UK: Goshawk v Tyser – Round 2 : Underwriters Strike Back

The Court of Appeal has now delivered the eagerly awaited judgment in the case of Goshawk Dedicated Ltd and Others v. Tyser & Co Ltd and Another [2005] EWHC 461 (Comm). The Lloyd’s Syndicate underwriters ("the Syndicates") had appealed the High Court decision that the defendant brokers ("the Brokers") had no obligation to produce to a Lloyd’s Syndicate placing and claims documents that had previously been produced to underwriters, but which the broker retained. The Court had also ruled that there was only a limited obligation to produce accounting documents for inspection.

In unanimously reversing the High Court decision, and upholding the Claimant Syndicates’ appeal, the Court of Appeal have now ruled authoritively that in the Lloyd’s market there has at all relevant times been a term implied in the insurance contracts between underwriters and insureds to this effect: that placing and claims documents which have been previously shown to underwriters, and premium accounting documents which are necessary to the operation of the contract, where retained by the Insureds’ Lloyd’s brokers, should be available to underwriters in case of reasonable necessity.

Furthermore, consequential to such a finding, and prior to any TOBA being entered into by the relevant parties, business necessity also required that there should be a contract held to exist directly between the Lloyd’s broker and Lloyd’s underwriters concerned, to the effect that the Lloyd’s broker was obliged to perform that duty undertaken by its principals, the insureds, namely to make available the documents necessary for the effective performance of the insurance contracts concerned.

The Court of Appeal has now delivered the eagerly awaited judgment in the case of Goshawk Dedicated Ltd and Others v. Tyser & Co Ltd and Another [2005] EWHC 461 (Comm). The Lloyd’s Syndicate underwriters ("the Syndicates") had appealed the High Court decision that the defendant brokers ("the Brokers") had no obligation to produce to a Lloyd’s Syndicate placing and claims documents that had previously been produced to underwriters, but which the broker retained. The Court had also ruled that there was only a limited obligation to produce accounting documents for inspection.

In unanimously reversing the High Court decision, and upholding the Claimant Syndicates’ appeal, the Court of Appeal have now ruled authoritively that in the Lloyd’s market there has at all relevant times been a term implied in the insurance contracts between underwriters and insureds to this effect: that placing and claims documents which have been previously shown to underwriters, and premium accounting documents which are necessary to the operation of the contract, where retained by the Insureds’ Lloyd’s brokers, should be available to underwriters in case of reasonable necessity.

Furthermore, consequential to such a finding, and prior to any TOBA being entered into by the relevant parties, business necessity also required that there should be a contract held to exist directly between the Lloyd’s broker and Lloyd’s underwriters concerned, to the effect that the Lloyd’s broker was obliged to perform that duty undertaken by its principals, the insureds, namely to make available the documents necessary for the effective performance of the insurance contracts concerned.

The background facts concerned "viatical" business that was insured by the Syndicates. Viatical companies purchase life assurance policies of the terminally ill or those over 65 at a discount, with a view to profiting from the payout upon death in the event that the sum assured exceeds the purchase price of the policy and the premiums paid to keep it in force thereafter. The risk insured by the Syndicates was the possibility that payment was delayed or was never paid at all because the life assured outlives the terms of his term insurance. The insurance put in place was a form of contingent cost insurance.

In this case such insurance business was placed with the Syndicates by the Brokers both directly and also indirectly via the Syndicates' appointed underwriting agents who, from 2000 onwards, held a binding authority granted by the Syndicates.

The dispute arose because the Syndicates went into run-off and the run-off managers sought access to placing, claims and premium /accounting documents in order to manage the run-off. The Brokers in fact provided a substantial quantity of this material to the Syndicates where relevant client assureds they had contacted gave their consent. However, in some cases the Brokers could not get such client consent and in many cases clients were uncontactable or unresponsive. In these instances, the Brokers refused the Syndicates access to documents relevant to these assureds (notwithstanding that the Syndicates had in many cases already seen the documents in issue or these had been made available to them, or had even been mentioned in the relevant slips) fearing that they might be sued if they volunteered the documentation without their client's express agreement.

