HIH v. JLT
Julian Flaux QC and Simon Picken QC (instructed by Holman Fenwick & Willan) for the Appellant, HIH
Tom Weitzman QC, Jonathan Davies-Jones and Adam Kramer (instructed by Eversheds) for the Respondent, JLT
INSURANCE AND REINSURANCE: BACK-TO-BACK POLICIES: BROKERS’ DUTIES TO INSURED AND REINSURED: POST-PLACEMENT DUTY TO INFORM REINSURED OF POTENTIAL COVERAGE ISSUES UNDER ORIGINAL POLICY: CAUSATION OF LOSS
Brokers ("JLT") who acted for both insured and reinsured ("HIH") owed a continuing post-placement duty to alert the reinsured to any potential coverage issues arising out of possible breaches of warranty in the original policy. In the context of film finance insurance, JLT owed a duty to inform HIH that not as many films had been or would be made as first contemplated, which constituted a breach of warranty.
JLT had acted in breach of that duty but had not caused HIH any loss because such information would not have made any difference to the reinsurers’ decision not to pay HIH in respect of their liability to the original insured.
DMC Category Rating: Confirmed
This case note is based on an Article in the July 2007 Edition of the ‘Re(insurance) Bulletin’, published by the Insurance & Reinsurance team at the international firm of lawyers,DLA Piper. DLA Piper is an International Contributor to this website.
The finance was provided for three slates of films, H1, H2 and H3, which were intended to comprise six, ten and five films respectively. There were slip policies in respect of each slate and each slip contained a waiver of rights clause by which HIH agreed "to the fullest extent possible under applicable law" not to seek to avoid or rescind the insurance or reject any claim under it. The intention was that the insurance be as close as possible to being a guarantee.
In addition, HIH entered into side agreements with Flashpoint Ltd, the company responsible for arranging the financing and marketing of the slates of films, to be its risk manager, responsible for procuring the production of the films within budget and to schedule, to exploit the films commercially and to provide status reports on the films and the revenues produced.
As a result of the shortfall in revenues, HIH paid out a total of US$54m in 1999 and 2000 in respect of the three insurances. HIH sought recovery from its reinsurers but New Hampshire and others did not pay up, relying on a breach of warranty as to the number of films produced. The court found that there had been such a breach and that the waiver of rights clause referred to above was not sufficient to protect HIH. Consequently, HIH found itself having paid out US$54m to its original insured but without the vast majority of cover from its reinsurers.
The Claim Against the Brokers
The First Instance Court’s Decision
The duty required the brokers to do more than just act as a "post-box" passing information received from Flashpoint on to HIH without further comment. The fact that, in this as in many other situations, the brokers owed duties to both insured and reinsured and those duties might come into conflict did not relieve the brokers from fulfilling their duty towards HIH.
While pointing out that there was not much evidence on the topic and indicating that it was decided by a "fine margin", the Court of Appeal found that JLT had breached its duty because it failed to draw HIH’s specific attention to the film reductions referred to in the update reports. JLT escaped liability to HIH, however, because the Court of Appeal found that JLT’s breach of duty had not caused any loss to HIH. The Court of Appeal held that the true cause of HIH’s loss was that it paid the original insured’s claims when it had no legal liability to do so. In the case of the H1 slate of films, it made the payments when it had not sought the views of the reinsurers on their validity. In the case of H2 and H3, HIH made the payments even when it knew that the reinsurers disputed the validity of the claims. The applicability of that cause was not affected by the breach of duty by the brokers.
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