Groupama Insurance Company Ltd. v Overseas Partners Re Ltd & Anor

This is an appeal by the second defendants Aon Ltd (“Aon”) against an order made by Morison J on 27^th February 2003 following the trial of this action in the Commercial Court whereby he directed that they bear their own costs of the action. The judge had directed that judgment be entered for the claimants Groupama Insurance Company Ltd (“Groupama”) against the first defendants Overseas Partners Re Ltd (“OP Re”) and that the claim against Aon should be dismissed. On this appeal Aon seeks an order that OP Re pay them their costs of the action. Groupama has played no part in the appeal.

In this action Groupama sought payment of unpaid claims and indemnity against future claims arising under a Marine Personal Accident Quota Share Treaty retrocession to which OP Re were the counter-party. The insured companies were US companies primarily involved in the maritime industry, and they received first tier insurance cover through Lloyd Thompson (now known as JLT Risk Solutions Ltd (“JLT”)) from a number of syndicates at Lloyd’s and a London based insurance company (“the first tier insurers”). Lloyd’s syndicate 724 was the lead syndicate, and the cover included “liability in respect of the insured's employees … in respect of bodily injury and death”. The first tier insurances were subject to various deductibles.

The first tier insurers then effected reinsurance in respect of the risk of bodily injury and death with LDG Worldwide Ltd (“LDG”) as underwriting agents for Groupama. Aon acted as the insurers’ brokers in this matter. The reinsurance was placed by way of a series of individual risks written by Mr Smart (LDG). LDG then used Aon as their brokers when placing the quota share retrocession cover with OP Re.

Mr McCann of OP Re played an important part in this history. When he joined that company’s underwriting department in late 1996, he had not had much experience as an underwriter of marine business and very little previous experience of writing personal accident business. Notwithstanding his inexperience, towards the end of 1997 he was appointed a lead underwriter. Significant risks were considered by a committee chaired by Mr Barone, the company’s president. He would listen to what his underwriters proposed, and the judge said that if the relevant lead underwriter expressed doubts about a risk, Mr Barone would no doubt have been reluctant to allow it to be written. Subject to this, he took all the decisions. He did not give evidence at the trial. Mr McCann left the employment of OP Re during 2000.

The relevant history began shortly before 13^th January 1998. Aon, acting through Mr Reeves and Mr Perkins, approached Mr McCann with the proposal that OP Re should accept a percentage share of Mr Smart’s book of business which he had written by way of a carve out of risks involving US assureds. Mr Smart had agreed to reinsure them on a facultative basis, accepting each risk as he thought fit when it was proposed to him. He took up 100% of the “bodily injury risk” accepted by the first tier insurers subject to the same limits and deductions. The risks had been assessed and written independently by Lloyd’s syndicates: this was not reinsurance by layers on an excess of loss basis. Mr Smart was only accepting a part of the risks written by Lloyd’s, and both they and he were exercising underwriting judgment in the matter. By the time Aon approached Mr McCann, Mr Smart had written three risks.

Aon was proposing that if OP Re was willing to accept a Quota Share retrocession, Mr Smart’s first three risks could be included as the first three declarations under the treaty. Aon sent Mr McCann a draft retrocession contract for the period between 26^th November 1997 and 31^st December 1998. It included an obligation by OP Re to “pay as may be paid by the Reinsured” together with the three declarations.

Mr McCann received this proposal by a fax dated 13^th January 1998. He noted on it that Groupama would retain 50% and that Mr Smart was the underwriter. During the period before 19^th January he spoke to Mr Reeves (Aon) over the telephone, and the judge inferred that he asked for information about Mr Smart and details of the written premium and incurred claims to date.

He received this information by a fax dated 19^th January. He was told that Mr Smart had been writing this class for two years on a selective basis. To date the premiums had been US$4,222,342 and the claims US$2,226,350.

This information had been obtained in part not from Aon’s own claims records but from JLT. The reason for this was that Aon’s claims department in Romford was in some disarray (it was described as a “black hole”) following the merger into Aon of five different companies, and when Mr Greig (Aon) was asked to obtain the information Mr McCann sought, he contacted Mr Wilson (JLT). Mr Wilson used to work for Aon, and when he moved to JLT he had been allowed by Aon to continue to effect some of these reinsurances for Lloyd’s (and earn brokerage on them) through his new employers.