The position was also complicated by the fact that on 20 December 2001 the Syndicates and the Brokers entered into a Terms of Business Agreement ("the TOBA") in which, by clause 8.1, the Brokers agreed that they would make the following available for inspection on reasonable notice:

Clause 2.2 of the TOBA also stated that

Both the High Court and the Court of Appeal considered the various relevant Lloyd's and Insurance Brokers Registration Council codes of practice for brokers issued since 1988 that addressed the production of brokers' papers. Both Courts noted provisions in these to the effect that brokers were to place the interests of their clients above all other considerations, and to oblige brokers not to use or disclose any information acquired by them from clients other than for use in the normal course of negotiating, maintaining or renewing a contract of insurance for such clients -unless the consent of the respective client concerned had been obtained or if the production of that information was ordered by a Court.

Also noted by both Courts was the fact that a guidance note annexed to the draft market model form TOBA agreement that was issued prior to the execution of the TOBA in this matter also stated that a broker had a duty of confidentiality, and could not grant third parties access to documents without an assured's permission. That note also proceeded to comment that as an exception "pursuant to London market practice" a managing agent was entitled to see documents that they saw at the time of placing.

Both parties put expert evidence before the High Court. For the Syndicates, expert underwriting evidence was put forward to the effect that it was "an accepted and understood market practice" that underwriters were entitled to require the production to them of copies of any documentation made available by the brokers at placing and remaining on the brokers' files (indeed as later expressly reflected by the terms of paragraph 8.1 of the TOBA). Furthermore, it was "the custom and practice" of the Lloyd's market that underwriters could call for claims files at any time even if a loss had been settled, otherwise the market would not work.

For the Brokers, expert broking evidence was called to the effect that where an underwriter did not retain copies of placing information that was shown to him at the time of placing, a broker would indeed make such documents available to the underwriter upon request, but subject to the qualification that a broker might not do so if the broker's client expressly forbade that act or if the broker thought that the request was not in the best interests of his principal. As to claims files, brokers should produce to underwriters any report or other document that had been paid for by the underwriters concerned but, in relation to other documents, the position was the same described above. In summary the expert broking evidence called was that the interests of a broker's client was paramount, even if they conflicted with an undertaking that the broker may have given to the underwriter.

The Syndicates’ legal argument before the High Court was focused on whether, as the Syndicates then contended, prior to the execution of the TOBA, there was an implied obligation between the Syndicates and the Brokers, based if necessary on a long established market practice and the custom of Lloyd's, that the Brokers would allow the Syndicates access to information which they did not have, but which had hitherto been produced or made available to them and which the Brokers had retained on their placing and claims files; after the execution of the TOBA, the Syndicates relied upon clause 8.1 as expressly conferring upon them such rights of access. These contentions were denied by the Brokers who maintained that there was no such unfettered right to compel production, whether before or after the execution of the TOBA.

Before the Court of Appeal the Syndicates put their case on a different basis from that argued before the High Court, namely they argued that in the Lloyd’s market there was an implied term in the contract of insurance on grounds of business necessity entitling underwriters to reinspect documents that brokers had shown underwriters in the course of placing the reinsurance or in the course of making claims under it, as well as inspecting documents that the Brokers held which would enable the premium to be checked or calculated. Additionally and consequently, the Syndicates argued that there was a contract between the Brokers and the Syndicates that obliged the Brokers to produce such documents.

The Syndicates made the following points, among others, in support of its case:

1. No confidentiality issues arose in respect of the documents.
2. It could not be sensibly said that it was against an insured’s interests for the Syndicates to see what it had seen before.
3. It was better for the Syndicates to be guided by what the documents said when reviewing matters rather than mere recollection.
4. In a contract of good faith, all documents presented to underwriters as part of the placing were necessary for a true appreciation of the contract.
5. The contract of insurance simply could not work without the Syndicates having available all such documents.
6. The practice of the Lloyd’s market, which was "idiosyncratic", was the background to necessity for such terms to be implied.

vii) Whilst the accounting documents had not been seen before, Clause 8.1 of the TOBA placed such documents into the same category as placing and claims documents.

It was not suggested the term operated where underwriters had retained the documents, but in the present case they had not.

The Society of Lloyd’s also intervened in the Appeal and made submissions of its own at the hearing supportive of the Syndicates’ arguments.

On the other hand the brokers contended that the alleged implied term was unnecessary, unreasonable and so impermissible. Additionally, they pointed out that the Syndicates’ requests were reasonably believed to be a prelude to an attempt to find reasons to decline liability, and to create litigation. It was a device to avoid the procedural code for disclosure. As for claims documents, paid claims were a "closed book"; premium accounting documents had never been introduced to underwriters.

