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Queen’s Bench Division (Commercial) [1995] LRLR 240, (Transcript) HEARING-DATES: 22 June 1994 22 June 1994 INTRODUCTION: This is a signed judgment handed down by the judge, with a direction that no further record or transcript need be made (RSC Ord 59, r 9(1)(f), Ord 68, r 1) I See Practice Note dated 9 July 1990, [1990] 2 All ER 1024. COUNSEL: None stated in original source PANEL: Judge Anthony Diamond QC JUDGMENTBY-1: ANTHONY DIAMOND QC JUDGMENT-1: ANTHONY DIAMOND QC: Introduction In this action the plaintiff, Mr Simner, sues on his own behalf and on behalf of all other members of Syndicate 1104 at Lloyd’s, to recover sums due under a stop loss reinsurance policy effected with the defendant, the New India Assurance Company Limited, in July to August 1990. The brokers who were instructed to effect the reinsurance, and did effect it, were Heath Fielding International Limited. They are sued as third party to the counterclaim. I shall refer to the parties as “the Syndicate”, “New India” and “Heath Fielding” respectively. Before dealing with the circumstances in which the reinsurance came to be placed, I shall have to describe the underlying insurance and the circumstances in which it came to be written. This was a 5.71 per cent participation in a scheme devised by Anthony Kidd Agencies Limited (Anthony Kidd), a subsidiary of the CE Heath group of c6mpanies specialising in personal accident and sickness business, to insure local education authorities and individual schools against the risks associated with the absence of teaching and other staff through sickness and accident. The Syndicate’s 5.71 per cent line on this risk was reinsured with New India on terms inter alia that the Syndicate would bear its proportion of loss on the original insurance up to £750,000 in the aggregate (£42,825 in respect of the Syndicate’s 5.71% line) and that losses in excess of this amount would be paid by New India. The reinsurance premium was to consist of a deposit premium of £600,000 (£34,260) from which a commission of 25 per cent fell to be deducted. This premium was to be adjusted on expiry so as amount to 30 per cent of the Syndicate’s 5.71% proportion of the gross premium payable on the underlying insurance, less the 25 per cent commission. It is New India’s case that it was induced to enter into the stop loss reinsurance by material misrepresentations made at the time the slip was presented to it on 27th July 1990 and/or on 8th August 1990; alternatively that when the slip was presented on these dates material facts and matters which were known to, (alternatively, could and should have been ascertained by) the Syndicate were not disclosed to New India. Accordingly, New India contends that it was entitled to avoid and did avoid the reinsurance contract by a letter dated 23rd May 1991 addressed to Heath Fielding. The Syndicate denies both that any material misrepresentations were made to New India and also that there were any material facts known to the Syndicate which were not disclosed to New India on either of the relevant dates. Alternatively the Syndicate contends that, if the reinsurance was any stage voidable on the grounds of misrepresentation or non-disclosure, New India waived its right to avoid the reinsurance and/or affirmed it by signing a “honeycomb endorsement” on 28th September 1990 after certain further information including a schedule of declarations and a bordereaux had been seen by it. In the further alternative the Syndicate contends that, if it is unable to enforce the reinsurance contract against New India, this arose through breach of contract or negligence on the part of Heath Fielding and that the Syndicate is accordingly entitled to recover from Heath Fielding damages based on the loss of the reinsurance contract or alternatively the lost opportunity of obtaining a like reinsurance in the market. The Early History of the Binder In about late March 1990 Anthony Kidd became involved in a scheme to insure first one local education authority and then others against the risks of staff being absent from work due to sickness or accident. Some of the business was introduced to Anthony Kidd by another subsidiary within the CE Heath group of companies, namely CE Heath (Yorkshire) Limited but other producing brokers were also involved. Anthony Kidd quoted rates and terms of insurance. The scheme became known as the “Teacher Supply Scheme” or “Supply Teachers Scheme” though it also covered the absence from work of other employees such as nursery nurses, clerical staff and caretakers. The scheme was originally underwritten as to 100% by Lloyd’s Syndicate No 296 (DJ Walker and Others) under a pre-existing binding authority granted by that Syndicate to Anthony Kidd in respect of personal accident business. The loss adjusters under the scheme were Robert Bishop Southern, an operating division of Robert Bishop Limited (“Robert Bishop”) who handled much of Anthony Kidd’s binder business. By 29th May 1990 premium income of the order of £2,300,000 gross (£1,500,000 net) had either been written or was the subject of orders received. A schedule of orders of that date lists 12 groups of schools or teachers or individual schools which had placed orders for insurance. It was then apparently decided between Anthony Kidd and DJ Walker that the scheme should be insured under a new binder to which DJ Walker would subscribe a reduced line of 25 per cent. The schedule of orders was initialled by DJ Walker to indicate a promised line of this percentage. It was then broked to other syndicates at Lloyd’s on about 31st May and 1st June 1990. The Circumstances in which Mr Goodsell came to write his Promised Line on 1st June 1990 The Syndicate primarily wrote property insurance but it was interested in developing other kinds of business of which personal accident insurance was perceived as being an attractive class. Accordingly in late April or early May 1990 Mr Andrew Goodsell, the deputy underwriter of the Syndicate, spoke to Mr Marcus Hopkins, a member of CE Heath’s Special Risks Department and told him that the Syndicate would like to see more personal accident business from his department. Mr Hopkins told Mr Goodsell that the majority of Heath’s personal accident business was placed by its subsidiary company, Anthony Kidd, and undertook to speak to Anthony Kidd and to ask it to offer business to the Syndicate. On 1st June 1990 Mr Robert Ayrton, a broker and director of Anthony Kidd came to see Mr Goodsell. He brought with him the schedule of orders at 29th May 1990 on which were the initials of DJ Walker and certain following syndicates. Mr Ayrton asked whether Mr Goodsell would be interested in writing a line on a binding authority in respect of accident and illness policies to be issued to various education authorities and schools. He showed the schedule to Mr Goodsell. It listed the names of the potential assured, the period of the proposed insurance and the gross and net premium. The scheme was described on the slip as “\;Personal Accident and Illness — Supply Teachers Scheme”. The schedule stated “Terms as attached” but Mr Goodsell could not recollect whether he was shown any detailed terms or what if any document was attached to the schedule. Mr Goodsell was aware that Anthony Kidd had an excellent reputation for profitably handling accident and illness binding authorities. He was pleased to have been offered the business. Mr Ayrton explained that he was seeking support in order to reduce the leader’s line from 100% to 25% and that this was being done because the potential level of income was greater than originally anticipated. Mr Goodsell asked about the claims statistics and was told by Mr Ayrton that the scheme was a new one and accordingly there were no further statistics available. In these circumstances Mr Goodsell put down a figure of 12.5 per cent on the slip and initialled it on behalf of the Syndicate. This was a commitment to write 12.5 per cent of the risk and Mr Goodsell agreed in evidence that he could have been held to it. After certain further syndicates had initialled the schedule the binder was registered with the appropriate Lloyd’s authorities on 6th June 1990. The Line Written by Mr Goodsell on 10th July On 10th July 1990 Mr John Burnham of Anthony Kidd came to see Mr Goodsell at the Syndicate’s box at Lloyd’s in order to obtain Mr Goodsell’s signature to his promised line. Mr Burnham brought with him a slip for the binder on which were the “scratches” of the DJ Walker syndicate and of a member of following syndicates. The slip was headed in manuscript “Supply Teachers Scheme”. It stated:-
Please sign binding authority with attached wording.” Attached to the slip were 9 sheets of paper consisting of the following:- (i) A Schedule (one page). This stated that it formed part of the binding authority. It provided, inter alia, “Limits £25,000 any one person”, that rates were to be agreed by Leading Underwriter: that there was to be a 35 per cent commission on gross premium unless otherwise agreed by the Leading Underwriter; there was to be a profit commission of 20 per cent; and that the claims adjusters were Robert Bishop. (ii) A Memorandum of Agreement between the Underwriting Members of Lloyds and the Cover Holder (3 pages consisting of 21 clauses). This provided inter alia as follows:- 3. Period of Binding Authority This Binding Authority is effective during the period 1st April 1990 to the 31st March 1991 and for such renewals as may be agreed. 14. Accounts and settlements Settlement in account between Anthony Kidd Agencies Limited and the Underwriters shall be on a quarterly basis. NA Declarations shall be agreed by Leading Underwriter only. 18. Cancellation This Binding Authority may be cancelled by the Underwriters by the giving of 30 days notice in writing to the Coverholder. 