Brokers' placing/claims documents denied to Underwriters

Whether, and to what extent, brokers are obliged to produce placing and claims/accounting documents to underwriters – which in many cases, the Lloyd's syndicates in issue had seen before- was considered very recently by Christopher Clarke J in the case of Goshawk Dedicated Ltd and Others v. Tyser & Co Ltd and Another [2005] EWHC 461 (Comm).

The Judge's decision on these issues may well have come as a surprise to many in the market, as he substantially ruled against underwriters' contentions that they should be allowed to compel production of the majority of such documents, even though they may have seen them before.

Factual background

The background facts concerned "viatical" business that was insured by various claimant Lloyd's syndicates ("the Syndicates"). Viatical companies purchase life assurance policies of the terminally ill or those over 65 at a discount, with a view to profiting from the payout upon death in the event that the sum assured exceeds the purchase price of the policy and the premiums paid to keep it in force thereafter. The risk insured by the Syndicates was the possibility that payment was delayed or was never paid at all, because the insurance was term insurance, and the life assured outlived the term.

In this case such insurance business was placed with the Syndicates by the defendant brokers ("the Brokers") both directly and also indirectly via the Syndicates' appointed underwriting agents who, from 2000 onwards, held a binding authority granted by the Syndicates.

The dispute arose because the Syndicates went into run-off and the run-off managers sought access to placing, claims and premium /accounting documents in order to manage the run-off. The Brokers in fact provided a substantial quantity of this material to the Syndicates where relevant client assureds they had contacted gave their consent. However, in some cases the Brokers could not get such client consent and in many cases clients were uncontactable or unresponsive. In these instances, the Brokers refused the Syndicates access to documents relevant to these assureds (notwithstanding that the Syndicates had in many cases already seen the documents in issue or these had been made available to them, or had even been mentioned in the relevant slips) fearing that they might be sued if they volunteered the documentation without their client's express agreement.

The position was also complicated by the fact that on 20 December 2001 the Syndicates and the Brokers entered into a Terms of Business Agreement ("the TOBA") in which, by clause 8.1, the Brokers agreed that they would make the following available for inspection on reasonable notice:

"8.1.1 the accounting records pertinent to any insurance business including information relating to the receipt and payment of premiums and claims and documentation such as any insurance contract or slip endorsements, addenda or bordereaux in the possession of [the Brokers] relating to that business; and

8.1.2 documents as may be in the possession of [the Brokers] which were disclosed to [the Syndicates'] managing agent by [the Brokers] in respect of any insurance business including, but not limited to, documentation relating to the proposal for the insurance business, the placing thereof (including endorsements and reinstatements) and any claims thereunder.

Crucially, as it would transpire, clause 2.2 of the TOBA stated that

"Nothing in this Agreement overrides [the Broker's] duty to place the interests of its client before all other considerations nor shall this Agreement override any legal or regulatory requirement (whether obligatory or advisory) which may apply to [the Brokers], [the Syndicates], or the placing of any insurance business."

The issues

The Court considered the various relevant Lloyd's and Insurance Brokers Registration Council codes of practice for brokers issued since 1988 that addressed the production of brokers' papers. It noted that the effect of these required brokers to place the interests of their clients above all other considerations, and to oblige brokers not to use or disclose any information acquired by them from clients other than for use in the normal course of negotiating, maintaining or renewing a contract of insurance for such clients -unless the consent of the respective client concerned had been obtained or if the production of that information was ordered by a Court.

It was also noted that under paragraph 44 of the GISC Code that came into force on 3 July 2000, broker members had to abide by similar provisions in respect of "commercial customers" (although an exception to production without consent was retained to enable GISC to fulfil its regulatory function); further that as from 14 January 2005, all Lloyd's brokers became subject to the Insurance Conduct of Business Code, an FSA document, which contained no repetition of paragraph 44 of the GISC Code.

The Court also had regard to the fact that a guidance note annexed to the draft market model form TOBA agreement that was issued prior to the execution of the TOBA also stated that a broker had a duty of confidentiality, and could not grant third parties access to documents without an assured's permission. That note also proceeded to comment that as an exception "pursuant to London market practice" a managing agent was entitled to see documents that they saw at the time of placing.

Both parties put expert evidence before the Court. For the Syndicates, expert underwriting evidence was put forward to the effect that it was "an accepted and understood market practice" that underwriters were entitled to require the production to them of copies of any documentation made available by the brokers at placing and remaining on the brokers' files (indeed as later expressly reflected by the terms of paragraph 8.1 of the TOBA). Furthermore, it was "the custom and practice" of the Lloyd's market that underwriters could call for claims files at any time even if a loss had been settled, otherwise the market would not work.

For the Brokers, expert broking evidence was called to the effect that where an underwriter did not retain copies of placing information that was shown to him at the time of placing, a broker would indeed make such documents available to the underwriter upon request, but subject to the qualification that a broker might not do so if the broker's client expressly forbade that act or if the broker thought that the request was not in the best interests of his principal. As to claims files, brokers should produce to underwriters any report or other document that had been paid for by the underwriters concerned but, in relation to other documents, the position was the same described above. In summary the expert broking evidence called was that the interests of a broker's client was paramount, even if they conflicted with an undertaking that the broker may have given to the underwriter.

The legal argument was whether, as the Syndicates contended, prior to the execution of the TOBA there was an implied obligation between the Syndicates and the Brokers, based if necessary on a long established market practice and the custom of Lloyd's, that the Brokers would allow the Syndicates access to information which they did not have, but which had hitherto been produced or made available to them and which the Brokers had retained on their placing and claims files. After the execution of the TOBA, the Syndicates relied upon clause 8.1 as expressly conferring upon them such rights of access. These contentions were denied by the Brokers who maintained that there was no such unfettered right to compel production, whether before or after the execution of the TOBA.

