Bonner v. Cox

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Bonner and others v Cox and others
English Court of Appeal (Civ Div): Waller, Tuckey and Moses LJJ.: [2005] EWCA Civ 1512: 8 December 2005
Jeffrey Gruder QC and Jessica Wells, instructed by Ince & Co., for the appellant reinsurers
Anthony Boswood QC and Robert Anderson, instructed by Clyde & Co., for the respondent underwriters
George Leggatt QC and Juliet May, instructed by CMS Cameron McKenna, for the respondent brokers
The Court of Appeal has held unanimously that, in the case of non-proportional reinsurance, the reinsured does not owe its reinsurer a duty to write business prudently, reasonably carefully or in accordance with market practice. Reinsurers are adequately protected by the pre-contract duty of disclosure, by the express terms of the reinsurance contract and by the reinsured's need to maintain a good reputation in the market

DMC Category Rating: Developed

This case note is based on an Article in the December 2005 Edition of the ‘(Re) Insurance Bulletin’, published by the Insurance and Reinsurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. . DLA is an International Contributor to this website

The Aon '77 cover
Lloyd's syndicates 535, 62, 187, 228 and Euclidian wrote risks in the energy market and jointly participated on an open cover devised and operated by Aon and known as the Energy (or Aon) '77 Cover.

This was a standing offer by subscribing Cover Underwriters to be bound to risks accepted by the leader. Declarations to the Cover provided insurance and reinsurance for risks relating to the energy industry anywhere in the world, both onshore and offshore. Such insurance was normally structured in layers on an excess basis. Each year was a new insurance venture, in that the preceding year's Cover Underwriters might or might not decide to continue or to change their level of participation.

The proportions of risk accepted by the Cover Underwriters for the 1999 year were as follows:


% share











Placing the reinsurance
In previous years, Cover Underwriters had arranged their own reinsurance on a facultative basis. For the 1999 year, however, Aon put together a reinsurance package to offer to prospective Cover Underwriters in respect of risks attaching during the period 1 December 1998 to 31 December 1999.

In October 1998, Aon was looking for suitable reinsurers and approached the underwriter employed by HIH Casualty & General, who was setting up syndicate 1688. Having seen the loss figures for 1995 through to 1998, the underwriter scratched a slip on 23 November, offering a 50% line.

Syndicate 1688, however, could not reinsure syndicate 535 as both were part of the Cotesworth Group, so Aon approached Tryg-Baltica International (UK) Ltd. On 7 December, Tryg's underwriter scratched a 50% line. But Tryg was not an acceptable security to syndicate 535. Aon, therefore, arranged for Euclidian to provide a front for Tryg in respect of the 50% line, in addition to becoming a direct underwriter on the '77 Cover with a 10% line.

It later became apparent that, just as syndicate 1688 could not reinsure 535, it could also not reinsure syndicate 228's 6.66% share. Consequently, in early January 1999, it was arranged that Euclidian would increase its reinsurance line to 56.66%. 11.75% of its retrocession was ceded to syndicate 1688 and Tryg's 100% was reduced to 88.25%. A final version of the slip showing these amendments was issued in March 1999.

In July 1999, Aon placed a quota share reinsurance for Tryg with Cox syndicate, subject to certain exclusions. Subsequently, Cox's quota share reinsurance was replaced with a direct reinsurance contract with syndicate 535, partially removing Tryg from the loop.

Disputes arose. Reinsurers claimed they were entitled to avoid the reinsurance contracts on numerous grounds, including non-disclosure by the brokers of a loss to the previous year's cover, that reinsurers had been misled as to the nature of the business being written and the duration of the cover and that the lead Cover Underwriter was "writing against" the reinsurance.

By the time of the trial, Syndicate 535 had settled its claims against Euclidian and Tryg, but continued to pursue its remaining reinsurance claim against Cox. Syndicate 228, which was reinsured by Euclidian fronting for 1688, settled with Euclidian, but pursued a claim against 1688. All the Cover Underwriters made contingent claims against Aon.

After a trial lasting some 35 days, however, Mr Justice Morison found that none of the reinsurers' defences succeeded.

Three aspects of that judgment were appealed. Syndicate 1688 appealed against the judge's conclusion that it was not entitled to avoid its reinsurance for non-disclosure relating to a claim, known as the Elk Point loss. Cox appealed against the finding that they were not entitled avoid their reinsurance of syndicate 535 for material misrepresentation. Lastly, both Cox and 1688 argued that a term should be implied into the contract relating to the duty of the reinsured in accepting declarations into the Cover, and that this duty had been breached in the case of one of the declarations.

The Court of Appeal rejected the appeals on the first two points and this note is not further concerned with them. The remainder of this note relates to the third point, perhaps the most interesting aspect of the appeal, namely, what, if any, duties, does a reinsured owe to its reinsurer when it accepts risks.

