The Court of Appeal has found that brokers who acted for both the insured and reinsured in relation to a film finance policy owed post-placement duties to ensure that the reinsured was aware of possible coverage issues. The fact that the brokers owed duties to both the insured and the reinsured and that those duties might conflict did not absolve the brokers from the obligation to inform the reinsured of the changing nature of the risk.
Brokers JLT placed “pecuniary loss indemnity” insurance with HIH for Law Debenture Trust (LDT) - the body acting on behalf of investors in a series of films. JLT also arranged reinsurance for HIH. The original policies in effect provided a guarantee to the investors in the event that they failed to recoup their investment. The idea was that three “slates” of films would be made with six films on one slate, ten on another and five on the last. These low budget films were not at all successful and resulted in substantial losses to the investors.
As a result of the shortfall in revenue from the films, HIH paid out to LDT under the original policies. HIH then sought an indemnity to the extent of the reinsurance coverage. Some of the reinsurers, however, denied the claim on the grounds of breach of a warranty about how many films were to be made. In earlier separate proceedings between HIH and various reinsurers (see HIH Casualty and General Insurance Co v New Hampshire Insurance Ltd (2001) and HIH Casualty and General Insurance Ltd v AXA Corporate Solutions (2003), the Court of Appeal had held that the provision concerning the number of films per slate amounted to a warranty in the original policies which had been incorporated into the reinsurances, and that as fewer films had been made than the number warranted, both the insurers and the reinsurers were discharged from their obligations under their respective policies. HIH’s claims against its reinsurers were therefore unsuccessful.
HIH then sought damages from JLT equivalent to the amount which it had paid out to LDT and failed to recover from its reinsurers. Following a trial in the Commercial Court, Langley J found that JLT owed post-placement duties to HIH, including an obligation to alert HIH to the risks associated with the number of films being made. JLT had argued that they had fulfilled their duties to HIH by sending it risk management reports, but Langley J found that JLT owed a duty to be more than a “post-box” for risk reports and were under an obligation to alert HIH to the significance of the reduction in the number of films being made when JLT became aware of this fact.
Langley J nevertheless dismissed HIH’s claim because he found that no causal link had been established between JLT’s breach of duty and HIH’s loss. HIH had paid out under the original policies without regard to the consideration that their reinsurers were denying coverage on the grounds of breach of warranty - and were contending that HIH should be taking the same point against the original insured. HIH appealed against the decision on the causation issue. JLT cross-appealed on the post-placement duty aspect.
The Court of Appeal upheld the decision that there was no causal link between JLT’s breach of duty and HIH’s loss, as HIH had been unable to show that the reinsurers would have agreed to a change in the cover had they known about the reduced number of films being made. The true cause of HIH’s loss was that HIH had paid LDT's claims when it had no legal liability to do so and when it had either not ascertained the view of its reinsurers, or when it knew that the reinsurers (correctly as it later turned out) were disputing the validity of the claims.
The Court of Appeal also agreed that, in this particular case, the brokers owed a post-placement duty of care to HIH. This duty was to be more than merely a “post-box” for information. The brokers should have sought instructions from HIH or at least ensured that HIH was aware of the concerns which JLT had regarding the risk. The fact that JLT might have found themselves in a position of conflict between their duties as agent to LDT as insureds and HIH as reinsureds did not necessarily exclude any obligation to HIH as their principal.