MERCANTILE MUTUAL HOLDINGS LTD. v. NEW HAMPSHIRE INSURANCE CO.

Civil Appeal No 197 of 1994

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H E A D N O T E

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Reinsurance - Indemnity - Retrocession - Contractors All Risks insurance - Follow the settlements provision without claims co-operation clause. ICSP v Grand Union [1990] 1 Lloyd's Rep 208 followed.

IN THE COURT OF APPEAL

1994, No. 197
(Civil)

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J U D G M E N T

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Nazareth, V.-P.:

1. This is an appeal against the order of Yam J made on 27th July 1994. By that order, made upon the application of the respondent/plaintiff ("Hampshire") for summary judgment under Order 14 of the Rules of the Supreme Court, he gave judgment against the 1st defendant, which is in liquidation and did not appear. But in respect of the appellant/2nd defendant ("MMH") he gave "conditional leave to defend the action on the defence of illegality only". MMH now appeals against that order and seeks unconditional leave to defend.

2. With the leave of this Court, Hampshire cross-appeals, seeking final judgment upon the ground that the judge was wrong in law to hold that there was a triable defence (that the contract of reinsurance was illegal - a matter to which I shall come).

3. Hampshire's claim against MMH is that by a contract of reinsurance contained in or evidenced by a reinsurance slip confirmed on or about 9th March 1984 by International Reinsurance Management Pty Ltd of Sydney Australia ("IRM"), their authorised agent, the 1st defendant had agreed to reinsure 66.66% and MMH agreed to reinsure 33.34% of Hampshire's cover of 40% of a Contractors All Risks ("CAR") policy issued to a French contractor, Societe Parisienne D'Entreprises ("SPE") in respect of the performance of SPE's contracts for the construction of 1780 housing units in Algeria including all associated and ancillary works connected therewith. The other 60% was underwritten by Societe Mutuelle d'Assurance du Batiment et des Traveaux Publics ("SMABTP"), the lead underwriter, which settled claims by SPE, and was in turn reimbursed its 40% by Hampshire, which then made the claims in these proceedings.

4. The appeal and cross-appeal raised the following questions, i.e. whether the judge was wrong in -

(i) finding that there was an issue that should go to trial on the question whether the contract of reinsurance was illegal;

(ii) finding that there was no triable issue as to whether the claims were outside the risks covered by the policy Hampshire issued;

(iii) concluding that MMH had not shown that there was a triable issue on material non-disclosure;

(iv) holding that MMH had not shown that there was a triable issue on participation by the agent who acted for Hampshire in breach of the fiduciary duty owed by IRM to MMH and;

(v) ordering that leave to defend could be confined to a single issue.

Illegality

5. The question of illegality arose in the following way. As MMH's agent in the reinsurance contract, IRM acted through IRM (UK) Ltd ("IRM (UK)"), an officer of which completed the reinsurance slip in London. MMH accordingly contends that the contract of reinsurance is illegal because IRM (UK) was not authorised to carry on insurance business in the United Kingdom as required by s.2 of the Insurance Companies Act 1982. It is not in dispute that insurance business is carried on where the contracts are made and the policies of insurance issued, and not where the risks are situated (re United General Commercial Insurance Corpn Ltd [1927] 2 Ch 51 CA). There was no direct evidence that IRM (UK) placed reinsurance contracts and completed slips regularly as a matter of business. However, indications and the inference of this are so clear that I have no hesitation in concluding that it must be at least arguable. Likewise, I have no doubt that it is at least arguable that the placement of reinsurance is "insurance business" within the ordinary meaning of that expression which is preserved by the definition in s.95 of the Insurance Companies Act 1982 (see re NRG Victory Reinsurance Ltd [1995] 1 All ER 533).

6. The historical development of the position as to illegality resulting from contravention of the authorisation requirements of s.2 of that Act (and, indeed, earlier of the Insurance Act 1974 which preceded it), is now well-documented. It is sufficient to proceed directly to the authority relied upon by Mr John Scott for Hampshire, i.e. the judgment of Gatehouse J in Bates & Others v Robert Barrow Ltd & Others, Times Law Reports 9th February 1995, a copy of the transcript of which was also produced.

