Groupama Insurance Company Ltd. v Overseas Partners Re Ltd. & Anor [2003] EWHC 34 (Comm)

Case No 2001 FOLIO 269[2003] EWHC 34 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 24 January 2003
Before
THE HONOURABLE MR JUSTICE MORISON
Between
GROUPAMA INSURANCE COMPANY LTDClaimants(1) OVERSEAS PARTNERS RE LTDDefendants
Between
AON LIMITED
Mr S. Berry QC and Mr D. Jowell (instructed by Messrs Clyde & Co) for ClaimantsMr A. Fletcher (instructed by Messrs Davies Arnold Cooper) for Defendants (Overseas Partners Re Ltd)Mr J. Nash (instructed by Messrs Cameron McKenna) for Defendants (Aon Limited)Hearing Hearing dates :    10 - 19 December 2002
Approved JudgmentI direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic..............................Mr Justice Morison
[1]The underlying facts are relatively straightforward. Groupama, the Claimants, seeks payment of unpaid claims and an indemnity for future claims under a Marine Personal Accident Quota shareTreaty retrocession to which Overseas Partners Re [OP] were the counterparty and are the fist defendants. The chain between the original insured and the two parties to the Action is as follows:[2]Certain US companies primarily involved in the maritime industry are the original insureds. US surplus lines producing brokers [McGriff Seibels & Williams of Texas] acted on the Insured’s behalf in obtaining first tier cover through Lloyd’s placing brokers, Lloyd Thompson (now known as JLT Risk Solutions Limited) [JLT] from Lloyd’s. Syndicate 724 was the lead syndicate which, with other syndicates and one London based Company, became the Insurers. The insurance covered, amongst other things, “liability in respect of the Insured’s employees … in respect of bodily injury and death”. The original insurances were subject to various deductibles, both aggregate deductibles and deductibles per loss. AON, who are insurance brokers and the second defendants, on behalf of the Insurers placed reinsurance in relation to the risk of bodily injury and death, with LDG Worldwide Ltd [LDG] who were underwriting agents for Groupama, and to whom Groupama had given their pen. The reinsurance was placed by way of a series of individual risks written by Mr Smart of LDG. In turn, LDG used AON as their brokers in placing the quota share retrocession cover with OP, and this cover lies at the heart of this case.[3]There is, therefore, a chain starting with the original Insureds through the initial Insurers to the first level reinsurer and thence to the retrocesionaire [OP]. AON fulfilled a broking role at two stages in the chain: first as brokers to the Insurers in placing the reinsurance and second as brokers to the Reinsurers’ agents in the retrocession contract. During the course of the hearing the parties referred variously to inquiries about losses being made either ‘up’ or ‘down’ the line. It does not matter which way up the chain is looked at. For present purposes I see the Insureds as being at the top and OP at the bottom of the chain or line and I shall use the word ‘up’ in that context.

The Facts

[4]The facts are substantially not in dispute. Mr McCann was not at the material time an experienced marine business underwriter. He also had very little previous experience of writing personal accident business. He joined OP’s underwriting department in late 1996 and was appointed a lead underwriter towards the end of 1997 [November]. Significant risks were presented to a committee chaired by Mr Barone, the President of OP. What Mr Barone said or decided ‘went’, however he would listen to his underwriters and would no doubt have been reluctant to allow a risk to be written which the relevant lead underwriter had doubts about. Mr Barone did not give evidence. Mr McCann ceased to be employed by OP in 2000.[5]Shortly before 13 January 1998 AON, through Mr Reeves and Mr Perkins, contacted Mr McCann with a proposal that OP should accept a percentage of Mr Smart’s book of business which he had written by way of a carve out of risks in relation to US assured. Mr Smart had agreed to reinsure the original Insureds on a facultative basis, assessing each risk as it was proposed to him. The reinsurance he was writing was taking up 100% of the ‘bodily injury’ risk accepted by the original Insureds, subject to precisely the same limits and deductibles. In other words, this was not a reinsurance by layers on an excess of loss basis. But it was not a fronting operation either: the risks were assessed and written independently by the Lloyd’s syndicates. Mr Smart agreed to reinsure those risks which he accepted. As Mr Smart pointed out, he was taking on the risk of a part only of the risks written by the Syndicates and it would not be accurate to describe Lloyd’s Syndicates as fronting for him. Both they and he made their own underwriting judgments.[6]By the time of AON’s approach to Mr McCann, Mr Smart had written three risks and it was proposed that if OP agreed to accept a quota share retrocession then the first three risks could be included as the first three declarations under the retrocession treaty. AON sent, with their proposal, a draft of the retrocession contract for the period from 26 November 1997 to 31 December 1998 which included an obligation on OP [subject to their acceptance] to pay “as may be paid by the Reinsured” [ie Groupama] together with three ‘declarations’. When Mr McCann received the fax of 13 January 1998 he made a number of comments on it, including the fact that Groupama [I do not distinguish between LDG and Groupama] retained 50% and that the underwriter was Ray Smart. There was a telephone conversation between Mr Reeves and Mr McCann at some time between 13 January and 19 January1998. It seems sensible to infer from AON’s fax of January 19 1998 that Mr McCann had asked for information both about Mr Smart and about the written premium and incurred claims to date.[7]The fax of January 19 1998 reads as follows:
“Further to our recent telephone conversation and in reply to your question, we would answer that Ray Smart has been writing this class for the past two years on a selective basis. We can advise that the written premium/claims to date are as follows: Gross Written Premium Incurred Claims US$ 4,222,342 US$ 2,226,350 We trust that the above will assist and await your advice.”
