The Plaintiff cedant participated in a treaty which
was a reinsurance of the marine excess of loss account of a number
of Lloyd's syndicates.
The Plaintiff cedant instructed the Defendant
brokers to obtain retrocession cover. The Defendant brokers
arranged retrocession agreements with various insurers from both
the Lloyd's and the London companies' market and the overseas
Subsequently, the Plaintiff cedant suffered
extremely heavy losses which it sought to recover from its
retrocessionaires. The retrocessionaires avoided the cover on the
basis of material misrepresentation and non-disclosure, in
particular, as to the nature of the underlying reinsurance treaty
subscribed by the Plaintiff cedant.
Subsequently, an arbitration took place between the
Plaintiff cedant and the retrocessionaires at which it was held
that the retrocessionaires were entitled to avoid the cover.
Following the arbitration, the Plaintiff cedant
commenced proceedings against its brokers alleging negligence in
the placing of the retrocession agreements. The brokers denied
The brokers were negligent in that they had failed
to make a fair presentation of the risk to the
The Defendant brokers had placed the cover on the
basis that the Plaintiff's treaty was a quota share, whereas it
was, in fact, a facultative/obligatory treaty.
Under a quota share treaty, the cedant is obliged
to cede and the reinsurer is obliged to accept, a fixed proportion
of all business protected by the treaty.
Under a facultative/obligatory treaty, the cedant
may select either those risks which it wants to cede, or what
proportion of its participation in each risk it wishes to cede, or
a combination of the two. This is the "facultative" element. The
reinsurer is obliged to accept the risks ceded and this is the
The Judge accepted that facultative/obligatory
treaties were generally regarded in the London market as less
attractive than quota share treaties. This was mainly because of
the risk of "anti-selection" by the cedant and, indeed, there was
some tendency for cedants to use facultative/obligatory contracts
as a "dumping ground" for high risk or other poor quality
On that basis, the nature of the Plaintiff's treaty
was material information according to the test in Pan Atlantic
Insurance Co Limited -v- Pinetop Insurance Co Limited (1994).
As regards the following market, the Judge held
that, the fact that the brokers had made a misrepresentation to the
Leading Underwriter regarding the nature of the Plaintiff's treaty
was, in itself, a material fact which the brokers were required to
disclose in order to make a fair presentation of the risk to each
of the following insurers.
Overall, the Judge was satisfied that the brokers
had made an unfair presentation of the risk and that they were
therefore in breach of duty.
The Judge then considered the issue of quantum.
The Plaintiff's primary case was that the brokers
should meet the total loss it had suffered on the treaty on the
basis that it would not have participated unless the brokers had
advised that retrocession protection was available.
The Plaintiff's alternative case was that the
brokers were liable for the amount which the Plaintiff had not been
able to recover under the actual retrocession agreements.
The Judge found that, if there had been a fair
presentation of the risk, alternative retrocession cover would have
been available at a broadly similar price. Accordingly, the
Plaintiff's primary case was too generous, because it would involve
the brokers paying more than the Plaintiff would have been able to
recover from the retrocessionaires had the retrocession agreements
not been validly avoided. The Plaintiff's alternative case was
therefore the correct way to assess damages.
In that regard, the Judge referred to the SAAMCO
case, where the House of Lords held that the liability of a
professional Defendant is limited to that part of the Plaintiff's
loss which falls within the scope of the Defendant's duty of care.
On the present facts, the Plaintiff's participation in the treaty
resulted in extremely heavy losses because of, for example,
Hurricane Hugo and Exxon Valdez. The brokers did not, however,
assume a duty to advise the Plaintiff as to whether to enter the
marine market and, in particular, whether to participate in the
treaty. Accordingly, the Judge held that the Defendant brokers
should only be liable for the amount which the Plaintiff could not
recover from the retrocessionaires. The other losses suffered by
the Plaintiff were not attributable to the broker's breach of
The Judge commented that it is highly desirable in
the interests of justice (and of avoiding unnecessary cost and
delay) that, whenever practicable, claims against brokers should be
heard at the same time, and by the same tribunal, as that which
decides whether underwriters have validly avoided. Reinsurance
disputes are, of course, often resolved by means of an arbitration.
The arbitration award will not be binding on the broker and, in the
absence of any issue estoppel, there is a danger that the issues
will have to be re-litigated in subsequent proceedings between the
cedant and the broker. One answer to this problem is for the broker
to participate as a party in the arbitration. However, depending
upon the facts, it may be better for the broker to keep a low
profile in the hope that either the arbitrators will find the
reinsurance to be valid, or the cedant and reinsurers will reach a
commercial compromise of their dispute without any contribution or,
alternatively, only a modest contribution being sought from the
The Judge also commented that it is highly
desirable that a means be found of recording (in a form which
precludes later dispute) what was said between brokers and
underwriters at the time of the presentation of a risk. Clearly,
disputes would be minimised if brokers made and retained
Cameron McKenna acted for the Plaintiff cedant
(Aneco Reinsurance Underwriting Limited (in liquidation) - v -
Johnson & Higgins, QBD: Judgment 1st August 1997).