The decision and the Court's reasoning

(a) Placing and claims files

The Court was not persuaded that prior to the execution of the TOBA on 20 December 2001, there was any contract or obligation to be inferred or implied between underwriters and brokers in the Lloyd's market to the effect that placing documents held by brokers which had hitherto been made available to syndicates or their managing agencies, or referred to in the slip at the time of placement of the risk, had to be produced by the brokers upon later request of the underwriters. Nor was there any such contract or obligation requiring a broker to subsequently produce claims documents that it had also hitherto disclosed and presented to underwriters.

The Court considered that the evidence before it fell considerably short of establishing a custom, as opposed to any common or habitual practice, to this effect as contended by the Syndicates. To establish a custom, one usually could show that it survived a previous challenge to it, but no such evidence existed here. Furthermore, the differing provisions of the various Codes and the market approved draft TOBA, given the tensions within such documents of the needs of a broker on one hand to safeguard his client's interests at all times, against the requirements of an underwriter on the other to seek production of placing and claims information, were also wholly inconsistent and not reconcilable with the existence of such a settled custom as alleged by the Syndicates.

Even if there were such a custom established in the market place to disclose documents to underwriters, the fact that to do so would be inconsistent with the instructions and best interests of the Brokers/ their clients would, in the Judge's view, make it unreasonable to impose and therefore unenforceable.

So far the TOBA was concerned, and its impact on the legal position, the Judge considered it was necessary to focus upon not only terms of the access to records clause, clause 8.1, but also the terms of clause 2.2. The Judge concluded that clause 2.2 was capable of "trumping" the terms of clause 8.1 in appropriate situations, so that even after the execution of the TOBA, the Brokers were not contractually obliged to grant the Syndicates access to any of these categories of documents if, to do so, would be inconsistent with the broker's duty to place the interests of his client before all other considerations.

(b) Premium accounting documents

The Judge did not accept that prior to the execution of the TOBA there was any implied contract between the Syndicates and the Brokers to the effect that the premium accounting documents would be made available and that the Brokers owed the Syndicates a duty of an accounting party. There was no implied contract arising whereby a broker undertook to ensure that he would himself pay the premium or to collect it as agent for the insurer, or that the broker became, or was to be treated as, the agent of the Syndicates for the collection and receipt of premium, so as to be under an obligation to produce, on request, every document in his hands relating to the collection, processing and accounting for premium.

The Judge, however, did not agree that after the execution of the TOBA the interaction of clause 2.2 with clause 8.1 meant that such documents did not have to be disclosed by the Brokers: clause 8.1 was not by its terms simply limited to producing such documents that had already been disclosed to the Syndicates and, indeed, it was a clause drafted with "wide words". Whether access was to be granted depended whether it could be accurately said that documents were pertinent to the insurance business and to record information of an accounting nature that related to the receipt and payment of premiums.

As the Syndicates had already been provided with documentation showing premium information, he was also not persuaded that the Brokers could have any genuine grounds in respect of this category of documents to fear that their production would be against the interests of the Brokers' clients. It might be the case, for example, that producing these was time consuming and tedious to locate and produce, but that was not a reason further to clause 2.2 to justify the non-production of this category of material pursuant to the terms of clause 8.1.

The Judge did not rule definitively as to what precisely the Brokers must produce out of this category of material but he made it clear that he was in no way fettering the Court from exercising its discretion independently to refuse to compel production of any documents of this nature if they were of limited relevance or where such production would involve effort and expense disproportionate to any value that the documents might have. He did, however, indicate that the effect of his ruling would provisionally include the Brokers producing, for example, any endorsements drawn up by the Brokers addressing any additional premiums that may have been due, any debit notes sent to the Brokers' clients (including producing brokers), producing brokers' invoices sent to the clients, and also any monthly accounts sent to the Brokers by producing brokers, provided that all such material was in the Brokers' possession.

Comment

The decision that, excepting any express agreement to the same (and see below), there is no 'right' of an underwriter in the Lloyd's market -whether derived from a custom and practice of the Lloyd's market or otherwise - to see placing/claims documents already made available to that underwriter may well surprise many.

This is certainly a highly relevant case for brokers and underwriters alike to consider when a broker is asked, or is to be asked, to produce documents which a broker holds and which it has made available to the underwriter beforehand. If it is indeed relevant to consider a brokers' "wider client interests" when construing relevant TOBA or other written agreements, then it should be noted that although on the facts in this case the absence of client instructions was considered a legitimate ground of objection for the Brokers to raise in opposition to the Syndicates' request, the Judge indicated that any objection based on "a state of confusion" in the Brokers' records, such that the Brokers did not want to make the effort to sort out the confusion, or that the Brokers was too busy to attend to the underwriter's requests, or even that the documents had been put away in a store and it would take time, effort and money to comply with the request, would not necessarily be valid objections to raise.

Even in respect of the provision of the accounting documents, it seems that the Judge was influenced to agree to the Syndicate's request in principle for their production because he could not see, on the facts before him, how there could be any prejudice to the Brokers' clients if the Brokers did produce them without their clients' express consents.

Finally, the case does not say that contractually there can be no express obligation imposed upon brokers to make documents available to an underwriter notwithstanding all other considerations, but very clear words would seem necessary to make this clear. Even if this is done, note should be taken that in this case, the Judge reserved the exercise of the Court's powers of discretion to refuse to compel the production of any documents on grounds that this would be unnecessary, irrelevant or disproportionate.

Please email Stephen Netherway or phone 020 7367 3015 or email Rebecca Bailey or phone 020 7367 3022 if you would like more information about this case, or about the rights of access to brokers' papers generally.