QUEENS BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
GROUPAMA INSURANCE COMPANY LTD
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(1) OVERSEAS PARTNERS RE LTD
(2) AON LIMITED
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GROUPAMA INSURANCE COMPANY LTD |
Claimants |
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(1) OVERSEAS PARTNERS RE LTD (2) AON LIMITED |
Defendants |
Mr A. Fletcher (instructed by Messrs Davies Arnold Cooper) for the Defendants (Overseas Partners Re Ltd)
Mr J. Nash (instructed by Messrs Cameron McKenna) for the Defendants (Aon Limited)
Hearing dates : ???10 - 19 December 2002??
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Crown Copyright ©
The Hon. Mr Justice Morison
Morison J
Background
The Facts
"Further to our recent telephone conversation and in reply to your question, we would answer that Ray Smart has been writing this class for the past two years on a selective basis.We can advise that the written premium/claims to date are as follows:
Gross Written Premium Incurred Claims US$ 4,222,342 US$ 2,226,350
We trust that the above will assist and await your advice."
"When Aon got --sorry, when Bain Hogg were purchased by Aon, which occurred, I believe, in the autumn of 1996, at some point subsequent to that Mr Wilson and one of his colleagues, Mr Edwards, left the employ of Aon and joined Lloyd Thompson. Either once they got to Lloyd Thompson or around the time they were going there, Mr Wilson said to me, "Would I be able to continue effecting some of these reinsurances for Lloyd's syndicates notwithstanding the fact that he was at Lloyd Thompson". And I said I would very much like to because there was some very nice brokerage in it obviously. So he went to Lloyd Thompson and we continued effecting these reinsurances for Lloyd's syndicates. So, when we were faced with the situation that we needed to get some claims information, and because our -- about five companies had been merged in together into Aon the claims department in Romford was known as a bit of a black hole I am afraid, at the time, because of the recent merger. It was, in my opinion, going to be the speediest way of getting this information in order to provide OP Re with claims information, was to call Mr Wilson. That is the background to that particular telephone conversation. Certainly, normally I would probably have just gone to my claims department and said, "What is happening?" But we were anxious, obviously to get this done quickly. Because I suspect, probably because there were some declarations upcoming, or even waiting on our ability to secure some reinsurance from Mr Smart.Q. For whatever reason, at that stage it was a quick and convenient way of getting claims information?
A. Yes."
"Q. And I am suggesting to you, that is because all that really mattered to you is that on this calculation it appeared this business was profitable?A. This is what we relied on, yes.
Q. It is also the case, is it not, that you had no idea where those figures had come from, apart from the fact they were being passed to you by Aon?
A. Well, I presumed that they would have come from LDG and the experience that they enjoyed to date.
Q. But you did not know what investigations LDG had carried out before putting those figures before you, did you?
A. No.
Q. And you did not ask?
A. No."
"Q. He [one of the expert underwriters] is making the comment that having received a fax in the form of page 17, it immediately raised a number of obvious questions to a careful underwriter, principally: when were these losses incurred, what is the prognosis for the loss history and does it include outstanding claims or unpaid claims and following on from that perhaps reserves. He says that is all basic underwriting information and I am asking you whether you agree with that?A. Yes."
It is irrelevant to the determination of this case whether Mr McCann and OP were careless in the way they approached the risk they had to take. But it is relevant to understand Mr McCann's approach because it sheds some light on what happened thereafter. Indeed, from the figures presented, it was obvious, without further inquiry, that this had been a profitable book of business in the past, assuming that it was not long tail.
It reads:
"This is to confirm our increased participation from 50% to 75% on the LDG marine personal accident program effective 1/1/98 [an irrelevant error] subject to satisfactory warranties as to no losses incurred on the program to date."
" Q. The effect of what you said to Mr Greig was: you have access to the best loss information because it was you who placed the business with us, and you can easily check what the position is as to losses?A. In its broadest sense, I think I was actually implying that he should contact his claims department to see if they had been advised of any claims prior to notifying us.
Q. You did not place any restrictions on Aon as producing broker, as to who they should contact in order to get loss information?
