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

The underlying facts are relatively straightforward. Groupama, the Claimants, seeks payment of unpaid claims and an indemnity for future claims under a Marine Personal Accident Quota shareTreaty retrocession to which Overseas Partners Re [OP] were the counterparty and are the fist defendants. The chain between the original insured and the two parties to the Action is as follows:

Certain US companies primarily involved in the maritime industry are the original insureds. US surplus lines producing brokers [McGriff Seibels & Williams of Texas] acted on the Insured’s behalf in obtaining first tier cover through Lloyd’s placing brokers, Lloyd Thompson (now known as JLT Risk Solutions Limited) [JLT] from Lloyd’s. Syndicate 724 was the lead syndicate which, with other syndicates and one London based Company, became the Insurers. The insurance covered, amongst other things, “liability in respect of the Insured’s employees … in respect of bodily injury and death”. The original insurances were subject to various deductibles, both aggregate deductibles and deductibles per loss. AON, who are insurance brokers and the second defendants, on behalf of the Insurers placed reinsurance in relation to the risk of bodily injury and death, with LDG Worldwide Ltd [LDG] who were underwriting agents for Groupama, and to whom Groupama had given their pen. The reinsurance was placed by way of a series of individual risks written by Mr Smart of LDG. In turn, LDG used AON as their brokers in placing the quota share retrocession cover with OP, and this cover lies at the heart of this case.

There is, therefore, a chain starting with the original Insureds through the initial Insurers to the first level reinsurer and thence to the retrocesionaire [OP]. AON fulfilled a broking role at two stages in the chain: first as brokers to the Insurers in placing the reinsurance and second as brokers to the Reinsurers’ agents in the retrocession contract. During the course of the hearing the parties referred variously to inquiries about losses being made either ‘up’ or ‘down’ the line. It does not matter which way up the chain is looked at. For present purposes I see the Insureds as being at the top and OP at the bottom of the chain or line and I shall use the word ‘up’ in that context.

The facts are substantially not in dispute. Mr McCann was not at the material time an experienced marine business underwriter. He also had very little previous experience of writing personal accident business. He joined OP’s underwriting department in late 1996 and was appointed a lead underwriter towards the end of 1997 [November]. Significant risks were presented to a committee chaired by Mr Barone, the President of OP. What Mr Barone said or decided ‘went’, however he would listen to his underwriters and would no doubt have been reluctant to allow a risk to be written which the relevant lead underwriter had doubts about. Mr Barone did not give evidence. Mr McCann ceased to be employed by OP in 2000.

Shortly before 13 January 1998 AON, through Mr Reeves and Mr Perkins, contacted Mr McCann with a proposal that OP should accept a percentage of Mr Smart’s book of business which he had written by way of a carve out of risks in relation to US assured. Mr Smart had agreed to reinsure the original Insureds on a facultative basis, assessing each risk as it was proposed to him. The reinsurance he was writing was taking up 100% of the ‘bodily injury’ risk accepted by the original Insureds, subject to precisely the same limits and deductibles. In other words, this was not a reinsurance by layers on an excess of loss basis. But it was not a fronting operation either: the risks were assessed and written independently by the Lloyd’s syndicates. Mr Smart agreed to reinsure those risks which he accepted. As Mr Smart pointed out, he was taking on the risk of a part only of the risks written by the Syndicates and it would not be accurate to describe Lloyd’s Syndicates as fronting for him. Both they and he made their own underwriting judgments.

By the time of AON’s approach to Mr McCann, Mr Smart had written three risks and it was proposed that if OP agreed to accept a quota share retrocession then the first three risks could be included as the first three declarations under the retrocession treaty. AON sent, with their proposal, a draft of the retrocession contract for the period from 26 November 1997 to 31 December 1998 which included an obligation on OP [subject to their acceptance] to pay “as may be paid by the Reinsured” [ie Groupama] together with three ‘declarations’. When Mr McCann received the fax of 13 January 1998 he made a number of comments on it, including the fact that Groupama [I do not distinguish between LDG and Groupama] retained 50% and that the underwriter was Ray Smart. There was a telephone conversation between Mr Reeves and Mr McCann at some time between 13 January and 19 January1998. It seems sensible to infer from AON’s fax of January 19 1998 that Mr McCann had asked for information both about Mr Smart and about the written premium and incurred claims to date.

