
".. as an experienced underwriter I find it distasteful, to put it at its lowest, that a London Underwriter should seek to avoid the payment of valid claims on a contract on the grounds that at the time of writing, there were rumours or reports which subsequently have proved to be false or immaterial, but which would, at the time, have influenced his mind. In my opinion, that is the epitome of bad faith."
(a) Was there a misrepresentation / non-disclosure?
(b) Was it material?
(c) Were the Reinsurers induced?
In his opening, he submitted that it was hard to think of a more "egregious" non-disclosure in a banking context than the non-disclosure of reports of banking scandals which are obviously likely to produce losses and which do in fact produce losses notified under the reinsurance. He submits that this is especially so where:
(1) the known losses arise in the context of allegations of moral hazard against the relevant bank;
(2) the senior officers implicated in the reports include one present at the presentation meeting and the President of Caja;
(3) the President had signed the Proposal Form certifying systems designed to avoid fraud by employees;
(4) the President is the person relied upon to implement the changes indicated in the RCL survey reports.
Findings of fact
(1) Mr Satterford. I regarded him as an honest and sensible witness and have no difficulty in believing what he told me. He has not been underwriting for a number of years, but had a good grasp of the facts of this case and was happy to answer in a positive manner all the questions asked in cross-examination, with an appropriate degree of patience and courtesy.
(2) Mr Wattenbach. The syndicate for whom he was the Underwriter took a line on the excess layer policy. His line was initially 5%, written down to 3.11% by BRS when they completed the slip. I think I can properly describe him as a tiresome witness, in the sense that he was impatient with the questions he was asked in cross-examination and was, on occasions, not as responsive as one might have wished. His combative attitude to the questioner was, I think, a symptom of his inexperience in the witness box. He has never given evidence in a court before. Otherwise, his manner and demeanour were quite acceptable, and I felt I was able to rely upon his answers, not just because he appeared to be a witness of truth but also what he said sounded to me to be sensible. He knew nothing of the press reports and it is not said against him [at least during cross-examination] that he was told anything about them or about the suspension of the President or that he should have known about them. He was cross-examined about materiality and inducement and his impatience with the questioning about these matters was partly due to his inability to understand how it could be said that the reports were not material and that they would have made no difference to his underwriting decision.
(3) Mr McQuiggan. He also wrote a line on the Excess layer [10% signed down to 6.21%]. Although, as was his right, he was only prepared to give evidence if he was paid for his time whilst doing so [at a rate of ฃ225 per hour, as disclosed in his first witness statement] his evidence was in no sense 'tainted' by this arrangement. I made a note that I regarded him as a very good and sensible witness. He was certain that had the reports been disclosed to him he would not have written the risk on the same terms and would probably have required, as a condition of writing the risk at all, an appropriate exclusion. He thought that the Discovery Limitation Clause was too general to be effective to meet the problems inherent in the press reports and he suggested the sort of wording that might have satisfied him were he to have written the risk after proper disclosure.
(4) Mr Head. He was, at the time, an underwriter employed by Sorema (UK) Limited, having joined them in 1994. When he joined them the risk for the 1994/5 reinsurance year in relation to Caja had already been written. For the 1995/6 year Sorema and the cedants agreed to void the year as there had been non-disclosure of a claim at renewal, and for the following year, 1996/7, Sorema did not offer any support for the reinsurance in relation to Caja. Sorema wrote a line on the primary layer as binding underwriters; ie they were not bound to follow but made their own underwriting decision. Because of the previous underwriting experience Mr Head regarded the risk as very 'iffy'. The broker persuaded him to take a line on the excess layer first and then returned the following day, and he said that "I was eventually persuaded to write a small primary layer line on the back of BRS' whole account with Sorema, ie as a favour; I probably agreed to do so because it looked as if the bank had "tidied up its act" from the survey report and the loss experience appeared to be getting better." As a witness, Mr Head appeared to me to be reliable.