A. No.
Q. And an easy source for them, if they chose to use it, would be to contact their client?
A. If they so chose."
As I read the evidence, Mr Smart did not ask AON to make inquiries up the line and did not expect them to do so;
"As far as I was concerned the only information I can give is the claims that have been reported to me and people who reported those claims to me were Aon.I did take the further step of asking Aon if they had -- or implied that they had any information that had not gone through the system, which we can see right the way through the case there are time lags. So to give them the best possible information was to ask Aon: had they been advised of any claims? If they came back to me and said: no they had not been advised, which I think they did but I am not too sure, that was as far as the information I would have thought that would have been given. I suppose it is a comfort level that OP are seeking:why are you increasing your reinsurance or reducing our line? Was it because of claims? The answer is: no, it was not, because we were not aware of any.
Q. And those appropriate enquiries did not include, as far as you understood it, instructing Aon to do more than look at the claims records it held?
A. That is the case, or else I would have instructed Aon to go further and I had not."
"Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to LDG to date that would affect any of the declarations ceded hereunderConsequently, I have attached our revised placement slip indicating the 75% Quota Share Treaty Limit and would ask you to return a signed and dated copy by facsimile, by return.
In addition you will note that two further declarations have been ceded hereunder, details as per the attached.
As soon as the slip has been signed and returned we will be in a position to account to O.P.L. Premium Income of approximately US$ 1,000,000.
I look forward to receipt of the documentation in due course."
The fax ended with the word "Andrew" which is Mr Perkins' first name.
"Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to date that would affect any of the declarations ceded hereunder."
The following table identifies the six claimants who had made claims by July 1 1998, the date when OP signed the slip accepting an increase in their proportionate quota share.
Claimant | Date of Loss | Advice to JL:T | Advice to Lloyd's | Advice to AON | Advice to L:DG |
O'Grady | 5.02.98 | 25.02.98 | 03.03.98 | 19.11.98 | 22.12.98 |
Cobb | 28.02.98 | 13.05.98 | 15.05.98 | 01.02.99 | 11.02.99 |
Smith | 30.03.98 | 26.05.98 | 03.06.98 | 27.07.00 | 23.11.00 |
Barfield | 04.04.98 | 11.05.98 | 14.05.98 | 19.11.98 | 22.12.98 |
Phelps | 13.05.98 | 30.07.98 | 30.07.98 | 01.02.99 | 11.03.99 |
York | 14.06.98 | 30.07.98 | 30.07.98 | 01.02.99 | 11.03.99 |
NAME | DATE OF ADVICE OF LOSS | GROSS RESERVE | RESERVE NET OF DEDUCTIBLE |
AGGREGATE DEDUCTIBLE | 'HIT' ON INSURANCE POLICY |
O'Grady | 03.03.98 | $123,000 | $73,000 |
$675,000 11% erosion |
No |
Cobb | 15.05.98 | $78,000 | $28,000 | No | Yes |
Smith | 03.06.98 | $48,000 | Nil | No | No |
Barfield | 14.05.98 | $6,250 | Nil | No | No |
The Parties' arguments:
(1) The first issue was whether the fax of 29 June 1998 was untrue because four 'losses' had been reported to Lloyd's at that date. And this issue depended in turn on the proper interpretation of the fax. He submitted that I should construe the communication consistently with the reasonable expectations of honest business men against the background of the relevant factual matrix. Although there may be sound reasons why, in ordinary circumstances, a reinsurer seeking retrocession cover on a quota share basis may only be obliged to report losses which have been advised to him and is not obliged to seek information higher up the chain, in the present case
"it was clear that the Lloyd's Syndicates were the best source of information as to losses which might affect the declarations ceded to OP. Further, it was reasonably practicable and straightforward to obtain that information. In that situation, market practice requires that step to be taken."
(2) The reasons why this is not a typical or ordinary case are that OP were seeking a warranty as to no losses, which gave the existence of losses a particular importance; that there was an obvious risk that Mr Smart's [or AON's] loss information was out of date; that the information from the single insurer [the lead Lloyd's Syndicate] was readily and conveniently to hand. OP were being asked to take on increased risk retrospectively; past loss information was, therefore, especially important. Looking at the tables it was clear that there were inevitable delays between the date when a loss was reported to the Syndicate and was passed down the line to Mr Smart. The evidence showed that inquiries of Lloyd's would have revealed a 'blacker' picture than inquiries stopping with Mr Smart and AON. For 'blacker' one should substitute the word 'accurate'.
