This case1 illustrates some of the difficulties encountered in interpreting inter-broker agreements for the run-off administration of existing risks.
According to the evidence cited by broker Miles Smith Broking Limited (MSB), MSB is being pursued for substantial unpaid premiums by the reinsurer on a 2001 excess of loss treaty which MSB placed. Some time after placing the treaty, MSB had entered into a broking “run-off” agreement with another broker, Square Mile Partnership Limited (SMP), which later collected the premium from the reinsured, but failed to pass it on to the reinsurer. It is not clear what became of the premium and SMP has since been dissolved, rendering it an unappetising target for a claim.
The reinsurer claims that the effect of the run-off agreement was that SMP acted as MSB’s agent in collecting the premium and so MSB remained primarily liable for the failure to pay it over. On the other hand, MSB’s position is that the run-off agreement made SMP and not MSB the broker which was liable to collect and pay sums due under the treaty.
MSB sought a Norwich Pharmacal order against SMP’s bank, requiring disclosure of documents relating to SMP’s bank account, in order to ascertain what had become of the premium and who at SMP was responsible for this. As is usual for Norwich Pharmacal applications, the application was not opposed by the subject bank, and MSB’s evidence was unchallenged in the application, so Master Clark made no findings of fact.
On the assumed basis (which SMB denies) that SMP acted as its agent, as alleged by the reinsurer, SMB would itself be able to claim against those responsible for any misapplication of the premiums. Whilst the normal position is that monies held in an Insurance Broking Account are not held on trust, there were features of the run-off agreement (including reference to a “sub-trustee”) which caused Master Clark to find there was a good arguable case that MSB had a proprietary interest in the premiums in SMP’s account (notwithstanding that the cedant or the reinsurer may have been the ultimate beneficial owner of the premiums). MSB was therefore in a position to complain of wrongdoing by SMP in misapplying the premiums, and had a good arguable case against the persons who procured mispayments to be made from the account (for e.g. inducing breach of trust) and those persons were likely to be SMP’s directors. Master Clark found a Norwich Pharmacal order was needed since it would or may enable MSB to identify the persons responsible for instructing the bank to pay away the premiums and may enable MSB to defend the reinsurer’s claim and he also said “the bank was mixed up in so as to have facilitated the wrongdoing”, if any, and so the necessary elements were present to enable him to make the Norwich Pharmacal disclosure order, which he duly did, whilst pointing out that any right to confidentiality of its accounts which SMP may once have had no longer exists, since SMP no longer exists. Master Clark also found that MSB’s proprietary interest in the premiums would entitle it to trace the premiums and that it is entitled to seek disclosure under Banker’s Trust principles.
It remains to be seen which direction this matter takes after the relevant documents have been disclosed.