(5) Mr Sharp. He was an experienced underwriter in the Lloyd's market and retired at the end of the 1999 underwriting year. He had no specific recollection of the 'broke' in 1997. He wrote a line on each of the two policies and was a 'bind own line' underwriter to whom a separate presentation was made. His line on the excess layer was signed down from 15% to 9.32%, which Mr Sharp split between the two syndicates for whom he wrote. He was cross-examined briefly and I have no difficulty in accepting his evidence.
(6) Carlos Fradique-M้ndez. This witness is a lawyer who practises in Colombia. A Civil Evidence Act Notice was served in relation to his evidence, and, therefore, his evidence has not been tested by cross-examination. The essence of his evidence relates, first, to the Colombian News Media and the relative importance of various newspapers and their readership statistics. Second he gives evidence as to the audience and reputation of TV news programs and their audience ratings. Based on his research and the figures quoted he expresses the view that TV news programmes were widely watched by Colombians between January 1997 and February 1998. Thirdly, the witness deals with the position of the "Contraloria General" under the Colombian Constitution. This is an independent state audit body in charge of the fiscal management and control of public bodies, with particular regard to the way that State assets are used. Fourth, he deals with the position of the Procuraduria General which supervises the conduct of persons performing public functions. This body has power to suspend and dismiss public servants where there has been misconduct or a breach of duty.
(1) Mr Mejia. His witness statement was made on 5 June 2003. At the relevant time he was President of Colseguros. It was his evidence that Colseguros never underwrote the Caja risk; he said that it was a formality under Colombian Law that any risk which is borne in Colombia has to be insured through a Colombian company. In this case the Colombian Company was Colseguros and La Previsora but the surveyors and the adjusters were appointed by the London reinsurers and the terms were also set by the reinsurers as well. On the other hand it is clear that Colseguros had been Caja's insurer for a number of years and the division of risk between them and other Colombian insurers varied. But in each case the whole of the risk was reinsured through the London market so that neither Colombian insurer retained any part of the risk themselves. I think Mr Mejia may have diminished the role which Colseguros actually played in relation to the risk. He had lunch with Mr Medina "some days before [his] departure to Europe". He said that he was unaware of Mr Medina's suspension. He also said that he was unaware of the allegations published in the newspapers in Colombia and "these are not matters which I would have regarded to be relevant as an insurer in Colombia." According to his written statement, he recalled being surprised by Mr Medina's absence from the meetings, yet he remembered being told by Caja and/or the local brokers' representative, Mr Arciniegas, on the Sunday before the meeting in London that Mr Medina had been suspended due to the alleged misuse of the Bank's aeroplane. I have to say that I found him an evasive witness when it came to dealing with Mr Medina's suspension and what he did or did not know. He purported to have a recollection of Mr Satterford knowing, before the meeting, of the suspension. He said, when asked whether he thought that Mr Medina's suspension was important to draw to the Reinsurers attention, that what was said to Mr Satterford was "enough for him to know and if he wanted something else he could have inquired."
(2) Mr Brown. He is currently the Chairman of BRS. He gave evidence about a conversation he said he had with Mr Satterford before the presentation meeting on 17 November 1997 to the effect that Mr Medina had been suspended as a "result of the Authorities questioning the use of an aircraft. It was explained [by the Colombian brokers or Colseguros, the first Defendant] that an aircraft had been used by the President to visit various locations of the Bank and that he had used this aircraft for his own personal use. No other reason was mentioned and I was told that it was hoped that this situation would be resolved in the near future." This witness says that he recalls that at the meeting on 17 November, Mr Satterford said that it was a shame that Mr Medina "was not able to come over" and one of the people present, and he cannot remember who, repeated the information that he had already received and passed on to Mr Satterford. "I recall that [Mr Satterford] passed on his regards and said that he hoped all matters would be resolved satisfactorily." What was said at the meeting is obviously important and I shall deal with it in due course. It is sufficient to say at this stage that I did not think that the evidence that was given by Mr Brown on this matter was reliable or trustworthy. It is inconsistent with the pleaded case and unsupported by any documentary material, and it does not explain why BRS made no disclosure of the suspension to the following market, although Mr Brown suggested in the witness box, but not in his witness statements, that the following market had been told.