19. Claims (a) All claims shall be dealt with by the Claims Adjuster nominated in the Schedule, referring to Coverholder or Leading Underwriter if need be . . . (c) All advice to LUNCO and/or LACC shall be for information only (e) Claim Bordereaux shall be submitted monthly to the Coverholder, or more frequently, if necessary, and claims shall be collected from Underwriters quarterly, or more frequently if necessary (f) Claim collection forms . . . shall be initialled by Leading Underwriter, LUNCO and/or LACC, only and LPSO is authorised to accept such agreement. (iii) A specimen Certificate of Insurance (1 page). (iv) Terms attaching to and forming part of the Certificate (4 pages). This included a schedule which provided for a daily sum of £80 to be paid in respect of each working day (excluding the first two) that a teacher was disabled through accident or illness and set out different rates of premium payable per teacher according to whether the benefit was payable for 10, 20 or 195 working days. There were optional extensions for other school employees including nursery nurses and caretakers at specified rates of premium. Mr Goodsell said in evidence that he discussed with Mr Burnham the amount of premium income that the scheme might generate and told him that he wished to put an upper limit. He said that Mr Burnham left to speak to a colleague, probably Mr Ayrton, and returned some time later saying that an upper premium limit of £5 million would be acceptable. There is however reason to think that there must already have been an upper premium limit of £5 million applicable to the binder although nothing in the documents referred to such limit. The expert evidence given by Mr Richard Outhwaite and Mr David Neil was to the effect that a premium income limit has to be provided to Lloyd’s authorities at the time a binding authority is registered with them and that until such registration it is contrary to Lloyd’s regulations for a binder to be presented for subscription by underwriting members of Lloyd’s. Mr Goodsell also said in evidence that by this stage he had decided that it would be prudent to seek reinsurance for the Syndicate’s participation in the scheme and that shortly after he had put down his promised line on 1st June he had approached Mr Tom Wardrop, a broker employed by Heath Fielding, and asked him to find out whether stop loss protection was available. In view of the lack of progress in obtaining a reinsurance quotation and the information provided by Mr Wardrop as to the prospects of obtaining reinsurance, he asked Mr Burnham whether it would be possible for the Syndicate’s participation to be reduced from 12 1/2 per cent to 6 per cent. Mr Burnham replied that, as the slip was oversubscribed, he would have no objection to this. Mr Burnham did not present any claims statistics with the slip, nor did Mr Goodsell enquire about claims statistics. The reason for this, according to Mr Goodsell, was that he assumed that the position was no different on 10th July from what it had been when he originally put down his line on 1st June; that undoubtedly there had been a few claims; and that “if Kidd had become aware that something bad was occurring, I would have expected to have been told”. Mr Goodsell then put down a line of 6 per cent. Under his Syndicate’s stamp he wrote:- “P/I (premium income) limit to slip £5m Nett.” Mr Goodsell however said that he did not expect the premium income to be as such as £5 million net. This was a limit, not an estimate. This evidence, which I accept, is supported by the fact that for internal purposes a rubber stamp was Placed on the Syndicate’s copy of the slip in which under the heading “Premium Exp (expected) Mr Goodsell inserted the figure of £125,000. This was an estimate of the premium expected on the Syndicate’s 6 per cent of the risk and is equivalent to a premium income of £3.2 million gross (£2.08 million net) for the whole risk. The Re-Insurance Instructions There was a difference of recollection between Mr Goodsell and Mr Wardrop as to when the instructions were given. Mr Goodsell thought that he approached Mr Wardrop with instructions to obtain reinsurance, or quotations for reinsurance, soon after he put down his promised line on 1st June. I found this evidence a little improbable in the light of the small amount of information concerning the risk that was apparently available for Mr Goodsell to hand to Mr Wardrop until the 9 pages of information had been provided by Mr Burnham on 10th July and the inherent difficulty of obtaining a firm quotation on such slender information. Mr Wardrop, on the other hand, thought he was first approached by Mr Goodsell at the very end of June or early July 1990. Mr Wardrop supported this by saying that he had checked Heath Fielding’s computer system to find out when the draft reinsurance slip was first typed and had discovered that the draft slip was typed on 11th July. Mr Wardrop thought it unlikely that there could have been a large gap in time between his being provided with the relevant information and the draft slip being typed. Little appears to turn on the precise timing and it is clear that the recollections of both Mr Goodsell and Mr Wardrop on timing are too blurred to be wholly reliable. It is I think probable that there were preliminary discussions about the possibility of obtaining reinsurance for Mr Goodsell’s promised line of 12.5 per cent, that these occurred at some time before 10th July 1990 but that firm instructions were only given to Mr Wardrop to obtain the reinsurance after Mr Goodsell wrote the line of 6 per cent on 10th July. Mr Goodsell at some stage provided Mr Wardrop with copies of the 9 pages of information that had been attached to the binder when it was presented to him on 10th July. He probably told Mr Wardrop that the risk had originally been written as to 100 per cent by DJ Walker and that the risk had been cancelled and re-written due to the quantity of premium being accepted under the previous arrangement. He probably did not provide Mr Wardrop with a copy of the schedule of orders as at 29th May 1990. Mr Goodsell told Mr Wardrop that the scheme was a new one with no claims history. He may also have casually added, in the course of the first discussion, that if Mr Wardrop needed any further information concerning the risk he could approach Anthony Kidd. Mr Wardrop had no recollection of being told this and it was not ultimately suggested on the part of the Syndicate that any firm instruction was given to Mr Wardrop that he should contact Anthony Kidd for information. There was a disagreement between Mr Goodsell and Mr Wardrop as to whether Mr Goodsell said that there was a premium limit of £5 million on the binder or whether Mr Goodsell passed on the figure of £5 million to Mr Wardrop as the broker’s (ie Anthony Kidd’s) estimate of the probable premium income. I accept Mr Goodsell’s evidence that he told Mr Wardrop that the premium limit on the binder was £5 million. I think Mr Wardrop at some stage mistakenly thought that he had been told that the figure was the brokers’ estimate of the premium income. It is not entirely clear at what stage Heath Fielding were provided with a copy of the binder slip. If Mr Wardrop had the slip and had examined it he would have seen that the figure of £5 million referred to the net premium income limit. A further mistake made by Mr Wardrop was that the memorandum of agreement which formed part of the 9 pages attached to the binder, as well as the binder slip itself, made it clear that risks could be declared so as to attach from 1st April 1990, more than 3 months previously, whereas Mr Wardrop, in drafting the reinsurance slip, inserted the 1st July 1990 as the date from which risks would attach. It was not suggested that Mr Goodsell caused or contributed to this mistake. In the light of the information provided by Mr Goodsell it was decided by Mr Wardrop that the most appropriate form of reinsurance was a stop loss reinsurance which would pay claims over an aggregate excess figure with no cap on the reinsurers’ liability. Mr Wardrop discussed this suggestion with Mr Goodsell who agreed to it. Mr Wardrop then caused a slip to be prepared as follows:-
The Placing of the Reinsurance Mr Wardrop at first handed the draft slip to a member of Heath Fielding’s “special risks team” with instructions to obtain reinsurance. It is not clear whether more than one underwriter was approached, but he declined the risk. Consequently after an interval of about two weeks Mr Wardrop retrieved the slip and entrusted a copy of it to Mr John Brehaut, a broker in the property division of Heath Fielding, with instructions to place the risk. Before doing so Mr Wardrop enquired from Mr Goodsell whether there had been any premiums or claims signings and was told there had been none. Mr Brehaut was instructed to place the risk on 27th July 1990. The information given to him consisted mainly of a copy of the 9 sheets of information attached to the binder. He was given nothing else in writing apart from the copy of the draft slip. He was not told the identity of the underwriters seeking reinsurance but knew that he was to seek reinsurance of a 6 per cent line of the risk that had been written by a Lloyd’s syndicate. He was also told by Mr Wardrop that the scheme was a new one, that there were no previous claims statistics available and that the estimate of the probable premium income under the scheme was £5 million. For some time Mr Brehaut had been placing a considerable amount of Heath Fielding’s reinsurance business with New India. Mr Brehaut had built up a good relationship with the chief manager of New India’s branch in London, Mr Manubhai Patel. Mr Wardrop probably made the suggestion that Mr Brehaut should approach New India, among other possible reinsurers, to see if it would write the risk. The Meetings at New India’s offices on 27th July 1990 The two visits made by Mr Brehaut to New India’s offices on 27th July were the subject of considerable investigation at the trial. I shall leave to a later stage of this judgment the question whether in the course of these visits Mr Brehaut made any and if so what representations to Mr Patel as to the claims position under the binder or as to the estimated premium income. The first visit was made in the morning. Mr Brehaut showed the slip and the 9 pages of information to Mr Patel. After reading it, Mr Patel signed the photocopy of the slip to indicate that New India would write 6 per cent of the whole order subject to a query as to whether the scheme covered the incapacity of teachers and staff due to pregnancy and whether death after illness was covered. Mr Brehaut then returned to Heath Fielding’s offices and reported the position to Mr Wardrop. It was apparent to both of them from looking at the placing information that pregnancy was not excluded, save within 6 weeks of confinement, and that the scheme did not cover death after illness. In the light of New India’s hesitancy about reinsuring pregnancy risks, Mr Wardrop decided that the excess should be raised from £500,000 to £750,000. Accordingly the draft slip was amended so as to read:-
In the afternoon Mr Brehaut paid a second visit to New India’s offices and answered Mr Patel’s two queries. Mr Patel then placed New India’s stamp on the slip, inserted words to indicate that New India wrote 6 per cent of the limit, and signed and dated his acceptance of the risk. Mr Brehaut then raised the question whether Mr Patel might be interested in securing stop loss cover for his exposure to the risk but the matter was left on the basis that nothing would be done until it was seen how the risk developed. Events Between 27th July and 8th August After being told by Mr Brehaut that the reinsurance had been placed, Mr Wardrop reported this to Mr Goodsell. At the same time he expressed the view that this was a “super” deal from the Syndicate’s point of view as it more or less guaranteed it a profit. On 30th July 1990 a “blue sheet” was drawn up by Heath Fielding summarizing the terms of the slip. This was sent to Mr Goodsell who checked it and requested that a number of amendments be made to the terms of the slip. These requests were apparently made on a number of different dates as a result of which the slip was amended on five different occasions. On 3rd August 1990 the slip was presented to Mr Patel’s deputy, Mr Desai, who initialled amendments deleting an ultimate net loss clause and providing that the premium should be payable in quarterly instalments in arrears. A few days later Mr Gocdsell appears to have noticed that the slip covered “risks attaching during the period 12 months at the 1st July 1990”. He pointed out the error to Mr Wardrop and requested that the cover be backdated to 1st April 1990. A copy of the blue sheet initialled by Mr Wardrop on 6th August 1990 suggests that the error was spotted on around this date. The Meeting at New India’s offices on 8th August 1990 Again I do not deal at this stage with the question of what if any representations were made by Mr Brehaut