Legion Insurance Company provided casualty insurance to businesses in the United States, including a Workers Compensation Act cover. This cover comprised two sections: Section A gave cover for statutory benefits in respect of death or bodily injury arising from an accident at work, and Section B gave cover for payments in respect of an employer’s fault based liability for an accident, killing or injuring an employee. This business was part of what was known as the “Mainframe Account.” In 1998, Hannover Re underwrote some excess of loss reinsurance policies giving cover to Legion for its liabilities in respect of business allocated to the Mainframe Account. By four excess of loss retrocession contracts, Syndicate 53 at Lloyd’s was a retrocessionaire of some of the Mainframe Accounts. One Ian Crane was the Syndicate’s active underwriter. Three of the four retrocessions included Hannover as reinsured. The retrocessions were limited to Section A of the cover.
The Syndicate avoided as against Hannover. During the ensuing trial, the Syndicate’s claims focused on nondisclosure by Hannover of underwriting and claims audits which it had conducted of Legion; misrepresentation and nondisclosure concerning the “comparative strictness of the underwriting requirements for the Mainframe Account”; and misrepresentation and nondisclosure concerning Legion’s underwriting practices (specifically, it was alleged that Legion had underwritten by reference to an “underwriting box” and had not used actual loss histories to calculate expected losses). In response, Hannover principally argued that the underwriting audits were not relevant and that the Syndicate’s criticism of Legion’s loss rating approach was not material since Crane had ample information with which to form his own judgment. Further, the claims audits did not reveal any serious problems relating to a Mainframe carve-out renewal proposal.
The court found that the underwriting and claims audits contained serious issues that were known to Hannover, and that Crane had not been able to consider these audits. Nonetheless, the 1998 carve-out renewal proposals described Legion’s loss rating approach, so Crane was in an equally good position as Hannover to form his own judgment about Legion’s loss rating practice. Regarding the nondisclosed claims audits, it was found that they described Legion’s practices as average, so this would not affect the judgment of a prudent underwriter. Regarding the allegation of the “comparative strictness of the underwriting requirements for the Mainframe Account,” the court found that these requirements had been explained to Crane. Finally, regarding the allegation on the use by Legion of an underwriting box was rejected as failing to understand how the box actually worked: Legion’s underwriters would individually underwrite each new piece of business going into the program and that business had to have enough experience to qualify it for the Mainframe Account, so Legion was providing cover to individual insureds by reference to their actual loss histories. The requirements for use of the underwriting box were consistent with the actual loss histories. Moreover, Crane was informed of the underwriting box in a November 1998 discussion. Thus, the Syndicate was not entitled, as against Hannover, to avoid the 1998 Mainframe carve-outs. Crane v. Hannover Ruckversicherungs-Aktiengesellschaft  EWHC 3165 (Q.B. Comm. Div. Dec. 19, 2008).