Since JLT, as the placing brokers, would know of the “claims incurred” some time before Aon did, and Aon needed the information quickly, Mr Greig obtained from Mr Wilson information about three of the four “claims incurred” figures totalling US$1,363,000. The judge found that it was not Mr McCann’s understanding that any of the figures had come from JLT. When he read a fax from Mr Reeves dated 19^th January, he assumed that all the figures came from LDG, and that they reflected the experience that company had enjoyed to date. He did not know what investigations LDG had carried out before producing these figures, and he did not ask. What mattered to OP Re was that it appeared that the business was profitable.

The judge found that in these circumstances OP Re had been content with the broadest assessment of the profitability of Mr Smart’s book of business. At the trial Mr McCann accepted that Mr Reeves’ fax raised a number of matters to which a careful underwriter would have required answers: when were the losses incurred; what was the prognoses of the loss history; did it include outstanding claims or unpaid claims; what was the position about reserves. This was all basic underwriting information. From the figures presented and in the absence of further inquiry it was obvious that this had been a profitable book of business in the past, assuming that it was not long tail.

Mr McCann acknowledged Mr Reeves’s fax on 4^th February. He said that his company’s potential participation had been submitted for final committee approval, and he believed that the review would proceed on a favourable basis. Two days later he told him that OP Re accepted a 50% share in LDG’s marine book, and he considered that his company was on risk from that time, although the relevant slip was not sent out and signed until much later. On 6^th April Aon told OP Re that Mr Smart had accepted three more risks, and gave them details of them.

This was the background to the events which were at the centre of the action. In due course Mr Smart told Aon that he was prepared to accept further marine bodily insurance carve out business provided that his participation could be reduced, whether by co-reinsurers sharing the burden or by extending the retrocession protection. One company had declined a proposal to join in the reinsurance, and he was now inviting OP Re to consider increasing its quota share to 75%. After being told that there had now been eight declarations for the purposes of the treaty, and after consulting Mr Barone, Mr McCann sent a fax to Mr Reeves on 18^th June:

This fax was shown to Mr Smart who marked it “noted”. He took the view that Aon should do the necessary work, particularly as their claims department knew what losses were going to impact on his book a short time before he himself was told. He therefore told Mr Greig to check the position. He left it to Aon as producing broker to decide whom they should contact. He did not ask them to make inquiries “up the line” (ie to JLT, for instance) and did not expect them to. Mr Smart told the judge he imagined that OP Re was interested to know why he wished to widen the reinsurance or to reduce his line on the retrocession treaty. The reason had nothing to do with claims, because he was not aware of any. OP Re’s inquiries did not ask Aon to do more than look at the claims records they held.

When Mr McCann had presented the proposal to Mr Barone’s committee on 18^th June he had told them the estimated premium income was US$4 million, and the expected loss ratio, derived from the January figures, was 53%. On a worst case scenario the loss ratio might be 90%. Mr McCann rejected the concept that underwriting was a science, but the judge found that he had very little information on which to make an informed analysis, and much of his workings could be said to derive from guesswork as much as judgment.

It was Mr Perkins who was given the task of obtaining the information sought by Mr McCann. After making inquiries within Aon he drafted a fax which included the following sentence:

This draft fax was shown to Mr Smart who marked it “noted”. It was then sent to Mr McCann with the words “to LDG” omitted. The judge found that Mr Perkins was probably responsible for the alteration. On 30^th June OP Re sent back the revised slip duly signed. The judge said that if the draft had not been altered the message would have stated the position correctly, since neither Aon nor Mr Smart had been advised of any loss that would affect the declarations. If JLT had been consulted, the story would have been rather different. The judge included in paragraph 17 of his judgment a table showing the six claimants who had made claims to JLT before 1^st July 1998, although only four of these six potential losses had been reported to the lead insurer by 29^th June. A table in paragraph 18 gave details of them.

The judge found that if inquiries had been made of Mr Wilson (JLT) before the fax was sent to OP Re, that company would have been told of a “hit” of US$28,000 with two other potential losses which had not burned through the individual deductibles, and a third “loss” which had impacted the aggregate deductible to the extent of 11%.

