Court of Appeal - Auld LJ, Longmore LJ and May LJ - 12 July 2007
HIH Casualty & General Insurance Limited v JLT Risk Solutions Limited (formerly Lloyd Thompson Limited)
Court of Appeal - Auld LJ, Longmore LJ and May LJ - 12 July 2007
HIH provided insurance to LDT who financed the production of films. The risk covered was that the films, which provided for three slates of 6, 10 and 5 films, did not make enough money to repay the loan notes used by LDT to finance them. Although the number of films that were actually made was less than those provided for in each slate, HIH paid LDT's claim when the films failed financially. However, HIH's reinsurers refused to indemnify HIH on the basis that the reduction in the number of films produced in each slate constituted a breach of warranty. This breach of warranty claim was confirmed by the Court of Appeal in HIH v New Hampshire Insurance Co .
HIH's claim against JLT
HIH turned their attention to the brokers, JLT, who placed both the insurance and reinsurance, and brought an action against them in negligence. HIH claimed that JLT were under a duty post-placement to alert them to the fact that the number of films made had reduced, the effect that this would have on their reinsurance coverage and to seek further instructions from them. The film reduction was apparent from the risk management reports that were passed from JLT to HIH without comment.
JLT's defence was that they were under no such duty. If they were under a duty, then they had not breached it and, if it had breached it, then that was not the cause of HIH's loss. JLT argued that it was HIH who were the architects of their own loss in paying LDT's claim when there was no legal liability to do so, such liability having been discharged by LDT's breach of warranty.
Langley J's decision in the Commercial Court
Langley J held that JLT did owe HIH a duty post-placement to alert HIH to the potential coverage issues arising from the reduction in the number of films. Further, they had breached this duty in failing to highlight the film reduction, which was evident in the risk management reports that they passed to HIH.
However, Langley J found that this breach did not cause HIH's loss. Even if JLT had alerted HIH to the coverage issues and HIH had raised these issues with their reinsurers, there would have been no difference to the eventual outcome. The reinsurers would still have rejected their liability to indemnify HIH. As an aside, Langley J considered that, if he was required to decide the question of contributory negligence by underwriters in not reviewing the risk management reports, he would have found HIH contributory negligent to the tune of 70% (20% for their failure to appreciate the coverage risks and 50% for paying LDT without the reinsurers agreement).
Each aspect of Langley J's judgment was considered on appeal, namely whether he was right to find the existence of a duty, whether JLT had breached this duty and, finally, whether there was the necessary causation to attribute HIH's loss to the breach.
JLT appealed the finding that they were under a post-placement duty on a number of grounds. Amongst others they claimed that the only duty they owed to HIH as a reinsurance broker was to effect back-to-back reinsurance cover, which they had done. They also argued that if there were coverage issues they would be in a position of conflict if they were to alert LDT and HIH to these issues due to the back-to-back nature of the insurance and reinsurance cover.
The arguments as to the conflicting duties of a reinsurance broker found no favour in the Court of Appeal. Auld LJ, delivering the principal judgment, did not accept that because the insurance and reinsurance cover was back-to-back this removed the duty for JLT to alert HIH. He found the reverse was true, that a risk to the reinsurance cover would correspond to a risk in the insurance cover which HIH may want to do something about. He found no reason to reject Langley J's finding that JLT were under a duty, specific to this case, to alert HIH to the coverage issue in the risk management reports.
JLT argued that they had not breached their duty by failing to draw HIH's attention to the reduction in the number of films as stated in the risk management reports. They argued that providing the reports was sufficient to satisfy their obligations. If they were required to do any more the effect would have been to require JLT to "protect HIH from the incompetence of its own staff". This argument was also rejected by the Court of Appeal and Langley's view, that there had been a breach of duty, upheld.
In determining whether JLT's breach was the cause of HIH's loss, Auld LJ reviewed the three questions that Langley J considered central to the issue of causation. The first was whether HIH appreciated that the film reductions raised potential issues as to coverage on insurance and reinsurance. The second was what HIH would have done if JLT had alerted it to the potential coverage issues. Again, Langley J's decision was upheld - on the evidence presented, HIH was not alive to the coverage risks that resulted from the film reduction but if they had been, they would have sought the views of their reinsurers.
It was the third and final issue, that worked against HIH in this case, as it had done at first instance. This question amounted to a decision as to whether the outcome would have been any different had HIH been alerted to the coverage issue and sought the views of the reinsurers. Again, Langley J's view was affirmed by the Court of Appeal, namely that there was insufficient evidence that reinsurers would have agreed to something that would have rendered them legally liable.
The comments of Langley J on contributory negligence did not strictly need to be considered by the Appeal Court. However with the failure of HIH's case, two of the three appellate judges expressed the same view that, if they had to, the appropriate reduction in damages for contributory negligence on the part of HIH would have been 100%.
Auld LJ and Longmore LJ's views on HIH's contributory negligence highlight one of the recurring themes of this judgment. The real cause of HIH's loss was not the failure of JLT to advise them about the reduction in the film numbers but the fact that HIH had paid LDT's claim when there was no legal liability to do so. HIH were too hasty in paying a claim, especially without the views of reinsurers.
On first reading, this judgment seems to widen the scope of duties owed by a broker to reinsurers by confirming the existence of certain duties post-placement. This is particularly true in the case of dissemination of information by brokers to their clients.
The practical point for brokers is to understand that it is no longer good enough simply to pass on information to underwriters, post-placement, without having reviewed it and considered whether specific points need to be brought to underwriters' attention.
However the judgment, is not as far reaching as it first seems. First, the Court of Appeal stressed that this decision turned very much on its facts and the limited evidence available. Secondly, although brokers are under a continuing duty post-placement to act in their client's best interests, this does not mean that underwriters can afford to be any less thorough. The case demonstrates that the courts will consider carefully contributory negligence on the part of underwriters.