The Aneco v Johnson & Higgins Decision - Brokers Beware!

The factual background to the case concerned a claim by the liquidators of a Bermudian reinsurance company, Aneco Reinsurance Underwriting Limited ("Aneco") against the reinsurance brokers, Johnson & Higgins Limited ("J&H").

In 1988, an underwriter who wrote marine excess of loss business on behalf of four Lloyd’s syndicates, Mr Bullen, requested J&H to obtain a proportional reinsurance of his excess of loss account. To facilitate such placement J&H drafted a "fac/oblig" treaty (known as the Bullen Treaty), under which the Bullen syndicates could decide which risks to cede to their reinsurers which, in turn, their reinsurers were obliged to accept. Acting on behalf of the Bullen syndicates, J&H identified Aneco as a potential reinsurer of the treaty and offered Aneco a share in it. It is clear that J&H contemplated from the outset that Aneco’s own risk under the Bullen Treaty should be subject to a retrocession. J&H suggested to Aneco that it should purchase retrocession cover, which J&H envisaged would be available at between 30-40% of the Bullen Treaty net premium income.

Aneco subsequently agreed to participate in the Bullen Treaty subject to J&H obtaining satisfactory retrocession protection for Aneco’s net account. For these purposes J&H were acting as Aneco’s brokers. J&H knew that if suitable retrocession cover was not available, Aneco would not enter into the Bullen Treaty. In the event, J&H confirmed to Aneco that they had obtained suitable cover and Aneco proceeded to subscribe to the Bullen Treaty.

During the course of placing the retrocession cover for Aneco, J&H described the contract as a "quota share" treaty instead of a "fac/oblig" treaty. (This latter type of risk was a less attractive form of risk and harder to obtain suitable retrocession cover for.) Upon subsequently learning the true nature of the Bullen Treaty, several of Aneco’s reinsurers avoided the retrocession contract on the basis of the material misrepresentation made by J&H (as they were entitled to do).

The losses suffered by Aneco under the Bullen Treaty were substantial and included the Hurricane Hugo and Exxon Valdez losses. Faced with a total exposure of approximately $35 million, the liquidators of Aneco brought proceedings against J&H for negligence. Aneco’s primary claim was for all the losses it had suffered by entering into the Bullen Treaty (ie $35 million). In support, Aneco argued that J&H had wrongly advised that suitable retrocession cover was available, and Aneco had relied on this when entering into the Bullen Treaty. In the alternative, Aneco claimed for all the sums that it would have been able to recover under the retrocession contract (approximately $11 million) if it had not been avoided by several of Aneco’s reinsurers.

Aneco’s claim was partially successful at first instance. Cresswell J held that J&H had been negligent. However, on his finding that alternative security could have been placed if J&H had not been negligent and had fairly represented the risk as a "fac/oblig" cover, Cresswell J limited Aneco’s recovery to $10,847,752, the total sum that would have been payable if the retrocession contract had not been avoided.

Aneco appealed this decision on the basis that it should be entitled to succeed on its primary claim for damages and that Cresswell J’s finding of fact that alternative cover would have been available was wrong.

Following a review of the evidence, the Court of Appeal unanimously found in Aneco’s favour that alternative security would not have been available, or was not available on commercial terms to Aneco. The Court of Appeal was, however, divided over the correct measure of damages payable by J&H. Following an analysis of the scope of the brokers’ duty to advise, the Court of Appeal held by a 2:1 majority that Aneco was entitled to recover all of its losses under the Bullen Treaty. The majority view of the Court of Appeal was that J&H had wrongly advised Aneco that suitable retrocession cover was available in the market, thereby causing Aneco to enter into the Bullen Treaty. Faced with having to pay an additional $24 million to Aneco following the Court of Appeal’s decision, J&H appealed to the House of Lords concerning the correct measure of damages to be applied.

In essence, the issue before the House of Lords was whether the correct measure of damages to be paid by J&H was:

1. the total sum of Aneco’s losses under the Bullen Treaty (ie $35 million), or
2. the total sum that would have been payable under the retrocession contract if it had not been avoided ($11 million).

The House of Lords, by a 4:1 majority, agreed with the Court of Appeal’s earlier decision that Aneco was entitled to recover the total sum of its losses under the Bullen Treaty amounting to $35 million from J&H.