to Mr Patel in the course of this meeting. What in fact occurred is that Mr Patel initialled a number of amendments to the slip. The most important of these was to amend the slip to read Period: Risks attaching during the period 12 months at the 1st April 1990. Other amendments included one which provided “Premium payable quarterly in arrears -- 2nd, 3rd and 4th Quarters to be signed additional premium”. Further Amendments to the Slip Further amendments were initialled on behalf of New India on 15th August and 4th September 1990. On 16th September 1990 a formal amendment to the slip was presented and initialled to identify the Re-Assured as “Lloyd’s Syndicate No 1104”. The Financial Effect of the Reinsurance The effect of a stop loss with a fixed excess point of £750,000 is that it is more beneficial to the reassured the larger the premium income to the underlying insurance. Mr Neill, the reinsurance consultant called on behalf of New India, calculated that if the gross premium income to the binder were £1.5 million, the Syndicate would pay out 123.07 per cent of its net premium before collecting any claim on the reinsurance. If however the gross premium to the binder were £5 million, the Syndicate would pay out only 69.23 per cent of its net premium in respect of claims and reinsurance premium and the reinsurer would then assume all further losses, thereby guaranteeing the Syndicate a profit of 30.77 per cent of its net premium income. The parties calculated that, so long as the gross premium income to the binder was more than £2,143,000 the Syndicate was guaranteed a profit and beyond that figure, the larger the premium income to the binder, the larger the profit to the Syndicate. These figures should have been readily apparent to any person in the market with ordinary expertise in reinsurance. No doubt it was for reasons such as these that Mr Wardrop described the reinsurance to Mr Goodsell as a “super deal”. Notification of Claims The first notification given to Mr Goodsell or the Syndicate as to the receipt of claims under the binder occurred on 4th September 1990. On that day Mr Goodsell was shown by Anthony Kidd a schedule of “Final Orders at 3.8.1990”. The schedule listed the assured together with, in each case, the period of the risk and the gross and net premium. The net premium to the binder as shown on the schedule amounted to £5,141,166.70. It was explained to Mr Goodsell that the reason the net premium income slightly exceeded the premium income limit of £5 million was that Anthony Kidd had agreed with the leading underwriter to rebate about £158,000 in respect of commission due to the fact that the contract was beginning to look as though it was not going to be as successful as originally hoped. About two days later Mr Goodsell received a copy of the first claims bordereaux. This was a two line manuscript document which summarized the amount of the claims paid to the educational authorities in July and August 1990. The bordereaux showed that the value of the total claims and fees paid in July 1990 amounted to £220,105.23 and that the total claims and fees paid in August 1990 amounted to £474,202.20, making a total for the two months of £694,307.43. I should however indicate that while, as I accept, the Syndicate had been given no information as to the claims position before 4th September 1990, Robert Bishop, Anthony Kidd and the leading underwriter had a considerable wealth of knowledge concerning the development of claims at an earlier stage. This knowledge included the following:- (1) Claims began to be received by Robert Bishop in about the second week in June. Mrs Elliott, a director of Robert Bishop, described how by the end of June boxes of claims were coming in; how, in early to mid July, an additional float of £250,000 to pay claims was sought and received from Anthony Kidd; and how additional staff had to be taken on in mid-July to cope with the flood of paperwork involved. (2) On 12th July 1990 Mrs Elliott notified Anthony Kidd that the level of claims notified to Robert Bishop by that stage amounted to £237,746. A 38 page fax was sent on 17th July 1990 by Robert Bishop to Anthony Kidd, consisting of a computerised print-out of the claims processed by that date. Mr Vic Grimwood, the claims manager of DJ Walker the leading underwriter, was in Anthony Kidd’s offices at the time. Mrs Elliott described how the print-out was sent to Anthony Kidd so as to be seen by Mr Grimwood “before he goes home”. About the same time the underwriter of Syndicate No 484 asked to see the figures and was shown them. (3) By 27th July 1990, when the risk was first broked by Mr Brehaut to Mr Patel, both Anthony Kidd and Robert Bishop clearly knew that the level of claims was as indicated in paragraph (2). I have little doubt that this level was in excess of what had been expected either by Anthony Kidd or Robert Bishop. (4) On 30th July 1990 Anthony Kidd, on the instructions of the leading underwriter, notified all producing brokers that all existing quotations for insurance would only be valid until 5 pm on 3rd August; that no orders could be accepted after that date; and that revised terms would be available upon request. There was no evidence before me as to the reason for sending this notice or as to its significance. The lack of such evidence appeared to be the result of a deliberate decision taken, no doubt for good reason, by all three parties to this litigation not to call as a witness Mr Ayrton, whose signature appears on the message, or indeed any witness from Anthony Kidd. This did not, however, deter Counsel from advancing theories at the trial as to the significance of the message. For New India it was submitted that what lay behind the communication was that it had by then become apparent to DJ Walker that many insured schools and authorities were making claims irrespective of whether a supply teacher had in fact been engaged in place of a teacher absent as a result of sickness or accident and that the terms of the certificates of insurance as issued did not reflect the underwriters’ original intention or assumption that the scheme would only pay claims when a supply teacher was actually engaged and a loss thereby suffered. The opposing theory, advanced on behalf of the Syndicate and Heath Fielding, was that the reason for the withdrawal of quotations was that the premium income limit had been reached pr was being approached. I was unable on the evidence before me to come to any conclusion as to the significance of the message. Mr Goodsell did not know of its existence at the time. While it is possible that the level of claims being received by Robert Bishop was a factor which caused or contributed to the sending of the message, I do not think it would be right to draw any inference to this effect. (5) On 31st July 1990 Robert Bishop submitted its first formal bordereaux to Anthony Kidd. This bordereaux, together with a covering letter, showed that the sums paid out to the end of July amounted to £204,749 in respect of claims and £15,356 in respect of expenses; in addition that a batch of claims were currently being processed to a value of a further £198,000. (6) Schedules of losses compiled from documentation held in the offices of Robert Bishop enabled Mr Neil to produce statistics relating to the value of claims notified to Robert Bishop by certain dates and the loss ratios they represent. These statistics were ultimately agreed by all three parties. They show that by 27th July 1990 the value of claims notified to Robert Bishop amounted to £435,499, some 58.1 per cent of the excess point under the reinsurance of £750,000. This represents a loss ratio of 92.8% of the net earned premium calculated on a strict monthly pro rata basis. By 8th August 1990 the value of the notified claims had risen to £569,462 or 75.9% of the excess of £750,000. This represented a loss ratio of 108 per cent calculated on a similar basis. The corresponding ratio in respect of claims notified in June was 4.95 per cent; for July was 98.10 per cent and for the whole of August was 127.5 per cent. None of this information, however, was known to Mr Goodsell or the Syndicate at the time. Mr Goodsell, as I have said previously, had no knowledge of the receipt of claims under the binder until he received the schedule of final orders on 4th September 1990 and a copy of the first bordereaux about two days later. Similarly there is no evidence that Heath Fielding had any knowledge as to the receipt of claims until it received the schedule and bordereaux from Mr Goodsell. On 25th September 1990 Mr Goodsell sent copies both of the schedule of final orders and of the first bordereaux to Mr Wardrop under cover of a compliments slip. On the compliments slip Mr Goodsell made a handwritten note asking Mr Wardrop, inter alia, to “pass this information to our reinsurers”. The “Honeycomb Endorsement” Mr Wardrop having received the schedule and bordereaux passed them to a clerk in Heath Fielding’s office who drew up a formal slip endorsement in the following terms:- “It is hereby noted and agreed that with effect from Inception the following amendments are applicable:
Mr Wardrop said in evidence that the endorsement was not drawn up at his suggestion. If the information had only concerned claims it would have been unusual to make it the subject of a slip endorsement. Because of the premium information the endorsement was called for. The Meeting at New India’s Offices on 28th September 1990 The endorsement together with the schedule of declarations and bordereaux was taken by Mr Donald Pangborn, a broker who worked for Heath Fielding (in the absence of Mr Brehaut, who was away on honeymoon) to New India’s offices. It is convenient to set out Mr Pangborn’s evidence as set out in his statement. He was not cross-examined:- “I was the broker who presented the endorsement and information sheets to Mr Patel on 28th September 1990. During my employment my invariable practice was to explain to Underwriters the substance and meaning of documents which I presented to them for their agreement and I am quite certain that I would have done so on this occasion. The documents were not complicated and would have taken very little time to explain. I have been shown Mr Patel’s affidavit of 21st June 1991 where he claims that the endorsement and information sheets were not presented with the original copy of the slip. This may have been the case; but in the absence of the slip I would certainly have presented a photocopy in accordance with Market practice. Whenever I broke business to Mr Patel, he read or appeared to read all documents put before him and he did not sign documents he had not read.” I shall at a later stage refer to Mr Patel’s evidence as to what he knew as the result of reading the endorsement and the attached documents. It is sufficient at this stage to say that, having read these documents, he placed New India’s stamp on the endorsement and each of the three attached pages and added his initials with the date. Subsequent Events Mr Brehaut returned from holiday in the first week of October 1990. Not long afterwards Mr Patel asked him to obtain bordereaux showing the full claims position. He did not however make any complaint about the placement of the risk. Mr Brehaut promised to chase up the bordereaux. The same request was made by Mr Patel on a number of later occasions in the next three months but the bordereaux, though apparently received by Heath Fielding, did