Contributors
The Commercial Court's decision in ABN Amro Bank NV v Royal & Sun Alliance Insurance plc [2021] EWHC 442 (Comm) makes for a sobering read for insurance brokers and cargo insurers. Insurers and insurance brokers involved were held liable for losses of some £33.5 million in circumstances where the cover claimed had no precedent in the market.
The Court handed down a lengthy and detailed judgment exploring many aspects of insurance law but, from a broker's perspective, this case is about how far a broker must go to protect its client from the risk of unnecessary litigation. We examine the key take away points for insurance brokers and their professional indemnity insurers.
What happened?
The claimant bank sought an indemnity of some £33.5 million under a marine cargo insurance policy when two of the leading players in the world's cocoa market collapsed and the bank was left with a significant shortfall between the value of the cocoa cargo and the loan repayments due. The claim was made on the basis that the policy included a bespoke clause drafted by the bank's solicitors which provided credit risk cover ("the Transaction Premium clause" (TPC)).
The policy was placed by the bank's brokers in the marine market in London with 14 subscribing underwriters who were specialists in insuring cargo in warehouses and in transit, and in particular, the risk of physical loss and damage to that cargo. Insurers denied liability under the TPC on a number of grounds including the argument that they did not agree to underwrite credit risks which would normally be insured under trade credit insurance and not by cargo insurers. The crux of the dispute centred around the construction of the bespoke TPC. Insurers also deployed arguments around estoppel and non-disclosure/ misrepresentation.
The court held that the TPC responded to the bank's claim which meant that the claims against the majority of insurers succeeded. The bank's claim against two insurers (Ark and Advent) failed because the bank was precluded from relying upon the TPC by reason of an estoppel arising from statements made by the brokers on renewal to those insurers.
The court went on to consider the brokers' liability for failing to procure cover which clearly and indisputably met the bank's requirements and did not expose it to an unnecessary risk of litigation.
Brokers' duty
Jacobs J examined what the brokers should have done to avoid the risk of litigation. He concluded that the brokers should not have proceeded to place the risk with the cargo market without informing the bank that the credit market was the appropriate market in which to place the cover which the bank was seeking. Such advice would have allowed the bank to take an informed decision as to how to proceed. This was not a situation where the bank was insistent on the cargo market being approached.
Moreover, if the cargo underwriters were nevertheless to be approached, then Jacobs J observed that "going to see the wrong market made it all the more important, for the broker to explain to the underwriter what the transaction premium clause was intended to address". This was because the cover was of considerable importance to the client; had no precedent in the marine cargo market; there was an established market in which such risks would usually be placed; and the risk materially increased the potential for losses and the full import of the TPC might not have necessarily been grasped on a first reading. This approach would not only have avoided the scope for disputes but it would also have highlighted whether credit risk insurance fell outside the authority of the cargo underwriters who were being approached.
In considering the brokers' defence that the bank was looking to its solicitors to protect its interest and that the brokers could not be expected to identify problems in the drafting of the TPC which had escaped the attention of the solicitors, Jacobs J held that "it is wrong to assert – as a general proposition – that a broker can have no responsibility where a particular clause has been carefully drafted by a lawyer". In some cases, the broker is better placed than a solicitor to recognise a problem – and it was noted that the underwriters' points on construction were all about the market and specifically about facts known to underwriters and brokers. Moreover, the judge held that underwriters' arguments were not spurious (as contended by the brokers).
Causation and Quantum
In considering causation, Jacobs J followed the two stage process established in case law [1]. The first question was, on the balance of probabilities, what would the bank have done if the brokers had acted competently? Specifically would the bank have taken out the necessary insurance or, if that was not possible, taken other steps to avoid the risk such as unwinding the uncovered transactions or declining to enter into new transactions which would not be covered?
Having heard factual witness evidence from the bank which demonstrated that it took a "thoughtful and thorough approach to risk management and the role of insurance in that context", Jacobs J concluded that the bank would have sought credit insurance equivalent to cover it thought it was getting under the TPC. Alternatively, it would have taken steps to avoid the risk.
Jacobs J then considered the second test; namely was there a real and substantial chance that credit insurers would have agreed to write the insurance which would have provided protection against the bank's losses? The judge had no doubt that the answer was yes based on the evidence before him – there was sufficient capacity in the market at the time the risk was placed and insurers were actively looking for business. The judge found that, although some cover was provided on the basis of a 50% retention, the evidence was that 75-80% of all policies issued in the credit and political risks market were at 90% and accordingly held that "if the Bank's claim against underwriters had completely failed….I would have assessed damages on the basis of 90% of the Bank's losses less the premium described." It is notable that the judge would not apply a loss of chance discount on the facts.
Of course, it was not strictly necessary for the court to determine this issue as the bank's claim against all but two underwriters succeeded. The brokers were found liable for 100% of the recovery that the bank would, but for the estoppel, have made against Ark and Advent.
Comment
This decision provides a stark example of why it is in everyone's interest, not least the insurance broker's, to ensure that there is no doubt in the minds of the client and from a market perspective about the nature of the cover underwritten in any given situation.
The court has affirmed a broker's duty to procure cover that clearly and indisputably meets its client's requirements, and does not expose the client to an unnecessary risk of litigation. There are no fixed rules which set out what the broker should or should not do in order to meet this duty. It will depend on the circumstances and the facts of each case.
However, where there is any doubt about whether a form of wording provides the cover needed, or indeed any doubt about the underwriter's authority to write the risk in question, brokers should:
- have a specific discussion with the underwriter
- discuss the wording and the consequences with the underwriter
- make sure the substance of the conversation is documented; and
- keep the client informed.
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[1] Following the legal framework established in Allied Maples Group Ltd v Simmons & Simmons [1995] WLR 1602 and Wellesley Partners v Withers LLP [2015] EWCA Civ 1146