We trust that the above will assist and await your advice.”[8]The information for this fax had been provided, in part, to Mr Reeves, by Mr Greig. Mr Greig knew Mr Wilson of JLT. JLT were the placing brokers and as such would have been notified of claims as they were being passed onto the Lloyd’s syndicates. Three of the four incurred claims figures [totalling US$ 1,363,000] had been provided by Mr Wilson rather than coming from AON’s own claims department. In the chain, JLT could be expected to know of claims some time before AON did. I accept Mr Greig’s evidence as to the circumstances in which he came to approach Mr Wilson. In my judgment he was a reliable witness and what he had to say on this issue makes good sense:
“When Aon got --sorry, when Bain Hogg were purchased by Aon, which occurred, I believe, in the autumn of 1996, at some point subsequent to that Mr Wilson and one of his colleagues, Mr Edwards, left the employ of Aon and joined Lloyd Thompson. Either once they got to Lloyd Thompson or around the time they were going there, Mr Wilson said to me, "Would I be able to continue effecting some of these reinsurances for Lloyd's syndicates notwithstanding the fact that he was at Lloyd Thompson". And I said I would very much like to because there was some very nice brokerage in it obviously. So he went to Lloyd Thompson and we continued effecting these reinsurances for Lloyd's syndicates. So, when we were faced with the situation that we needed to get some claims information, and because our -- about five companies had been merged in together into Aon the claims department in Romford was known as a bit of a black hole I am afraid, at the time, because of the recent merger. It was, in my opinion, going to be the speediest way of getting this information in 9. Q. For whatever reason, at that stage it was a quick and convenient way of getting claims information? A. Yes.”
[9]When he received the fax, it was not Mr McCann’s understanding that any of the figures had come from JLT as this passage from his evidence makes clear:
“Q. And I am suggesting to you, that is because all that really mattered to you is that on this calculation it appeared this business was profitable? A. This is what we relied on, yes. Q. It is also the case, is it not, that you had no idea where those figures had come from, apart from the fact they were being passed to you by Aon? A. Well, I presumed that they would have come from LDG and the experience that they enjoyed to date. Q. But you did not know what investigations LDG had carried Q. But you did not know what investigations LDG had carried out before putting those figures before you, did you? 12. A. No. 13. Q. And you did not ask? 14. A. No.”
[10]Furthermore, I infer from the absence of any inquiries by OP of LDG about the figures that OP were content with the broadest assessment of the profitability of Mr Smart’s book of business:
“Q. He [one of the expert underwriters] is making the comment that having received a fax in the form of page 17, it immediately raised a number of obvious questions to a careful underwriter, principally: when were these losses incurred, what is the prognosis for the loss history and does it include outstanding claims or unpaid claims and following on from that perhaps reserves. He says that is all basic underwriting information and I am asking you whether you agree with that? A. Yes.”
It is irrelevant to the determination of this case whether Mr McCann and OP were careless in the way they approached the risk they had to take. But it is relevant to understand Mr McCann’s approach because it sheds some light on what happened thereafter. Indeed, from the figures presented, it was obvious, without further inquiry, that this had been a profitable book of business in the past, assuming that it was not long tail.[11]On 4 February 1998 Mr McCann indicated that OP’s potential participation was ‘up for final committee approval’ on the Friday and that he believed that “the review will proceed on a favourable basis”. Two days later Mr McCann faxed back confirmation of OP’s acceptance of a 50% share on the LDG marine book. It was Mr McCann’s view that as from this date OP were on risk even though the contract [slip] was not signed until 16 April 1998. I think he was right, even though OP had been sent the slip for signature on March 3 1998. Meanwhile, on 6 April 1998 AON advised OP that Mr Smart had accepted a further three risks and sent to OP a copy of the six declarations and a revised placement slip.

out before putting those figures before you, did you?

[12]Shortly after these events, Mr Smart indicated to AON that he was only prepared to accept further marine bodily injury carve out business if his participation could be reduced, by, for example, participation by co reinsurers sharing the burden, or by extending the retrocession protection. In the event, after an unsuccessful approach to AXA Re, a proposal was made to OP that their quota share should be increased to 75% leaving Groupama with 25% of the risk. A telephone conversation between Mr McCann and Mr Greig of AON, took place on 10 June 1998. By this date there had been 8 declarations to the Quota Share Treaty: the oldest in time had incepted some 6 months before; the most recent about 1 month before. The note sent by AON to Mr McCann probably overstated Mr McCann’s willingness to participate:
“verbal confirmation that an increase from 50% to 75% is likely to be agreed by your goodselves – we now await formal confirmation of this late to-day following on from your meeting”
. I think this faxed note was turning a possibility into something firmer, and I accept Mr McCann’s version of the telephone call. He must have said something encouraging, but bearing in mind his relative inexperience, I have no doubt that he would have been anxious to avoid any commitment on the part of OP until after his president had been able to form a view. The evidence shows that the president looked at the proposal and instructed Mr McCann to send the fax dated June 18 1998. From the evidence it would appear that the fax was drafted by Mr McCann but shown to and approved by the President. The wording of the fax lies at the heart of this case. It reads:
“This is to confirm our increased participation from 50% to 75% on the LDG marine personal accident program effective 1/1/98 [an irrelevant error] subject to satisfactory warranties as to no losses incurred on the program to date.”