The correct measure of damages turned upon an evaluation of factual matters by the House of Lords rather than "high legal principle". The majority had little difficulty upholding the Court of Appeal’s decision. The law lords considered the scope of J&H’s duty to Aneco by reference to the facts and in the light of the established law concerning "scope of duty". The established principles considered included:

1. The principle that brokers (and others) cannot be held liable for losses that fall outside of their duty of care ² . This principle was ever disputed in Aneco.
2. The general principle that brokers (and others) will be liable in contract for the foreseeable consequences of their negligence, including any adverse consequences of entering into a transaction with a third party, provided such consequences can be fairly held to fall within the scope of the broker’s duty of care ³ .
3. The sub-rule in SAAMCO ⁴ applicable in special circumstances where those who undertake to provide specific information are not generally liable for all the foreseeable consequences of their negligence but only for the consequences of the specific information they provide being wrong.

Based upon an analysis of the general principle at 2 above, it was held that J&H had undertaken a duty to advise Aneco on the availability of retrocession cover in the market, without which Aneco would not have entered into the Bullen Treaty. Further, J&H’s failure to advise that appropriate retrocession cover was not available resulted in Aneco’s loss of $35 million. J&H’s duty was not limited to merely effecting the placement of the retrocession contract and confirming that they had done so to Aneco.

It is now clear that reinsurance brokers may be subject to wider duties of care concerning advice they have given during the placement of reinsurance contracts than they previously considered applied. Further, that the measure of damages payable by them if negligent in providing such advice may include all of a reinsured’s uninsured losses and the value of any reinsurance cover that is not effective. It should, however, be remembered that the House of Lords decision is not groundbreaking news. The reinsurance industry has been aware of the position since July 1999 when the Court of Appeal handed down its judgment in Aneco.

It is likely that the greatest impact of the Aneco decision will be in relation to outstanding claims against reinsurance brokers rather than claims arising from post-Aneco conduct. Following the House of Lords’ decision, both reinsurance brokers and their professional indemnity insurers should ensure that they have made adequate reserves in respect of claims involving advice given by a reinsurance broker in similar circumstances to that in Aneco (if they have not already done so following the Court of Appeal’s earlier decision).

Whilst the House of Lords decided Aneco on its facts, the decision has the potential to expose brokers to greater liabilities than they may have thought possible. There are several questions that reinsurance brokers should now ask themselves in order to manage and limit their potential liabilities:

Reinsurance brokers should ensure that they can identify who their client is when acting for a number of parties in a chain of reinsurance/retrocession placements. Different duties will be owed to each reinsured.

In a perfect world (quite possibly an accountants’ world where long letters of engagement are commonplace) the duties of a reinsurance broker would be clearly recorded so that both the reinsurance broker and his client are aware from the outset of the full extent of the broker’s duties. The reality is that we do not live in a perfect world. It is often the case that brokers’ duties are accepted during the course of a retainer either in ongoing correspondence or conversations. For example, a reinsurance broker may be asked to comment on, or confirm a point, during the course of a placement. It is unlikely at that time that either party will consider the full legal effects of such conduct. In order to avoid doubt concerning the scope of a reinsurance broker’s duties to his client, detailed records of instructions should be kept, preferably agreed by both parties. Reinsurance brokers should also be wary in the future of "loose" discussions with, or letters to, clients that may give rise to an increased duty of care.

The reinsurance broker can seek to limit the duty of care in a number of ways. One way is to enter into a letter of engagement with a client setting out the terms of the reinsurance broker’s retainer. If the reinsurance broker’s duties are to be limited to the placing of a reinsurance/retrocession contract, this should be clearly stated. Alternatively, if a reinsurance broker is concerned during the course of placing business that the advice he is giving may give rise to a wider duty of care, akin to the one in Aneco, he should send a letter to his client stating what his duties are limited to. The Aneco decision essentially turned upon the facts of the case. However, it is clear that the issues it raises will have an immediate impact upon how reinsurance brokers should conduct their business in the future.

1. Aneco Reinsurance Underwriting Limited (In Liquidation) (A body incorporate under the laws of Bermuda) v Johnson & Higgs Limited 18^th October 2001 [2001] UKHL 51
2. Overseas Tankships (UK) Ltd v Morts Dock and Engineering Co Ltd (The Wagon Mound (No 1)) [1961] AC 388.
3. Youell v Bland Welch & Co Ltd (No 2) (The "Superhulls Cover" case) [1990] 2 Lloyd’s Rep 431.
4. Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 known as South Australia Asset Managment Corporation v York Montague Ltd ("SAAMCo")