7. It is not in dispute that the contract of reinsurance here was made prior to the coming into operation of s.132 of the Financial Services Act 1986, which was brought into operation on 12th January 1987. Its effect was to provide that a contravention of s.2 would not prevent a contract of reinsurance being enforceable against the reinsurer. The question that then arises here is whether the section has retrospective effect. It seems to me that Gatehouse J in the Bates case was right in concluding, for the powerful reasons he gave, that s.132 does have retrospective effect, notwithstanding that that position is not as clear as one might have desired. Needless to say, I am not persuaded by the contrary views of Mr Adrian Hamilton Q.C. (sitting as a Deputy Judge of the High Court) in D.R.. Insurance Co v Seguros American Banamex [1993] 1 Lloyd's Rep 120 upon which Mr John Bleach for MMH relied. Upon that basis, MMH's contention that the reinsurance contract is void for illegality is not arguable. Hampshire's cross-appeal therefore succeeds. I turn then to the individual grounds of MMH's appeal.

Were the claims within the scope of the cover?

8. The relevant provisions of the contract of insurance were as follows:

"TYPE:	CONSTRUCTION 'ALL RISKS' AND PUBLIC LIABILITY REINSURANCE
INTEREST:	In respect of the performance of the Insured's contracts for the construction of 1780 housing units in the Wilaya of Djefla being part of the Medea Low Cost Housing Scheme,Algeria, including all associated and ancillary work connected therewith and/or as original.
SUM INSURED:	SECTION I - CONSTRUCTION 'ALL RISKS'

F.Fcs 3,500,000

each and every loss on 'Works' (permanent and/or temporary), materials in progress and/or completed on contractors plant and equipment/vehicles, temporary buildings/ camps (and contents thereof), including removal of debris, professional fees and expediting expenses etc.

TERRITORIAL LIMITS:

Anywhere in Algeria including all inland transits and storage therein."

9. The contract of reinsurance was, as indicated, contained in or evidenced by a reinsurance slip endorsed upon a copy of the insurance policy.

10. Put shortly, Hampshire's case on this ground relates to a number of claims based on motor-vehicle accidents, some involving private cars, that occurred not upon the construction site, but on public roads. The reports of the insurance adjusters, Messrs Toplis & Harding of Paris, although on the face of them professional and full, made no reference to whether at the time of the accident, the particular vehicle was being used in or about the performance of the construction contract. It was accepted that the claims would have to have arisen in the latter context to fall within the scope of the cover. Mr Bleach argues that having off-loaded almost their entire liability, Hampshire would have had very little incentive to investigate the claims properly. He stresses in that regard that Hampshire and its broker, Lowndes Lambert Construction Ltd ("Lowndes Lambert"), have refused repeated requests by MMH for access to or inspection of the underwriting files in relation to the claims.

11. Yam J dealt with the matter at p. 3 of his judgment in the following way. He noted that the reinsurance slip did not include a claims co-operation clause, and went on to cite the following passage in ICSP v Grand Union Insurance Co [1990] 1 Lloyd's Rep 208 at 224 where Hunter J.A. was addressing the conclusion that had been reached in earlier authorities that the onus of proof if there is any question as to the sufficiency or propriety of a settlement by the insurer is upon the reinsurer:

"Reason to my mind equally points to the same conclusion. The reinsurer's obligation is to follow the settlement. If he wants the right to be consulted, he can try to include a claims co-operation clause in his cover, which is what happened in slip D. But if Mr. Collins is right, even without that, the reinsurer is entitled to put the insurer to proof in respect of every claim that (a) it is within the policy and (b) that the settlement is proper. If that is right, the clause is valueless and meaningless. It seems to me in this field both sensible and economical for the lead reinsurer to be trusted to do all the necessary investigation. Repetition down the line is absurd, and where, as here, the reinsurance cover spans the globe it is ruinous in cost. I agree with the Judge under this head for these reasons and for those that he gave. In the circumstances question (3) is not reached.

This will I hope be the last chapter in an unhappy insurance saga. No doubt Contractors All Risks is difficult and risky insurance. Maybe it is plain that Grand Union misjudged the risk in this case. But I have to say that it was very unfortunate that when they realised this they did not face up to the liabilities which I am convinced that they know they had accepted, and instead have wasted vast sums on arguments which vary between the faint and the hopeless."

12. Yam J added that "If the claims were not within the risk covered by the policy, it would be unlikely the plaintiff would pay for them if they were outside the CAR policy. In the end, the allegation of the 2nd defendant that Toplis & Harding got it wrong was not sufficient from the evidence before me which suggested that all claims were properly considered and settled."