not come forward. On 12th December 1990 MIS Underwriting Agency Limited on behalf of the Syndicate wrote to Heath Fielding seeking reimbursement of claims amounting to £49,673.36. This letter would have appeared to list the claims paid under the binder, as shown on four bordereaux, but only a single bordereaux (as attached to the “honeycomb endorsement”) had so far been sent to New India. The total claims were said to have amounted to £1,619,988.83, more than double the excess of £750,000. This was the first claim made under the stop loss and was not shown to New India until 14th January 1991. A manuscript note written by Mr Desai on that date shows that he was unhappy at not having received any premium and also that he raised a query as to when the claims had reached the limit under the stop loss of £750,000 and the reason for the notification being delayed. On or about 7th February 1994 a cheque for the premium due in respect of the first three quarters was sent to New India. This cheque was not presented by New India for payment pending answers to their questions. MIS Underwriting replied on 25th February 1991 that various bordereaux had been passed to Heath Fielding on 25th September and 8th November 1990, and on 8th January and 6th February 1991. None of these, however, appear to have been delivered by Heath Fielding to New India before the commencement of the present action. The Syndicate continued to press for the payment of sums due under the reinsurance. A letter of 18th March 1991 states that there were by then claims totalling £345,977.45 due from New India. It appears to have been at a meeting held on 27th March 1991 that New India first expressed unhappiness as to how the risk had been placed with them. As a result a further meeting took place in the offices of New India on 12th April 1991. Following that meeting New India in a letter dated 19th April wrote as follows:- “As you are aware from our discussions, our questions relate to our concern as to the accuracy of information given to us about this risk at the time of placement. This relates in particular to information regarding losses, claims and EPI. To make our position perfectly clear, our Mr Patel enquired direct to your Mr John Brehaut on the 27th July 1990 at the time of placement as to what the claims experience was on this risk. To this question your representative replied that this was new business and that there were no claims to date. He also indicated that the estimated premium income was expected to be in the region of £1.5m gross of the facility. We find these answers difficult to reconcile with the figures contained in MIS Underwriting Agency Limited’s letters to you of the 12th December and 18th March.” A loss adjuster was instructed by New India and given facilities to inspect the Syndicate’s books. This failed to resolve the problem. Eventually on 23rd May 1991 in a letter addressed to Heath Fielding, New India gave notice of its decision to rescind and avoid the policy. This was again said to be due to misrepresentations made by Mr Brehaut at the time of placing the risk that there had been no claims on the underlying insurance and that the estimated gross premium income to the binder was £1,500,000. The cheque in respect of the Premium was returned with the letter. Complaint was also made of the failure to deliver bordereaux. It was pointed out that on 27th July 1990 there had been a discussion between Mr Patel and Mr Brehaut as to the possibility of New India obtaining reinsurance and that the timely delivery of bordereaux was essential to the proper management of any such reinsurance. The writ in the present action was issued on the following day. The Issues A large number of issues were canvassed in the course of the hearing of which the following were the most important: 1. Whether New India was induced to write the stop loss reinsurance as the result of misrepresentations made by Mr Brehaut to Mr Patel on 27th July and/or 8th August 1990 that:- (a) there had been no claims on the binder; and/or (b) that the gross premium income on the binder was unlikely to be more than £1.5 million. 2. Whether the Syndicate through Heath Fielding and Mr Brehaut failed in its duty to disclose material facts to Mr Patel on 27th July and/or 8th August 1990. A variety of pleas of non-disclosure were advanced of which the principal issue was whether the facts relating to the claims made under the binder, as known to Anthony Kidd, Robert Bishop and/or the leading underwriter on 27th July and/or 8th August 1990 are facts which the Syndicate is deemed to have known for the purposes of the reinsurance so that the Syndicate failed in its duty of disclosure by failing to disclose those facts to New India before the contract was concluded. 3. Whether New India affirmed the contract on 28th September 1991 by signing the “honeycomb endorsement” after seeing the schedule of declarations and the bordereaux attached to it. As to the Syndicate’s claim to recover damages from Heath Fielding, this only arises if it is held that the Syndicate is not entitled to enforce the stop loss reinsurance against New India. In the light of this, all the evidence relevant to the Syndicate’s claim against Heath Fielding was adduced at the hearing but it was sensibly agreed that Counsels’ final speeches and their arguments relevant to this claim should be deferred until it was seen whether the Syndicate’s claim against New India succeeds or fails; and, if it fails, on what ground it does so. Accordingly I do not deal with the Syndicate’s claim against Heath Fielding in this judgment. 1. Misrepresentation I deal first with the question what if any representations were made by Mr Brehaut as to claims made on the binder. To do this I must evaluate the evidence given by Mr Patel and Mr Brehaut. Mr Patel was very firm in his evidence but it is fair to say that it underwent some development during the trial. Mr Patel in his affidavit of 21st June 1991 had said that during the visit of 27th July 1990 “I asked him (Mr Brehaut) what the claims experience was and Mr Brehaut informed me that there was no claims experience because it was new business”. On 8th August 1990 “I asked about claims and was informed that there were no claims to date”. In his oral evidence at the trial Mr Patel said that the question of claims was discussed both on 27th July and also on 8th August. On 27th July, during the first visit in the morning, there had first been a statement by Mr Brehaut that the business was new to the market and that there was no claims experience. Mr Patel however asked whether there had been any claims since 1st July and was told there had been none. Mr Patel said that he asked again about claims during Mr Brehaut’s second visit in the afternoon of 27th July and was given the same answer. As to the visit on 8th August Mr Patel asked what the claims position was as from the 1st April and was told by Mr Brehaut that there had been no claims. Mr Brehaut’s evidence painted a very different picture. He said that he had been given no information about claims by Mr Wardrop and was in no position to make any representation about claims to Mr Patel. He was “staggered” when Mr Patel signed the slip without making any enquiry as to the claims position. Mr Brehaut would not have written the business on this basis if he had been an underwriter. He thought Mr Patel was “foolish” to have signed the slip without asking about claims. There had been previous occasions when Mr Patel had written business and when Mr Brehaut thought he had been “foolish” to sign and might have been “a little more diligent”. Having heard both witnesses I can only say that I accept the evidence given by Mr Brehaut and reject that given by Mr Patel. It was apparent that Mr Patel had retained little recollection of what was said on either of the two dates and was doing his best to reconstruct the questions which he now thinks he ought to have asked Mr Brehaut before signing the slip. New India had only recently begun to write reinsurance in London in 1989. Though Mr Patel had extensive insurance experience, relatively little of that had been gained in the London market. By 1990 he had become a regular participant as an underwriter on the lines of reinsurance being broken by Heath Fielding. I suspect that he would have taken too much on trust, in the sense of being less than diligent in asking the kind of question which any prudent reinsurance underwriter should ask. Mr Patel also suffered from the disadvantage, as he himself said, that he was “not good at mathematics”. An experienced and diligent reinsurance underwriter would clearly have been extremely cautious about subscribing to the slip in any event. The fact that the reinsurance would pay all claims in excess of £750,000, irrespective of the amount of business written under the binder, and that no figures were specified in the slip as regards either the maximum premium income or previous claims experience should have put any potential reinsurer very firmly on his guard. A further difficulty in accepting Mr Patel’s evidence on the point is that a statement made by Mr Brehaut on 27th July that no claims at all had been received between 1st and 27th July would have seemed somewhat surprising. A statement made by him on 8th August that no claims at all had been received in the period between 1st April and 8th August would have been so surprising as to seem impossible. Mr Neill, the expert called on behalf of New India, would not have believed such a statement had it been made. It is therefore hard to accept that Mr Brehaut made the statements as to the claims position attributed to him by Mr Patel, since he could not have expected such statements to be believed. I have therefore come to the conclusion that Mr Patel was not induced to sign the slip through any misrepresentation concerning claims but that he signed due to a lack of the necessary expertise care and caution. I turn to the allegation that Mr Brehaut represented to Mr Patel that the gross premium income under the binder was estimated at £1.5 million. Mr Patel said that he was informed by Mr Brehaut that, as the insurance being written under the binder was new business in the market, it would take time to develop and that the premium income would “be difficult to reach £1.5 million”. He understood this figure to relate to gross income. Mr Brehaut’s evidence was, as recorded by him in a memorandum dated 15th April 1991:- “The estimated premium income for the account was approximately £5,000,000 which equated to £1,500,000 for the stop loss, premium being adjusted at 30%.” Mr Brehaut said that when he broked the business to Mr Patel he mentioned both these figures. I found Mr Patel’s evidence on this point difficult to accept. Had he been alive to the significance of the level of premium income to a stop loss reinsurance with a fixed excess of £750,000, then I have no doubt that he would have immediately protested on 28th September 1990 when he was shown and initialled the schedule of final orders with its clear statement that the net premium under the binder had amounted to £5,141,160.70. Mr Brehaut’s evidence, on the other hand, is consistent with his having been told by Mr Wardrop that the brokers’ estimate of the probable premium income to the binder was £5 million. Unless I conclude that Mr Brehaut deliberately lied to Mr Patel as to the probable premium to the binder, a possibility which I think is unlikely, I