Insurance brokers frequently agree to take responsibility for the ongoing management of cover they have placed. These post-placement functions are often perceived as purely administrative. However, the recent Court of Appeal decision in HIH Casualty & General Insurance Limited v JLT Risk Solutions Limited  EWCA Civ 0710 has made clear that brokers may owe duties to alert their clients to potential breaches of policy terms and conditions. That means brokers may be required not only to scrutinise information they receive in the course of their post-placement work for issues that could jeopardise the cover, but may also need to deal with conflict issues where, in fronting arrangements, that duty is owed to both the underlying client and the insurer in its capacity as reinsured.
Decision and practical implications
The highlights of the judgment are:
- In the circumstances of this case, the brokers had a duty to monitor the information they received and to alert their insured and reinsured clients to potential risks to the cover.
- The duty went beyond acting as a mere post-box. Rather, the broker was required to consider carefully the information it received and highlight any issues arising from it.
- The duty overrides any potential conflicts of interest that may arise where the broker has arranged the insurance and reinsurance.
- On the facts, the broker escaped liability on causation grounds because even if the reinsured had been alerted to the potential risks, the reinsured's loss would not have been averted.
The case was yet another which concerned the insurance of film finance. HIH Casualty & General Insurance Limited ("HIH") had fronted insurance providing a form of guarantee to certain investors in film projects against the risk of failure of the investments. The scheme involved the provision of finance by investors through a trust company for the production of three "slates" of films, supported by insurance and back-to-back reinsurance against the films not generating sufficient revenue to repay the finance. The defendant insurance brokers, JLT Risk Solutions Limited ("JLT") placed the insurance and the reinsurance and in doing so it became the agent for the insureds and the insurer in its capacity as reinsured.
After the placement, JLT learnt from a series of risk management reports created by the producers that less than the projected number of films were being produced. The minimum number of films to be made was an express term of the insurance and reinsurance. Fewer films of course meant that the prospect of the venture generating enough profit to repay the finance were reduced. JLT passed copies of the reports to HIH, but did not draw HIH's attention to the potential coverage implications of the reduction.
The scheme subsequently failed and a claim was made under the insurance. HIH failed to appreciate the significance of the reduction in the number of films and paid out under the insurances. Thereafter, it sought to recover from its reinsurers. The reinsurers successfully argued that the minimum film requirement was a warranty and escaped liability. Unable to recover from reinsurers, HIH brought a claim against JLT in negligence for failing to inform HIH about the material change in the risk by virtue of the reduction in the number of films.
The critical issues in the case were (a) whether JLT had a duty to alert HIH to the risk that the reduction in the number of films might jeopardise its reinsurance (b) if so, whether JLT had discharged that duty by forwarding copies of the risk management reports and (c) whether any breach was the cause of HIH's loss. At first instance, Mr Justice Langley found JLT did owe a duty in these terms and that it had been breached, but that HIH had caused its own loss by paying out under the insurance policies when it had no liability to do so. All these findings were all challenged on appeal.
The Court of Appeal upheld Langley J's judgment on all the issues.
The Court of Appeal indicated that, although post-placement monitoring obligations might not arise in every case, in circumstances where a broker had been at the centre of devising and structuring a "high risk, high premium" insurance and reinsurance scheme, it was a strong candidate for attracting a duty in these terms. Here, in all the circumstances, JLT had a duty to monitor the information it received and to alert both the underlying client and HIH to any risks to the cover.
Of course, imposing a duty on the brokers to alert HIH (in its capacity as reinsured) to potential coverage defences does not sit easily with the broker's interest in ensuring that the underlying insured's claims are paid. The Court of Appeal was dismissive of the suggestion that this apparent conflict meant the duty should be excluded. By contrast, it reinforced the imposition of a duty because a potential risk to the reinsurance cover would necessarily reflect a corresponding risk to the insurance cover, which HIH in its own interests might want to do something about.
The Court of Appeal upheld Langley J's finding that it was insufficient for JLT to discharge its duty simply by distributing the risk management reports. JLT ought to have drawn HIH's specific attention to the film reductions that were mentioned. The fact that HIH might independently have come to the conclusion that there was an issue was not an answer to the point because it was the broker, not HIH, who was familiar with and an expert in the film finance business.
That is not to say a broker is under a duty to assess what in any given case the legal effect of a policy provision may be. Rather, a broker is required to identify information that is of potential importance to the cover. Here, information as to the reduction in the number of films plainly was.
JLT escaped liability because its breach of duty did not cause HIH's loss. Had JLT complied with their duty, the Court of Appeal found that the likelihood was that reinsurers would not have agreed to continue with the reinsurance notwithstanding having been notified of the reduction in the number of films. Moreover, HIH had paid the claims in circumstances where they were well aware the reinsurers' position as the effect of the reduction. Accordingly, the true cause of the loss was HIH's payment of the insured's claims when it had no legal liability to do so.
At first instance it was noted that, if the court had found differently on causation, HIH would have been found contributory negligent to the tune of 70% (20% for its failure to appreciate the significance of the film reductions mentioned in the risk management reports, and 50% for paying the claims without agreement of reinsurers when it knew they might refuse to indemnify HIH). The Court of Appeal indicated, obiter, that in these circumstances they would have been inclined to find 100% contributory negligence on the part of HIH.
Conclusions The Court of Appeal's recognition that brokers may have post-placement "monitoring" duties is significant. It is not clear to wha extent the duty is specific to the facts of this case. The film finance schemes were broker-driven and unusually complex and risky. That said, they do share some features with many of the complex global fronting arrangements that are part of the insurance landscape today. The judgment is a further example to set alongside the Aneco decision, that where an insurance arrangement is deemed to be the broker's "baby" the Courts will be more willing to find extensive duties. Brokers who are concerned about assuming the additional (and potentially onerous) responsibilities found to have been owed by JLT may wish to re-assess the fees they charge for post-placement work or otherwise make clear in their contracts of retainer that post-placement monitoring does not form part of their duties. This should be considered when a broker is placing the insurance and reinsurance because of the obvious scope for a conflict of interest to arise.