13. In reaching his conclusion in the foregoing passage from his judgment at p. 224, Hunter J.A. followed the judgment of Robert Goff L.J. (as he then was) in The Insurance Company of Africa v Scor (UK) Reinsurance Co Ltd[1985] 1 Lloyd's Rep 312 at 330 where, upholding Legatt J (as he then was), he said:

"In my judgment, the effect of a clause binding reinsurers to follow settlements of the insurers, is that the reinsurers agree to indemnify insurers in the event that they settle a claim by their assured, ie, when they dispose, or bind themselves to dispose, of a claim, whether by reason of admission or compromise, provided that the claim so recognized by them falls within the risks covered by the policy of reinsurance as a matter of law, and provided also that in settling the claim the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement."

Stephenson and Fox L.JJ. agreed with that part of his judgment, which was recently endorsed by the Court of Appeal (Hirst, Nourse and Waite L.JJ. in Hill v Mercantile and General Reinsurance Co Plc (Times Law Reports, 25th July 1994) and followed in Hiscox v Outhwaite [1991] 2 Lloyd's Rep 524).

14. For the reasons he gave at pp. 223 and 224 of ICSP v Grand Union I would with respect agree with the conclusions of Hunter J.A. in the foregoing passage at p. 224 reproduced above and in the judgment of Yam J. They embody the practical operation of the dicta in the Scor case.

15. Both Fuad V-P and Macdougall J.A. (as he then was) agreed with Hunter J.A. The significance of the ratio of his judgment, which binds this Court, is that in the absence of a claims co-operation clause the reinsurance must follow the settlements of the insurer. The reinsurance slip was subject, by reason of condition 2, to a "Full Reinsurance Clause (excluding rate and retention)", which is plainly a "follow the settlements" requirement. And there was no claims co-operation clause. That is not disputed. It follows therefore upon the foregoing legal position that MMH's ground that the claims were outside the risks covered must fail.

Non-disclosure

16. The nature of the non-disclosure relied upon by MMH in its appeal is that Hampshire failed to disclose to it the following matters which were material and were necessary to enable a prudent reinsurer to make an informed judgment as to whether to accept the risk, i.e. the fact that the remaining 60% of the risk was accepted on a Co-insurance basis by SMABTP and that the retention of SMABTP was negligible, such that neither of the original insurers had any significant retention of the primary layer of the risk; that Hampshire and SMABTP participated in an excess layer of the risk which was better rated than the primary layer and without exposure to claims of the primary layer; that the rate offered to MMH was only approximately 10-15% of the original rate for the works cover and no more than 50% of the contract, plant and equipment (CPE) rate; and that by reason of the foregoing, acceptance of the risk on the proposed terms was inevitably calculated to produce a loss to MMH.

17. MMH's case is that by reason of the non-disclosure, it was entitled to and did avoid the contract of reinsurance.

18. The judge referred to a passage at p. 176 of the 6th edition of Ivamy's General Principles of Insurance Law which sets out the insurer's onus to prove that the fact not disclosed was material, that it was within the knowledge of the assured, and that it was not communicated to the insurers. He then said "Here, it is not clear from the allegations of [MMH] what facts were not disclosed but were material". It seems to me that the judge was not right in so stating, for the facts relied upon are reasonably clear in the draft defence itself, which I have outlined.

19. However, it is plain that IRM (UK) was aware of the facts in question. And although contended by MMH that only IRM and not IRM (UK) was its agent, there is clearly nothing in the point, as was also found by another Division of this Court differently constituted as to two members in the case of National Union Fire Insurance Company of Pittsburg, PA (another claimant against the two defendants upon a basis similar to that here) CA 1993 No. 181 (Civil).

20. Moreover, it was not shown that there was in the circumstances any duty upon Hampshire or its agent to disclose the 60% lay-off by SMABTP, or that there had been no significant retention. If, as Hobhouse J (as he then was) held in Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1985] 2 Lloyd's Rep 599 at 611 "there is no inconsistency between the idea of reinsurance and a nil retention", I do not see why the fact of the nil retention needed to be disclosed. Finally, it was conceded by Mr Bleach that there was no evidence that SMABTP had laid off the 60% risk before the reinsurance slip was signed.