have to regard his evidence as more consistent with all the other evidence given in the case. It was urged on behalf of New India that it was improbable that the figure of £1.5 million represented the income to the reinsurance since this would involve that the excess point of £750,000 would amount to only 27 per cent of the Syndicate’s net retained premium and thus would guarantee the Syndicate a large profit. While I have to accept that, given this estimate, a reasonably prudent underwriter would have declined to undertake the risk, I am driven to the conclusion that Mr Patel failed to carry out any prudent calculations and thus failed to spot the implications of an estimated premium to the binder of £5 million. It was also urged on behalf of New India that a gross deposit premium of £600,000 would be very low if the anticipated gross premium to the reinsurance were £1.5 million. This in my view is a point of little weight. Indeed it was said on behalf of the Syndicate that if Mr Patel’s evidence is right and if the figure of £1.5 million represented the gross premium to the binder, then the gross deposit of premium of £600,000 would be greater than the eventual premium due on expiry of £450,000 and that this would be unusual. There was evidence which I am inclined to accept that, when the risk was broken to him, Mr Patel expressed concern that the stipulated gross premium of £600,000 seemed rather low and was only dissuaded from that view on being told that the figure was a deposit premium and would be adjusted on expiry. Mr Patel in my judgment failed to spot, when the reinsurance was broken to him, that with a fixed excess and a premium income to the binder estimated at £5 million gross, the deal would guarantee a profit to the Syndicate. He has subsequently concluded that the figure of £1.5 million must have represented the premium income to the binder. I find that the stop loss reinsurance was not induced by any misrepresentation as to the estimated premium to the binder. 2. Non-Disclosure Mr H Page QC for New India put forward the following main allegations of non-disclosure:- 1. The Syndicate failed to disclose to New India at the time the reinsurance contract was concluded on 27th July and/or 8th August 1990 the up-to-date figures with regard to premium written and claims notified and anticipated as known to Robert Bishop and Anthony Kidd. It was submitted that in view of the interval which had elapsed between Mr Goodsell putting down his promised line on 1st June 1990 and the reinsurance being broken to Mr Patel on 27th July and/or on 8th August, the Syndicate was under a duty to make reasonable enquiries of Anthony Kidd to ascertain the up-to-date premium and claims position. Alternatively it was submitted that Anthony Kidd and Robert Bishop were the agents of the Syndicate for the purposes of receiving claims notifications and/or premium figures and that in these circumstances the knowledge of Anthony Kidd and Robert Bishop was to be imputed to the Syndicate. Finally it was submitted that the knowledge of Anthony Kidd as to claims notifications and/or premium figures was to be imputed to the Syndicate on the ground that the Syndicate had delegated to Anthony Kidd the entire management of the insurance business relating to the binder. 2. Alternatively it was submitted that at the very least the Syndicate ought to have disclosed to New India before the reinsurance was concluded that information regarding claims and premium income was available but that no steps had been taken to find out what it was. 3. It was further submitted that the Syndicate failed to disclose all material information in its possession to New India since it failed to disclosure:- (i) The schedule of declarations at 29th May 1990. (ii) The binder slip subscribed to by Mr Goodsell on 10th July 1990. (iii) That the leading underwriter, DJ Walker, had originally written 100 per cent of the binder but had then been permitted to cancel its line and to replace it with a line of 25 per cent. 4. Finally it was submitted that the Syndicate failed to disclose to New India before the reinsurance was concluded that the underwriters had decided at the end of July 1990 to revoke quotations pending revision of the terms of the insurance which would, it was said, have provided that claims would only be paid if and to the extent that a supply teacher had been engaged. All these allegations were disputed by the Syndicate. In addition, Mr Crane QC for Heath Fielding submitted that Mr Patel must be taken to have been aware both on 27th July and 8th August that it was highly likely if not inevitable that there had been claims made under the binder since the inception of the cover on 1st April and that, by failing to enquire what such claims amounted to, Mr Patel must be held to have waived disclosure of that which any such enquiry would have revealed. I begin with the relevant legal principles. The assured is under a duty to disclose to the insurer, before the contract is concluded, every circumstance which is material to the risk in the sense that it would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. The ambit of this duty is defined in Sections 17 to 19 of the Marine Insurance Act 1906 which codify the pre-existing common law and are generally as applicable to non-marine as to marine insurance: “17. A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party. ”18. (1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract. (2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk. (3) In the absence of enquiry the following circumstances need not be disclosed, namely:- (a) Any circumstance which diminishes the risk; (b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know; (c) Any circumstance as to which information is waived by the insurer; (d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty. (4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact. (5) The term “circumstance” includes any communication made to, or information received by, the assured. “19. Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer:- (a) Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or ought to have been communicated to, him; and (b) Every material circumstance which the assured is bound to disclose, unless it came to his knowledge too late to communicate it to the agent.” The duty on the assured is essentially to make a fair presentation of the risk to the insurer. As was said by Kerr LJ in CTI v Oceanus [1984] 1 Lloyd’s Rep 476 at p 496:- “Provided that the presentation of the material facts in summarized form is done fairly, there is no need for more . . . it is “fair representation” on which the London market practice, as well as the law are based.” The duty however is limited to circumstances which are known to the assured with the proviso that the assured (like the insurer; see Section 18(3)(b)) is presumed to know “every circumstance which, in the ordinary course of business, ought to be known by him”. Neither the Act of 1906 nor any authority suggests that, to make a fair presentation, the assured is under a duty to make enquiries or investigations as to facts outside his knowledge. Kerr LJ in CTI v Oceanus (supra) drew the concept of “fair representation” from the classic statement of the law of non-disclosure in Carter v Boehm [1766] 3 Burr 1905. In that case Lord Mansfield explained the need for fair disclosure as one which was required in order that facts within the knowledge of the assured should not be concealed from the insurer (p 1909):- “The special facts upon which the contingent chance is to be computed, lie most commonly in the knowledge of the assured only; the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance, in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist . . . and to induce him to estimate the risque, as if it did not exist.” Mr Page was unable to cite any authority for the proposition that that a potential assured is under a duty to make enquiries or investigations as to facts outside his knowledge for the purpose of complying with his duty of disclosure. It is indeed difficult to see how, as a matter of principle, any such duty can arise. An assured is under no duty of care not to cause financial loss to the insurer. He is under no duty to advise the insurer whether or not to write the risk. The insurer is presumed to know his own business and to be capable of forming his own judgment as to the risk presented to him. The submission that an assured is under a duty to investigate matters outside his knowledge for the purpose of making a fair presentation to the insurer would, as it seems to me, conflict with some if not all of these elementary propositions. In Australia & New Zealand Bank v Colonial & Eagle Wharves [1960] 2 Lloyd’s Rep 241 it was submitted that the board of directors of the assured ought to have ascertained, if they made the enquiries a prudent board of directors ought to have made, that the company’s system of operation was such that goods held by the company to the order of a bank were habitually delivered without the knowledge or consent of the bank. McNair J had no hesitation in rejecting this submission (p 252):- . . . “the submission that the board of the defendant company ought to have known the material facts because they would have known them if they had made such inquiries as to their system as a reasonable, prudent board of such company in the ordinary course of business would have made, in my judgment fails both in law and on the facts. I have been referred to no authority to suggest that the board of a company proposing to insure owe any duty to carry out a detailed investigation as to the manner in which the company’s operations are performed, and I know of no principle in law which leads to that result. If a company is proposing to insure wages in transit, I cannot believe that they owe a duty to the insurers to find out exactly how the weekly wages are in fact carried from the bank to their premises, though clearly they must not deliberately close their eyes to defects in the system and must disclose any suspicions or misgivings they have. To impose such an obligation upon the proposer is tantamount to holding that insurers only insure persons who conduct their business prudently, whereas it is a commonplace that one of the purposes of insurance is to cover yourself against your own negligence or the negligence of your servants.” I turn to consider the meaning of the expressions used in Section 18, “material circumstance which is known to the assured” and “deemed to know every circumstance which, in the ordinary course of business, ought to be known by him”. It is clear that knowledge includes not only “any communication made to, or information received by the assured” (Section 18(5)) but also the kind of knowledge expressed in the phrase “turning a blind eye”. If the assured, suspicious of a material circumstance which ought to be disclosed, turns a blind eye and refrains from enquiry, he is to be regarded as knowing whatever such enquiry would have revealed. The presumption, however, inherent in the phrase “deemed to know” goes somewhat further than this. In London General Insurance Co Ltd v General Marine Underwriters’ Association Ltd [1921] 1 KB 104 and it was held that a reassured was deemed to have knowledge of a casualty slip received by the underwriters employed by them in circumstances when the underwriters and their staff had done nothing to make use of the information