[13]The fax was addressed to Mr Reeves of AON and was shown to Mr Smart, who scratched it, “Noted” on 22 June 1998. At the time, Mr Smart was of the view that AON should do the work and provide the answers to the request. AON had their own claims department and would know about losses which were going to impact on Mr Smart’s book some short time before the detail was passed on to Mr Smart. To that extent they had slightly more up to date information than Mr Smart, but, having seen Mr Smart give evidence I suspect that the reason he left it to AON had more to do with getting the broker to do his job and earn his money than anything else. “ Q. The effect of what you said to Mr Greig was: you have access to the best loss information because it was you who placed the business with us, and you can easily check what the position is as to losses? A. In its broadest sense, I think I was actually implying that he should contact his claims department to see if they had been advised of any claims prior to notifying us. Q. You did not place any restrictions on Aon as producing broker, as to who they should contact in order to get loss information? A. No. Q. And an easy source for them, if they chose to use it, would be to contact their client? A. If they so chose.” As I read the evidence, Mr Smart did not ask AON to make inquiries up the line and did not expect them to do so; “As far as I was concerned the only information I can give is the claims that have been reported to me and people who reported those claims to me were Aon.I did take the further step of asking Aon if they had -- or implied that they had any information that had not gone through the system, which we can see right the way through the case there are time lags. So to give them the best possible information was to ask Aon: had they been advised of any claims? If they came back to me and said: no they had not been advised, which I think they did but I am not too sure, that was as far as the information I would have thought that would have been given. I suppose it is a comfort level that OP are seeking:why are you increasing your reinsurance or reducing our line? Was it because of claims? The answer is: no, it was not, because we were not aware of any. Q. And those appropriate enquiries did not include, as far as you understood it, instructing Aon to do more than look at the claims records it held? A. That is the case, or else I would have instructed Aon to go further and I had not.” A. If they so chose.” “As far as I was concerned the only information I can give is the claims that have been reported to me and people who reported those claims to me were Aon.I did take the further step of asking Aon if they had -- or implied that they had any information that had not gone through the system, which we can see right the way through the case there are time lags. So to give them the best possible information was to ask Aon: had they been advised of any claims? If they came back to me and said: no they had not been advised, which I think they did but I am not too sure, that was as far as the information I would have thought that would have been given. I suppose it is a comfort level that OP are seeking:why are you increasing your reinsurance or reducing our line? Was it because of claims? The answer is: no, it was not, because we were not aware of any. Q. And those appropriate enquiries did not include, as far as you understood it, instructing Aon to do more than look at the claims records it held? A. That is the case, or else I would have instructed Aon to go further and I had not.”[14]Mr McCann was, as he himself says, the architect of various documents dated 18 June 1998 which formed part of his presentation to the OP Committee which had the final say. According to this documentation he informed the committee that LDG wished to reduce their line to 25% and that the potential for this had been put to OP at the time of their original acceptance. He recorded the fact that he had visited Mr Smart on a recent trip to London “and site visit suggested a very strongly run MGA [Managing General Agency] operation “ He indicated an estimated premium income of US$ 4 millions and referred to what he called his analytics, which set out different scenarios: best, expected and worst. For the expected case, the loss ratio was estimated to be 53% and that figure is derived from the figures given on 19 January 1998. The worst case scenario showed a 90% loss ratio; and the best a ratio of 40%. He also produced a cash flow analysis. Mr McCann was asked, in evidence, how he had arrived at his assumptions and he replied, convincingly, that he considered that counsel was trying to make underwriting a science. The truth is that he had very little information on the basis of which he could make an informed analysis, and much of his workings could be said to be guess work or ‘judgment’.[15]Mr Perkins of AON was asked by a colleague to obtain written confirmation from another colleague regarding the loss information pertaining to the Quota Share Treaty:
“preferably in the form of original declaration numbers”
. Inquiries were made within AON The results of those inquiries showed that there had been no losses to date of which they had been advised which impacted on Mr Smart’s book. Accordingly, Mr Perkins drafted a fax to send to OP. The wording of it is important. On the fax header the subject matter is defined as LDG P.A. MARINE QS TREATY. The wording of the fax is:
“Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to LDG to date that would affect any of the declarations ceded hereunder Consequently, I have attached our revised placement slip indicating the 75% Quota Share Treaty Limit and would ask you to return a signed and dated copy by facsimile, by return. In addition you will note that two further declarations have been ceded hereunder, details as per the attached. As soon as the slip has been signed and returned we will be in a position to account to O.P.L. Premium Income of approximately US$ 1,000,000. I look forward to receipt of the documentation in due course.”
The fax ended with the word “Andrew” which is Mr Perkins’ first name. I look forward to receipt of the documentation in due course.”[16]It is difficult now to say which AON employee took the draft to Mr Smart, and I do not think it matters. Mr Smart scratched it on 29 June against the word “Noted”. This fax was subsequently altered on a word processor and the words “to LDG” were deleted in the first paragraph which, as transmitted, read:
““Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to date that would affect any of the declarations ceded hereunder.”
