ERC Frankona Re v. ANI
In this case, the judge found that a person's previous criminal conviction and a criminal charge were known or ought to have been known to the reinsured and should have been disclosed to reinsurers. What is particularly interesting, however, is that the person concerned was not someone employed by the reinsured, but the chief operating officer of the company that managed the pool in which the reinsured was taking part.
DMC Category Rating: Confirmed
This case note is based on an Article in the October 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 Piper is an International Contributor to this website.
The NAIG pool was set up at the end of 1996 to write personal accident business. An Underwriting Agreement gave NAIU, as manager, extensive responsibilities. Management, supervision and direction of the business was under its sole control and it had had authority for (amongst other things) underwriting, collecting premiums, settlements, contesting claims and obtaining reinsurance for the common account of the participants.
Papers provided to Frankona during the presentation of the risk included a document about NAIG, which said that NAIU would undertake any approval and licensing requirements necessary: "Irv Drobny, President and Chief Operating Officer [of NAIU], was for many years a key regulator in the Illinois Department and his network of relationships are invaluable in such activities".
In February 1997, Frankona signed a slip subscribing to a 45% quota share of Philadelphia’s one-third participation in the Pool. The agreement ran from 1 January to 31 December 1997.
The following year, the two other participants in the NAIG programme decided not to take part. Philadelphia Life, however, agreed to underwrite the whole programme. A new underwriting agreement gave NAIU much the same authority and duties as the previous year. Bradstock was again involved in placing Philadelphia Life’s reinsurance, and Frankona signed up to a 32.5% quota share in January.
In April 1998, the key individual at Philadelphia Life, Mr Schouweiler, left the company to join Anico. Philadelphia Life no longer wanted to continue to write the NAIG programme, and it was agreed that, with effect from the beginning of 1998, Anico would take over Philadelphia Life's interest in NAIG by providing Philadelphia Life with full reinsurance cover. Anico and NAIU signed an underwriting agreement reflecting the new arrangement.
Anico was to be reinsured as to 90% of the risk. A new broker, Kininmonth, took over the placing of the reinsurance from Bradstock. On 23 September 1998, Frankona agreed to write a 45% line, although in the end this was written down to 35%. The previous 1998 quota share was cancelled as at 1 January 1998.
The increased line
This gave rise to some doubt about the date on which Frankona was bound and the effect of the note "TBE". The judge held that the initials, on their own, merely suggested that the underwriter did not have his records readily available to mark up his entry. They did not indicate he was withholding commitment to the risk. Frankona was, therefore bound as from 30 April.
The conviction and the charge
Biographical information provided to NAIU's regulators, the Department of Insurance of the State of Texas, described Mr Drobny as "inactive for health reasons" between 1983 and 1988, but, in 1999, as word of his background was beginning to circulate, the regulators obtained a corrected version. NAIU was fined, but its licence was not revoked. In addition, in 1998, Mr Drobny disclosed the conviction to the Department of Insurance of Illinois and obtained their consent to his continued employment by NAIU.
The information, however, was not disclosed to Frankona, either in 1998 or 1999. This was not disputed. The issue was whether, at the relevant time, Anico knew (or ought in the ordinary course of business to have known) of these matters. Frankona also alleged that, even if Anico did not have the requisite knowledge, NAIU, as Anico's agent, had a duty to disclose them.
As with any allegation of a breach of the duty of utmost good faith, Frankona also had to show that the non-disclosure was material to the reinsurance and that it had induced the underwriter to enter the contract on the terms he did.
On the facts, however, the judge found that Mr Schouweiler had known about Mr Drobny's background. Even if he had not had actual knowledge of the conviction and the charge (which, the judge found, he did) he ought to have been aware of them in the ordinary course of business. Consequently, Anico knew about these matters and should have disclosed them to Frankona.
The same did not apply to NAIU. Although, by September 1998, NAIU knew of Mr Drobny's background, it did not follow that it had any duty to disclose this information to Frankona.
There are three situations where there is a duty to disclose matters known to the insured’s agent (Simner v New India Assurance Co Ltd  1 Lloyd's Rep 240):
In the case of an agent to insure, the agent is required to disclose, not only material circumstances the insured is bound to disclose, but also material circumstances known to the agent. He will be deemed to know every circumstance which, in the ordinary course of business ought to be known by, or to have been communicated to, him (section 19(1) of the Marine Insurance Act).
In this instance, Kininmonth were Anico's agents to insure. Should Kininmonth in the ordinary course of business have known about Mr Drobny's background because, in the ordinary course of business, NAIU should have told them about it?
The judge thought not. Although NAIU had authority to negotiate and secure reinsurance, the judge found it had not exercised that authority. NAIU supplied the US brokers with information about the business written by the pool, which was duly passed on to Kininmonth, but it did not assume a role of passing on information about the officers of NAIU.
But was it Anico's "agent to know"? Frankona argued that, because NAIU ran the NAIG programme, it was Anico's agent to know about that part of Anico's underwriting, so whatever NAIU knew about it was to be disclosed - including Mr Drobny's background. The judge did not accept this argument. There was no basis for suggesting that Anico, by appointing NAIU as its agent, was relying on NAIU for information, not only about the programme and the business written under it, but also about NAIU's officers and employees.
Materiality and inducement
Except for the fact of the conviction, the same considerations applied to the charge of conversion. The allegation was undeniably serious. Even though no conviction resulted, a prudent underwriter assessing the quota share would have wanted to take it into account.
The judge was also satisfied that the non-disclosure induced Frankona to participate in and increase their line. The underwriter's evidence was that Frankona would not engage in business with a company whose key functions were controlled by someone with a conviction for dishonesty. Not only would there be an increased danger that funds might be misapplied, but there would be serious doubts about whether Frankona could rely on the representations, underwriting and other decisions of such a person. In any event, had he known of Mr Drobny's past, the underwriter would not have had authority to write the risk and would have had to refer it to his superior, who would have rejected it.
Although Anico criticised Frankona's underwriting standards and the underwriter's failure to keep proper records, this did not, in the judge's view, undermine his evidence about the effect disclosure of Mr Drobny's background would have had on Frankona's underwriting decision. Frankona was, therefore, entitled to avoid the reinsurance contract for non-disclosure.
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