contained in the slips. Moreover, to consider the ambit of the presumption, it is important to examine the situations in which facts within the knowledge of an agent of the assured will be deemed to be within the knowledge of the assured. There are three different situations, as appears from the authorities, where this will be so. First, as appears from a number of marine insurance cases, including Fitzherbert v Mather (1785) 1 TR 12; Gladstone v King (1813) 1 M & S 35; Proudfoot v Montefiore (1867) LR 2 QB 511 and Blackburn Low v Vigors (1887) 12 App Cas 531 there is a class of agent on whom an assured relies for information concerning the subject matter of the proposed insurance. Section 18, which is derived from the above authorities, provides that the assured is deemed to know circumstances which such agents ought to have communicated to the assured in the ordinary course of business. The relevant principle was expressed by Cockburn CJ in Proudfoot v Montefiore (supra) at p 521 as follows:- “. . . if an agent, whose duty it is, in the ordinary course of business, to communicate information to his principal as to the state of a ship and cargo, omits to discharge such duty, and the owner, in the absence of information as to any fact material to be communicated to the underwriter, effects an insurance, such insurance will be void, on the ground of concealment or misrepresentation. The insurer is entitled to assume, as the basis of the contract between him and the assured, that the latter will communicate to him every material fact of which the assured has, or, in the ordinary course of business, ought to have knowledge; and that the latter will take the necessary measures, by the employment of competent and honest agents, to obtain, through the ordinary channels of intelligence in use in the mercantile world, all due information as to the subject matter of the insurance. This condition is not complied with where, by the fraud or negligence of the agent, the party proposing the insurance is kept in ignorance of a material fact, which ought to have been made known to the underwriter, and through such ignorance fails to disclose it.” This principle was approved by the House of Lords in Blackburn Low v Vigors (supra) subject to the proviso that it applied only to a category of agent (described by Lord Halsbury LC at p 537 as an “agent to know”) and was not a principle to be extended to all agents without restriction:- “I can quite understand that when a man comes for an insurance upon his ship he may be expected to know both the then condition and the history of the ship he seeks to insure. If he takes means not to know, so as to be able to make contracts of insurance without the responsibility of knowledge, this is fraud. But even without fraud, such as I think this would be, the owner of the ship cannot escape the necessity of being acquainted with his ship and its history because he has committed to others, -- his captain, or his general agent for the management of his shipping business -- the knowledge which he underwriter has a right to assume the owner possesses when he comes to insure his ship. With respect to agency so limited, I am not disposed to differ with the proposition laid down by Cockburn, CJ in Proudfoot v Montefiore”; (per Lord Halsbury LC at pp 536-573). “In the case of insurance by a shipowner, it has been decided that he is affected by the knowledge of a class of agents other than those whom he employs to insure. In the ordinary course of business, the owner of a trading vessel employs a master and ship-agents, whose special function it is to keep their employer duly informed of all casualties encountered by his ship, which would materially influence the judgment of an insurer. On that ground it has been ruled that the insurer must be held to have transacted in reliance upon the well-known usage of the shipping trade, and that he is consequently entitled to assume that every circumstance material to the risk insured has been communicated to him, which ought in due course to have been made known to the shipowner before the insurance was effected . . . He (the insurer) is entitled to contract, and does contract, on the basis that all material facts connected with the vessel insured, known to the agent employed for that purpose, have been by him communicated, in due course, to his principal”; (per Lord Watson at pp 539-541). It should be noted that the principle, as laid down by Cockburn CJ and explained by Lord Watson, is not strictly a case where the knowledge of the agent is imputed to the assured. The principle is rather different, namely that both parties contract on the basis that the assured has disclosed both material facts within his knowledge and also material facts that would have been within his knowledge if the agents whom he employed to provide knowledge of the subject matter of the insurance, or in the ordinary course of his business ought to have employed, had communicated to the assured in ordinary course such facts as the agent knew or ought to have known in the ordinary course of business. It is also worth emphasizing, as was pointed out in Blackburn Low v Vigors (supra) and in Australia & New Zealand Bank v Colonial & Eagle Wharves (supra) at p 254 that the principle is limited to certain categories of agent. “The test of what “ought to be known” by the assured is not, therefore, an objective test of what ought to be known by a reasonable, prudent assured carrying on a business of the kind in question, but a test of what ought to be known by the assured in the ordinary course of carrying on his business in the manner in which he carries on that business; the underwriter takes the risk that the business may be run inefficiently unless the circumstances are such that the assured knows or suspects facts material to be disclosed. To hold otherwise would be tantamount to saying that underwriters only insure those who conduct their business prudently, whereas it is a commonplace that one of the purposes of insurance is to obtain cover against the consequences of negligence in the management of the assured’s affairs; Arnould on Marine Insurance, 16th ed, (1981) p 488 para 640; relying on the second of the above authorities. I turn to the second class of situation where it can be said that the assured will be deemed to know circumstances within the knowledge of his agent. This arises where the agent can be regarded as being in such a predominant position in relation to the assured that his knowledge can be regarded as the knowledge of the assured. As was said by Lord Halsbury in Blackburn Low v Vigors (supra) at pp 537 to 538:- “Some agents so far represent the principal that in all respects their acts and intentions and their knowledge may truly be said to be the acts, intentions and knowledge of the principal . . . Where the employment of the agent is such that in respect of the particular matter in question he really does represent the principal, the formula that the knowledge of the agent is his knowledge is I think correct, but it is obvious that that formula can only be applied when the words “agent” and “principal” are limited in their application.” So in Regina Fur Company Ltd v Bossom [1957] 2 Lloyd’s Rep 466 at p 484 one of the factors which Pearson J considered relevant in deciding whether the knowledge of a director of the assured, a Mr Waxman, that he had been convicted of a criminal offence, was knowledge which should be imputed to the assured was “the position of the agent in relation to the principal and whether the agent had a wide or narrow sphere of operations”. It was there held that because of “Mr Waxman’s predominant position in relation to the plaintiff company “or also because he was “sufficiently concerned with the insurance transactions” his knowledge was that of the company. The third situation where the assured will be deemed to know circumstances which lie within the knowledge of his agent is where that agent has effected the relevant insurance. This is made clear by Section 19 of the Act of 1906 which also provides that “an agent to insure is deemed to know every circumstance which ought to be known by, or ought to have been communicated to him”. In Blackburn Low v Vigors (supra) Lord Halsbury LC (p 539), Lord Watson (ibid) and Lord Macnaghten (p 542) all agreed that “where an insurance is effected through the medium of an agent, the ordinary rule of law applies, and non-disclosure of material facts, known to the agent only, will affect his principal, and give the insurer good ground for avoiding contract” (p 539 per Lord Watson); see also Blackburn v Haslam (1888) 21 QBD 144. It was not suggested that this third category of situation is relevant to the facts of the present case. I turn to consider these facts. There was no dispute between the parties that the information as to the claims made on the binder, as known to Robert Bishop, Anthony Kidd and the leading underwriter on 27th July and 8th August 1990 was information material to be disclosed to a reinsurer. Somewhat different reasons were given by Mr Neil and Mr Outhwaite for concluding that the information was material. Mr Neil tended mainly to rely on the loss ratios which he had calculated as 92.8% and 108 per cent respectively, as showing that, even at such an early stage, the insurance was likely to be loss-making. Mr Outhwaite doubted whether any such sophisticated calculations were likely to have been carried out at such an early stage in practice and whether, if they had been, they would have been much of a guide as to the eventual outturn of the business. He agreed however that with a stop loss reinsurance which had a fixed excess of £750,000 the fact that as at 12th July 1990 the notified claims under the binder amounted to as much as £237,746 (a fact notified by Robert Bishop to Anthony Kidd and the leading underwriter) was a fact material to be disclosed to the reinsurer. In these circumstances it is sufficient to proceed on the basis common to both experts that, whether the reinsurance contract is held to have been concluded on 27th July or 8th August, there was on both these dates information relating to notified claims known to Robert Bishop, Anthony Kidd and the leading underwriter which was materials to be disclosed to the reinsurer and which was not disclosed. This information, however, was not known to the Syndicate or to Heath Fielding. There is moreover no material on which I could possibly find that Mr Goodsell or the Syndicate were suspicious that there might be a large level of notified claims and were deliberately shutting their eyes to an obvious source of knowledge by failing to make enquiries from Anthony Kidd. Mr Goodsell was asked about this. He replied:- “. . . the way you are posing the question you are suggesting that I felt that there was something desperately going wrong with it. That wasn’t the case at all. I mean, personal accident business generally in the market was perceived as being very attractive business and generally speaking ran well. It had claims. All personal accident business generally has claims, but it still in the main used to make a lot of money for the market as a whole. So I wasn’t unduly concerned, no.” Q. You had not had any inkling from any other source at all of any growing problem? A. No, none whatsoever.” Mr Goodsell also said that he wasn’t unduly concerned as “Anthony Kidd had a reputation for running these sorts of binding authorities very successfully”. The