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The Wrong Market: The insurance broker’s duty to protect its client from the risk of unnecessary litigation

  • United Kingdom
  • Insurance and reinsurance
  • Litigation and dispute management

31-03-2021

 

In the recent Commercial Court case of ABN Amro Bank N.V. v Royal & Sun Alliance Insurance plc & Ors [2021] EWHC 442 (Comm), the Court held that the Bank’s insurers were liable for the Bank’s losses, even in circumstances where credit risk cover was unprecedented in the marine cargo market. The Court also held that the broker had negligently exposed it to the unnecessary risk of litigation in the way it conducted the placement.  The Judgment considered various matters relevant to the broke, including whether brokers owe a “duty to nanny” underwriters, misrepresentations made by the broker during the course of the broke, underwriter inducement, estoppel by convention and the appropriate counterfactual analysis under the loss of a chance principle. 

We set out our comments on the case below.

Summary of background & the 2016 broke

The Claimant (ABN Amro Bank NV) (“the Bank”) provided structured commodities finance in the form of repo transactions to two cocoa traders. However, in 2016, both cocoa traders became insolvent and defaulted on their obligations to the Bank. The Bank was left with a significant shortfall and claimed an indemnity from insurers in the sum of £33.5 million under its marine cargo insurance policy (“the Policy”).  

The claim was made on the basis that the Policy included a bespoke clause (“the Transaction Premium Clause”) (“TPC”), which had been drafted by the Bank's solicitors. The TPC expanded the scope of the marine cargo cover to effectively include credit risk cover.  This cover was unprecedented in the marine cargo insurance market, but had been inserted in the Policy at the Bank’s instruction. The Policy also included a Non-Avoidance Clause (“NAC”), which prevented avoidance of the Policy for non-disclosure, except for fraudulent non-disclosures or fraudulent misrepresentations.

The Policy was placed by the Bank’s insurance broker in the Lloyd’s of London marine cargo market and was underwritten by fourteen subscribing underwriters, who were Defendants in the case.  

In 2015, the broker was instructed by the Bank to obtain an endorsement (to include the TPC) for the 2015/2016 policy year, which was agreed only by RSA as the lead underwriter. At renewal, neither the TPC nor the NAC were specifically brought to the following market’s attention. Critically, all underwriters did however scratch a slip containing the TPC and NAC.

In addition, the evidence before the Court showed that the broker misrepresented the risk to three of the thirteen following underwriters (Navigators, Ark and Advent) by stating that the renewal was “as before” or “as expiry”, without drawing specific attention to the TPC or NAC.

No “Duty to Nanny” Underwriters

Whilst much of the dispute centred around the construction of the TPC, the Court ultimately held that the TPC had been incorporated into the Policy and effectively introduced responsive credit risk cover. Of more interest, however, was the Court’s dismissal of the arguments run by underwriters, who sought to rely on the fact that the clauses had not specifically been drawn to their attention by the broker in order to mount non-disclosure defences, despite having scratched the slip containing the terms.

The attempts by underwriters to characterise this as a failure of the broker to disclose the purpose of the clause, or a failure to disclose the subjective intention of the broker or the Bank were rejected.  The Court held that there was no duty on the broker to highlight and explain to underwriters the Bank's subjective understanding or intention about the terms of the Policy. 

It was noted in the judgment that it was difficult to see how the underwriters could properly allege that the TPC was not disclosed to them. It was, after all, there in the Policy to which they subscribed. As a result, the Bank’s claim against the majority of underwriters succeeded.

Misrepresentation and Estoppel by Convention

As noted above, there was a further element to the broke which prevented the Bank from succeeding against all underwriters.  It was held that the broker had misrepresented the position to three following underwriters at renewal.

The Court was then required to answer the counterfactual question of “what would the underwriter have done had the position not been misrepresented”. In order to establish inducement, underwriters to whom the "as expiry" representation was made would have to prove that they would otherwise have noticed the TPC and NAC and would therefore have refused to renew the risk with those clauses.

Interestingly, based on the evidence before the Court, Navigators were unable to prove that the misrepresentation induced their underwriter to write the risk, in circumstances where his evidence indicated that he had read through the Policy which contained the TPC, as he was required to do so in accordance with Navigator’s underwriting guidelines. This precluded Navigators from proving inducement.

The evidence before the Court in relation to the two other underwriters, Ark and Advent, was that those underwriters would, in the counterfactual world, have noticed the TPC and NAC, or had them drawn to their attention and would therefore have refused to renew the risk with those clauses.

Given the manner in which the underwriters pleaded their Defence, this resulted in Ark and Advent mounting an effective estoppel by convention defence, which deemed it unjust to allow the Bank to rely upon the TPC and NAC contained in the Policy.  

The Court went on to consider the broker’s liability for exposing the Bank to the unnecessary risk of litigation and failing to obtain cover which indisputably met the Bank’s requirements.

