Bonner & Ors v Cox Dedicated Corporate Member Ltd & Ors

In excess of loss reinsurance, the reinsured may consider the existence and terms of its reinsurance when deciding what business to accept. Reinsurance is intended to enable an underwriter to write larger or more numerous risks. It does not generally create fiduciary, quasi-fiduciary or duties of care between commercial parties with conflicting interests.

Nevertheless, the contract may contain an implied term that risks accepted to a facility are subject to a genuine underwriting judgment and are risks which the lead underwriter would write in the ordinary course of business, taking account of the reinsurance. A recent loss must be disclosed while the duty of utmost good faith continues, but non-disclosure avoids the contract only if it induced the reinsurer. A risks-attaching reinsurance without an express time limit covers long-term risks for their duration.

The claimants were Lloyd’s syndicates participating in an energy insurance facility. They sought payment under excess of loss reinsurance arranged by AON. The reinsurers, including Syndicates 1688 and Cox, raised extensive defences based on alleged non-disclosure, misrepresentation, improper underwriting, writing against the reinsurance, and limitations on the duration and scope of cover.

The principal factual issues concerned the Elk Point blow-out, the meaning of a memorandum of understanding describing the business, alleged oral representations, the placement of replacement and fronting reinsurances, six challenged declarations, and the treatment of long-term and non-standard risks. The court also considered whether the reinsureds owed duties of care or fairness to the reinsurers.

1. Elk Point loss. AON acquired sufficiently concrete knowledge of the loss on 8 December 1998, not on 1 December. The loss was material and should have been disclosed to reinsurers whose contracts were not yet concluded. However, Syndicate 1688 failed to prove inducement. The offer had already been made, the broking process had substantially progressed, and it was improbable that the underwriter would withdraw or materially alter the offer. Non-disclosure therefore did not entitle 1688 to avoid the contracts. Euclidian had affirmed its fronting contracts and could not rely on a right of avoidance which it had abandoned.
2. Nature and duration of the business. The memorandum of understanding did not represent that first loss business was excluded. In context, business written on a ground-up basis included business other than excess business, including first loss risks. The reinsurance slip and surrounding material made clear that long-term risks were covered on a risks-attaching basis. Annual re-signing was an accounting mechanism and did not cancel or re-declare the underlying risk: Baker v Black Sea [1996] Lloyd’s RLR 353. Category B risks were not covered because they had not been expressly scheduled and agreed.
3. Writing against and underwriting duties. The existence of reinsurance could properly influence underwriting decisions. The pleaded prohibition on accepting risks because of the reinsurance was therefore rejected. A term was implied that a declaration must have been the subject of an underwriting judgment and must represent business which the lead underwriter would write in the ordinary course, taking account of the reinsurance. The six challenged declarations fell within that standard, including the Oceaneering declaration, although it was close to the line.
4. Duty of care. No duty of care was implied between the Cover Underwriters and excess of loss reinsurers. The parties were commercial actors with potentially conflicting interests, not joint venturers or fiduciaries. A continuing implied obligation of honesty could arise, but dishonesty was not established.
5. Other allegations. The alleged oral misrepresentations, the Cox placing allegations, and the complaints concerning non-standard security and the six declarations failed on the facts or in law. The reinsurers’ defences were rejected. The parties were directed to draw up the order giving effect to the judgment.