In due course when these (and other) losses came to light OP Re purported to avoid the Quota Share Treaty on the grounds set out in a letter they wrote to Aon on 12^th February 2001. Their main reason was that there had been a breach of an alleged warranty that no losses had been incurred at all which might affect the treaty. They also relied on allegations of misrepresentation and/or non-disclosure. OP Re claimed to be entitled to avoid the treaty in its entirety, alternatively to avoid the variation whereby its participation was increased from 50% to 75%.

Groupama issued proceedings against Aon about four weeks after this letter was received. By their Defence OP Re asserted that the fax dated 29^th June 1998 contained a warranty (or collateral warranty) which meant or implied that no losses had been advised after due inquiry of the underlying insured, or that there had been no losses advised to any person in the insuring chain. The allegations of misrepresentation and material non-disclosure were also related to the contents of that fax message.

As a consequence of the matters asserted in the Defence, Groupama applied successfully to join Aon as a second defendant. The basis of this claim was that Aon had altered the draft of the crucial fax negligently and without Groupama’s authority. If the statement in that fax meant (as OP Re contended) that reasonable inquiry had been made of the underlying insureds, and if Groupama failed in its claim against OP Re, then Aon was said to be liable in damages for Groupama’s inability to recover in full under the 75% Quota Share. At the trial the losses for which Aon was potentially liable, supposing the treaty was set aside in full, were about US$11,361,890 and £4,148,729.

At the trial Aon made common cause with Groupama in contesting OP Re’s defence. Morison J accepted all their arguments in his judgment. He rejected the contention that the effect of the removal of the words “to LDG” meant that the fax could reasonably bear the meaning that inquiries had been made of the Lloyds’ syndicates. He also rejected the argument that the losses were material, even if they had been known. In reaching this conclusion he rejected the evidence of Mr McCann that he would have wished to consider for himself the reserves which had been placed on the claims by loss adjusters in the United States. Finally, he said that if he had found in favour of OP Re on any of these matters their effect would only have been to reduce its liability to 50%, and not to cause the whole treaty to be avoided.

As between Groupama and Aon he found that Aon did not have authority to alter the fax, so that if the claim against OP Re had failed in whole or in part, Aon would have had to bear the loss.

After handing down his judgment on 24^th January 2003 the judge heard the parties’ submissions on costs, on which he reserved judgment. He gave his judgment on costs on 21^st February 2003, and it is this judgment that is the subject of this appeal. In short the judge:

The reasons the judge gave for the fourth of these directions, which Aon asks us to reverse, were along the following lines. If Aon had not altered the draft fax after it had been seen and initialled by Mr Smart, these proceedings would never have been started. The original wording was clear. The altered wording gave rise to an argument, which he eventually rejected, that the words meant that the losses included those that had been reported “up the line”. It had obviously been sensible for Groupama to join Aon as a defendant in the light of OP Re’s defence in the action. Although he had held that the draft fax ought not to have been altered once it had been seen and “noted” by Mr Smart, this finding did not affect the actual outcome of the litigation.

After summarising the parties’ submissions, the judge said that at the end of the day the court should recognise in its order the fact that this case had been brought about by Aon’s alteration of a fax without authority and contrary to accepted practice. In paragraph 3 of his judgment he explained his reasons for making directions (i) and (ii), and at the end of paragraph 4 he explained his reasons for making direction (iii). The reasons why he made direction (iv) can be found in the first part of paragraph 4 and in paragraph 5:

It might have been more prudent for the judge to have structured his judgment on costs round the provisions of CPR 44.3, since that rule makes transparent the thought processes that should lead up to a decision of this kind. It is understandable why Aon was aggrieved by the judge’s order. They had been brought into the action because OP Re elected to take points in their defence which the judge held to be bad points at the end of a five-day trial in the Commercial Court. If the judge had held they were good points, Aon faced a potential liability of £10 million. I turn therefore to CPR 44.3, being the essential working tool for resolving a problem of this kind. It provides, so far as is material, that:

These rules begin with the proposition that the court should follow the general rule in CPR 44.3(2)(a) unless in the exercise of its discretion it decides to make a different order. In this context it should consider (i) whether any of the three particular matters listed in CPR 44.3(4) need to be taken into account, and (ii) if not, whether there is any other circumstance to which it should have regard in deciding how to exercise his discretion. CPR 44.3(4)(a) is the only item that could possibly be relevant. This gives rise to the question: what do the words “the conduct of all the parties” mean in this context?