[17]The balance of the evidence shows that Mr Perkins was responsible for the alteration, although he cannot now recall doing it or, therefore, why he did it. OP received the altered fax on 30 June 1998 and in due course returned to AON the signed slip. If the fax had not been altered, it appears to be common ground that it was a true statement of the position, subject to OP’s argument that a loss affects or potentially affects a declaration if it has eroded the aggregate deductible. Neither Mr Smart nor AON had been advised of any loss that would affect any of the declarations to date. Had inquiries been made of Mr Wilson of JLT the position would have been different. The following table identifies the six claimants who had made claims by July 1 1998, the date when OP signed the slip accepting an increase in their proportionate quota share. Claimant Date of Loss Advice to JL:T Advice to Lloyd’s Advice to AON Advice to L:DG O’Grady 5.02.98 25.02.98 03.03.98 19.11.98 22.12.98 Cobb 28.02.98 13.05.98 15.05.98 01.02.99 11.02.99 Smith 30.03.98 26.05.98 03.06.98 27.07.00 23.11.00 Barfield 04.04.98 11.05.98 14.05.98 19.11.98 22.12.98 Phelps 13.05.98 30.07.98 30.07.98 01.02.99 11.03.99 York 14.06.98 30.07.98 30.07.98 01.02.99 11.03.99[18]By 29 June 1998, the day before the fax of that date was sent to OP, only four of the potential six losses had been reported to the lead Insurer. NAME DATE OF ADVICE OF LOSS GROSS RESERVE RESERVE NET OF DEDUCTIBLE AGGREGATE DEDUCTIBLE ‘HIT’ ON INSURANCE POLICY O’Grady 03.03.98 $123,000 $73,000 $675,000 11% erosion No Cobb 15.05.98 $78,000 $28,000 No Yes Smith 03.06.98 $48,000 Nil No No Barfield 14.05.98 $6,250 Nil

No

[19]Thus, had inquiries been made of Mr Wilson of JLT before the fax was sent to OP, what was called by me, inelegantly, during the hearing but accepted as a crude albeit comprehensible description, a ‘hit’ of $28,000 would have been reported together with two other potential losses which had not burned through the individual deductibles, and a third ‘loss’ which had impacted the aggregate deductible to the extent of 11%. The Parties’ arguments:[20]Mr Fletcher, on behalf of OP, who conducted his case with great ability, made the following submissions:(1) The first issue was whether the fax of 29 June 1998 was untrue because four ‘losses’ had been reported to Lloyd’s at that date. And this issue depended in turn on the proper interpretation of the fax. He submitted that I should construe the communication consistently with the reasonable expectations of honest business men against the background of the relevant factual matrix. Although there may be sound reasons why, in ordinary circumstances, a reinsurer seeking retrocession cover on a quota share basis may only be obliged to report losses which have been advised to him and is not obliged to seek information higher up the chain, in the present case “it was clear that the Lloyd’s Syndicates were the best source of information as to losses which might affect the declarations ceded to OP. Further, it was reasonably practicable and straightforward to obtain that information. In that situation, market practice requires that step to be taken.”(2) The reasons why this is not a typical or ordinary case are that OP were seeking a warranty as to no losses, which gave the existence of losses a particular importance; that there was an obvious risk that Mr Smart’s [or AON’s] loss information was out of date; that the information from the single insurer [the lead Lloyd’s Syndicate] was readily and conveniently to hand. OP were being asked to take on increased risk retrospectively; past loss information was, therefore, especially important. Looking at the tables it was clear that there were inevitable delays between the date when a loss was reported to the Syndicate and was passed down the line to Mr Smart. The evidence showed that inquiries of Lloyd’s would have revealed a ‘blacker’ picture than inquiries stopping with Mr Smart and AON. For ‘blacker’ one should substitute the word ‘accurate’.(3) The information provided by AON in their fax was no more than the brokers were obliged to supply having regard to their duty to disclose all material information when broking the risk.(4) There is a difference between ‘no losses incurred on the programme to date’ [the wording of the request for a warranty] and what was stated by AON, namely “no losses … that would [a]ffect the declarations ceded hereunder. Losses which affect declarations are not merely losses which have burnt through aggregate deductibles; any loss which eats into the aggregate deductible is a loss which affects a declaration and should have been disclosed.(5) I was referred to a number of authorities which led, so Mr Fletcher submitted, to the conclusion that either the loss information should have been obtained from JLT in June 1998 or the fact that a different source was being used from that used in January, 1998 should have been disclosed.(6) By the ‘no loss’ statement there was either a misrepresentation or a material non-disclosure. The fact that Mr McCann said he would have ignored the proper loss information does not affect the materiality of the representation or non-disclosure. As underwriter Mr McCann was entitled to exercise his underwriting judgment at the time of disclosure. Information is material if it would have an effect on the mind of a prudent underwriter in deciding whether to write business on the terms proposed. Losses which affect the declarations during the period of retrospectivity “are particularly material”.(7) Mr McCann was insistent that he thought that inquiry had been made of the syndicates before the no loss statement was made. Of the four losses which had been notified to Lloyd’s, that in relation to O’Grady and Cobb was particularly pertinent and, had he known of them, he would not have been in a position to recommend to Mr Barone that OP increased its quota share; and Mr Barone would not have agreed to write a risk which his lead underwriter was not recommending.