Implied Terms
It was claimed that Cover Underwriters had accepted business without believing or caring whether it would make a gross underwriting profit because they relied on the existence of the Cover reinsurance. Reinsurers argued that Cover Underwriters had breached implied terms in the reinsurance that they would not "write against" the reinsurance and that risks would be written with the ordinary skill and care of a reasonable underwriter. By the time of the trial, six declarations were alleged to have been written in breach of these duties.

The judge disagreed, but held that certain terms could be implied into the contract. One was that a policy would only be declared to the Cover if it had been the subject of an underwriting judgment made by the lead underwriter. The other was that policies accepted to the Cover would be those which the lead underwriter would write in the ordinary course of business, taking into account the reinsurance. Applying these principles to the 6 declarations, the judge concluded that there had been no breach.

On appeal, 1688 and Cox argued that, in respect of one of the declarations, the judge should have found that Cover Underwriters were in breach of the implied terms he had found to exist. Alternatively, following Phoenix v Halvanon ([1985] 2 Lloyd's Rep 599), there was an implied term that they would conduct the business "prudently, reasonably carefully and in accordance with the ordinary practice of the market".

Phoenix v Halvanon
The Phoenix case involved a facultative obligatory (fac.oblig) reinsurance of a variety of business. The reinsurance appeared to be proportional, albeit facultative.

The issues were whether the reinsured was obliged to keep a retention and whether the writing of its business was subject to implied terms. The judge took account of the fac.oblig nature of the transaction, which imposed no restriction on the reinsured's right to choose whether to cede or not, but gave the reinsurer no equivalent right to reject the risk ceded. In his view, this necessitated an implied term that the reinsured would conduct business prudently, reasonably carefully and in accordance with the ordinary practice of the market. But, he commented, reasonableness "does not preclude the plaintiffs from taking into account the added capacity to write business that the availability of the reinsurances give them".

This decision has given rise to some debate whether the implied term found by the judge applies only to proportional reinsurance or to all forms of reinsurance.

Judgment of the Court of Appeal
The Court of Appeal found that Phoenix v Halvanon had no application in non-proportional reinsurance. The judge in that case had been careful to restrict his implied term to the transaction before him. It was very unlikely he intended it to apply to other forms of reinsurance.

The fundamental difference between proportional and non-proportional reinsurance is that the former involves a sharing of risk between reinsured and reinsurer, whereas the latter does not. The parties to non-proportional reinsurance are not partners in a joint venture. Each has its own separate commercial interests, which will probably conflict. In both proportional and non-proportional reinsurance (unless it is facultative) the reinsurer does not usually exercise any underwriting judgment as to the particular risk which he reinsures. His assessment relates to the skill and judgment of the reinsured.

If, as contended, implied terms imposed duties on the reinsured, and if these applied to all types of reinsurance, the "spectre of retrospective underwriting" would haunt the market. Enormous numbers of unprofitable treaties would be subject to challenge. It was also worth remembering that such terms would apply, not just to reinsureds in relation to reinsurers, but also to reinsurers in relation to their retrocessionaires.

The touchstone for implying a term is necessity. Why would such an implied term be necessary in non-proportional reinsurance? The parties have competing interests. Each party tries to secure the best deal it can. How would either of them know what the other's interests were? Implied terms would merely introduce uncertainty. How could one determine what the ordinary course of conducting a particular type of business should be?

The fact that a reinsured does not owe the reinsurer a duty to write business reasonably and prudently does not leave the reinsurer defenceless or at the mercy of the reinsured. Pre-contract disclosure means it is entitled to a fair presentation of the risk, including the type of business the reinsured proposes to write, or has written, and the contract itself should clearly define the nature of the risks reinsured. If required, it can even give the reinsurer the right to monitor the business. A further valuable protection is provided by the market itself. If an underwriter wants to continue in the market, he needs to have - and maintain - a good reputation.

In an extreme case, if an underwriter exercised no judgment at all and accepted a risk recklessly, not caring whether it was good or bad, or deliberately took a risk knowing of a loss which would only fall on his reinsurers, or took a bribe to write the risk, a remedy might well be available. On the proper construction of the policy, such a risk would very likely not be covered at all. But this situation did not arise here so the Court of Appeal did not explore this further.

As far as this case was concerned, the reinsurance was not subject to any of the implied terms contended for. "We would reach the same conclusion in respect of any non-proportional reinsurance. We do not have to decide and we do not decide whether the same applies to proportional reinsurance" (Lord Justice Waller).

Had the Phoenix implied terms applied, the Court of Appeal would have agreed with the judge's finding that there had been no breach.

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