Before the advent of the Civil Procedure Rules it was well settled that in exercising his discretion as to the costs of any proceedings, a judge was entitled to consider any relevant aspect of the conduct of the parties, whether it related to their conduct in relation to the matters that gave rise to the litigation, or to their conduct in the period that led up to the issue of proceedings, or to their conduct in the proceedings themselves. This was made clear in the speech of Viscount Cave LC in Donald Campbell & Co Ltd v Pollak [1927] AC 732. He said at p 811 that the court had an absolute and unfettered discretion to award or not to award costs to a successful defendant in a non-jury case, and at p 812 he doubted whether three earlier decisions of the Court of Appeal (which he had summarised at pp 808) could be supported. In those cases this court had interfered with a decision on costs by a judge who had paid regard to the conduct of the eventual successful party which had formed the original trigger to the litigation.

The Lord Chancellor did not mention in his speech two earlier decisions of this court to similar effect – Harnett v Vise 5 Ex D 307 and Bostock v Ransey UDC [1900] 2 QB 616 – but these were cited with approval in the powerful concurring speech of Lord Atkinson at pp 815-817. See, too, Angus v Cifford [1891] 2 Ch 449, per Kay LJ at p 481.

It is clear that in 1927, partly as a result of the language of the relevant primary and secondary legislation then in force (for which see Viscount Cave LC at pp 805-6), the discretion of a judge, sitting without a jury, in relation to costs was not open to challenge so long as there existed some material on which he could properly have exercised his discretion. But the rule that the conduct of a party in and about the matters that gave rise to the litigation might be a factor which could properly be taken into account in a decision on costs was not abrogated even when the wording of RSC Order LXV Rule 1 was replaced in 1965 by RSC Order 62 Rules 2(4) and 3.

Nothing in the language of CPR 44.3(4)(a) and 44.3(5)(a) or in Lord Woolf’s Interim and Final Reports which preceded the introduction of the Civil Procedure Rules suggests that there was any intention to alter the ground rules established by the House of Lords in 1927. Chapter 7 of Lord Woolf’s Final Report (July 1996) merely suggested that the court should be more willing to identify areas where it considered that costs had been unnecessarily incurred, both before and after proceedings were commenced. This observation no doubt gave rise to the present wording of CPR 44.3(4)(a) (“The conduct of the parties includes conduct before, as well as during the proceedings”).

I mention these matters because our attention was drawn to a recent unreported decision of this court (Tuckey and Longmore LJJ) in Hall v Rover Financial Services Ltd (GB) [2002] EWCA Civ 1514.

In that case the claimant had succeeded in recovering her newly purchased car from a finance company which had seized it, because she proved that she had acquired it from the hirer under a hire-purchase agreement in good faith and without notice of the agreement. The trial judge, however, had deprived her of her costs on the ground that any reasonable person would have been suspicious of certain features of the transaction by which she had bought the car, but because she suffered from “moral blindness”, she had none of the suspicions an ordinary person would have entertained.

It appears that the case was argued on the basis that it was common ground that there had to be a good reason why a successful claimant should be deprived of her costs, and that if this reason related to the conduct of a party, the conduct in question had to be conduct in relation to the litigation and not conduct extraneous to it. Reliance was placed in this context on the judgments in this court in Bostock v Ramsey UDC [1900] 2 QB 616, which turned on the question whether the trial judge had “good cause” to deprive the successful defendants of their costs pursuant to RSC Order LXV Rule 1.

Counsel for the defendants submitted that it was the claimant’s very dishonesty which had caused her failure to entertain the suspicions which an ordinary person would have entertained, and that it was the dishonest absence of documentation in relation to the purchase of the car which had led to the finance company contesting the litigation in the first place. He suggested that this was “dishonesty intricately connected with the transaction”, and in itself sufficient to deprive the claimant of her costs.