(8) The change of percentage participation was not a variation of the existing quota share contract; rather it formed a completely new contract. But even were it to be a variation, the right of avoidance applies to the whole contract and not just to the variation and dicta in the Court of Appeal in the case of K/S Merc-Skandia XXXII v Certain Lloyd’s Underwriters & Others [2001] Lloyd’s reports 563 to the contrary effect were either obiter or wrong: see the judgment of Longmore LJ at paragraph 22(2) where he said; “A duty of good faith arises when the assured (or indeed the insurer) seeks to vary the contractual risk. The right of avoidance only applies to the variation and not to the original risk: There is no authority for a proposition that a fraudulent misrepresentation leading to a variation will avoid the original contract as well.”[21]For the Claimants, Mr Berry QC submitted that(1) Groupama must succeed either against OP or against AON. If the fax had been sent in the form approved [“noted”] by Mr Smart, then the present case would not have been brought. Either the June fax was misleading due to the alteration or it was not. If it was then AON must be liable if OP are entitled to avoid liability; if it was not, then OP are liable to Groupama.(2) The June fax meant and could only have been thought by Mr McCann to meant that no ‘hits’ had been advised to LDG and/or AON to date. That is the natural and ordinary meaning of the fax which accords with market practice. There was no implication that “reasonable inquiries” had been made.(3) If the representation was untrue because of the US$28,000 loss, such information was not material and it would not have induced the underwriter to act differently.(4) On the facts, it appears that neither Mr MCann nor anyone at AON apart from Mr Perkins was aware that inquiries had been made of Mr Wilson of JLT. LDG bound itself to risks as they incepted; there was no element of retrospectivity so far as Mr Smart was concerned.(5) OP’s case is that losses were incurred in respect of declarations under the Treaty [namely the claims notified to Lloyd’s], but it is not their pleaded case that the fax was untrue because a claim had been made which had absorbed part of an aggregate deductible.(6) A reinsured only need disclose what he knows or what he is deemed to know [section 18(1) Marine Insurance Act 1906]. The Claimants do not assert any wider plea of breach of a duty to make a “fair presentation”.(7) The general market expectation is that, through the introduction of electronic notification of claims and losses, LDG and AON were reasonably up-to-date with loss information of which Lloyd’s were aware.(8) The fact that OP were asking for a warranty demonstrated that OP must have appreciated that LDG could only warrant what they themselves knew; they could not have been expected to give a warranty which might be falsified by the occurrence of an accident in respect of which no claim had been made, as yet. This is entirely consistent with the natural meaning of the words used. Mr Howard, the expert retained by OP stood logic on its head by suggesting, effectively for the first time during cross-examination, that the fact that a warranty had been requested widened the meaning of the words so as to include events which had happened and which would or might become a loss on the treaty.(9) Mr McCann accepted in evidence that the use of the words “losses incurred” was an oversight on his part as these words did not fully convey his desire for information from Lloyd’s. He also accepted that he was not familiar with Lloyd’s market practices in this area. Although he said that he expected inquiries would have been made of Lloyd’s he gave no foundation for this expectation. Mr Howard accepts that normal market practice would not require inquiries to be made up the chain but sought to argue that there were special circumstances which over-rode that general practice. Mr Howard’s thesis was flawed in that it depended upon the proposition that because a warranty had been asked for the duty to make inquiries was extended so that there was a duty to inquire up the line. He supported his opinion by saying that the inquiries were easy to make and the information would have been readily available. Even were the premise true, it would not affect the market practice which cannot depend upon whether an inquiry was or was not easy to make. Mr Howard also relied upon the fact that LDG were seeking to reduce their participation below 50%. But Mr Berry submitted that this point cannot have had any bearing on the question at issue provided, as was the case, that Mr Smart was retaining a significant proportion of the risk [25%]. Nor does Mr McCann’s point that there was retrospectivity affect the position, as the 50% risk was written when the declarations were about two months into their life, yet no inquiries from Lloyd’s could have been expected [even though they were made for the reasons stated above]. Mr Berry submitted that, at the end of the day, the only basis upon which Mr Howard could say that normal market practice did not apply in this case was because OP had asked for a warranty But “[I]t is obvious that the word “warranties” cannot make this difference and cannot so dramatically widen the meaning of the request, from the normal meaning of the words, into something ridiculous.”(10) It was effectively common ground between all the witnesses, including Mr McCann, that before there was a need to report a claim which had eroded the aggregate deductible the erosion would have had to be significant. Apart from Mr Howard, the experts agreed that there was no expectation that a report would be made unless the aggregate had been eroded to about 75%. Mr McCann said that he would want to know of a hit on the aggregate deductible where the deductible was being eroded “near to its limit” or “materially in excess of 50%”.(11) There was no evidence to justify a conclusion that the non-disclosure of the Cobb loss “would influence the judgment of a prudent insurer in fixing the premium or determining whether to take the risk”: section 18(2) of the Marine Insurance Act 1906. Mr McCann did not think it was material; Mr Smart thought it insignificant and this was the view of Mr Theakston and Mr Cheal [two experts]. Mr Howard was only prepared to go so far as to say that this loss information “could” influence the prudent underwriter. Mr Howard also accepted that the erosion of the aggregate deductible was irrelevant to OP as this feature was in the Lloyd’s insurance policy but not in OP’s treaty.(12) The test for inducement was that laid down by Clarke LJ in Assicurazioni Generali v Arab Insurance Group [2002] ECCA Civ 1642 at paragraph 62:
“In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.”
