UK: Hamishmar Insurance Agency Ltd & Harel Insurance Company Ltd v Firstcity Partnership Ltd

Last Updated: 23 April 2009
Article by Alison Zobel

Definition of "funding" and the discretion of the court to interfere in an expert determination

The Claimants - Hamishmar, an insurance agent and the wholly owned subsidiary of Harel, an insurance company incorporated in Israel (generically referred to as "Harel") - were the coverholder on a number of binding authority agreements entered into from 1993 to 2000 in relation to public/product liability and professional indemnity business with various underwriters, including Lloyd's underwriters. FirstCity - a Lloyd's broker - acted on behalf of Harel in the placing and operation of the Binders.

Harel commenced proceedings in late 2006. The Claim, which alleged claims mishandling on FirstCity's part, was discontinued one month before trial with the usual order as to costs and cannot now be resurrected. This left FirstCity's Counterclaim, for a deduction in account in relation to outstanding claims float, as the only active part of the proceedings. The hearing in relation to FirstCity's Counterclaim, part of a long-running dispute, concerned the definition of what constituted "funding" and the scope of a jointly agreed expert determination.

The Counterclaim - basically an accounting exercise to reconcile the balance due between the parties – had been hived off for determination by a jointly appointed expert. Following a lengthy determination process, two draft awards were circulated in August 2008 with a view to the Final Award being publishing in substantively similar terms following comments, corrections etc.

Harel took issue with the draft awards, alleging that the expert had failed to deal with the Counterclaim as pleaded, specifically the claim that FirstCity had "funded premium payments to Lloyd's Underwriters" on behalf of Harel. Harel argued that the expert determination, being based on the Counterclaim, must also determine the legal issue of the recoverability of any "funded amounts", which it had not done, and that further work was required.

FirstCity opposed any suggestion that the determination process should be extended as:

  1. The determination, envisaged to be a quick and cost effective solution, had already taken much longer than anticipated and costs were already substantial;
  2. The expert had undertaken a balance reconciliation exercise as at Q4 2007 and had made the appropriate deduction in account of US$487,103. The determination had successfully undertaken the exercise required, the parties had certainty as to the accounts and the expert should publish his Final Award as soon a possible; and
  3. The expert, on careful review of the parties arguments and his joint instructions had ruled that the scope of his instructions, which were set out in a joint letter of instruction, did not include the issue of "funding", given the narrow meaning which Harel ascribed to it.

The February 2009 hearing

Harel applied to the Commercial Court, inter alia, for a declaration that the scope of the expert determination included the issue of "funding" in its narrow sense and/or that this issue remained to be determined by the Court and also to Strike Out FirstCity's Counterclaim.

The issue of what constituted funding came before the Court. Harel argued that funding is as defined at paragraph 16.3.1 of Barlow Lyde & Gilbert's Reinsurance Practice and the Law as "funding involves one party (usually the broker) paying over a sum of money to another in advance of receipt of the money from the person from whom it is owed. The funding is usually of premium or claims. An example of funding would be where a reinsured makes a claim upon its reinsurer, and, pending receipt of the claims money from the reinsurer, the broker pays the amount of the claim to the reinsured."

FirstCity's position was that funding had occurred but in a "broader" sense and relied on the definition in paragraph 16.3.3 of that same legal text book which stated, "Funding occurs either when money is paid over or when an appropriate credit entry is made in the broker's books of account. The principal reason for funding appears to be the broker's perception that it is a commercial necessity in order to keep his client happy. The broker funds premiums and claims in the hope or expectation that ultimately he will have no difficulty recovering the amount funded from the party by whom it is owed."


Mr. Justice Field dismissed Harel's application in its entirety and ruled that the Counterclaim was not, as Harel had argued, to be treated as a "narrow claim" (i.e. within only the first definition of funding where monies are paid over in advance of receipt) but that the reference to funding encompassed bringing the Counterclaim sum into account. The second, broader definition of funding, where an appropriate credit entry is made in the broker's book of account, was therefore made out. Field J. held that:-

  1. Harel knew before the reference to the expert that FirstCity were claiming for a deduction in account (as opposed to making a personal claim for these monies);
  2. FirstCity's case was clear from the joint letter of instruction to the expert which referred to the amount claimed as, "claims floats advanced [to Harel] in 2003"; and
  3. Even if he was of the opinion that, contrary to his ruling, the expert was obliged to consider the issue of funding in the "narrow sense" in his determination, he would exercise his discretion against this and not make the declaration sought. The Court should not interfere in the expert's determination as:
  • Harel, in the course of their submissions, accepted that even if the Court granted the declaration sought to extend the scope of the expert determination, they must give credit regardless;
  • Therefore, the only reason for seeking the declaration was to avoid an award of costs from the expert in relation to his determination; and
  • On deciding the question of costs, the expert will be able to take into account, should he choose to do so, the way in which the Counterclaim was drafted and whether this involved Harel incurring extra costs in their attempt to demonstrate that funding had not occurred in the "narrow sense".

HFW represented FirstCity in the discontinued proceedings and in its successful opposition to Harel's application in the recent hearing at first instance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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