The Commercial Court has held that a bespoke term in a bank’s marine cargo insurance covered financial losses arising from the default of customers, even where there was no physical loss or damage to the cargo. The cover in question was “unprecedented” in the marine market (being a trade credit risk) and the Court found that although there was coverage for the claim, the insurance broker that placed the risk had breached its duty to procure cover for its client that clearly and indisputably met the client’s needs. The decision is the latest in a line of cases where insurers have disputed the construction of policy terms and scope of cover and the broker has been found to have failed to protect the client from an unnecessary risk of litigation.
Through a subsidiary company the bank provided structured commodities finance to two major cocoa traders by way of "repo" transactions – purchasing the client's commodity for a defined period of time at the end of which the trader was obliged to buy the commodity back. In 2016 the traders became insolvent, defaulted on their obligations and the bank suffered significant losses as a result.
The bank had marine cargo insurance. The policy was described in the judgment as being built on a foundation of conventional marine “all risks” terms but containing extensions to cover going beyond ordinary physical loss and damage to cargo. The key extension was a bespoke “Transaction Premium Clause” (TPC) which had been drafted by the bank’s lawyers. Although cover for customer defaults not related to physical loss or damage would not normally be covered by marine insurers, such cover being available in the trade credit market, the TPC was added to the cargo policy by way of an endorsement presented by the bank’s insurance broker to the lead underwriter and was subsequently incorporated into the policy wording when the risk was renewed the following year. When the cocoa traders defaulted, the bank claimed under the policy, arguing that the TPC covered its losses. The insurers argued (among other things) that because the TPC was a trade credit risk, the clause had, in the context of a cargo insurance, to be interpreted as applying only to situations where there had also been physical loss of or damage to the cargo. The judge rejected this argument. The bank’s claim succeeded against twelve of the fourteen insurers who had written the risk (two of the following market insurers were successful in arguing that statements made by the broker to their underwriters when the risk was presented to them on renewal meant that the bank was estopped from relying on the TPC).
Claim against the broker
Mr Justice Jacobs found that the broker was liable to the bank for losses arising from its inability to recover from the two following market insurers. In addition, however, the bank argued that it was entitled to recover from the broker its irrecoverable costs of pursuing its claim against all the insurers.
The broker accepted that it owed duties of reasonable skill and care to the bank: to procure the insurance cover required by the bank; and to procure cover that clearly and indisputably met the bank’s requirements and so did not expose it to an unnecessary risk of litigation (the second limb having been recognised in FNCB Ltd v Barnet Devanney (Harrow) Ltd  Lloyd’s Rep IR 459 and subsequent cases).
The broker argued, however, that it was not responsible if the insurers rejected the bank’s claim under the TPC. The TPC had been drafted by specialist insurance solicitors and the bank had looked to them to ensure that its interests were protected.
Jacobs J rejected the broker’s submission that the bank had relied mainly on the solicitors. The judge said that not only did he not accept this on the facts (the bank had not looked exclusively to the solicitors for advice, it had also looked to the broker for its professional expertise), but that issues of reliance, while potentially important where a claim is made in tort, were irrelevant where the broker had accepted that it owed a contractual duty to arrange cover that clearly and indisputably met its client’s requirements and not to expose it to the unnecessary risk of litigation. The duties owed by the broker were not reduced because the solicitors had drafted the contentious clause.
To fulfil its duty to arrange cover that clearly and indisputably met its client’s requirements, the Court found that the broker should have:
Advised at the outset that the credit risk market was the appropriate market for the cover sought. As the individual at the broker who dealt with the placement had not had the relevant expertise, specialist brokers within the broking firm should have been involved. Approaching underwriters who did not usually write credit risk insurance should only have happened if the bank had been given appropriate advice so that it could make an informed decision about how to proceed.
Discussed the nature of the cover that was being sought in the TPC (i.e. that it was credit risk cover) with the underwriters that it approached (approaching the wrong market had made it more important for the broker to have these discussions with the underwriters). Had that been done, it would have avoided the potential for future disputes. Where the clause was unusual and, as Jacobs J noted, “unprecedented in the market in which the cover was placed”, the broker could not rely on the careful drafting of the clause by lawyers to protect the bank from that risk.
Although not relied on by the insurers as a defence to the bank’s claim, Jacobs J noted that if there was a risk that the writing of credit risk insurance lay outside the authority of the subscribing underwriters, there was potential scope for a future dispute on the cover if the nature of the TPC was not discussed with the subscribing underwriters. The placement of cover, without any discussion with subscribing underwriters, therefore exposed the bank to the risk of unnecessary litigation.
The decision provides guidance on circumstances where the courts may apply the FNCB duty and find an insurance broker in breach of its duty to protect a client from the risk of future disputes. Brokers should be clear about the cover that a client is seeking, including understanding clauses drafted by specialist lawyers, and ensure that individuals who specialise in the type of cover required are involved in the placement. The broker’s duty will not always extend to explaining particular clauses, including unusual clauses, to the underwriters approached. The duty in this case arose on the facts and Jacobs J rejected the broker’s contention that he would be imposing a “duty to nanny”.
The decision serves as a salient a reminder of the often very high standards to which brokers may be held. Ultimately, the broker was found liable for 100% of the recovery that the bank would, but for the estoppel, have made against two of the following insurers, as well as any costs liability of the bank to those two insurers and any irrecoverable costs incurred by the bank in the action against them. In addition, the broker was found liable in principle for any irrecoverable costs incurred by the bank in the proceedings against the twelve other insurers.
Further reading: ABN Amro Bank NV v Royal & Sun Alliance Insurance Plc & Ors  EWHC 442 (Comm) (26 February 2021)