UK: The scope of a reinsured’s duties to its reinsurers: important Court of Appeal decision

Last Updated: 9 December 2005
Article by Vere Wheatley and Alexander Denslow

Yesterday’s decision by the Court of Appeal in Bonner v Cox & Others, provides guidance to the reinsurance market as to whether a reinsured owes a duty to its reinsurers in respect of its own underwriting.

The Court determined that the reinsurance in issue was not subject to any implied terms by which a duty was sought to be imposed. The Court indicated that it would have reached the same conclusion in respect of any non-proportional reinsurance.


Full Article

Yesterday's decision by the Court of Appeal in Bonner v Cox & Others provides guidance to the reinsurance market as to whether a reinsured owes a duty to its reinsurers in respect of its own underwriting.

The Court determined that the reinsurance in issue was not subject to any implied terms by which a duty was sought to be imposed. The Court indicated that it would have reached the same conclusion in respect of any non-proportional reinsurance.

The facts:

Reinsurers agreed to reinsure the Cover underwriters in respect of risks attaching to business known as the '77 Energy Cover.

Having unsuccessfully argued various defences at first instance, the reinsurers asked the Court of Appeal to reconsider whether the Cover underwriters were in breach of duty when writing risks a particular loss making risk referred to as the Oceaneering risk.

At first instance, the trial judge had found that there were implied terms in the reinsurance that:

i) a policy would only be declared to the Cover if it had been the subject of an underwriting judgment made by the lead underwriter;

ii) the policies to be accepted to the Cover would be those which in the ordinary course of business the lead underwriter would write, taking account of its reinsurance.

Despite commenting that the writing of Oceaneering was "near the knuckle" and that it had not been written "decently", the trial judge held that upon the facts, neither of the terms had been breached.

The reinsurers contended that the judge should have found that in writing the Oceaneering risk, the Cover underwriters had breached these two implied terms. Alternatively, the reinsurers contended that there was also an implied term that the Cover underwriters "had an obligation to conduct the business involved in the cession prudently, reasonably carefully and in accordance with the ordinary practice of the market", in accordance with the decision of Hobhouse J in Phoenix-v-Halvanon [1985] 2 Lloyds Rep. 599.

The Court of Appeal concluded that the reinsurance was not subject to any of the implied terms contended for "and would reach the same conclusion in respect of any non-proportional reinsurance."

The reasons:

i) A distinction between proportional / non-proportional reinsurance

In reaching its decision, the Court attached significance to the fact that in proportional reinsurance, the risk is shared between reinsured and resinsurer where their interests might be expected to coincide. In non-proportional reinsurance, commercial interests of a reinsured and reinsurer may and often will conflict in the sense that one might profit at the expense of the other. The disparity in interests was itself enough to preclude the existence of any duty.

The Phoenix case, upon which the reinsurers relied, appeared to concern a quota share reinsurance. The Court considered that Hobhouse J in Phoenix could not possibly have intended this implied term to be applied to all forms of reinsurance. The Court did note, however, that some leading textbooks regard the implied term of Phoenix as applicable to instances of selective cession by a reinsured, whereas other textbooks regard it as being more widely applicable to treaty business.

ii) Commercial factors – necessity and certainty

The Court next considered whether the incorporation of implied terms was a necessity in the context of non-proportional reinsurance and whether they could be defined with any certainty (necessity and certainty being the touchstones of any implication of terms).

The Court found that there was no necessity for an implied duty of care. Since the reinsured and reinsurer have competing interests to make money for their respective capital providers, there was no scope, still less a necessity, for implying a term that the reinsured owes some sort of duty to protect the interests of the reinsurer. This is the more so when neither side could be expected to know what the other's interests might be.

A reinsured could not be expected to decline an excellent risk simply because it might be a bad one from the point of view of its reinsurer.

The Court ruled that it would be impossible to determine with any certainty what could be written in either "the ordinary course of business" or "in accordance with the ordinary practice of the market" (as per Phoenix). There may be countless different views and it would simply be unworkable.

The Court also anticipated difficulties in calculating the measure of damages in the event that such implied terms were breached.

The Court stopped short of considering whether an implied term might be appropriate in circumstances of recklessness or dishonesty by the reinsured because such conduct was not in issue.

iii) Protection of the reinsurer

When considering whether terms should be implied, the Court noted that reinsurers were already able to protect themselves through:

  • appropriate pre-contract disclosure showing the history of the risks written and/or the nature of those proposed to be written;
  • agreeing contract wording which would allow the reinsurer to monitor the business;
  • exercising (better) judgment as to which underwriter to reinsure and upon what terms.

The Court noted that if a reinsurer established an implied term with his reinsured, he might be subject to similar terms down the chain with his retrocessionaires.

iv) Commercial opportunism

The Court was careful not to penalise Cover underwriters for their commercial opportunism. The Oceaneering risk had been written in the knowledge that the aggregate deductible had already been exhausted, meaning an almost exclusive exposure to the reinsurers. The fact that the (fixed) premium to be earned by the reinsurers did not fairly reflect their exposure to the risk could not be judged retrospectively. As the trial judge put it, when running a book of business, a reinsurer will "win some and lose some".

The Court echoed similar sentiments expressed by Thomas J in the Sphere Drake case when commenting "there is nothing wrong in taking advantage of an advantageous contract". Taking this one step further, the Court questioned why should there be an implied duty of prudence upon the reinsured to protect the reinsurers against their own imprudence. The Court concluded that if the implied term in Phoenix were to apply to all types of reinsurance, it would open up the spectre of "retrospective" underwriting, whereby every unprofitable treaty would be subject to challenge. The Court did, however, acknowledge that market reputation inevitably plays a part in tempering abuse by a reinsured.

This decision reiterates that the Courts are unwilling to rescue negligent reinsurers who have effectively been taken advantage of by clever reinsureds. Indeed, there are only two English cases, Phoenix and Economic v Le Assicurazioni d'Italia, that provide any support for the proposition that there is any implied duty of care that is owed by a reinsured to its reinsurer. Those two cases, which deal with proportional reinsurance, survive. The Court of Appeal had no need to overrule them, restricting itself as it did to clarifying the position in respect of non-proportional reinsurance.

CMS Cameron McKenna acted for the broker Aon Limited who were entirely vindicated by the Court's decision.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 09/12/2005.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.