On 12 July 2007, the Court of Appeal handed down its much anticipated judgment ([2007] EWCA Civ 0710) on whether JLT Risk Solutions Limited (JLT) owed HIH Casualty & General Insurance Limited (HIH) a duty of care post-placement. JLT had placed insurance with HIH and ‘back-to back’ reinsurance cover on HIH’s behalf. HIH sought to recover damages from JLT on the basis of losses suffered as a result of a breach by JLT of an alleged post-placement duty to alert HIH to potential coverage problems relating to the reinsurance that it had placed.

The facts in HIH v JLT can be summarised as follows. In 1997, JLT placed three film finance insurance policies with HIH and arranged back-to-back reinsurance cover with various reinsurers. The purpose of the film finance policies was to meet any shortfall in projected revenue from the making and marketing of a specified number of films (known as a slate of films) covered by each of the policies. Fewer films were produced than originally intended and the returns fell substantially short of the projected revenues. Consequently, between August 1999 and June 2000, HIH made payments under each of the policies to the insured totalling just over $55m.

Thereafter, it sought, unsuccessfully, to recover those payments from some of its reinsurers. (See HIH v New Hampshire Insurance Co & Ors [2001] 1 Lloyd’s Reports 378 and [2001] 2 Lloyd’s Reports 161 in which Steel J, and subsequently the Court of Appeal, found that the reduction in the number of films being produced was a breach of warranty entitling reinsurers to a complete defence to HIH’s claim.) HIH therefore turned its attention to its reinsurance broker, JLT.

The first instance decision

At first instance, Langley J found that:

  • JLT owed HIH, as the reinsured, a continuing postplacement duty, specific to this case, to alert it to any potential coverage issues that could arise from the making of fewer films than specified at placement. Although JLT had circulated various risk management reports in late 1998 and early 1999 stating that fewer films than the projected number in each slate were being produced, Langley J considered that it was not enough for JLT to ‘act as a mere postbox’ by simply circulating copies of the reports;
  • JLT was in breach of that duty;
  • JLT’s breach had not caused HIH loss. Although Langley J found that HIH, had it been alerted by JLT to the potential coverage issues raised by the film reductions, would have instructed JLT to seek the views of reinsurers, that would not have made any difference to reinsurers’ later rejection of liability to indemnify in respect of the insured’s claims; and if, contrary to his view, the breach had caused HIH loss, HIH would have been contributorily negligent to the tune of 70 per cent: 20 per cent due to its failure to appreciate the risk to coverage on learning of the film reductions and 50 per cent in paying claims without first obtaining reinsurers’ agreement to indemnify it in respect of them.

Appeal

HIH appealed the judge’s findings on causation and the contingent finding on contributory negligence and JLT challenged the findings as to the existence of the postplacement duty, JLT’s breach of that duty and the extent of HIH’s contributory negligence.

The Court of Appeal upheld Langley J’s decision in full, save that two out of the three judges suggested that, had they been required to decide the issue, they would have found HIH to be 100 per cent contributorily negligent.

The post-placement duty

The issue that caused most controversy and consternation among brokers had been Langley J’s finding that JLT owed HIH a post-placement duty to alert HIH to the potential coverage issues arising out of the reports.

It is well established that a reinsurance broker’s duties to its client do not come to an end once the cover has been placed and the risk has incepted. For example, market practice dictates that brokers in the Lloyd’s market will collect claims from reinsurers when called upon to do so and will retain all documentation necessary for the presentation of claims for so long as a reasonable broker would regard a claim as possible (Johnson v Leslie Godwin [1995] LRLR 472). Brokers are also under a duty to exercise reasonable skill and care in presenting claims to reinsurers, including notifying reinsurers in the appropriate manner (Alexander Forbes Europe Ltd v SBJ Ltd [2002] All ER (D) 349).

Furthermore, in Youell & Ors v Bland Welch & Co Ltd & (No 2) [1990] 2 Lloyd’s Rep 431 (a case relied on by the Court of Appeal in the present case), it was held that the brokers were in breach of duty, not only for failing to inform the insurers of a gap in cover between the insurance and the reinsurance policies when placing their reinsurance, but also in failing to inform them of the gap after placement and to take steps to obtain from reinsurers an extension of it.

Langley J held that JLT’s role was more than that of a ‘mere postbox’. If the reports contained information that was ‘a matter of at least potential concern on coverage issues’ JLT had a duty to alert HIH to such issues. Langley J did, however, say that the duty was ‘specific to this case’ and was ‘a duty to exercise care and not absolute in its terms’. The Court of Appeal had no difficulty in upholding Langley J’s finding that there was a postplacement duty owed by JLT to HIH involving more than acting as a ‘mere postbox’.

Comment

The Court of Appeal’s decision should give brokers considerable food for thought. Whether this duty is specific to this case, as Langley J had suggested, must be open to some doubt. Auld LJ, who gave the leading judgment (with which May LJ concurred), commented that: ‘[w]here a broker has been at the centre of devising and structuring a risky scheme of that sort for insurers and reinsurers, as JLT was, it is plainly a strong candidate for post-placement monitoring obligations of the sort alleged here’.

Longmore LJ appears to have taken an even broader view that suggests that this post-placement duty should not be confined to particularly risky or complex arrangements:

‘…an insurance broker who, after placing the risk, becomes aware of information which has a material and potentially deleterious effect on the insurance cover which he has placed is under an obligation to act in his client’s best interest by drawing it to the attention of his client and obtain his instructions in relation to it’.

Longmore LJ was also of the view that Langley J had been right to reject JLT’s argument that its only duty regarding post-placement information was to act as a postbox: “… as between a lay client unversed in insurance matters and his insurance broker, I would think that the existence of such a duty should be comparatively uncontroversial’.

In the light of these comments, brokers would be ill advised to assume that an equivalent post placement duty will only arise in circumstances similar to those in HIH v JLT. One way that a broker could try to protect itself would be to seek to exclude or limit such a duty in its contract with its client.