Bonner & Ors v Cox & Ors

In reinsurance, the scope of the reinsurer’s protection is principally determined by the pre-contract duty of disclosure and the reinsurance wording. In a non-proportional excess-of-loss contract, the court declined to imply a general duty requiring the reinsured to write business prudently, reasonably carefully, or in accordance with ordinary market practice. Such a duty was unnecessary and uncertain where the parties had adverse commercial interests and the reinsurer could protect itself through disclosure requirements and contractual wording. The court left open whether dishonesty, wilful misconduct or recklessness could exclude a risk. It also held that materiality and inducement in non-disclosure cases require sufficiently concrete information and evidence of what the underwriter would probably have done.

The claimants were Lloyd’s syndicates participating in an open cover and suing their reinsurers and brokers. After a lengthy trial, Morison J gave judgment in the Commercial Court on 21 December 2004, reported at [2004] EWHC 2963 (Comm).

Cox and Syndicate 1688 appealed three findings: that 1688 could not avoid for non-disclosure concerning the Elk Point loss; that Cox could not avoid for misrepresentation; and that the reinsurers were not liable for the Oceaneering declaration. The central questions concerned formation and lapse of reinsurance offers, materiality and inducement, the effect of clerical errors in reinsurance documents, and the implication of prudence-based duties in non-proportional reinsurance.

1. Disposition. The Court of Appeal dismissed the appeal on all three issues: the Elk Point non-disclosure issue, Cox’s avoidance claim, and the Oceaneering declaration.
2. Elk Point. The Lloyd’s practice considered in The Zephyr [1985] 2 Lloyds Rep. 529 treated a scratched slip as an offer capable of acceptance when the reinsured accepted participation in the underlying cover. The court proceeded on the basis that disclosure continued until the reinsurance contract was concluded. Information available on 1 December 1998 consisted only of reports of a serious blow-out and did not contain sufficiently concrete material, such as a loss-adjuster’s report or estimate, to be material in the context of the placement. There was also no evidence that the underwriter would have withdrawn or varied his offer on receiving that information. The technical arguments concerning conditional acceptance, mismatch of cover periods and lapse of the offer therefore failed. Whether an offer had lapsed was a question of fact depending on all the circumstances, and this offer remained open for acceptance.
3. Cox. Category B risks under the March 1999 slip had to be scheduled, identified and expressly accepted by the reinsurers. Cox had accepted none of them, so its exposure was not increased by the October 1999 slip. The failure to delete Tryg’s name was a clerical oversight. The parties’ common intention was to remove both Tryg and Euclidian from the chain, with the result that Cox became the direct reinsurer of Syndicate 535 for Category A risks from 1 October 1999.
4. Oceaneering and implied terms. Sections 18 and 19 of the Marine Insurance Act 1906 embodied pre-contractual disclosure duties, while post-contract relations were governed by the reinsurance wording. In non-proportional excess-of-loss reinsurance, the parties have adverse commercial interests. A general implied duty to act prudently, reasonably carefully, or in accordance with ordinary market practice was neither necessary nor sufficiently certain. The court confined Phoenix v Halvanon [1985] 2 Lloyds Rep. 599 to its own transactions and did not overrule it or Economic v Le Assicurazioni d’Italia (unreported 27 November 1996), leaving proportional reinsurance undecided.
5. Alternative analysis. Even assuming such implied terms applied, they did not prevent the reinsured from taking the benefit of reinsurance into account. Oceaneering was a genuine fortuity, not arbitrage or a guaranteed loss, and the cover underwriters retained an exposure. No breach was established. Section 55(2)(a) of the 1906 Act suggested that dishonesty, wilful misconduct or recklessness might provide a basis for refusing a risk, but the court left the legal basis and effect of such conduct open.

1. Court of Appeal (Civil Division) — The appeal was dismissed on all three grounds on 8 December 2005.
2. Queen’s Bench Division, Commercial Court — Morison J delivered a reserved judgment after trial, reported at [2004] EWHC 2963 (Comm). The judge rejected 1688’s non-disclosure defence, Cox’s misrepresentation defence, and the reinsurers’ claim concerning the Oceaneering declaration.