(3) Mr Cuthbert. He is a Director of BRS. After the meeting on 17 November 1997, he subsequently met with Mr Satterford to negotiate the placing of the reinsurance. He produced for Mr Satterford various quotation sheets. Although there was nothing in his witness statement which dealt with the alleged misrepresentation and non-disclosure, this witness recalled that Mr Brown had been contacted in the week leading up to the presentation to say that Mr Medina would not be coming over after all, and that he believed that Mr Satterford was aware before the meeting that Mr Medina was not going to be there and "he was informed during the meeting again, the reasons why Mr Medina was not coming over". He also said that he mentioned the suspension to Mr Sharp, despite the fact that such was never suggested to Mr Sharp when he gave evidence. I am afraid that I felt unable to accept what this witness was saying on the crucial issues of non-disclosure and misrepresentation. His witness statement did not cover this ground and I think he was making things up as he went along, supporting, where he could, the evidence of his boss, Mr Brown.
(4) Mr Mr Roberto Garcia-Pe๑a. His witness statement was supported by a Civil Evidence Act Notice. He is a qualified lawyer and journalist and works for El Tiempo, the most widely read newspaper in Colombia, with a readership of 37.5%, according to the Claimants' journalism witness. His opinion was that "Colombians take all news in the press relating to investigations against public functionaries with a pinch of salt and with certain mistrust, since it is now quite usual to find, after the scandal, rectifications and corrections in respect of information that was made public in an inaccurate manner without any grounds or where the sources of the information that was made public in an inaccurate manner or without any grounds or where the sources of the information had not been checked. In addition, since these are public personalities, the public is aware that there might be a political motivation behind the story." I am not surprised that Mr Millett did not spend any time on this evidence. It is remarkably long on generality and short on detail. For example, this witness fails to deal with articles and news items carried in his own paper about Mr Medina's suspension, which was reported in the edition of 5 November 1997 and referred both to improper handling of the aeroplane. It reported that the Procuraduria had asked the government to suspend Mr Medina as a preventative measure. On 6 November, his newspaper reported that the President had signed the decree suspending Mr Medina and that a replacement had been appointed for the next three months. On 8 November 1997 El Tiempo carried an article saying that the judicial authorities sent police to look for [Mr Medina] "currently suspended under charges of corruption in that company." They report that the police arrived at Mr Medina's house the previous day "to serve an arrest warrant on him" and that he was told that "the arrest warrant was related to criminal proceedings for embezzlement". The article also referred to the alleged granting of irregular loans for an amount of 11 billion pesos. It reported that the Contraloria was pursuing an investigation in respect of fiscal liability arising out of the loans and that it had reported four months previously that the accounts of the bank were being managed in breach of internal regulations. There were other reports of corruption which were published after the meeting on 17 November 1997 but before the risk incepted. If the purpose of this witness' evidence was designed to persuade me that the Colombian press was not to be trusted with accurate reporting, or that allegations of the sort which were published about Mr Medina were commonplace and likely to be regarded as purely political, and could be dismissed as worthless, it fails to do so.
(5) NJ Puentes. He is a lawyer employed by Colseguros in their claims department. He said that he had been instructed to process and record on Colseguros' systems, those notified claims and events likely to become claims under the Bankers Blanket Bond Policies of Caja for the period of 12 months from 7 December 1997 and extended up to 31 January 1999. He produces a schedule and expresses his belief that the best estimate of the Defendants' claims under the Reinsurance Policies is contained within it. This evidence was given in writing under the Civil Evidence Act. It shows that claims were being made, amongst others, in relation to irregular credits by employees at the Regional Bogota branch in sums totalling 10.5 billion pesos and another claim in relation to irregular credits of 7.2 billion pesos at that branch and three others. These irregular credits formed part of the case pursued by the authorities against Mr Medina.
