UK: Minimum and deposit premium: is the reinsurance broker entitled to be paid brokerage twice?

In a recent judgment of the Court of Appeal (G Absalom (on behalf of all members of Lloyd’s Syndicate 957) v. TCRU (formerly known as Monument Insurance Brokers Ltd) it was held that a broker who had arranged reinsurance providing for payment by the reinsured of a minimum and deposit premium, was only entitled to be paid brokerage on first, the deposit premium and, second, the total adjusted premium (also known as the minimum) taking into account the deposit premium already paid. In other words, the broker was not entitled to claim brokerage on the deposit premium twice.

Reinsurance facilities often provide for payment by the reinsured of a minimum and deposit premium. The deposit premium is usually a fixed amount payable either at the inception of the contract or in instalments. Further amounts will become payable later on a fixed date or dates based on an adjustment applied to, for example, net premium income written to the facility. This is usually subject to a minimum adjustment.

In this case the brokers, Monument, argued that they were entitled to be paid 15% brokerage based on the deposit premium and, in addition, brokerage on the total adjusted premium which amount included the deposit premium that had already been paid. At first instance it was held that Monument were only entitled to brokerage on the deposit premium as it became payable and on the minimum premium as the premium came to be adjusted, taking into account the deposit premium already paid. Monument appealed. The Court of Appeal recently dismissed Monument’s appeal, effectively holding that Monument were not entitled to receive brokerage on the deposit premium twice.

In reaching its decision the Court of Appeal confirmed that, when interpreting clauses in insurance policy wordings, the courts will not review the wording in a vacuum and will take into account relevant admissible background material. The courts will not however allow evidence to be given concerning the negotiations and subjective intent of the parties. In this case the Court of Appeal held that the ordinary and natural meaning of the brokerage clause, when viewed against the background of the premium clause, did not entitle the reinsurance brokers to recover brokerage on the deposit premium twice.

In a recent judgment of the Court of Appeal (G Absalom (on behalf of all members of Lloyd’s Syndicate 957) v. TCRU (formerly known as Monument Insurance Brokers Ltd) it was held that a broker who had arranged reinsurance providing for payment by the reinsured of a minimum and deposit premium, was only entitled to be paid brokerage on first, the deposit premium and, second, the total adjusted premium (also known as the minimum) taking into account the deposit premium already paid. In other words, the broker was not entitled to claim brokerage on the deposit premium twice.

Reinsurance facilities often provide for payment by the reinsured of a minimum and deposit premium. The deposit premium is usually a fixed amount payable either at the inception of the contract or in instalments. Further amounts will become payable later on a fixed date or dates based on an adjustment applied to, for example, net premium income written to the facility. This is usually subject to a minimum adjustment.

In this case the brokers, Monument, argued that they were entitled to be paid 15% brokerage based on the deposit premium and, in addition, brokerage on the total adjusted premium which amount included the deposit premium that had already been paid. At first instance it was held that Monument were only entitled to brokerage on the deposit premium as it became payable and on the minimum premium as the premium came to be adjusted, taking into account the deposit premium already paid. Monument appealed. The Court of Appeal recently dismissed Monument’s appeal, effectively holding that Monument were not entitled to receive brokerage on the deposit premium twice.

In reaching its decision the Court of Appeal confirmed that, when interpreting clauses in insurance policy wordings, the courts will not review the wording in a vacuum and will take into account relevant admissible background material. The courts will not however allow evidence to be given concerning the negotiations and subjective intent of the parties. In this case the Court of Appeal held that the ordinary and natural meaning of the brokerage clause, when viewed against the background of the premium clause, did not entitle the reinsurance brokers to recover brokerage on the deposit premium twice.

Monument placed on behalf of the Syndicate a number of excess of loss reinsurance contracts and burning cost contracts. The Syndicate issued proceedings against Monument seeking recovery of over $8 million in claims that Monument had collected on the Syndicate’s behalf. Monument resisted onward payment of the claims to the Syndicate arguing that it was entitled to bring into account a number of claims for brokerage against the Syndicate either by way of net accounting or set-off. Monument claimed total brokerage due to it of $9.2 million.

Monument’s claim was predicated on the brokerage actually being due. The court at first instance looked at four preliminary issues to determine whether the brokerage was due to Monument. Preliminary issue one, which was the subject of the appeal, was phrased as follows: "Do the terms of the reinsurance contracts …on their proper construction entitle [Monument] to charge brokerage on both (a) the deposit premium, and (b) the total adjusted premium (without deduction of the deposit premium)?"

The argument on the proper amount of brokerage due turned on the clause: "Brokerage: 15% applicable to deposit premium and minimum rate." Monument argued that the natural and ordinary meaning of this clause was that brokerage was payable on both the minimum amount of premium payable and, in addition, also on the deposit premium. This argument was principally based on the use of the word "and" in the brokerage provision which, the brokers argued, had to be read as being conjunctive and cumulative.

The Syndicate disagreed and pointed out that the reinsurers were not entitled to be paid both the deposit premium and the full amount of the adjusted premium without taking account of the deposit premium already paid. It was also submitted on behalf of the Syndicate that the use of the word "and" did not mean that Monument could keep brokerage on both the deposit premium and the minimum rate; it simply meant that the same rate applied to both.

Another argument put forward by Monument related to what they said would be the relative under-remuneration of the brokers in a soft market. Monument argued that the large "swing" (or disparity) between the minimum (10% of the net premium income of the underlying facility) and maximum (35% of the NPI) premiums payable, would lead to the brokers being under-remunerated. In light of the premium clause, which provided that "the minimum payable premium in all" is equal to "10% of the net premium income written under the Master Lineslip Facility", Monument were only entitled to brokerage on the minimum premium payable (15% of 10% of net premium income). Moreover, total premium payable would depend on the claims generated on the reinsurance.

The court agreed with the Syndicate on construction of the brokerage clause and disagreed with Monument that this produced an absurd result which under-remunerated the brokers. When looked at as a whole complex of contracts, the court found that the brokers were not receiving an uncommercial rate of commission.

The Court of Appeal dismissed the appeal and, for the same reasons as the judge at first instance, found that Monument were not entitled to claim brokerage twice in respect of the deposit element of the premium. One appeal judge commented that a deposit is a part payment, usually in advance, of what is expected eventually to be a greater amount. It was not the case that the deposit would be paid twice and it followed that the brokers should not be entitled to brokerage in respect of it twice.

While this decision is an unwelcome outcome for the brokers who perceived that they were under-remunerated where the minimum premium was adjusted based on net premium income. It would however appear that on the facts of the case common sense has prevailed in this instance.

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 30/01/2006.