(3) The information provided by AON in their fax was no more than the brokers were obliged to supply having regard to their duty to disclose all material information when broking the risk.
(4) There is a difference between 'no losses incurred on the programme to date' [the wording of the request for a warranty] and what was stated by AON, namely "no losses … that would [a]ffect the declarations ceded hereunder. Losses which affect declarations are not merely losses which have burnt through aggregate deductibles; any loss which eats into the aggregate deductible is a loss which affects a declaration and should have been disclosed.
(5) I was referred to a number of authorities which led, so Mr Fletcher submitted, to the conclusion that either the loss information should have been obtained from JLT in June 1998 or the fact that a different source was being used from that used in January, 1998 should have been disclosed.
(6) By the 'no loss' statement there was either a misrepresentation or a material non-disclosure. The fact that Mr McCann said he would have ignored the proper loss information does not affect the materiality of the representation or non-disclosure. As underwriter Mr McCann was entitled to exercise his underwriting judgment at the time of disclosure. Information is material if it would have an effect on the mind of a prudent underwriter in deciding whether to write business on the terms proposed. Losses which affect the declarations during the period of retrospectivity "are particularly material".
(7) Mr McCann was insistent that he thought that inquiry had been made of the syndicates before the no loss statement was made. Of the four losses which had been notified to Lloyd's, that in relation to O'Grady and Cobb was particularly pertinent and, had he known of them, he would not have been in a position to recommend to Mr Barone that OP increased its quota share; and Mr Barone would not have agreed to write a risk which his lead underwriter was not recommending.
(8) The change of percentage participation was not a variation of the existing quota share contract; rather it formed a completely new contract. But even were it to be a variation, the right of avoidance applies to the whole contract and not just to the variation and dicta in the Court of Appeal in the case of K/S Merc-Skandia XXXII v Certain Lloyd's Underwriters & Others [2001] Lloyd's reports 563 to the contrary effect were either obiter or wrong: see the judgment of Longmore LJ at paragraph 22(2) where he said;
"A duty of good faith arises when the assured (or indeed the insurer) seeks to vary the contractual risk. The right of avoidance only applies to the variation and not to the original risk: There is no authority for a proposition that a fraudulent misrepresentation leading to a variation will avoid the original contract as well."
(1) Groupama must succeed either against OP or against AON. If the fax had been sent in the form approved ["noted"] by Mr Smart, then the present case would not have been brought. Either the June fax was misleading due to the alteration or it was not. If it was then AON must be liable if OP are entitled to avoid liability; if it was not, then OP are liable to Groupama.
(2) The June fax meant and could only have been thought by Mr McCann to meant that no 'hits' had been advised to LDG and/or AON to date. That is the natural and ordinary meaning of the fax which accords with market practice. There was no implication that "reasonable inquiries" had been made.
(3) If the representation was untrue because of the US$28,000 loss, such information was not material and it would not have induced the underwriter to act differently.
(4) On the facts, it appears that neither Mr MCann nor anyone at AON apart from Mr Perkins was aware that inquiries had been made of Mr Wilson of JLT. LDG bound itself to risks as they incepted; there was no element of retrospectivity so far as Mr Smart was concerned.
(5) OP's case is that losses were incurred in respect of declarations under the Treaty [namely the claims notified to Lloyd's], but it is not their pleaded case that the fax was untrue because a claim had been made which had absorbed part of an aggregate deductible.
(6) A reinsured only need disclose what he knows or what he is deemed to know [section 18(1) Marine Insurance Act 1906]. The Claimants do not assert any wider plea of breach of a duty to make a "fair presentation".
(7) The general market expectation is that, through the introduction of electronic notification of claims and losses, LDG and AON were reasonably up-to-date with loss information of which Lloyd's were aware.
(8) The fact that OP were asking for a warranty demonstrated that OP must have appreciated that LDG could only warrant what they themselves knew; they could not have been expected to give a warranty which might be falsified by the occurrence of an accident in respect of which no claim had been made, as yet. This is entirely consistent with the natural meaning of the words used. Mr Howard, the expert retained by OP stood logic on its head by suggesting, effectively for the first time during cross-examination, that the fact that a warranty had been requested widened the meaning of the words so as to include events which had happened and which would or might become a loss on the treaty.