"Unlike some Cedants, who were happy simply to act as fronts, Colseguros as a company liked to be directly involved in the placement process, and a senior executive of Colseguros would almost always attend renewal meetings if the Original Insured was (as in this case) a major client. Often this would be Colseguros' reinsurance manager, sometimes (as in this case) a more senior figure."
It is common ground between the parties that there was a duty on all the people present from Colombia to disclose facts material to the writing of the risk, starting with the Bank and working up through the chain: see Day 6 page 18 lines 17 22.
The Representative(s) | The Organisation |
William Ospina & Patricia Cruz | Caja Agraria |
Mr Mejia | Colseguros |
Graham Cuthbert | BRS |
Julio Arciniegas | Aseguros |
Mr Satterford | Lead Underwriters |
Of those who participated, it is significant that there was no evidence from Caja's representatives; nor from Mr Arciniegas. Although Mr Mejia told me that he was unaware from the Colombian press and TV coverage that Mr Medina was suspended from duty and why, it was not part of the positive case for Colseguros that they were unaware of the reports and their contents. As Mr Millett QC said on Day 1 page 11, "we make no admissions about what the defendants actually knew because we have no positive case about what they, as an organisation actually knew or did not know." The absence of such evidence, without explanation, entitles me to draw inferences, if appropriate, as to why no positive case was being run that Colseguros did not know of Mr Medina's suspension and the alleged reasons for it.
"If I had been told in the process of a renewal presentation that the president of a bank had been suspended I would undoubtedly have asked questions. I would undoubtedly have made notes. I did not. Therefore, I do not believe that I was told in that meeting."
He also said, and I accept, that if Mr Brown had told him whilst he was at the box, he Mr Satterford would have made a note and probably asked questions. If Mr Satterford is right, then at least it is possible to understand the thinking behind the approach of the Colombian team: namely to say as little as possible about Mr Medina's absence and to dismiss it as of no consequence. That would explain why it was not felt necessary to say anything to the following market: having decided not to disclose that Mr Medina had been suspended, there was nothing to say to the others who were not expecting him to be in the UK and who had not met with him before. But on any view, even on the Defendants' own case, what was said to Mr Satterford was simply not enough. Fiddling one's expenses on one occasion is one thing; being suspended for involvement in improper credits involving billions of pesos is quite another. In the latter case, the Reinsurer would or might take the view that there was a moral hazard and the risk of a substantial claim in due course.
"words to the effect that Caja .. was having a change at the top, and that Benjamin" .. was under suspicion as a result of allegedly taking a plane flight for his own use. As it was presented to me, this was an isolated allegation that [Mr] Medina had done a foolish thing on a single occasion."
He said that he was reasonably sure that the conversation took place after inception of the 1997/8 reinsurance. As I read that statement I took him to mean that the conversation took place after 7 December 1997 [in fact, Mr Satterford's final scratch was put on the slip after inception on 23 December 1997, but by then the Syndicate was already bound]. The pleaded case was that this conversation took place "in or about late November 1997" [paragraph 11.1 of the Re-Amended Particulars of Claim]. In other words, there is a conflict between the witness statement and the pleading as to the date when the conversation took place. This discrepancy has, in my view, more relevance to the issues of inducement and materiality than to the truth of Mr Satterford's evidence. Whichever date is right, it occurred after the presentation meeting, and not before it, as Mr Brown says. It may be that Mr Brown has convinced himself that he spoke to Mr Satterford about the suspension before the meeting. As I have explained, I am not convinced by his evidence on that point. Whether before or after the risk incepted, but after the presentation meeting, I accept that Mr Satterford was told, on a casual and unplanned basis, that Mr Medina had been replaced. Despite Mr Swainston QC's re-examination, I think Mr Satterford remained of the view that his conversation with Mr Brown was on or after December 7. The reason why Mr Satterford did not follow this up was partly because of the circumstances in which he was told, namely during a purely casual encounter, and partly because of what he was told. Mr Cuthbert, although wrong about what was said at the presentation meeting, said that he was told by the Colombian team that Mr Medina's suspension was ridiculous. He may be right that he learned this after rather than before or at the meeting. It would certainly fit with Mr Brown's perception that there was nothing serious about the aeroplane incident. This explains why he did not chase the matter up. He was properly pressed about this by Mr Millett QC. Leading counsel's attempt to categorise what he was told as a "matter of grave significance" misfired. It all depends. If Mr Medina thought he was entitled to use the plane on that journey at company expense, because, for example, the occasion was mixed business and pleasure, but acted in breach of the Bank's internal procedures that would not be a matter of grave significance. I am satisfied on a balance of probabilities that Mr Satterford, and indeed BRS generally thought that the incident for which Mr Medina was suspended was, to use Mr Cuthbert's expression, based on a ridiculous allegation and that the issue would shortly be resolved.