The fax of January 19 1998 reads as follows:

“Further to our recent telephone conversation and in reply to your question, we would answer that Ray Smart has been writing this class for the past two years on a selective basis.

We can advise that the written premium/claims to date are as follows:

Gross Written Premium	Incurred Claims
US$ 4,222,342	US$ 2,226,350

We trust that the above will assist and await your advice.”

The information for this fax had been provided, in part, to Mr Reeves, by Mr Greig. Mr Greig knew Mr Wilson of JLT. JLT were the placing brokers and as such would have been notified of claims as they were being passed onto the Lloyd’s syndicates. Three of the four incurred claims figures [totalling US$ 1,363,000] had been provided by Mr Wilson rather than coming from AON’s own claims department. In the chain, JLT could be expected to know of claims some time before AON did. I accept Mr Greig’s evidence as to the circumstances in which he came to approach Mr Wilson. In my judgment he was a reliable witness and what he had to say on this issue makes good sense:

When he received the fax, it was not Mr McCann’s understanding that any of the figures had come from JLT as this passage from his evidence makes clear:

“Q. And I am suggesting to you, that is because all that really mattered to you is that on this calculation it appeared this business was profitable?

A. This is what we relied on, yes.

Q. It is also the case, is it not, that you had no idea where those figures had come from, apart from the fact they were being passed to you by Aon?

A. Well, I presumed that they would have come from LDG and the experience that they enjoyed to date.

Q. But you did not know what investigations LDG had carried

Furthermore, I infer from the absence of any inquiries by OP of LDG about the figures that OP were content with the broadest assessment of the profitability of Mr Smart’s book of business:

“Q. He [one of the expert underwriters] is making the comment that having received a fax in the form of page 17, it immediately raised a number of obvious questions to a careful underwriter, principally: when were these losses incurred, what is the prognosis for the loss history and does it include outstanding claims or unpaid claims and following on from that perhaps reserves. He says that is all basic underwriting information and I am asking you whether you agree with that?

A.

Yes.”

It is irrelevant to the determination of this case whether Mr McCann and OP were careless in the way they approached the risk they had to take. But it is relevant to understand Mr McCann’s approach because it sheds some light on what happened thereafter. Indeed, from the figures presented, it was obvious, without further inquiry, that this had been a profitable book of business in the past, assuming that it was not long tail.

On 4 February 1998 Mr McCann indicated that OP’s potential participation was ‘up for final committee approval’ on the Friday and that he believed that “the review will proceed on a favourable basis”. Two days later Mr McCann faxed back confirmation of OP’s acceptance of a 50% share on the LDG marine book. It was Mr McCann’s view that as from this date OP were on risk even though the contract [slip] was not signed until 16 April 1998. I think he was right, even though OP had been sent the slip for signature on March 3 1998. Meanwhile, on 6 April 1998 AON advised OP that Mr Smart had accepted a further three risks and sent to OP a copy of the six declarations and a revised placement slip.

Shortly after these events, Mr Smart indicated to AON that he was only prepared to accept further marine bodily injury carve out business if his participation could be reduced, by, for example, participation by co reinsurers sharing the burden, or by extending the retrocession protection. In the event, after an unsuccessful approach to AXA Re, a proposal was made to OP that their quota share should be increased to 75% leaving Groupama with 25% of the risk. A telephone conversation between Mr McCann and Mr Greig of AON, took place on 10 June 1998. By this date there had been 8 declarations to the Quota Share Treaty: the oldest in time had incepted some 6 months before; the most recent about 1 month before. The note sent by AON to Mr McCann probably overstated Mr McCann’s willingness to participate: “verbal confirmation that an increase from 50% to 75% is likely to be agreed by your goodselves – we now await formal confirmation of this late to-day following on from your meeting”. I think this faxed note was turning a possibility into something firmer, and I accept Mr McCann’s version of the telephone call. He must have said something encouraging, but bearing in mind his relative inexperience, I have no doubt that he would have been anxious to avoid any commitment on the part of OP until after his president had been able to form a view. The evidence shows that the president looked at the proposal and instructed Mr McCann to send the fax dated June 18 1998. From the evidence it would appear that the fax was drafted by Mr McCann but shown to and approved by the President. The wording of the fax lies at the heart of this case.

