On 18 October 2001 the House of Lords handed down an important decision for reinsurance brokers in the Aneco case 1 . The case concerned the circumstances when a reinsurance broker will be held liable for negligent advice and the measure of damages payable by the reinsurance broker in such circumstances. The decision has potentially serious ramifications for reinsurance brokers and the reinsurance industry as a whole.
The factual background to the case concerned a claim by the liquidators of a Bermudian reinsurance company, Aneco Reinsurance Underwriting Limited ("Aneco") against the reinsurance brokers, Johnson & Higgins Limited ("J&H").
In 1988, an underwriter who wrote marine excess of loss business on behalf of four Lloyd's syndicates, Mr Bullen, requested J&H to obtain a proportional reinsurance of his excess of loss account. To facilitate such placement J&H drafted a "fac/oblig" treaty (known as the Bullen Treaty), under which the Bullen syndicates could decide which risks to cede to their reinsurers which, in turn, their reinsurers were obliged to accept. Acting on behalf of the Bullen syndicates, J&H identified Aneco as a potential reinsurer of the treaty and offered Aneco a share in it. It is clear that J&H contemplated from the outset that Aneco's own risk under the Bullen Treaty should be subject to a retrocession. J&H suggested to Aneco that it should purchase retrocession cover, which J&H envisaged would be available at between 30-40% of the Bullen Treaty net premium income.
Aneco subsequently agreed to participate in the Bullen Treaty subject to J&H obtaining satisfactory retrocession protection for Aneco's net account. For these purposes J&H were acting as Aneco's brokers. J&H knew that if suitable retrocession cover was not available, Aneco would not enter into the Bullen Treaty. In the event, J&H confirmed to Aneco that they had obtained suitable cover and Aneco proceeded to subscribe to the Bullen Treaty.
During the course of placing the retrocession cover for Aneco, J&H described the contract as a "quota share" treaty instead of a "fac/oblig" treaty. (This latter type of risk was a less attractive form of risk and harder to obtain suitable retrocession cover for.) Upon subsequently learning the true nature of the Bullen Treaty, several of Aneco's reinsurers avoided the retrocession contract on the basis of the material misrepresentation made by J&H (as they were entitled to do).
The losses suffered by Aneco under the Bullen Treaty were substantial and included...