Aneco Reinsurance Underwriting Limited v Johnson & Higgins Limited

The House considered the proper measure of damages where a reinsurance broker negligently advised that required reinsurance cover had been obtained (and was available) when in fact it was not. The central legal principle was the "scope of duty" concept as articulated in SAAMCO (Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191): a defendant who undertakes only to provide information is generally liable only for the consequences of the information being wrong, whereas a defendant who assumes responsibility to advise on the course of action may be liable for all foreseeable loss flowing from the claimant's decision to act.

The majority concluded on the facts that the brokers had assumed a duty to advise Aneco as to the availability of reinsurance in the market (and thus effectively on the market's assessment of the risk) and that, because no alternative reinsurance was in fact obtainable, Aneco would not have entered into the Bullen treaty but for the brokers' negligent advice. On that basis the brokers were liable for the whole loss suffered by Aneco rather than being limited to the value of the avoided reinsurance ($11m).

Background and parties:

Aneco Reinsurance Underwriting Ltd (a Bermudian reinsurer) agreed to enter a proportional treaty (the Bullen treaty) with Lloyd's syndicates. Aneco required outward excess of loss reinsurance (retrocession) for its own account as a precondition to entering the treaty. Johnson & Higgins (brokers) acted for both the syndicates and, in seeking the retrocession, for Aneco.

Nature of the claim:

• (i) Aneco sued the brokers in negligence seeking damages for losses arising from entering into the Bullen treaty on the basis that the brokers negligently advised that the necessary reinsurance was available and had been obtained.
• (ii) The primary claim was for all losses flowing from entering the treaty (approximately $35m); the alternative claim was for the value of the reinsurance that would have been recoverable (about $11m).

Procedural history:

Creswell J (Commercial Court) found brokers negligent but concluded alternative reinsurance would have been obtainable and awarded damages equal to the lost cover (c. $11m) [1998] 1 Lloyd's Rep 565. The Court of Appeal reversed that factual finding and, by majority, awarded Aneco the full loss (c. $35m) [2000] 1 All ER (Comm) 129. The brokers appealed to the House of Lords.

Issues before the House:

1. Whether, as a question of fact, the brokers had assumed a duty to advise Aneco about the market's assessment of the risks (and thus effectively to advise whether Aneco should enter the Bullen treaty), or whether their duty was limited to procuring and reporting the availability of reinsurance.
2. Given that reinsurance was not available, what is the appropriate legal measure of damages: limited to the value of the lost cover, or the whole loss from the transaction?

Court’s reasoning and disposition:

The majority (Lords Slynn, Browne-Wilkinson, Lloyd and Steyn) agreed with the Court of Appeal majority that on the evidence the brokers had undertaken a duty not merely to obtain cover but to advise on the availability of reinsurance and the market's assessment of the risks — advice central to Aneco's decision. The House applied the SAAMCO "scope of duty" analysis and concluded that, because the brokers had assumed a wider advisory role, they were liable for all foreseeable loss flowing from Aneco's entry into the Bullen treaty. The appeal by the brokers was therefore dismissed. One Law Lord (Lord Millett) dissented and would have allowed the appeal and restored the High Court award (limiting damages to the value of the lost reinsurance).

Wider context: The judgment applies and refines the SAAMCO scope-of-duty principle in the reinsurance broking context, emphasising careful factual analysis to determine whether a broker assumed an advisory responsibility distinct from a duty merely to procure or report reinsurance.

Appeal dismissed. The majority held that on the facts the brokers had assumed a duty to advise Aneco about the availability of reinsurance in the market (and thereby effectively on the market's assessment of the risk). Because no alternative reinsurance was actually available and Aneco would not have entered the Bullen treaty but for the brokers' negligent advice, the brokers were liable for the full loss occasioned by entry into the treaty rather than being limited to the value of the lost reinsurance.

First instance: Commercial Court, Creswell J found negligence but awarded damages equal to lost reinsurance [1998] 1 Lloyd's Rep 565. Court of Appeal: appeal by Aneco allowed by majority (Evans and Ward LJJ) awarding full loss; Aldous LJ dissenting [2000] 1 All ER (Comm) 129. House of Lords: appeal by brokers dismissed [2001] UKHL 51.