UK: Brokers PI: Administration Of Run Off Business

A recent case provides useful guidance on brokers’ obligations to clients in run off.

Equitas brought proceedings to establish sums due under reinsurance protections that the brokers had placed for Lloyd’s syndicates for the 1992 and earlier years of account. The court commented on brokers’ duties in the context of dealing with the run off of discontinued business:

• The court approved the brokers’ concession that they owed a duty to maintain proper and reasonable records so that the amounts due to the syndicates or Equitas at any stage could be ascertained.

• The court also found that the brokers owed a duty to provide Equitas with records (or copies of records) relating to transactions where the brokers acted as the agent of Equitas or the syndicates. This included documents prepared for the brokers’ own purposes, such as their IBA ledgers, cash books and nominal ledgers.

The case suggests that if brokers are unable to demonstrate the amount of premium and claims monies due to clients, this could result in claims and costs sanctions against them.

To view the article in full, please see below:

Full Article

The recent case of Equitas v Horace Holman provides useful guidance on brokers’ duties to their clients when accounting for premiums and claims in run off business and the cost penalties that can be incurred through poor record keeping.

The brokers had arranged outwards reinsurance contracts on behalf of Lloyd’s syndicates. Following the settlement of the Lloyd’s litigation Equitas were the assignees of the syndicates’ rights relating to the 1992 and earlier years of account. Equitas wanted to establish the sums due to the syndicates and, when the brokers failed to provide sufficient information, Equitas commenced proceedings seeking an order for delivery up of all documentation held by the brokers relating to the placement and subsequent administration of the contracts.

In response, the brokers provided a composite account that showed that no funds were due to Equitas. One of the difficulties for the brokers was that they were unable to reconcile their accounting records with the claims files. The brokers claimed that Equitas was not entitled to see their internal ledgers.

Equitas asserted that the composite account was inadequate and amended its claim on the basis that seeking a claim for account was meaningless due to the brokers’ poor records. In the amended claim, Equitas dropped its claim for an account. Instead, Equitas sought the balance of the sums due and, importantly, the legal and accounting fees that had been incurred in investigating the position. Although some attempts were made to settle the dispute out of court, the matter eventually went to a hearing and the question of Equitas’ costs fell to be determined.

Although the judgment was principally concerned with Equitas’ costs, the Commercial Court noted that brokers have a duty to take reasonable care to maintain proper and adequate records; in the present case, the brokers had a duty to be constantly ready with correct accounts of their transactions on behalf of their principals.

When considering whether the brokers were obliged to hand over copies of their internal ledgers, the court decided that the brokers were under a fiduciary duty to provide Equitas with copies of internal records in so far as they related to transactions undertaken as agents. The fact that the brokers had kept records in such a manner so that they were inter-mixed with records relating to other principals meant that they were under a duty to disclose both the relevant and the irrelevant records. When reaching this conclusion, the court did not set out any guidance as to how the brokers might then avoid criticism for potentially breaching the confidentiality owed to other principals.

The court took the view that the composite account was not presented in sufficient detail. It decided that where an agent provided accounting information that was inadequate, it was open to the principal to order a fresh account or to challenge the account provided. As the composite account provided by the brokers contained information that was taken from the claims files, the court decided it was vulnerable to error; in these circumstances, Equitas was entitled to reject the composite account as inadequate.

The brokers accepted that Equitas was entitled to its costs up to the delivery of the composite account but maintained that Equitas should bear its own costs of pursuing the proceedings thereafter. The court disagreed and decided that the brokers should also be liable for half of Equitas’ costs from the date of providing the composite account; the court made this finding on the basis that the brokers’ records were such that they were not able satisfactorily to demonstrate to Equitas how they had dealt with funds received on behalf of the syndicates. It was reasonable for Equitas to expect a properly detailed account that would show what funds had been received and the claim for delivery of the documents was therefore justified.

This case demonstrates that the court will adopt a rigorous approach when considering the adequacy of brokers’ record keeping and accounting documentation. Failure adequately to demonstrate what sums are due to their clients may result in claims and cost sanctions against brokers.

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

The original publication date for this article was 28/06/2007.