The fax was addressed to Mr Reeves of AON and was shown to Mr Smart, who scratched it, “Noted” on 22 June 1998. At the time, Mr Smart was of the view that AON should do the work and provide the answers to the request. AON had their own claims department and would know about losses which were going to impact on Mr Smart’s book some short time before the detail was passed on to Mr Smart. To that extent they had slightly more up to date information than Mr Smart, but, having seen Mr Smart give evidence I suspect that the reason he left it to AON had more to do with getting the broker to do his job and earn his money than anything else.

“ Q. The effect of what you said to Mr Greig was: you have access to the best loss information because it was you who placed the business with us, and you can easily check what the position is as to losses?

A. In its broadest sense, I think I was actually implying that he should contact his claims department to see if they had been advised of any claims prior to notifying us.

Q. You did not place any restrictions on Aon as producing broker, as to who they should contact in order to get loss information?

A. No.

Q. And an easy source for them, if they chose to use it, would be to contact their client?

A. If they so chose.”

As I read the evidence, Mr Smart did not ask AON to make inquiries up the line and did not expect them to do so;

“As far as I was concerned the only information I can give is the claims that have been reported to me and people who reported those claims to me were Aon.I did take the further step of asking Aon if they had -- or implied that they had any information that had not gone through the system, which we can see right the way through the case there are time lags. So to give them the best possible information was to ask Aon: had they been advised of any claims? If they came back to me and said: no they had not been advised, which I think they did but I am not too sure, that was as far as the information I would have thought that would have been given. I suppose it is a comfort level that OP are seeking:why are you increasing your reinsurance or reducing our line? Was it because of claims? The answer is: no, it was not, because we were not aware of any.

Q. And those appropriate enquiries did not include, as far

as you understood it, instructing Aon to do more than

look at the claims records it held?

A. That is the case, or else I would have instructed Aon to

go further and I had not.”

Mr McCann was, as he himself says, the architect of various documents dated 18 June 1998 which formed part of his presentation to the OP Committee which had the final say. According to this documentation he informed the committee that LDG wished to reduce their line to 25% and that the potential for this had been put to OP at the time of their original acceptance. He recorded the fact that he had visited Mr Smart on a recent trip to London “and site visit suggested a very strongly run MGA [Managing General Agency] operation “ He indicated an estimated premium income of US$ 4 millions and referred to what he called his analytics, which set out different scenarios: best, expected and worst. For the expected case, the loss ratio was estimated to be 53% and that figure is derived from the figures given on 19 January 1998. The worst case scenario showed a 90% loss ratio; and the best a ratio of 40%. He also produced a cash flow analysis. Mr McCann was asked, in evidence, how he had arrived at his assumptions and he replied, convincingly, that he considered that counsel was trying to make underwriting a science. The truth is that he had very little information on the basis of which he could make an informed analysis, and much of his workings could be said to be guess work or ‘judgment’.

Mr Perkins of AON was asked by a colleague to obtain written confirmation from another colleague regarding the loss information pertaining to the Quota Share Treaty: “preferably in the form of original declaration numbers”. Inquiries were made within AON The results of those inquiries showed that there had been no losses to date of which they had been advised which impacted on Mr Smart’s book. Accordingly, Mr Perkins drafted a fax to send to OP. The wording of it is important. On the fax header the subject matter is defined as LDG P.A. MARINE QS TREATY. The wording of the fax is:

“Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to LDG to date that would affect any of the declarations ceded hereunder

Consequently, I have attached our revised placement slip indicating the 75% Quota Share Treaty Limit and would ask you to return a signed and dated copy by facsimile, by return.