On the facts Mr Barone was the effective decision maker and yet has not given any evidence. The suggestion that Mr McCann would have wished to exercise his own judgment as to the adequacy of the reserving policy or the reserves in any particular case was unrealistic and contrary to reasonable underwriting practice. Mr McCann was not qualified to assess the reserves; he had never reassessed reserves put on business further up the line; he made no inquiries about reserving policy at the time when he accepted a 50% share. 22. For AON, Mr Nash contended: (1) The information provided to Mr McCann in January was historical and related to declarations which were not going to form part of the retrocession arrangements. The words “losses incurred on the programme to date” in the fax of 18 June 1998 from OP meant, according to market practice, losses which had been reported to the reinsured as claims upon him and until such losses have been reported, they are not losses “incurred” on the programme. Mr McCann Mr McCann did not regard this fax as an un-date of the information which had been provided in January; and the request was not so regarded by AON. Thus the information requested in June was different from the information provided in January. (2) The fax of 29 June from AON used words which exactly reflected the request for information, or ‘warranty’. As a matter of law, the court must construe the fax objectively that is, the court must ascertain from the words used the natural ordinary meaning which would be conveyed to a normal person. (3) The consistency argument should be rejected not least because Mr McCann was unaware that in January information had been obtained from JLT. He could not, therefore, have been expecting JLT to be consulted again. The fact that AON deleted the words “to LDG” does not affect the construction of the fax. Mr McCann was unaware of the earlier draft and cannot have been influenced by the alteration. (4) The factors on which Mr Howard [OP’s expert] relied for displacing the normal market practice understanding of the fax were of no weight as Mr Howard was not an underwriter and disclaimed any expertise in the field. Therefore, he was not competent toe express an opinion as to what a reasonable underwriter would have understood the 29 June fax to mean. In any event, none of the factors on which he relied were of weight. (5) If, when properly construed, the fax of 18 June meant a request for information and that that was the market’s interpretation of it, there cannot have been any implied obligation on AON to undertake inquiries up the chain. The alleged duty to make a fair presentation cannot exist alongside the market practice: the fact that the increase in the quota share was accepted subject only to information about losses “incurred” on Mr Smart’s book showed that OP were ‘waiving’ any right to additional information. They knew what they wanted and they got what they regarded as sufficient. (6) The case on non-disclosure must fail. There is a duty to make disclosure of facts actually known to LDG/AON or to facts which “in the ordinary course of its business” LDG/AON should have had. It is clear that neither AON nor LDG knew of the claims already made but not passed on. The only basis for saying they ought to have known is the alleged duty on them, in response to OP’s fax, to make inquiries up the chain (7) The test for materiality in the insurance context, whether in relation to a plea of misrepresentation or non-disclosure is whether the matter in question would, if disclosed, have affected the judgment of a prudent underwriter in deciding whether to write the risk or setting terms on which he would be prepared to write the risk. There is no evidence before the court which would enable it to conclude that the loss of US$ 28,000 or the other matters relied upon would have had the necessary affect. The suggestion that Mr McCann might sensibly have wished to examine the reserves placed by third party administrators is fanciful. OP were running a risk that Mr Smart’s book of business was unprofitable. That was not a risk which involved examining the correctness of the underlying losses. If Mr Smart’s book was ‘hit’ then OP were obliged to participate in any payment made to the Lloyd’s syndicates. (8) The effect of Mr Smart’s scratch on the draft fax of 29 June was simply to confirm that he was happy with its contents; that is, with the substance of what was written. The alteration [by deletion of the words “to LDG”] made to the fax by Mr Perkins did not alter the substance; if, without the words no-one would understand the fax to be a representation that inquiries had been made up the chain, then the deletion of those words cannot have made any difference. The Decision[22]There are a number of issues. The first question I must deal with is the meaning of the fax of 29 June 1998. The fax is a response to OP’s fax of 18 June 1998 and the two must be read together. For convenience I repeat the crucial paragraphs:
“This is to confirm our increased participation from 50% to 75% on the LDG marine personal accident program effective 1/1/98 [an irrelevant error] subject to satisfactory warranties as to no losses incurred on the program to date.” ““Following on from your facsimile dated 18 June, I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to date that would affect any of the declarations ceded hereunder.”