Broker’s Duty to Avoid an Unnecessary Risk of Litigation

It is well established that insurance brokers owe a duty of reasonable skill and care to their clients to obtain cover which meets their clients’ requirements, which includes a duty not to expose their clients to an unnecessary risk of litigation by failing to obtain cover which clearly and indisputably meets those requirements.  The Court concluded that the broker had breached those duties and held that the broker was liable for the recovery that the Bank would, but for the estoppel, have made against Ark and Advent.

The Bank also claimed that the broker was liable for the costs it had incurred in pursuing its claim against the underwriters, as the broker had exposed the Bank to an unnecessary risk of litigation.

As the Bank succeeded against the majority of the underwriters, the residual claim against the broker was for:

  • the costs incurred by the Bank in respect of its claim against Ark and Advent, which failed due to the broker’s misrepresentation; and
  • for any irrecoverable costs in relation to the Bank’s successful claim against the other underwriters.

The broker sought to defend itself by stating that the Bank had relied on its solicitor in drafting the TPC and that it was not responsible for insurers rejecting the bank’s claim without valid grounds.

The Court rejected the broker’s argument and held that:

1)    A reasonably competent broker would have advised the Bank from the outset that the credit risk market (not the marine cargo market) was the appropriate market in which to place the cover the Bank was seeking. Such advice would have enabled the Bank to take an informed decision as to how to proceed;

2)    Having gone to the “wrong” market, it became important for the broker to explain to the underwriters what the TPC clause was intended to address;

3)    Any reasonably competent broker would have explained the purposes and of the TPC and its intended effect to underwriters; and

4)    As a matter of general principle, brokers do not owe a “duty to nanny” to underwriters to explain unusual clauses. However, brokers do have a duty to protect their own clients, including against the risk of unnecessary litigation, and there may be circumstances, as in this case, in which brokers are required to give information to underwriters in order to protect their clients against the risk future litigation arising from a misunderstanding.

Causation: Loss of a Chance

Having determined that the broker was in breach of its duties to the bank, the Court then had to consider the issue of  causation.  The Court  followed the established two stage test for causation in such circumstances, which was to ask:

1)    On the balance of probabilities, what would the Bank have done if the broker had not been in breach of duty?; and

2)    Was there a real and substantial chance that credit risk insurers acting in the market at that time would have agreed to provide cover which would have responded to the Bank’s losses?

Under the first test, and having considered factual witness evidence from the Bank, the Court concluded that had the Bank been appropriately advised to approach the credit risk market by the broker, it would have done so and would have sought credit insurance equivalent to the cover it thought it was getting under the TPC. Alternatively, it would not have entered the repo transactions which caused the Bank’s losses.

In terms of the second test, the Court was of the view that there was a real and substantial chance that credit insurers would have agreed to write the insurance which would have provided protection against the Bank’s losses. This was on the basis that there were no capacity constraints at the time and underwriters were looking for good business to write within a soft market. 

Quantification of the Chance – No Discount

The Court, having considered expert evidence,  found that although some cover was provided on the basis of a 50% retention within the market, the evidence indicated that most policies issued in the credit risk market at the time provided a 90% indemnity and accordingly held that the Bank's claim against the broker succeeded and awarded damages of 90% of the Bank's losses (in respect of the losses not covered by Ark and advent), less the premium that would have been paid for the hypothetical credit risk insurance.

In reaching this conclusion, the Court held that it was not appropriate to make any discount from the amounts claimed by the Bank to reflect the possibility that underwriters could have imposed more restrictive terms.  The Court considered that the Bank's chance in this case did not simply depend upon the chance of obtaining an insurance policy with satisfactory terms. That was because if special terms were imposed, in particular terms which had the effect of excluding certain transactions from cover, the Bank would still have been able to protect itself and unwound uncovered transactions or declined to enter into new transactions which would not be covered.

Comment

The judgment emphasises the high standards to which brokers may be held to by the Courts and reinforces the fact that brokers should be clear about the nature of cover that their client is seeking, even in circumstances where it is following the client’s instructions and the coverage clauses have been drafted by specialist Lawyers.

At first blush this appeared a harsh result, especially since the clause as drafted did what it was required to do and, as the Court confirmed, the broker owed no duty to “nanny” underwriters through the risk presentation.  On the other side of the coin, however, the broker failed to fulfil its role as the insurance market expert by failing to advise that the marine cargo market was not the appropriate market to seek credit insurance cover from and that an unnecessary dispute could result by failing to provide clarity to underwriters during the course of the broke that this was the purpose of the TPC. 

As explained above, whilst a broker’s duties will not always extend to explaining unusual clauses to underwriters, it was incumbent on the broker to obtain sufficient clarity during the broke to protect its client against the risk of future litigation arising from a misunderstanding or disagreement regarding the cover sought under the policy amendments.  

This case thus emphasises the importance of clear communication between the client, the broker and underwriters in the placement process, at least in relation to features of cover which do not necessarily speak for themselves.  As evidenced above, a negotiation strategy of seeking to slip additional cover in unnoticed, or worst still, misrepresenting the position, creates more risk than benefit for the client.