UK: Aneco v Johnson, House of Lords, 18 October 2001

Measure of Damages Against Reinsurance Broker
Last Updated: 5 February 2002
Article by Nigel Brook

Background

In 1988, J&H invited Aneco to participate in a fac/oblig retrocession of an XL account underwritten by Norman Bullen at Lloyd’s. Aneco’s underwriter made it clear to the broker that its willingness to participate in these fac/oblig was subject to J&H being able to obtain satisfactory XL protection. Once J&H confirmed that XL cover would be available on acceptable terms, Aneco wrote the Bullen Treaty.

Later, a number of Aneco’s XL reinsurers successfully avoided their participations on the basis that they had been told the Bullen Treaty was a quota share, not a fac/oblig. Aneco sought damages from J&H. Cresswell J. at first instance found that J&H had been negligent and awarded damages equal to the shortfall in Aneco’s XL reinsurance. On appeal, the Court of Appeal found that XL cover would not in fact have been available if J&H had made full disclosure and that Aneco would not have participated at all if it had known this. It awarded Aneco damages equal to its entire loss under the Bullen Treaty. J&H appealed to the House of Lords.

Decision

By a majority of four to one the House of Lords upheld the Court of Appeal’s decision.

In SAAMCO (South Australia Asset Management v. York Montague, 1997), and two subsequent decisions, the House of Lords has given guidance on assessing damages against advisors. In SAAMCO, Lord Hoffmann said:

"… a person under a duty to take reasonable care to provide information on which someone else will decide on 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 ….

The principle thus stated distinguishes 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. If the duty is to advise whether or not a course of action should be taken, the advisor must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong."

Applying that principle to the facts of this case, the majority concluded that J&H had in fact taken on a duty to advise Aneco as to what course of action it should undertake in relation to the inwards risk. J&H had conceded that alternative reinsurance was not in fact available, and the House of Lords decided that J&H was bound to report this to Aneco. Lord Steyn held that there was no real distinction between (i) reporting on the availability of reinsurance and (ii) reporting on the assessment of the market on the risks inherent in the Bullen Treaty.

J&H argued that the House of Lords decision put the broker in an invidious position: owing a duty to Bullen to place the Treaty, and at the same time a duty to Aneco to provide advice on whether to write the Treaty at all. Lord Steyn had no sympathy for this argument:

"Any problem of the brokers arising from the performance of their dual functions in this case was entirely of their own making".

He also referred to the Superhulls Cover case (Youell v. Bland Welch (No 2), 1990). This had similar facts: XL reinsurance turned out not to be "back to back" with the inwards contract (the same broker had placed both), and insurers would have written very much smaller lines if they had known this. Phillips J had awarded damages against the brokers which reflected this additional exposure. But this basis of assessment was conceded by the broker, and it had been thought the House of Lords might overturn it, or at least qualify it in some way. In the event, Lord Steyn not only approved the earlier decision, but held that "the Superhulls Cover case represents the ordinary rule, whereby brokers (and others) are liable in contract for the foreseeable consequences of their negligence, including the adverse consequences of entering into a transaction with a third party, provided such consequences can fairly be held to fall within the scope of the defendant's duty of care.

Analysis

The decision is a striking application of the principle in SAAMCO. According to that principle, the defendant can only be liable for the foreseeable consequences of its breach of duty; it is not enough for the claimant to show that certain losses would not have happened "but for" that breach. Why is it appropriate to conclude that the broker took on a duty to advise Aneco on whether to accept the inwards (Bullen) risk?

Lord Millett, giving a dissenting judgment, concluded that J&H had not taken on any duties in relation to the inwards risk:

"Mr Forster was instructed to obtain reinsurance for Aneco. He had to test the market to find out if it was available and at what rate it could be obtained. He undertook these duties as Aneco’s broker, but he understood them in relation to the reinsurance, not in relation to the Bullen Treaty. He had no responsibility for advising or reporting with regard to Mr Crawley’s conditional decision to enter into the Bullen Treaty. He was a broker, not an underwriter…..

It was enough for Mr Crawley that the reinsurance had been obtained (or not). He did not ask to be informed, and was not concerned to know, how easy or difficult it was to obtain it…

Aneco must show, not that Mr Forster would probably have reported the market’s reactions in fact, but that he was legally bound to do so, and for the reasons I have given, this it cannot do."

Even if the broker were under a duty to report why he had been unable to obtain the reinsurance – i.e. because of market hostility to the risk – that surely still falls some way short of the broker undertaking a duty to advise in relation to the inwards risk. Nonetheless, despite the powerful logic of the dissenting judgment, the decision raises concerns for brokers whenever an insurer is only prepared to write a risk if outwards cover can be obtained, and the inwards broker agrees to try and place that outwards cover. What is less clear is how far the exposure of the broker may go.

To test the matter, assume that J&H fairly presents the XL risk and eventually just manages to get it fully placed, despite widespread hostility towards the underlying risk in the market. Aneco thereupon accepts the inwards (Bullen) risk and suffers heavy losses net of its reinsurance. Would Aneco have any cause of action against J&H for failing to report the widespread hostility? Surely not, and yet that appears to be where the logic of the majority decision would lead. It remains to be seen in the future how far the courts will seek to restrict the Aneco case closely to its particular facts

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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