[23]It seems to me, as a matter of ordinary language, that the words “the losses incurred on the program to date” meant the losses incurred on the book of business written by Mr Smart, in the fortunes of which Mr McCann was considering an increased participation. A loss is incurred if a loss has been reported to Mr Smart and which has impacted his book. A loss is not incurred if a claim has been made which has not yet resulted in a loss. Thus, a potential loss, in the sense that a loss for which a reserve below a deductible has been made would not be reported to Mr Smart and would not be incurred on the program. Mr McCann did not expect to be advised of losses incurred but not reported. Having regard to the request, the difference in words between ‘losses incurred on the program’ and ‘losses advised .. that would affect any of the declarations’ is not significant. It seems to me obvious that ‘the declarations ceded hereunder’ meant and can only have meant the program which Mr Smart had written. ‘Hereunder’ must be a reference to the program which is identified in the header to the fax. The ‘losses advised to date’ must, in the context, therefore, be losses advised to Mr Smart.[24]My view of the matter is reinforced by what is said in the experts’ joint memorandum, namely that the market would understand the request from OP to be referring “to LDG’s losses, either paid or outstanding or a combination of both, and which either have given rise, or may give rise, to claims under the reinsurance contract and which have taken place at the time of the enquiry”. They were also of the view that the words “no losses advised to date that would affect any of the declarations ceded hereunder” were “for all practical purposes synonymous with “incurred loss position to date on the program”. They were also of the view that “market practice would not normally expect claims where initial amounts advised fall within policy deductibles to be reported as “losses” to a reinsurance treaty. In general market practice, a request from a reinsurer to a reinsured for “incurred losses” would not be interpreted to include IBNR [Incurred But Not Reported] losses.” The experts were also of the common view that the words “we can confirm” would, as a matter of market practice, mean “LDG can confirm”. I would be inclined to the view that the “we” was apt to include both AON and LDG, but nothing turns on this, since AON had checked their own claims department before drafting the fax of 29 June. 25. Whilst it is true that on this construction of the two faxes, OP were being told no more information than they would have been entitled to as a matter of law, the brokers were asked for specific information limited to the losses notified to Mr Smart and that is the information they were given. Mr McCann confirmed that the request was directed to losses that would impact on the treaty and accepted that he had by an oversight failed to ask for what he said he wanted. “Q. I think my question was: when you ask for losses incurred in this document, did you not mean the same thing as claims or losses incurred in the earlier document, which is losses above any relevant deductible? A. Yes, I was interested in losses that would impact the treaty between myself and Mr Smart. Q. I.e. losses which amount to a claim under that treaty? A. Yes. Q. And that does not include things that are not deductible? A. If an aggregate deductible was pushing near to its limit, I think it would be proper for a fax of this nature to -- a response to be given to me. Q. Are you aware of market practice that one only notifies claims under an aggregate deductible when the aggregate deductible has been wasted or burnt by 75 per cent or more? Is that what you are referring to? A. No, I am not aware of that practice. Mine was more one of commonsense that -- and 75 per cent would seem reasonable, if that is the market practice. Q. So, your concept is pushing the other limit, is what you are interested in? A. Nothing is black and white. If the aggregate deductible is for a 12-month period and you are only -- well, in this case we are six months into it so all things being equal, you may expect 50 per cent of the aggregate to have been burned through. If it was materially in excess of 50 per cent, would you probably want to know, and I think you should be told. Q. Can I just read that answer again? Other things being equal you may expect 50 per cent of the aggregate to have been burnt. If it was in excess of 50 per cent, would you want to know, but it follows that under 50 per cent it would not be anymore than you expected? A. Probably not.” And later:
“Q. I think my question was: are you saying what you wanted was a chance to reassess the reserves on the incurred losses? A. No, not reassess the reserves but to have information where there were losses that could have a chance of reaching a programme. Q. Why did you not ask that, then, rather than ask for simply losses incurred? A. That is an oversight on my part.”
Q. I.e. losses which amount to a claim under that treaty? Q. And that does not include things that are not deductible? Q. So, your concept is pushing the other limit, is what you are interested in? A. Probably not.” And later:

