Facts
The underlying cover, placed at Lloyd’s, insured a group of US companies involved in the maritime industry against liability to employees for bodily injury and death. Aon, acting on behalf of Lloyd’s underwriters, placed reinsurance with LDG Worldwide Ltd, underwriting agents for Groupama (and to whom Groupama had given underwriting authority). LDG, in turn, used Aon as their own brokers in placing the quota share retrocession cover with Overseas Partners.

The underlying cover was subject to various deductibles, both in the aggregate and per loss. The reinsurance was on a facultative basis, with LDG’s underwriter assessing each risk individually as it was proposed to him. Consequently, although 100% of reinsured risks were passed on to Groupama, this was not a fronting arrangement, but nor was it reinsurance on an excess of loss basis.

By the time Aon approached Overseas Partners about the retrocession, LDG had written three risks and it was proposed that these be included as the first three declarations. During the negotiations, Aon provided Overseas Partners with figures for gross written premium and incurred claims. The broker at Aon obtained the claims information from an ex-colleague who worked at Jardine Lloyd Thompson (‘JLT’), the brokers who had placed the underlying risk at Lloyd’s. This, he explained, was because Aon’s claims department was still "a bit of a black hole" following recent mergers, and it had seemed the quickest way to get the information.

Overseas Partners accepted a 50% quota share in February 1998. Not long afterwards, however, LDG’s underwriter wanted to reduce Groupama’s participation. A proposal was made to Overseas Partners that their share should be increased to 75%, leaving Groupama with 25% of the risk.

Overseas Partners responded by fax, stating, "this is to confirm our increased participation from 50% to 75% on the LDG Marine personal accident program… subject to satisfactory warranties as to no losses incurred on the program to date".

LGD passed this fax to Aon to deal with. This time, Aon made enquiries from its own claims department, who reported that there had been no losses to date that impacted on LDG's book. The broker's response to Overseas Partners stated, "I am pleased to confirm that LDG have noted the contents [of Overseas’ Partners’ fax] and we can confirm that there have been no losses advised to date that would affect any of the declarations ceded hereunder". On receipt of this information, Overseas Partners returned the signed slip.

It was true that neither LDG nor Aon had been advised of any losses that would impact on the reinsurance. But by the time this response was sent, four potential losses had been reported by the underlying insured to insurers via the brokers, JLT. Taking into account deductibles under the original policy, only one of these was anticipated to hit the insurance cover and (since 100% of the risk was being passed on) the reinsurance cover. This claim, net of the deductible was reserved at US$28,000. By the date Overseas Partners signed the slip, a further two potential claims had been made, although neither of these looked likely to impact on the reinsurance.

Overseas Partners sought to avoid the retrocession contract, arguing that there had been a material misrepresentation or non-disclosure regarding these claims. Although they accepted it was not normal practice for a reinsurance broker to seek claims information up the line (namely, as between original insured and original insurer), they claimed that their request for a warranty invested the information with particular importance and extended Aon’s duty to investigate. On this basis, the Aon broker should, therefore, have made enquiries of JLT, as he had before. Had he done so, JLT would have been able to tell him all about these potential claims. Aon should then have disclosed, not only potential losses that burned through deductibles (and were, therefore, anticipated to hit the reinsurance), but also any potential claims that ate into an aggregate deductible, since these affected the declarations.

Judgment
Mr Justice Morison disagreed. Overseas Partners’ request concerned "losses incurred on the program to date". This could only mean losses incurred on the book of business written by LDG for Groupama. A loss in this context was incurred if it had been reported to LDG and impacted that book. A loss was not incurred if a claim had been made which had not yet resulted in a loss. It followed that a loss for which a reserve below the deductible had been set would not be reported to LDG and had, therefore, not been incurred on the program. The words used in the response ("losses advised that would affect any of the declarations") could only refer to the program written by LDG, and, in context, the difference between the phrases "losses incurred" in the request and " losses advised" in the response was not significant.

This analysis of the ordinary meaning of the words used was supported by expert evidence. Market practice would not normally expect a claim falling within policy deductibles to be reported as a loss to a reinsurance treaty. In general, a request from a reinsurer to a reinsured for "incurred losses" would not be interpreted to include IBNR (incurred but not reported) losses.

Nor was the judge convinced by the argument that the request for a warranty displaced normal market practice and widened the broker’s duty to make enquiries. It was obvious that AON/LDG could not be expected to give a warranty about losses other than those actually incurred on the program. That would be asking them to get involved in extensive enquiries and make difficult judgments about reserves and the reserving policy. Problems would arise, for instance, if a claim came in just after the last check had been made, or a minor claim with a small reserve suddenly become much more significant.

In this case, five of the six underlying claims were not incurred losses. But what of the single claim that impacted on the reinsurance by US$28,000? The judge took the view that a claim of this size was not significant in the context of the programme as a whole and so was not material. There was no evidence to suggest the non-disclosure induced the contract or that the information, if disclosed, would have had any effect on Overseas Partners’ decision to accept an increased share. Overseas Partners’ defences against Groupama’s claim for payment under the retrocession, therefore, failed.

Comment
Had there been a material non-disclosure, a question would have arisen whether Overseas Partners were entitled to avoid the retrocession contract as a whole, or only in respect of the 25% increase. Following the Court of Appeal’s decision in K/S Merc-Skandia XXXII v Certain Lloyd’s Underwriters & others [2001] Lloyd’s Rep 563, the judge would have been bound to find that avoidance only related to the variation of the original contract, namely the 25%.