The High Court was not persuaded that prior to the execution of the TOBA on 20 December 2001, there was any contract or obligation by market practice or custom or otherwise to be inferred or implied between underwriters and brokers in the Lloyd's market to require the Brokers to produce such documents to the Syndicates without client instructions. So far the TOBA was concerned, and its impact on the legal position, Christopher Clarke J considered it was necessary to focus upon not only terms of the access to records clause, clause 8.1, but also the terms of clause 2.2. The Judge concluded that clause 2.2 was capable of "trumping" the terms of clause 8.1 in appropriate situations, so that even after the execution of the TOBA, the Brokers were not contractually obliged to grant the Syndicates access to any of these categories of documents if, to do so, would be inconsistent with the broker's duty to place the interests of his client before all other considerations. He did rule that some limited premium accounting documents should be produced.

The Court of Appeal, for whom Rix LJ gave the judgment of the Court, accepted the Syndicates reformulated case, namely the implied term requiring the Insured to permit re-inspection of documents retained by the Broker and the contract between the Brokers and the Syndicates contended accordingly.

Rix LJ viewed it as "critical" that in a market (the Lloyd’s market) where traditionally the placing and claims documents shown to underwriters are kept by brokers and not underwriters, there is an implied obligation in the insurance contract itself that those documents should be made available to underwriters where that is reasonably necessary. There was however no obligation to provide such underwriters with what they had already got, or to provide what the brokers had not retained.

Rix LJ was not persuaded that motivation for the request by the Syndicates was a relevant consideration (absent bad faith) : in commercial matters, he decided "a simple rule is best". The documents in question were those already seen by underwriters or necessary to the working out of premium. In his view it was undesirable to compel parties to litigation simply in order for them to know what their contractual rights and obligations are.

Rix LJ considered that the post TOBA period in issue presented no problem. There was a contract between the Brokers and the Syndicates which, by Clause 8.1, obliged the Brokers to produce these very documents in issue. If, as he held, there was an implied tem in the contract between the Brokers’ clients and principals (the assureds) to the effect that such documents retained in the possession of these Brokers should be disclosed to the Syndicates, there was no conflict between Clauses 8.1 and 2.2. It was not necessary for him to consider whether, in terms, Clause 2.2 indeed "trumped" 8.1, and he did not do so – save to observe that he considered this question as very much an "open one".

He also held that in his judgment it was the business necessity that required there should be a contract created directly between the Brokers and the Syndicates to give effect to the Brokers obligations to the Syndicates in this regard. Indeed, he observed, it was for that reason that the standard form of TOBA was created, to formulate the terms on which underwriters and brokers deal with one another. He viewed it as unrealistic to suppose that there was no contract between them prior to the TOBA.

The initial High Court decision caused much comment within the market. Round 2 will do so likewise. Whether there is a "Round 3" will depend on whether the House of Lords grants permission to appeal (the Court of Appeal refused permission).

This is certainly a highly relevant case for all brokers and underwriters/insurers alike to consider. Although the instant case was addressing the confines and context of the Lloyd’s market, it will certainly be a first reference point for any general market dispute between insurers and brokers concerning document production.

It should be noted that the premise of the Court of Appeal’s decision appears to be that there was a common and habitual practice in the Lloyd’s market regarding document retention by brokers, which justified the imposition of an implied term and contract between brokers and underwriters on the basis of business necessity.

The Court clearly thought that in circumstances where documentation is retained in London with brokers, it would be highly un-businesslike to suppose that parties contracted on the basis that an underwriter would need to apply direct to a brokers’ client, wherever they were in the world, in order to obtain (again) sight of documentation needed that was in the possession of the brokers.

Rix LJ also clearly considered that the insurance context, where good faith operates, supported the Court’s conclusions.

Obviously this is a reversal of the legal position as stated following the High Court decision last year – to the extent working practices and procedures have been modified by that High Court decision, then these will need to be further reviewed.

Finally, it will also be interesting to see whether the finding of a contract between a broker and an underwriter in the Lloyd’s market in this regard, will be used as a basis for the further extension by the Courts in due course regarding duties owed directly by brokers to underwriters/insurers.

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 07/02/2006.