In addition you will note that two further declarations have been ceded hereunder, details as per the attached.

As soon as the slip has been signed and returned we will be in a position to account to O.P.L. Premium Income of approximately US$ 1,000,000.

I look forward to receipt of the documentation in due course.”

The fax ended with the word “Andrew” which is Mr Perkins’ first name.

It is difficult now to say which AON employee took the draft to Mr Smart, and I do not think it matters. Mr Smart scratched it on 29 June against the word “Noted”. This fax was subsequently altered on a word processor and the words “to LDG” were deleted in the first paragraph which, as transmitted, read:

““Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to date that would affect any of the declarations ceded hereunder.”

The balance of the evidence shows that Mr Perkins was responsible for the alteration, although he cannot now recall doing it or, therefore, why he did it. OP received the altered fax on 30 June 1998 and in due course returned to AON the signed slip. If the fax had not been altered, it appears to be common ground that it was a true statement of the position, subject to OP’s argument that a loss affects or potentially affects a declaration if it has eroded the aggregate deductible. Neither Mr Smart nor AON had been advised of any loss that would affect any of the declarations to date. Had inquiries been made of Mr Wilson of JLT the position would have been different.

By 29 June 1998, the day before the fax of that date was sent to OP, only four of the potential six losses had been reported to the lead Insurer.

Thus, had inquiries been made of Mr Wilson of JLT before the fax was sent to OP, what was called by me, inelegantly, during the hearing but accepted as a crude albeit comprehensible description, a ‘hit’ of $28,000 would have been reported together 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%.

Mr Fletcher, on behalf of OP, who conducted his case with great ability, made the following submissions:

For the Claimants, Mr Berry QC submitted that

There are a number of issues. The first question I must deal with is the meaning of the fax of 29 June 1998. The fax is a response to OP’s fax of 18 June 1998 and the two must be read together. For convenience I repeat the crucial paragraphs:

“This is to confirm our increased participation from 50% to 75% on the LDG marine personal accident program effective 1/1/98 [an irrelevant error] subject to satisfactory warranties as to no losses incurred on the program to date.”

““Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to date that would affect any of the declarations ceded hereunder.”

It seems to me, as a matter of ordinary language, that the words “the losses incurred on the program to date” meant the losses incurred on the book of business written by Mr Smart, in the fortunes of which Mr McCann was considering an increased participation. A loss is incurred if a loss has been reported to Mr Smart and which has impacted his book. A loss is not incurred if a claim has been made which has not yet resulted in a loss. Thus, a potential loss, in the sense that a loss for which a reserve below a deductible has been made would not be reported to Mr Smart and would not be incurred on the program. Mr McCann did not expect to be advised of losses incurred but not reported. Having regard to the request, the difference in words between ‘losses incurred on the program’ and ‘losses advised .. that would affect any of the declarations’ is not significant. It seems to me obvious that ‘the declarations ceded hereunder’ meant and can only have meant the program which Mr Smart had written. ‘Hereunder’ must be a reference to the program which is identified in the header to the fax. The ‘losses advised to date’ must, in the context, therefore, be losses advised to Mr Smart.

My view of the matter is reinforced by what is said in the experts’ joint memorandum, namely that the market would understand the request from OP to be referring “to LDG’s losses, either paid or outstanding or a combination of both, and which either have given rise, or may give rise, to claims under the reinsurance contract and which have taken place at the time of the enquiry”. They were also of the view that the words “no losses advised to date that would affect any of the declarations ceded hereunder” were “for all practical purposes synonymous with “incurred loss position to date on the program”. They were also of the view that “market practice would not normally expect claims where initial amounts advised fall within policy deductibles to be reported as “losses” to a reinsurance treaty. In general market practice, a request from a reinsurer to a reinsured for “incurred losses” would not be interpreted to include IBNR [Incurred But Not Reported] losses.” The experts were also of the common view that the words “we can confirm” would, as a matter of market practice, mean “LDG can confirm”. I would be inclined to the view that the “we” was apt to include both AON and LDG, but nothing turns on this, since AON had checked their own claims department before drafting the fax of 29 June.