21. It follows that the ground of non-disclosure does not present an arguable issue.

Participation by Hampshire in MMH's agent's breach of fiduciary duty

22. I turn finally to the associated ground of participation by Hampshire through its agent in IRM's breach of fiduciary duty to its principal MMH. It is pleaded in 11 paragraphs of the draft defence and extends to several pages. For the purpose of this appeal, it suffices to sum it up in the following way. During 1983 and 1984, a group of CAR retrocessions (including the contract of reinsurance which is the subject of this appeal) was "broked" by Lowndes Lambert on behalf of Hampshire, and were purportedly accepted by IRM on behalf of MMH. The risks were of such poor quality no prudent underwriting agent would have accepted them. The information provided by Lowndes Lambert was insufficient and inadequate to enable an informed decision to be made by IRM as to the acceptance of the risks. In accepting the risk in those circumstances, IRM was in breach of its fiduciary duty to MMH. Lowndes Lambert with knowledge of the foregoing facts facilitated the implementation and furtherance of IRM's breach of fiduciary duty by purporting to place the reinsurance to the account of MMH. In the premises Lowndes Lambert participated in such breach with knowledge of that breach by IRM. That knowledge and conduct of Lowndes Lambert was acquired and undertaken in the ordinary course of its authority on behalf of Hampshire and is therefore to be attributed to Hampshire. By reason of the foregoing Hampshire participated in the breaches of fiduciary duty by IRM with actual or constructive knowledge and is liable to MMH.

23. In finding that there was no triable issue on breach of fiduciary duty, the judge at p.5J of his judgment referred to the assumption of Hampshire's expert, Mr Beaven, that "a loss had been made", and to his conclusion that it must have resulted from "some kind of non-disclosure or conspiracy between the two agents". MMH contends that the judge was wrong. In pursing the appeal Mr Bleach submitted that the risk in the circumstances was so high as to make losses a near certainty; one would have to be "barking mad" to accept it. Lowndes Lambert therefore could not but have been aware of that. He attempted to demonstrate his point by comparing the modest premium which MMH would have earned against the likelihood of claims exceeding the premium by a significant margin.

24. His submissions and calculations were strenuously resisted by Mr Scott, who pointed to significant weaknesses in the latter particularly. The situation Mr Bleach contended for as plain did not emerge as such in significant respects. Moreover his submissions and calculations were posited upon hindsight, and in particular took into account the accidents and claims that ultimately eventuated but which prospectively could only be speculated upon. I do not see how it can possibly be inferred that IRM was in breach of its fiduciary duty to MMH, let alone that Lowndes Lambert participated in that breach.

Conclusions

25. It follows that there is no triable issue. MMH's procedural ground of appeal that leave to defend cannot be limited to a specified ground of appeal therefore does not arise.

26. For the foregoing reasons, I would dismiss the appeal, allow the cross-appeal, set aside paragraph 1 of the order below dated 27th July 1994, and give final judgment to Hampshire, with an order nisi that Hampshire is to have its costs of the appeal and below. To give effect to the foregoing, I would give a direction that an agreed order be prepared by the plaintiff and submitted to this Court, with liberty to apply in default of agreement.

Litton, V.-P.:

27. I concur with Nazareth V.-P.'s judgment and add the following observations: It seems to me, on the evidence before the court, New Hampshire has in fact established that the claims were within the scope of the cover. This evidence is to be found in "NS-8" to "NS-37" exhibited to Mr Stone's affidavit. They comprise the loss adjuster's reports in respect of each of the claims amounting to the total of FFr 252,605.38 pleaded in the Points of Claim, together with their invoices for fees and expenses. Mr Bleach's submission that many of the claims arose from accidents involving private cars on public roads, and therefore outside the scope of the CAR policy, is simply not borne out on the evidence. Out of 25 claims, a few could be said to be equivocal; the circumstances of an accident occurring in Algeria may not always be clear to loss adjusters carrying on business in Paris; but in relation to the majority of cases, upon the statements in the loss adjuster's reports, there can be no doubt that the claims came squarely within the cover. Losses No. 16 to 29 were described thus: "Damage to constructional plant and equipment and site installations at various dates, at or around the AIN OUSSERA work site". The recommendations for settlement made by the loss adjusters often involved many different considerations: depreciation of the equipment or vehicle, salvage expenses, cost of spare-parts etc., and of course negotiation with the assured. Some of the claims involved relatively small sums. The settlement followed in each case the recommendation in the loss adjuster's report. It seems to me that Yam J's reliance on the loss adjuster's reports for concluding that "all claims were properly considered and settled" was well placed. Moreover, the facts of this case provide a vivid illustration of the wisdom of Hunter JA's remarks in ICSP v. Grand Union Insurance Co. at 224 where he said:

"It seems to me in this field both sensible and economical for the lead reinsurer to be trusted to do all the necessary investigation. Repetition down the line is absurd and where, as here, the reinsurance cover spans the globe it is ruinous in cost".

Keith, J.:

28. I agree with the judgment of Nazareth V-P. There is nothing I wish to add.