Application of SAAMCO decision to brokers’ liability

United Kingdom

In 1988, Johnson & Higgins, acting on behalf of a number of Lloyd’s syndicates, approached Aneco, a Bermudan insurer, and asked if it would participate in a facultative/obligatory reinsurance treaty, under which the syndicates would be able to choose which risks to cede to the treaty and the reinsurers would be obliged to accept the selected risks. Aneco agreed to participate in the treaty, but made it clear that their participation was subject to Johnson & Higgins arranging satisfactory retrocession protection for Aneco.

Thereafter, Johnson & Higgins placed retrocession agreements with various insurers from both the Lloyd’s and the London companies’ market and the overseas market.

Subsequently, the retrocessionaires avoided Aneco’s cover on the basis of misrepresentation and non-disclosure as to the nature of the reinsurance treaty. The retrocessionaires alleged that they had been informed that the treaty was, in fact, a quota share treaty, under which the reinsured syndicates had no right to select the risks to be ceded, with all risks accepted by the syndicates being automatically ceded to the treaty.

At a subsequent arbitration, the avoidance was upheld. Following the arbitration, Aneco commenced proceedings against Johnson & Higgins alleging negligence in the placing of the retrocession agreements.

At first instance, the Judge held that Johnson & Higgins were negligent in that they had failed to make a fair presentation of the risk to the retrocessionaires. In particular, Johnson & Higgins should have disclosed to the retrocessionaires that Aneco had participated in a facultative/obligatory treaty. Under such a treaty, once a cedant selects risks to be ceded, the reinsurer is obliged to accept the risks. Such treaties were generally regarded in the London Market as less attractive than quota share treaties because of the risk of “anti-selection” by a cedant (there being a greater risk that cedants will use facultative/obligatory contracts as a “dumping ground” for poor quality business).

In relation to quantum, Aneco argued that Johnson & Higgins should meet the entire loss it had suffered on the reinsurance treaty, on the basis that it would not have participated unless the brokers had advised that retrocession protection was available.

The Judge rejected this argument and found that, if there had been a fair presentation of the risk, alternative retrocession cover would have been available at a similar price. On that basis, Johnson & Higgins were only liable for the amount which Aneco had been unable to recover under the retrocession agreements as a consequence of the avoidance.

The Judge also referred to the decision in South Australia Asset Management Corporation v York Montague Limited (1996) (“SAAMCO”). In the SAAMCO appeal, the House of Lords held that the liability of a professional Defendant is limited to that part of the Plaintiff’s loss which falls within the scope of the Defendant’s duty of care. On the present facts, Aneco’s participation in the reinsurance treaty resulted in extremely heavy losses due to, for example, Hurricane Hugo and Exxon Valdez. The brokers did not, however, assume a duty to advise Aneco whether to enter the marine market and whether to participate in the treaty. Accordingly, the Judge held that Johnson & Higgins should only be liable for the amount which Aneco could not recover from the retrocessionaires. The other losses suffered by Aneco under the reinsurance treaty were not attributable to the brokers’ breach of duty.

On that basis, Aneco was awarded damages of around US$11 million.

Aneco appealed, contending that Johnson & Higgins should meet the total loss it had suffered on the reinsurance treaty, amounting to approximately US$30 million.


By a majority of 2 to 1, the appeal was allowed.

Johnson & Higgins did not challenge the Judge’s finding that the presentation of the risk to the retrocessionaires had been negligent. The sole issue was the quantum of damages payable to Aneco.

Johnson & Higgins contended that the correct measure of damages was the value of the retrocession protection which Aneco lost when the cover was avoided.

Aneco argued that, had a proper presentation been made, no retrocession cover would have been available in the London market and, as a consequence, Aneco would have declined to participate in the reinsurance treaty. On that basis, Aneco would not have incurred any losses. Accordingly, Aneco contended that all of their losses were caused by Johnson & Higgins’ negligence.

The Court of Appeal had to consider two issues:

The factual issue - the Court of Appeal unanimously disagreed with the Judge and found that, had a fair presentation been made by Johnson & Higgins, no retrocession cover at commercially acceptable rates would have been available in the London market at the relevant time. The Court of Appeal relied upon expert evidence and also the contemporaneous evidence provided by Johnson & Higgins’ placement sheets, which recorded the actual reactions of underwriters to specific proposals at the relevant time and effectively covered the whole of the relevant London market (these sheets showed many examples of general objections, for example, the statement “need that like a hole in the head”).

The legal issue - this was the central issue. If Aneco had been informed that no retrocession protection was available, it would not have participated in the reinsurance treaty. Accordingly, if Johnson & Higgins had not been negligent, no losses would have been incurred. On that basis, the real question was whether the SAAMCO decision operated to restrict Johnson & Higgins’ liability.

The SAAMCO appeal decided that the fact that a Plaintiff would not have entered into a contract if the advice received from the Defendant had not been negligent does not mean that the Defendant is liable for the whole of the Plaintiff’s loss; the Defendant’s liability is limited to that part of the Plaintiff’s loss which falls within the scope of the Defendant’s duty of care.

On the present facts, the brokers’ duty of care went beyond obtaining retrocession cover. Johnson & Higgins effectively put together the deal between the insurers, Aneco and the retrocessionaires and were aware that Aneco’s participation in the reinsurance treaty was subject to the availability of satisfactory retrocession protection; if they had advised that no such protection was available, Aneco would not have participated in the treaty. Accordingly, Johnson & Higgins assumed a duty of care to Aneco in respect of its participation in the reinsurance treaty and breached that duty by failing to report correctly to Aneco the current market assessment of the reinsurance risks which Aneco was proposing to undertake. Johnson & Higgins’ duty of care was not simply to obtain retrocession cover, but rather to obtain cover for the specific purpose and programme which they had put in place; their duty was to protect Aneco from the very risk they knew Aneco would not accept if no satisfactory retrocession protection was available.

Accordingly, Aneco was entitled to recover from Johnson & Higgins damages for the whole of the losses it suffered as a consequence of entering into the reinsurance treaty, some US$30 million.


In essence, the Court of Appeal decided that the particular facts of this case meant that the SAAMCO principle did not operate to restrict the damages payable. The Judgment does not, however, establish a general rule that a reinsurance broker will be liable for losses on inward contracts merely because outward contracts are invalid owing to the broker’s negligence. The scope of the duty assumed in this case by Johnson & Higgins went well beyond the arranging of retrocessionaire cover and reflected their role, in effect, as the “dealmaker”.

The active role that brokers play in placing reinsurance within the market may involve them in simultaneously offering to arrange appropriate retrocession cover for the relevant reinsurers. In such cases, the potential damages for any breach of duty may - depending upon the particular facts - not be limited by the SAAMCO principle. The usual measure of damages in brokers’ errors and omission cases will, however, remain the shortfall in cover resulting from the broker’s negligence.

Similarly, although it has been suggested by some commentators that the decision potentially expands the quantum of claims against other professionals, it is likely that the Courts will require very strong facts to distinguish the restrictive principles set out by the House of Lords in SAAMCO.

Leave to appeal was refused by the Court of Appeal and Johnson & Higgins have petitioned the House of Lords seeking leave to appeal.

CMS Cameron McKenna acted for Aneco (Aneco Reinsurance Underwriting Limited (in liquidation) v Johnson & Higgins Limited, CA: Judgment 30th July 1999).

For more informaiton, please contact Peter Maguire in London at [email protected] or on 0171 367 2893 or Jonathan Wright in Singapore at [email protected] on 0065 534 1711.