Longmore LJ, with whom Tuckey agreed, rejected these submissions. He said:

It does not appear that the members of that court enjoyed the benefit of the much greater citation of authority that we have enjoyed. Because the decision is unreported, I do not know whether they were taken to the precise wording of CPR 44.3 which contains no language of limitation either in CPR 44.3(4)(a) or CPR 44.3(5)(a) such as would shut out reliance in an appropriate case on misconduct in and about the matters that triggered off the litigation.

Longmore and Tuckey LJJ both have immense experience of practice in the Commercial Court, where issues of this kind arise very frequently, and in this passage Longmore LJ should be interpreted as doing no more than describing the contemporary practice of the judges of that court. In commercial transactions business people not infrequently do not follow the Queensberry Rules in their dealings with each other, but this in itself is not seen to be sufficient to deprive one of them, if successful in the ensuing litigation, of his costs of the litigation. The philosophy of the Woolf Reforms is that the parties should lay their cards on the table as fully as possible and as early as possible, so that they can assess the desirability of a negotiated settlement (as against the risks of contested litigation) in a well-informed way. If they then decide to litigate (and to burden other parties with the costs of litigation), and to pursue the litigation to trial they must expect, as a general rule, to have to pay the costs of parties necessarily joined to the litigation if they lose.

It follows that on its proper construction CPR 44.3(4)(a) entitled Morison J as a matter of law to have regard to Aon’s conduct in altering the approved wording unilaterally contrary to market practice, even though to do so would be inconsistent with the contemporary practice of the judges of the Commercial Court, as evidenced by the judgment in Hall. It is also trite law that this court should be very slow to interfere with an order for costs, in the absence of any variation of the substantive judgment in the court below. In Adamson v Halifax plc [2002] EWCA Civ 1134 at [16]; [2003] 1 WLR 60 Sir Murray Stuart-Smith said:

I return, then, to the judge’s order for costs in this case. It is apparent from the parties’ written submissions before the substantive judgment was handed down on 24^th January, and from the transcript of the discussion in court that day, that it was the judge himself who initially suggested that Aon should pay their own costs “because they brought the litigation about”. He was also anxious about duplication of costs. He returned to this theme in his reserved judgment on costs when he said that it was Aon’s fault that there was a case at all and that they could not complain about being joined. He added later that to saddle OP Re with one set of costs only reflected the justice of the case.

In my judgment the judge placed disproportionate weight on his anxiety to spare OP Re having to pay two sets of costs and wholly inadequate weight, if any, on the consideration that Aon were entitled to instruct lawyers to represent their interests in court when they faced a potential liability of £10 million. By their defence in this action dated 21^st May 2001 OP Re took the points which led to Aon being joined to the action as second defendants by an amendment granted nine months later. Aon served their defence on 11^th March 2002, and OP Re then took the risk of pursuing the points on the wording of the fax to trial, notwithstanding that there were now two parties’ costs which they were at risk of having to pay if they lost.

It needs to be borne in mind that OP Re elected to rely on an interpretation of the wording of the altered fax which the judge expressly rejected at the trial. They chose to allege that on its proper interpretation the words “can confirm no losses advised to date”, in response to a request for “satisfactory warranties as to no losses incurred on the program to date”, carried with them the implication that Aon had checked all the way up the line before responding. In any event, he held that the losses then recorded up the line would have been immaterial even if they had been disclosed. In these circumstances the fact that Mr Perkins should not have departed from market practice in omitting the words “to LDG” from the draft fax was too flimsy a foundation for depriving Aon of all their costs. If the judge had had the decision in Hall drawn to his attention it is hard to think that he would have penalised Aon so heavily especially as their anterior conduct was not even dishonest.

It follows that this, in my judgment, is one of those rare occasions when it is appropriate for this court to interfere with a judge’s costs order. It is therefore open to us to exercise our discretion afresh. In my judgment it would be fair to disallow 10% of Aon’s costs because of the conduct to which the judge took exception. I would therefore substitute for the judge’s order a direction that OP Re pay Aon 90% of its costs of the action. To this extent I would allow this appeal.

I agree.

I also agree.