Q. Why did you not ask that, then, rather than ask for simply losses incurred?

[25]However, I do not accept that Mr McCann ever had it in mind to ask for more information than the fax of 18 June implied. I did not find it credible that OP would have wished to involve themselves in examining the reserving policies of third party administrators. The risk which Mr McCann was writing was based upon a judgment he had to make about the competence of Mr Smart as an underwriter and whether he was writing risks in a sensible and properly organized way. That is why Mr McCann made his visit to Mr Smart and reported back on the quality of the Agency run by Mr Smart as it appeared to him to be. He was not concerned with writing risks on a facultative basis; he was not directly concerned with reserving policies, although he might have asked questions about the way Lloyd’s wrote their business and how the claims were reserved and by whom when he embarked on the quota share treaty. But he never did. Broadly, Mr McCann was only concerned with whether Mr Smart was writing a profitable book of business, and no other questions were ever asked. It is clear, I think, that OP wanted to know, before they took on a higher percentage, whether LDG had any losses paid or outstanding, which had given rise or might give rise to claims under the reinsurance contract and which had already occurred at the time when the enquiry was made. Since there was an element of retrospectivity in the variation of the percentage, such an inquiry, initiated by Mr Barone, was obviously sensible.[26]The essence of the defence of OP hinges on the fact that in their fax of 16 June OP asked for a “warranty” about the incurred loss position to date on the program. This was the peg, as it seemed to me on which OP’s broker expert based his opinion that contrary to what he accepted was normal market practice, AON/LDG were obliged to make inquiries further up the line. I cannot accept this thesis. It seems to me clear and obvious that no-one could expect AON/LDG to give a warranty about facts of which they were not fully aware. To warrant that there were no claims in the pipeline which might impact on the program was not practicable for a number of reasons. There might be an accident giving rise to a claim very shortly before the warranty was given and after the last check had been made. Claims which appeared to be so minor that they would never exceed the deductible and thus never impact on the program might suddenly deteriorate. To give a warranty of any value about losses other than those actually incurred on the program to date, would involve extensive inquiries and fine judgments to be made about reserves and the reserving policy. In each case where a claim had been made AON and LDG would have to examine the claims file and find out whether there were up-to-date medical reports and so on. In my view the fact that OP were asking for a warranty in relation to the “incurred loss position to date on the program” strengthens rather than weakens the conclusion that OP were concerned to ascertain the loss position as it impacted on Mr Smart’s book. LDG and AON could have given a warranty that there were no losses reported to them which were incurred to date on the program; the fact that they chose to respond by saying that there had been no losses advised to them to date was as effective as a warranty to that effect as OP must have recognized when deciding to proceed despite the absence of a warranty as asked. In my view the request for a warranty says nothing helpful to OP’s case; rather it works the other way.[27]Further, the fact that it might have been simple to have made inquiries up the line says nothing about whether there was or was not a modified market practice as suggested by Mr Howard. The fact that there was a retrospective element in the business in which OP were being asked to have an increased share, again does not support Mr Howard’s opinion. The retrospective element plainly justified the request which was made; but I do not understand why it suggested that normal market practice ceased to apply. It must be quite normal in the market for their to be some retrospectivity and the identified market practice is sufficient to accommodate this. At this time I am satisfied on the evidence that the reporting of losses up the line was reasonably quick. The delay between the Syndicate accepting a loss in the Cobb case and reporting the position to Mr Smart was unfortunate and unusual. Of itself this delay does not, I think, alter market expectation. I also do not understand how it can be argued that because the January figures had been partly derived from information held by JLT it was necessary ‘for the sake of consistency’ to return to JLT in June. Mr McCann did not know that JLT had been approached in January, and could not have had it in mind when he requested the warranty in June. The figures given in January related to historical information; the information in June was to answer a specific request from OP. The figures did not purport to be given on the same basis. It is true that Mr Smart made some admissions about this point when being cross examined by Mr Fletcher but overall, the weight of the evidence suggested that Mr Smart’s concessions were misplaced, and conflicted with other parts of his evidence. I am not entirely sure he fully understood what he was agreeing to.28. In my view, there is force in Mr Nash’s submission that Mr Howard was, in any event, not really competent to speak about the expectations of underwriters. He has a distinguished background as a broker and he gave his evidence clearly and well. But as between him and the other two underwriting experts, I defer to their opinions. None of the factors on which Mr Howard relied for saying that normal market practice did not apply in this case was convincing. Accordingly I find that AON/LDG were obliged as a matter of fact and law to do no more than they did in their fax of 29 June. I accept that it would have been better if the text of the original draft had been sent to OP; but in the event the change made no difference because without the words “to LDG” the fax meant the same as with them. Mr Perkins’ removal of the words must have been deliberate; I accept that what he did was not intended to deceive and it may well be that he thought that they were mere surplusage, as indeed they were. I also accept that before the altered fax was sent the amendment should have been shown to Mr Smart. The purpose of showing him the original was to seek his approval and authority to its terms. Any alteration of potential substance, as this was, should have first been cleared with Mr Smart, on whose behalf it was being sent. This position accords with the market practice identified by the expert witnesses. Therefore, had OP a defence to the claim because of the alterations made, then AON would have had to bear the loss sustained by LDG being unable to recover from OP. But that does not arise.29. If the Cobb loss should have been reported but was not, then the question of materiality would have arisen. In my view this was not a material misrepresentation and not a material breach of the duty to disclose. The general consensus on the evidence was that a loss of US$ 28,000 was, in the context of the program, nothing of significance. It was not a matter which “would” have affected an underwriter’s judgment and there was no underwriting evidence to that effect. I reject Mr McCann’s suggestion that he would have wanted to examine the reserves in other cases. As I have said, that was not his business and he had no experience to rely on and therefore he would have had nothing to gain from looking at the reserves. The position seems to me to be clear that had LDG gone up the line nothing would have been disclosed which would have had any effect on the underwriting decision which OP then made.30. Assuming that there was a material non-disclosure which induced OP to increase their share, would OP have been entitled to avoid the whole of their participation or just the extra 25%? I regard myself as bound by the decision of the Court of Appeal as expressed in the judgment of Longmore LJ, cited above. Because this issue is purely hypothetical I decline to say more about it. On the basis of that decision I would regard the right to avoid as being related only to the variation. The difference between a new contract and a variation is not easy to define since in one sense every variation could be said to lead to a new contract and in the end it may just be a matter of form. Here, the only term of the contract that was altered was the % share, all the other terms remained the same and in form at least the change was closer to a variation than a new contract.31. For the reasons I have attempted to give, I find in the Claimants’ favour against OP and dismiss their claim against AON. The financial consequences and the form of order are matters which are to be left to the parties to consider, after they have had a chance to review this judgment. I would like to express my thanks to the experts and to counsel. All of them have assisted to a greater or lesser extent.