However, I do not accept that Mr McCann ever had it in mind to ask for more information than the fax of 18 June implied. I did not find it credible that OP would have wished to involve themselves in examining the reserving policies of third party administrators. The risk which Mr McCann was writing was based upon a judgment he had to make about the competence of Mr Smart as an underwriter and whether he was writing risks in a sensible and properly organized way. That is why Mr McCann made his visit to Mr Smart and reported back on the quality of the Agency run by Mr Smart as it appeared to him to be. He was not concerned with writing risks on a facultative basis; he was not directly concerned with reserving policies, although he might have asked questions about the way Lloyd’s wrote their business and how the claims were reserved and by whom when he embarked on the quota share treaty. But he never did. Broadly, Mr McCann was only concerned with whether Mr Smart was writing a profitable book of business, and no other questions were ever asked. It is clear, I think, that OP wanted to know, before they took on a higher percentage, whether LDG had any losses paid or outstanding, which had given rise or might give rise to claims under the reinsurance contract and which had already occurred at the time when the enquiry was made. Since there was an element of retrospectivity in the variation of the percentage, such an inquiry, initiated by Mr Barone, was obviously sensible.

The essence of the defence of OP hinges on the fact that in their fax of 16 June OP asked for a “warranty” about the incurred loss position to date on the program. This was the peg, as it seemed to me on which OP’s broker expert based his opinion that contrary to what he accepted was normal market practice, AON/LDG were obliged to make inquiries further up the line. I cannot accept this thesis. It seems to me clear and obvious that no-one could expect AON/LDG to give a warranty about facts of which they were not fully aware. To warrant that there were no claims in the pipeline which might impact on the program was not practicable for a number of reasons. There might be an accident giving rise to a claim very shortly before the warranty was given and after the last check had been made. Claims which appeared to be so minor that they would never exceed the deductible and thus never impact on the program might suddenly deteriorate. To give a warranty of any value about losses other than those actually incurred on the program to date, would involve extensive inquiries and fine judgments to be made about reserves and the reserving policy. In each case where a claim had been made AON and LDG would have to examine the claims file and find out whether there were up-to-date medical reports and so on. In my view the fact that OP were asking for a warranty in relation to the “incurred loss position to date on the program” strengthens rather than weakens the conclusion that OP were concerned to ascertain the loss position as it impacted on Mr Smart’s book. LDG and AON could have given a warranty that there were no losses reported to them which were incurred to date on the program; the fact that they chose to respond by saying that there had been no losses advised to them to date was as effective as a warranty to that effect as OP must have recognized when deciding to proceed despite the absence of a warranty as asked. In my view the request for a warranty says nothing helpful to OP’s case; rather it works the other way.

Further, the fact that it might have been simple to have made inquiries up the line says nothing about whether there was or was not a modified market practice as suggested by Mr Howard. The fact that there was a retrospective element in the business in which OP were being asked to have an increased share, again does not support Mr Howard’s opinion. The retrospective element plainly justified the request which was made; but I do not understand why it suggested that normal market practice ceased to apply. It must be quite normal in the market for their to be some retrospectivity and the identified market practice is sufficient to accommodate this. At this time I am satisfied on the evidence that the reporting of losses up the line was reasonably quick. The delay between the Syndicate accepting a loss in the Cobb case and reporting the position to Mr Smart was unfortunate and unusual. Of itself this delay does not, I think, alter market expectation. I also do not understand how it can be argued that because the January figures had been partly derived from information held by JLT it was necessary ‘for the sake of consistency’ to return to JLT in June. Mr McCann did not know that JLT had been approached in January, and could not have had it in mind when he requested the warranty in June. The figures given in January related to historical information; the information in June was to answer a specific request from OP. The figures did not purport to be given on the same basis. It is true that Mr Smart made some admissions about this point when being cross examined by Mr Fletcher but overall, the weight of the evidence suggested that Mr Smart’s concessions were misplaced, and conflicted with other parts of his evidence. I am not entirely sure he fully understood what he was agreeing to.