One of the most important duty of a reinsurance broker, if not the most crucial one is to select reinsurers in good financial health, which have to be solvent over the long term, so that the latter may be able to meet with their obligations, especially as for payment of claims.
Referring to some common law precedents upon which reinsurance practice and customs have been largely influenced, it is commonly agreed that a broker could be held guilty of negligence in recommending his client ( i.e his principal) to (re)insure with a company known to be facing some financial troubles at the time of the placement.
In such a case, the client could be entitled to recover premiums paid, claim(s) normally due, and other related costs, on the basis that the breach of duty from the broker have “foreseeable consequences on his client” (Osman v. J Ralph Moss Ltd (1970) Lloyd’s Re.313)
In addition, a broker has the continuing duty of care to maintain his client informed of any information which indicates that the (re)insurer may not remain financially in good health (Australian case of Lewis v. Tressider Andrews Associates (1987))
One of the specificity of the reinsurance brokerage comparing to insurance brokerage is that the legal relationship is between two “specialists” i.e the ceding company and the reinsurance broker, which are operating in the same field. As such, the obligations/liabilities of the reinsurance broker could be to some extent be moderated in certain situations.
I: Reinsurance broker’s duties when placing upon instructions of the ceding company:
In case, a reinsurance program (facultative and/or treaty) is placed with specific reinsurers upon instructions of the ceding company, it would appears “logic” to think that a reinsurance broker may not be held liable for any later insolvencies, as acting upon instructions of its client.
Nevertheless, reinsurance broker’s skills and expertise is to be considered beyond the fact of only giving advice and complying with his client’s instructions. As such, “he must make use of his knowledge of the market and use appropriate skills” (“Zephyr” (1984) 1 Lloyd’s Rep. 58, Hob-house)
Indeed, the broker may be aware of some market facts which are not available to his client, such as that reinsurers become unwilling to pay claims and/or is delaying them without any specific reasonable reasons.
II: Duty of the ceding company to asses carefully “appropriateness” of reinsurers:
There is an assumption for the ceding company to assume that the reinsurance broker would only effect placement with solvent/reliable reinsurers, and in the same time, the reinsurance broker can assume that a ceding company will be sufficiently competent to asses as to the “appropriateness” of that reinsurers in regard of its particular needs ( Berriman v. Rose Thomson Young Underwriting° Ltd ( 1996) I.R.L.R. 426)
Moreover, and in case the reinsurance broker points out to the ceding company any doubt about the financial health of a reinsurer, at this moment, the ceding company would have to asses carefully as to the real capacity of the reinsurer, and the amount of business he intends to cede to the said reinsurer.
It goes without saying that upon renewal the reinsurance broker must reassess the financial health of each reinsurer, particularly when it has been initially selected by the ceding company.
In addition, and in the event of a reinsurer known to be clearly in a bad financial health, so that this situation cannot be ignored by the ceding company (at condition for the ceding company to be aware of the identity of the reinsurer, at the time of the placement), it would therefore appears that the reinsurance broker cannot be held liable for the selection of the said reinsurer.
III: Facts allowing the reinsurance broker to minimize his liability:
1. In case the reinsurance broker can proves that he had properly, and in reasonable diligence effected all the necessary and possible researches, and as a result, it was concluded that there was no grounds whatsoever to believe that reinsurers would be insolvent in a near future, and not able to pay claims, then the broker cannot be held liable to the ceding company.
2. The reinsurance broker could establish proofs that the business of the ceding company are not sufficiently of quality to place same with reinsurers of a higher standard, and could have been only accepted by reinsurers of a lower quality.
Nevertheless, it still that the reinsurance broker would be liable in case he failed to inform the ceding company about the “low quality” of reinsurers. Same leading for the ceding company to miss a potential opportunity to place with “more secure” reinsurers, or not to place the account at all, allowing him to save the amount of premium.
3. The reinsurance broker may argue as well that had the reinsurance been placed with a “higher standard reinsurer”, it would have been very though to recover claims. Nevertheless, and with the assumption that obligations between contracting parties are intended to be fulfilled, courts will sometime reduce the damages payable by the reinsurance broker to the ceding company, to be equal to the additional premium that would have been payable by the ceding company with a better quality reinsurer.
The reinsurance broker has to use his knowledge of the market and use his appropriate skills, to advise in a diligent way his client about the potential and/or actual bad financial health of a reinsurer, even if acting upon the instructions of the latter.
Moreover, and since the ceding company is a specialist operating in the same field than the reinsurance broker, they have the duty to asses carefully “appropriateness” of reinsurers, especially when a specific financial situation of the said reinsurer has been pointed out by the reinsurance broker.
Last, and in case all possible researches had been duly effected by the reinsurance broker about the financial situation of a reinsurer, and that quality of risks ceded by the ceding company do not permit the reinsurance broker to place with high standards reinsurers, therefore the liability of the latter could in certain cases minimized.