(9) Mr McCann accepted in evidence that the use of the words "losses incurred" was an oversight on his part as these words did not fully convey his desire for information from Lloyd's. He also accepted that he was not familiar with Lloyd's market practices in this area. Although he said that he expected inquiries would have been made of Lloyd's he gave no foundation for this expectation. Mr Howard accepts that normal market practice would not require inquiries to be made up the chain but sought to argue that there were special circumstances which over-rode that general practice. Mr Howard's thesis was flawed in that it depended upon the proposition that because a warranty had been asked for the duty to make inquiries was extended so that there was a duty to inquire up the line. He supported his opinion by saying that the inquiries were easy to make and the information would have been readily available. Even were the premise true, it would not affect the market practice which cannot depend upon whether an inquiry was or was not easy to make. Mr Howard also relied upon the fact that LDG were seeking to reduce their participation below 50%. But Mr Berry submitted that this point cannot have had any bearing on the question at issue provided, as was the case, that Mr Smart was retaining a significant proportion of the risk [25%]. Nor does Mr McCann's point that there was retrospectivity affect the position, as the 50% risk was written when the declarations were about two months into their life, yet no inquiries from Lloyd's could have been expected [even though they were made for the reasons stated above]. Mr Berry submitted that, at the end of the day, the only basis upon which Mr Howard could say that normal market practice did not apply in this case was because OP had asked for a warranty But "[I]t is obvious that the word "warranties" cannot make this difference and cannot so dramatically widen the meaning of the request, from the normal meaning of the words, into something ridiculous."
(10) It was effectively common ground between all the witnesses, including Mr McCann, that before there was a need to report a claim which had eroded the aggregate deductible the erosion would have had to be significant. Apart from Mr Howard, the experts agreed that there was no expectation that a report would be made unless the aggregate had been eroded to about 75%. Mr McCann said that he would want to know of a hit on the aggregate deductible where the deductible was being eroded "near to its limit" or "materially in excess of 50%".
(11) There was no evidence to justify a conclusion that the non-disclosure of the Cobb loss "would influence the judgment of a prudent insurer in fixing the premium or determining whether to take the risk": section 18(2) of the Marine Insurance Act 1906. Mr McCann did not think it was material; Mr Smart thought it insignificant and this was the view of Mr Theakston and Mr Cheal [two experts]. Mr Howard was only prepared to go so far as to say that this loss information "could" influence the prudent underwriter. Mr Howard also accepted that the erosion of the aggregate deductible was irrelevant to OP as this feature was in the Lloyd's insurance policy but not in OP's treaty.
(12) The test for inducement was that laid down by Clarke LJ in Assicurazioni Generali v Arab Insurance Group [2002] ECCA Civ 1642 at paragraph 62:
"In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so."
On the facts Mr Barone was the effective decision maker and yet has not given any evidence. The suggestion that Mr McCann would have wished to exercise his own judgment as to the adequacy of the reserving policy or the reserves in any particular case was unrealistic and contrary to reasonable underwriting practice. Mr McCann was not qualified to assess the reserves; he had never reassessed reserves put on business further up the line; he made no inquiries about reserving policy at the time when he accepted a 50% share.
(1) The information provided to Mr McCann in January was historical and related to declarations which were not going to form part of the retrocession arrangements. The words "losses incurred on the programme to date" in the fax of 18 June 1998 from OP meant, according to market practice, losses which had been reported to the reinsured as claims upon him and until such losses have been reported, they are not losses "incurred" on the programme. Mr McCann Mr McCann did not regard this fax as an un-date of the information which had been provided in January; and the request was not so regarded by AON. Thus the information requested in June was different from the information provided in January.
(2) The fax of 29 June from AON used words which exactly reflected the request for information, or 'warranty'. As a matter of law, the court must construe the fax objectively that is, the court must ascertain from the words used the natural ordinary meaning which would be conveyed to a normal person.
(3) The consistency argument should be rejected not least because Mr McCann was unaware that in January information had been obtained from JLT. He could not, therefore, have been expecting JLT to be consulted again. The fact that AON deleted the words "to LDG" does not affect the construction of the fax. Mr McCann was unaware of the earlier draft and cannot have been influenced by the alteration.