The renewal in 1998.
"It was further explained that the market had been insuring the bank and that whilst some three years ago due to the survey which had been conducted by RCL the loss record had reduced, unfortunately the last two years have been disastrous and this could not continue".
RCL were due to re-survey the Caja on 15 September and it was agreed that the Bank's representatives would travel to London in the week commencing 28 September with a view to considering the cancellation and replacement of their existing policy. The Bank were to prepare their own report summarising their efforts to control and reduce the losses. Mr Satterford had seriously considered avoiding the policy as a result of an alleged non-disclosure in relation to a particular claim. He cannot recall precisely why the avoidance issue was not pursued at that time, although a sense of loyalty to Colseguros was an element.
Materiality
(1) Were the reports of the suspension of Mr Medina and the subsequent suspensions of other senior officials of the Bank which occurred in 1998, matters which were material to the risk being written?
(2) Were they just rumour and gossip which could be brushed aside and not disclosed?
(2) Were they matters which did not need to be disclosed because of section 18(3) of the Marine Insurance Act?
"The prudent underwriter would be aware that newspapers in this country are hardly accurate and unbiased reporters of events: news is distorted, invented and suppressed according to their own agenda. It is my understanding that that would apply in Colombia also and probably, because of the heated political atmosphere that pertains in that country, to a greater extent than in the UK.
That being so I do not believe that any prudent underwriter would have assumed that the reports cited regarding Mr Medina would alone have formed any basis for deciding his attitude to the Caja .. risk. The fact of the newspaper allegations alone, given their source, would not be sufficient. Only if the Defendants knew there was some truth in the allegations or perhaps were unable to demonstrate or satisfy insurers at the time that the allegations were baseless, could they be considered as material and discloseable." [my emphasis].
"In my opinion the allegations set out in [the Points of Claim] taken as a whole were very serious and material to the underwriting of the risk and there is no question in my mind that they should have been disclosed to underwriters at the broking of the main policy incepting 7 December 1997. They were facts or circumstances that would if true give rise to a potential claim under "Infidelity of Employees" Insuring Clause 1 of the Policy."
These matters were also, in my view, material to the extension of the 1997 policy, incepting at December 1998. By this time, all of the events had occurred, including the bringing of disciplinary charges against four senior officials which had taken place after the inception of the 1997 policy."
Section 18(3)(b)
"as a matter of London market practice would be deemed to know matters of common notoriety or matters which a direct underwriter would be deemed to know in the ordinary course of business."