next question therefore is whether the Syndicate must be deemed to know the facts concerning the incidence of claims on the ground that Anthony Kidd ought to have communicated those facts to the Syndicate in the ordinary course of business. I fail to see, however, how the facts can be brought within the first of the three categories discussed above. The system of communicating claims information by Anthony Kidd to the underwriters on the binder was fixed by the terms of the binder itself. Anthony Kidd were not obliged to communicate any information about losses to anybody except the leading underwriter who had to initial claims collection forms; Clause 19(f). Otherwise Clause 19(e) merely provided that “claims shall be collected from underwriters quarterly, or more frequently if necessary”. Mr Outhwaite said that this was a typical claims reporting structure for a facility of this sort. There was no evidence that the system was in any way unusual. Mr Goodsell was asked about the time-lag between the inception of the risk on 1st April and the receipt of the first claims bordereaux on or shortly after 4th September. He replied:- “There is quite often a lag with these sort of things in Lloyd’s because binding authorities have to be registered and by the time they are registered and they then get submitted to LPSO for signing and so forth, there’s quite often a lag.” There was, moreover, no evidence that either Robert Bishop or the leading underwriter had any duty to communicate the facts concerning notified claims to the Syndicate. I turn therefore to consider the second and principal way in which Mr Page for New India put the claim for non-disclosure. His submission was that the Syndicate had delegated to Anthony Kidd the whole management of the business connected with the binder and that in these circumstances the claims reporting provisions contained in the binder as to the reporting of claims were not definitive as to the facts which were deemed to be known to the Syndicate in the ordinary course of business. A reinsurer, said Mr Page, is entitled to expect that a prospective reinsured knows what claims have been notified under the original insurance and the reassured cannot avoid that consequence by delegating to an agent the management of the business he has written. In support of this submission Mr Page relied on certain answers given by Mr Goodsell in the course of his evidence:- Q. You had effectively, had you not, delegated to Anthony Kidd the management of this business on your behalf? A. That is correct. Q. It is quite plain, therefore, that if you had made enquiry of them at any time before the stop loss was placed with New India there would not have been the slightest difficulty about you obtaining information about claims? A. I mean, if indeed they were in possession of the data, then there would perhaps have been data available there for me, yes. Q. Well, quite understandably, you are not in a position to give first hand knowledge about whether they did or they did not. But assume for this purpose they did have it, then it is plain, is it not, that that would have been readily accessible to you . . . A. Sure. Q. . . . if you had chosen to ask for it. A. Yes. There was also evidence that if approached by Mr Goodsell, Robert Bishop would have provided him at any time with the up-to-date position with regard to notified and paid claims. I am however unable to accept Mr Page’s submissions for two main reasons. First, this is not in my judgment a case where Anthony Kidd so far represented the Syndicate that Anthony Kidd’s actions, intentions and knowledge can properly be said to be that of the Syndicate; see per Lord Halsbury in Blackburn Low v Vigors (supra), Anthony Kidd had only a specific and limited authority to act on behalf of the Syndicate. No general underwriting discretion had been delegated to them. The terms on which Anthony Kidd could write business so as to bind the Syndicate, including the risks insured, the limits of liability and the rate of premium were all fixed by the binder. That contract also set out procedures for the receipt adjustment and payment of claims, for the submission of bordereaux by Robert Bishop to Anthony Kidd and for the periodic collection of claims from the underwriters. In view of the limited nature of the agency I cannot conclude that Anthony Kidd was in such a “predominant position” (see per Pearson J in the Regina Fur case (supra) at p 484) in relation to the Syndicate that the knowledge of Anthony Kidd can, without more, be imputed to the Syndicate. Second, I can see no foundation for the submission that New India was entitled to expect that, at the time the reinsurance was placed, the Syndicate knew what claims had been notified under the binder. At the time he wrote the business Mr Patel had before him the terms of the binder which set out the reporting procedures as between Robert Bishop and Anthony Kidd and as between Anthony Kidd and the underwriters. He had been given no information as to the incidence of claims but any prudent reinsurer would have known it to be probable that between 1st April and 27th July or 8th August 1990 some claims must have been notified to Robert Bishop and/or Anthony Kidd. He also ought reasonably to have known that the reporting procedures set out in the binder were not in any way unusual. For both these reasons I see no force in the submission that the knowledge of Anthony Kidd is to be imputed to the Syndicate. I can deal relatively briefly with the remaining allegations of non-disclosure advanced on behalf of New India, as follows:- (a) I reject the submission that the Syndicate failed to comply with their duty of disclosure because they failed to disclose to Mr Patel that there might have been the claims on the binder but that the Syndicate did not know and had not taken steps to ascertain the position. The fact that there might have been claims on the binder should have been obvious to any reinsurer presented with the slip and the 9 pages of information on 27th July and/or 8th August 1990. There was no reason to suspect that the value of the claims notified to Robert Bishop or Anthony Kidd was noteworthy or such as to require disclosure. (b) Mr Patel was informed that the premium to the binder was estimated at approximately £5 million. There was therefore no additional information material to the insurance contained in the schedule of declarations at 29th May 1990 or in the binder slip which ought to have been disclosed to New India. (c) The expert evidence did not support the plea that it was material to disclose to New India that DJ Walker had originally written 100 per cent of the binder but had later been permitted to cancel its line and to replace it with a line of 25 per cent. It would only have been material to disclose this fact if the reason for the reduction of the leading underwriter’s line reflected adversely on the nature of the risk but it did not do so. (d) Mr Goodsell gave evidence that he did not know of Anthony Kidd’s notice of 30th July 1990 (“all existing quotes are only valid until 5 pm 3rd August 1990”) until he was shown it very shortly before the trial. He could not have disclosed to New India that the underwriters had decided at the end of July 1990 to revoke quotations pending revision of the terms of insurance, as he did not know that this had occurred. I therefore conclude that the quota share reinsurance was not voidable on the grounds of non-disclosure. 3. Affirmation In view of my conclusions on misrepresentation and non-disclosure this topic does not strictly arise. I will however consider whether, if the quota share reinsurance had been voidable on either of these grounds, New India by signing the honeycomb endorsement on 28th September 1990 elected to affirm the contract. The endorsement contains an unequivocal statement that the information placed before the reinsurers has been altered. The nature of the information so amended includes the statement that the net premium to the reinsurance was £5,141,160.70 and that the claims paid in July and August amounted to £694,307.43. The Syndicate did not however rely on the endorsement to found an estoppel; nor did it allege that it altered its position or suffered any detriment as the result of the endorsement. The sole principle relied on at the hearing was that of election. This principle was discussed in depth by Lord Goff of Chieveley in The “Kanchenjunga” [1990] 1 Lloyds Rep 391 at pp 397 to 399, in an extended passage of which I cite only the following:- “In the context of a contract, the principle of election applies when a state of affairs comes into existence in which one party becomes entitled to exercise a right, and has to choose whether to exercise the right or not. His election has generally to be an informed choice, made with knowledge of the facts giving rise to the right. His election once made is final; it is not dependent upon reliance on it by the other party” (p 399). In the present case I assume that a state of affairs had come into existence by 28th September 1990 in which New India had become entitled to exercise a right to avoid the reinsurance contract and had to choose whether or not to exercise that right. This could have arisen for one or other of the following reasons:- (i) that Mr Brehaut had made a representation inducing the contract on 27th July and/or 8th August 1990 that there had been no claims on the binder or that the gross premium to the binder was unlikely to exceed £1.5 million; (ii) that the Syndicate had failed to comply with its duty of disclosure by failing to disclose information known to Anthony Kidd or Robert Bishop with regard to the amount of premium written or claims notified. The question then arises whether by making the unequivocal representations set out in the indorsement, Mr Patel on behalf of New India exercised “an informed choice made with knowledge of the facts giving rise to the right” sc to avoid or affirm the contract. To answer this question I must consider what Mr Patel knew at the time he signed the endorsement and shortly afterwards. Mr Patel maintained that during the meeting with Mr Pangbourne on 28th September, in the course of which he signed the documents, he “just casually” looked at them. It was, he said, “a very brief meeting and I just stamped and signed and that’s all. I did not ask any questions”. In the course of his evidence, however, Mr Patel made whole sale admissions as to what he said he learned from studying the schedule of declarations and the bordereaux. He maintained that he only appreciated the significance of these documents on studying them during the evening of 28th September, some time after he had signed them. At that stage he agreed that it was clear to him that the income to the binder was £5 million as at 27th July and/or 8th August 1990; that either the Syndicate must have known this or, if it did not, it could have found out. At that stage he agreed that he appreciated that the notified claims had probably already reached the excess of £750,000 by 27th July and/or 8th August; that Anthony Kidd must have known about the level of notified claims by these dates; and that the Syndicate either knew about the level of claims on 27th July and/or 8th August or that, if it did not, it could have found out. It was, said Mr Patel, in the evening of 28th September that he studied the documents and he was not happy with what he saw. On the other hand Mr Patel knew