This dispute over reinsurance brokerage has visited both sides of the Atlantic. In May 2005 the Court of Appeal in England in Carvill America Inc v Camperdown UK Ltd & others (2005) considered at an interlocutory stage the position regarding brokerage where a reinsurance contract is terminated. In May 2007 the Connecticut Superior Court considered the same issue at trial.
XL Speciality Insurance Company ("XL") appointed Carvill America Inc ("Carvill") to act as its reinsurance broker. XL paid gross premium to Carvill, who in turn passed on net premium to reinsurers after deducting brokerage. Reinsurers had agreed to remunerate Carvill "as is customary in the industry".
XL terminated Carvill’s appointment mid-way through the period of cover following a dispute which arose between the parties. XL subsequently appointed Benfield in place of Carvill to whom it paid the remaining gross premium. Benfield passed on to reinsurers the net premium having withheld, upon XL’s instructions, the portion of premium that would otherwise have been paid to Carvill by way of brokerage.
An issue arose as to when the brokerage was earned, ie, whether it was on the placement of a reinsurance contract or only when the premium in question becomes due and payable or is paid. Carvill issued proceedings in England against reinsurers and XL in respect of the European brokerage and separately it sought payment from XL in the US in respect of the American brokerage.
In the English proceedings, Carvill argued that it was customary in the London and European market for reinsurers to be liable to pay the brokerage. Alternatively, as against XL, Carvill argued that there was an express or implied term in its retainer that rendered XL liable to pay the gross premium either to reinsurers or to Carvill. XL applied to have Carvill’s claim set aside. The Court of Appeal dismissed the application on the ground that it was arguable that such an implied term existed in the retainer between XL and Carvill. In so doing, the Court of Appeal did not comment on the Commercial Court’s reluctance to find that there was a custom in the London reinsurance market that places the responsibility to pay brokerage on reinsurers. The claim subsequently settled before trial.
In the US proceedings, Carvill sought payment of the brokerage being withheld by XL in respect of reinsurance contracts placed before termination of Carvill’s appointment.
The Connecticut Superior Court held that in the US reinsurance market brokerage is earned on the inception of a reinsurance contract and that the obligation to pay such brokerage falls upon the reinsurers, irrespective of whether the retainer between the broker and the reinsured is terminated. Carvill was therefore awarded damages in the sum of USD$5 million in respect of the outstanding brokerage and interest, on the basis that XL did not forward the full amount of the premium to reinsurers through its new broker Benfield.
Historically there has been a discernable lack of case law in relation to reinsurance brokerage, and a degree of uncertainty over what the reinsurance market practice is as regards the obligation to pay brokerage.
Whilst the position on this side of the Atlantic remains open for discussion, the US Court in Connecticut has confirmed that it is the obligation of reinsurers to pay brokerage (in its entirety as identified on the slip) and that this obligation will continue notwithstanding termination of the reinsurance broker’s appointment as broker of record for an insurance company.