(4) The factors on which Mr Howard [OP's expert] relied for displacing the normal market practice understanding of the fax were of no weight as Mr Howard was not an underwriter and disclaimed any expertise in the field. Therefore, he was not competent toe express an opinion as to what a reasonable underwriter would have understood the 29 June fax to mean. In any event, none of the factors on which he relied were of weight.
(5) If, when properly construed, the fax of 18 June meant a request for information and that that was the market's interpretation of it, there cannot have been any implied obligation on AON to undertake inquiries up the chain. The alleged duty to make a fair presentation cannot exist alongside the market practice: the fact that the increase in the quota share was accepted subject only to information about losses "incurred" on Mr Smart's book showed that OP were 'waiving' any right to additional information. They knew what they wanted and they got what they regarded as sufficient.
(6) The case on non-disclosure must fail. There is a duty to make disclosure of facts actually known to LDG/AON or to facts which "in the ordinary course of its business" LDG/AON should have had. It is clear that neither AON nor LDG knew of the claims already made but not passed on. The only basis for saying they ought to have known is the alleged duty on them, in response to OP's fax, to make inquiries up the chain
(7) The test for materiality in the insurance context, whether in relation to a plea of misrepresentation or non-disclosure is whether the matter in question would, if disclosed, have affected the judgment of a prudent underwriter in deciding whether to write the risk or setting terms on which he would be prepared to write the risk. There is no evidence before the court which would enable it to conclude that the loss of US$ 28,000 or the other matters relied upon would have had the necessary affect. The suggestion that Mr McCann might sensibly have wished to examine the reserves placed by third party administrators is fanciful. OP were running a risk that Mr Smart's book of business was unprofitable. That was not a risk which involved examining the correctness of the underlying losses. If Mr Smart's book was 'hit' then OP were obliged to participate in any payment made to the Lloyd's syndicates.
(8) The effect of Mr Smart's scratch on the draft fax of 29 June was simply to confirm that he was happy with its contents; that is, with the substance of what was written. The alteration [by deletion of the words "to LDG"] made to the fax by Mr Perkins did not alter the substance; if, without the words no-one would understand the fax to be a representation that inquiries had been made up the chain, then the deletion of those words cannot have made any difference.
The Decision
"This is to confirm our increased participation from 50% to 75% on the LDG marine personal accident program effective 1/1/98 [an irrelevant error] subject to satisfactory warranties as to no losses incurred on the program to date.""Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to date that would affect any of the declarations ceded hereunder."
"Q. I think my question was: when you ask for losses incurred in this document, did you not mean the same thing as claims or losses incurred in the earlier document, which is losses above any relevant deductible?
A. Yes, I was interested in losses that would impact the treaty between myself and Mr Smart.
Q. I.e. losses which amount to a claim under that treaty?
A. Yes.
Q. And that does not include things that are not deductible?
A. If an aggregate deductible was pushing near to its limit, I think it would be proper for a fax of this nature to -- a response to be given to me.
Q. Are you aware of market practice that one only notifies claims under an aggregate deductible when the aggregate deductible has been wasted or burnt by 75 per cent or more? Is that what you are referring to?
A. No, I am not aware of that practice. Mine was more one of commonsense that -- and 75 per cent would seem reasonable, if that is the market practice.
Q. So, your concept is pushing the other limit, is what you are interested in?
A. Nothing is black and white. If the aggregate deductible is for a 12-month period and you are only -- well, in this case we are six months into it so all things being equal, you may expect 50 per cent of the aggregate to have been burned through. If it was materially in excess of 50 per cent, would you probably want to know, and I think you should be told.
Q. Can I just read that answer again? Other things being equal you may expect 50 per cent of the aggregate to have been burnt. If it was in excess of 50 per cent, would you want to know, but it follows that under 50 per cent it would not be anymore than you expected?
A. Probably not."
And later:
"Q. I think my question was: are you saying what you wanted was a chance to reassess the reserves on the incurred losses?A. No, not reassess the reserves but to have information where there were losses that could have a chance of reaching a programme.
Q. Why did you not ask that, then, rather than ask for simply losses incurred?
A. That is an oversight on my part."