that the endorsement might contain something of major significance relating to the nature of the risk and the development of the account. He knew that the endorsement was effecting an amendment. He could see that he had agreed to a premium income which exceeded the expectation which he said that he was originally given and that this was a very serious matter. Despite this he did not communicate his unhappiness to Heath Fielding. All he did was that, when Mr Brehaut returned from honeymoon in early October, he asked to be supplied with full bordereaux. He regarded the bordereaux attached to the endorsement as one which did not give the full facts. It was nevertheless, he agreed, sufficient to show that what he had been told about the claims position was entirely wrong. I have to consider what findings I should make as to the stage at which Mr Patel obtained knowledge as to the facts giving rise to New India’s right to avoid or affirm the contract. Lord Blackburn in Kendall v Hamilton (1879) 4 App Cas 504, 542, said “There cannot be election until there is knowledge of the right to elect”; see also Peyman v Lanjani [1985] 1 Ch 457, [1984] 3 All ER 703 and Sea Calm Shipping Co SA v Chantiers Navel De L’Esterel SA (The “Uhenbels”) [1986] 2 Lloyd’s Rep 294. Normally, if the party said to have elected has knowledge of the facts giving rise to the right, it is not too difficult for the Court to draw the inference that he also had knowledge of the right to elect. In the present case it was not disputed that Mr Patel had knowledge of an insurer’s right to avoid a contract of insurance on the ground of non-disclosure or misrepresentation. I shall therefore mainly consider at what stage he obtained knowledge of the facts giving rise to a right to avoid the reinsurance on either of these grounds, while bearing in mind that what has to be shown is actual knowledge of the relevant facts and that imputed or constructive knowledge does not suffice. I shall begin by assuming (contrary to my finding) that Mr Brehaut represented to Mr Patel on 27th July and/or 8th August that there had been no claims on the binder and asking at what stage Mr Patel acquired knowledge of the facts giving New India a right to avoid the reinsurance on the ground that this representation was untrue. I find that Mr Patel acquired the relevant knowledge as soon as he was shown the bordereaux by Mr Pangbourne on 28th September. The bordereaux did not convey a great deal of information but it clearly stated the number and value of claims paid in July and August 1990. It was quite clear that claims had been paid to the value of approximately £220,000 by 27th July or 8th August. It was therefore clear that there had been a misrepresentation and that the misrepresentation was material. I next assume (contrary to my finding) that Mr Brehaut represented to Mr Patel on 27th July and/or 8th August that the gross premium income to the binder was unlikely to exceed £1.5 million. The schedule of declarations is quite detailed and states clearly that the net premium to the binder as at 3rd August 1990 was £5,141,160.70 (corresponding to a gross premium of £7,909,478). The representation was not, however, as to a matter of fact; it was one of expectation and belief. New India would not have had a right to avoid the contract unless the representation was not made in good faith or unless it was not made on reasonable grounds. There would, moreover, be no right to avoid the reinsurance unless the representation was material. Mr Patel was “not good at mathematics” and may not have understood the significance of the greatly increased premium as extending New India’s exposure, while guaranteeing that the Syndicate made a profit on the reinsurance. In this instance I find that Mr Patel did not acquire knowledge of the facts which gave New India a right to avoid the contract on being shown the schedule of declarations by Mr Pangbourne but that he did so through studying the documents, either during the evening of 28th September or at any rate shortly afterwards. Mr Patel tended to sign on trust many of the documents presented to him by Heath Fielding and, as I have found earlier, he did not ask the kind of question that a diligent underwriter would be likely to ask. As to Mr Pangbourne, while he was not cross-examined, he had not previously been involved in the reinsurance and he would not have drawn to Mr Patel’s attention that the information contained in the schedule must have been available earlier or that it was significant in relation to New India’s exposure. Finally, I assume (contrary to the conclusion reached earlier in this judgment) that New India had a right to avoid the contract on the ground of the Syndicate’s failure to disclose the information known to Anthony Kidd as to the claims notified under the binder by 27th July and/or 8th August and I shall consider at what stage Mr Patel acquired knowledge of the facts relevant to New India’s right to avoid the contract on this ground. While it would be obvious from a speedy reading of the bordereaux that the level of claims was material to the reinsurance (in that the paid claims represented a large proportion of the excess), I do not think that it would necessarily have been immediately plain to Mr Patel on first reading the bordereaux that the information as to paid claims must have been known to Anthony Kidd at the time the reinsurance was placed on 27th July and/or 8th August or that the Syndicate, if it had wished to do so, could have found out about the level of claims by asking Anthony Kidd. It was not in my view established that Mr Patel drew these inferences before he signed the endorsement although such inferences could well have been drawn by a prudent underwriter who conducted a reasonably careful examination of the schedule and bordereaux on 28th September 1990. On the other hand Mr Patel agreed that when he studied the documents during the evening he realised that if the Syndicate did not know the level of claims on 27th July and/or 8th August it could have found out by asking Anthony Kidd. I therefore find that knowledge of these facts was acquired by Mr Patel through studying the documents during the evening of 28th September or at any rate shortly afterwards. If there was any non-disclosure with regard to the amount of premium written under the binder, rather similar considerations apply. It follows that, in respect of one of the alleged misrepresentations and in respect of the alleged non disclosure, I have to consider a rather unusual situation, namely that the Syndicate has not established that Mr Patel had the requisite conscious knowledge of the facts giving rise to the right of election at the time he signed the endorsement and attached documents, but that he gained that knowledge some time later from a proper study of those documents. Is it possible in these circumstances to say that, by signing the documents, Mr Patel elected to affirm the contract? I do not think that it is. The signing of the documents was an unequivocal representation that the information placed before New India had been amended in the respects set out in the schedule and bordereaux. If the Syndicate had been able to show that it acted to its detriment in reliance upon that representation, no doubt it would have been able to rely on an estoppel by representation or conduct. Where, however, there is no allegation of detriment, I do not think it would lead to impractical or unbusinesslike results to hold that that a party who has not made an informed choice with knowledge of the facts has not elected to affirm a contract, even though he has made an unequivocal representation which would seem objectively to be inconsistent with any right to avoid the contract. The next question, however, is whether, if Mr Patel did not elect to affirm the contract when he signed the documents on 28th September, he should be held to have elected at a later stage when he had appreciated the effect of the documents and failed to countermand the indorsement. In my view the position is that, having made an unequivocal representation that the information placed before New India had been amended in the respects set out in the schedule and bordereaux, Mr Patel was obliged to retract that representation if he did not intend New India to be bound by it, once Mr Patel had appreciated the effect of the documents and had obtained knowledge of the facts giving rise to the right to elect, I would hold, therefore, that, once Mr Patel had obtained such knowledge and had failed within a reasonable time to countermand the endorsement, he must be held to be making a continuing representation on behalf of New India that the information material to the reinsurance was as set out in the schedule and bordereaux and that, by doing so, he elected not to exercise the right to avoid the contract on the basis of such information. It remains to mention two further points. First, I have not overlooked the question whether New India at any stage had knowledge of the legal proposition, essential to any right to avoid for non-disclosure, namely that information within the knowledge of Anthony Kidd can be imputed to the Syndicate. There is no evidence that New India had knowledge of this. Nor does it seem probable that New India knew it had a right to avoid the contract for non-disclosure at any time before it elected to avoid for misrepresentation on 23rd May 1991, since no such right is set up in the relevant correspondence. In my judgment however Mr Patel’s knowledge both (a) that the Syndicate could have found out the information as to notified and paid claims by asking Anthony Kidd, and (b) that an insurer has in general a right to avoid a contract for material non-disclosure, constitutes sufficient knowledge of the relevant matters of fact and law for it to be held that New India had the requisite knowledge of its right to elect. Second it was urged by Mr Page that, before New India could be called upon to elect, the Syndicate must first have made a clear and unambiguous disclosure of the relevant facts. This involved, said Mr Page, that the Syndicate must expressly have informed New India that the Syndicate had failed to comply with its duty of disclosure before the contract was concluded. It was not sufficient, he argued, for one party to leave the other to “put two and two together”. Nor was there any place for the poet’s exhortation “piece out our imperfections with your thoughts”; nor (pace Spencer Bower on Actionable Non-Disclosure, 2nd ed (1990), para 2.07) will “subdolous pretences of candour” suffice. But while I have kept Mr Page’s elegant and refined submissions well in mind, still it appears to me that Mr Patel adhered to the representation contained in the endorsement and attached documents long after he had appreciated all the facts giving rise to New India’s alleged right to avoid the contract. For these reasons, had I been of the view that the reinsurance was voidable on the grounds of misrepresentation or non-disclosure, I would have held that New India elected to affirm the contract. Conclusion There will be judgment for the Syndicate for the sum agreed to be due under reinsurance contract of £1,462,088.37. I shall also declare that New India is liable to indemnify the Syndicate in respect of any further claims made under the binder. DISPOSITION: Judgment accordingly SOLICITORS: None stated in original source |
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