I regard this opinion as unsustainable. In a most general sense a London Underwriter ought to know the market in which he is writing business. With modern methods of communication, he can be expected to know more things than 50 or more years ago. But he is based in Lime Street and not Colombia. In order to comply with the law, Colseguros were both formally, and in reality, the Insurer, even if their underwriter played little or no part in assessing the risk. But that does not put Mr Satterford into the position of a local insurer. He is being broked reinsurance at his box in London. To presume that Mr Satterford knew matters which the head of the local insurer was himself unaware of, makes Mr Outhwaite's opinion on this issue odd, to say the least. And in any event, Mr Outhwaite's opinion flies in the face of reality. Mr Satterford wrote business in relation to a large number of banks located widely in South America. It is fanciful to suggest that he is deemed to know everything a direct underwriter would be deemed to know in relation to all the risks which were broked to him in the London market. It is true that the local insurer took no part of the risk himself, and that, as a result the reinsurer was more directly concerned with the ultimate insured than otherwise might have been the case. It is also true that he travelled to Colombia two or three times a year and met with the ultimate insureds and the local insurance company and their broker. But this does not make him the direct insurer in fact or in law, and no Lloyd's broker could possibly think that he was relieved of his duty to make full disclosure when broking the reinsurance in London.
The Discovery Limitation Clause.
"has the effect of narrowing the insured's disclosure obligations since information material to a claim known by the insured prior to inception is dealt with on a contractual basis instead. In other words, there is no requirement for the insured to disclose such information because any claim it is relevant to would not be covered. Effectively, the insurer and reinsured have agreed that such information is immaterial. It is inferred that the matters reported in the media were known by the Defendants prior to inception. They therefore were not required to disclose them to reinsurers. The reinsurers are not liable in respect of the claims arising out of the known circumstances but they are certainly not entitled to void the entire cover on the grounds that the circumstances were not disclosed."
Inducement
"It seems to me that the true position is that the misrepresentation must be an effective cause of the particular insurer or reinsurer entering into the contract but need not of course be the sole cause. If the insurer would have entered into the contract on the same terms in any event, the representation or non-disclosure will not, however material, be an effective cause of the making of the contract and the insurer or reinsurer will not be entitled to avoid the contract. Thus I agree with Sir Christopher Staughton, whose judgment I have seen in draft, that, in this context at least, causation cannot exist when even the 'but for' test is not satisfied; cf the recent decision of the House of Lords in a very different context in Fairchild v Glenhaven Funeral Services Limited (2002) UKHL 22."
At this stage, the factual evidence of the underwriter and the other witnesses as to what they would have done had disclosure been made is, necessarily, of a different quality from their other evidence about the facts. There were very good reasons why an underwriter should not have written the risk in November 1997 and then the two month extension in 1998. The business was not profitable; the Bank's position had appeared to deteriorate between 1997 and 1998; the Bank had not been carrying out RCL's recommendations; many of the written off loans had been granted in breach of procedures; in certain areas there was "widespread" breaches of procedures. Mr Satterford knew of Mr Medina's suspension but made no attempt to find out more before he agreed to the extension. As Mr Millett QC fairly pointed out, Mr Satterford had a number of underwriting reasons and opportunities to cease to write the business in 1997 and again in 1998. Thus, he submits, it is odd that some considerable time after the events, the Claimants now say that had they known of the real reasons for Mr Medina's suspension, and of the suspension of other senior employees they would not have written the risk. I quite see the force of these submissions.
The following market
(1) At the presentation in November 1997, the lead underwriter was misled about Mr Medina's absence and the true reasons for his absence were material matters which should have been disclosed and which would have materially affected the way he wrote the risk; in fact, he probably would not have written it at all. The Claimants are entitled to avoid the policy and the extension to it.
(2) The material relating to Mr Medina's suspension contained in the press and TV reports, which are summarised in the pleadings, are not mere gossip or tittle tattle and which could be ignored. These reports were plainly material and were based on facts known to the ultimate assured who was represented at the presentation meeting in November 1997.
(3) The matters referred to were not matters of common knowledge which an underwriter in Lime Street could be deemed to know.
(4) The existence of the Discovery Limitation Clause did not limit the ambit of the duty of disclosure.
(5) The fact that Mr Satterford was entitled to avoid the policy means that the following market are also entitled to avoid, since the common assumption of the parties was that a fair presentation had been made to the lead underwriter.
(6) The Claimants have succeeded in their claim. I shall hear the parties on the terms of the order which follow this judgment and with the question of costs.