Briefing

First broker’s negligence judgment given in DIFC Courts

The first judgment concerning an insurance broker’s negligence has been handed down by the DIFC Court of First Instance in June: Qatar General Insurance & Reinsurance Company QSPC v Emergent Risk Solutions Ltd. The Court found in favour of the claimant reinsurer that the defendant broker had acted negligently in failing to obtain retrocession cover as instructed, and to notify the claimant that this was the case.

HFW acted for the successful claimant reinsurer in this matter.

Background

The broker was instructed to place retrocession coverage on behalf of the claimant in July 2018.

The underlying insurance comprised excess liability insurance written by the Doha Insurance Group (“Doha”) in respect of the Nakilat Damen Shipyard in Qatar, which contained a superyacht facility owned by Qatar Petroleum (now Qatar Energy) which subcontracted licences to occupy and use certain areas for superyacht repairs.

The underlying insurance had a policy period of two years, from 1 June 2018 to 31 May 2020, and was governed by the law of Qatar, subject to Qatar jurisdiction. It contained three sections of cover: Section 1 Ship Repairer’s Legal Liabilities; Section 2: General Third Party Liabilities; and Section 3 Excess Liabilities.

Doha reinsured its exposure as follows:

40% of the risk was brokered via AON, with QBE and Liberty participating in the risk. QBE was slip leader (the “AON Slip”) and Liberty acted as second claims agreement party. This was governed by Qatar law and subject to jurisdiction of the Qatar courts. The AON slip was on materially the same terms as the underlying insurance.
10% was reinsured with the claimant. This policy also contained the same clauses as the underlying insurance and was governed by Qatar law and subject to the jurisdiction of the Qatar courts.
50% was placed with other reinsurers.

Around 18 July 2018, the claimant entered into a contract with the broker to obtain retrocession cover for its 10% share of the reinsured risk. It was common ground that this contract was governed by the law of the DIFC and was a contract of agency within Article 124 of the DIFC Contract Law.

The claimant provided the broker with a copy of the two year reinsurance policy in respect of which the broker was instructed to seek retrocession of 10% with 20% deduction. A 5% line was placed with MS Amlin with the slip mirroring the AON slip led by QBE.

Subsequently, the broker contacted a London placing broker to place the other 5%. The broker informed the claimant that Liberty was willing to write the other 5% retrocession on the terms of the AON slip, and the claimant gave instructions to go ahead.

The Liberty slip was received by the broker on 27 July 2018. The period on the slip was two years and ran from 1 June 2018 to 31 May 2020, but scratched on the slip by Liberty was a notice of cancellation stating “notice deemed given at cancellation“. This was pursuant to a cancellation clause on the slip which stated:

“Notwithstanding that this insurance is for a period of 24 months, it may be cancelled by either the Underwriters or the Assured giving 30 days notice to take effect from the time of the anniversary of the inception of this Insurance”.

In October 2018 the claimant queried the amount of the premium being charged, and the broker confirmed the coverage was for two years but the invoice showed a single-year period due to its internal IT systems and the broker asked the claimant to confirm that it would pay the premium in two annual instalments.

On 11 August 2019 there was a fire in one of the Superyacht Halls causing the constructive total loss of three yachts and damage to the Hall itself. Claims were made (and paid) under the underlying insurance and it was anticipated that further claims would be presented in due course.

Liberty refused to pay under the retrocession on the basis that there was no cover in place, as it had ceased due to the cancellation notice. The broker sent the claimant a copy of the Liberty cancellation notice on 5 September 2019.

In view of Liberty’s position the claimant commenced a negligence claim against the broker.

The parties’ positions

The claimant argued that that the broker breached its duties in contract and tort by failing to procure back-to-back retrocession cover as instructed, and by failing to notify the claimant on a timely basis of the cancellation notice.

The broker, by the time of the trial, no longer sought to argue that there was no breach as the cancellation notice had been sent to the claimant before 5 September 2019, and the court found on the facts that the cancellation notice was not sent to the claimant by the broker until this date. The broker’s arguments were focussed on the following:

It was not admitted that the Liberty cancellation notice was effective (although no positive case was advanced that it was not).
It was said that there was no prima facie cover for the claim under the underlying insurance in Qatar law, and therefore no cover under the reinsurance or the retrocession.
The broker argued that the obligation of Liberty to pay under the retrocession had not crystallised due to the absence of claim documents provided to support the claims under the underlying insurance and reinsurance.
Finally, it was said there had been material non-disclosure to the underlying insurers Doha, and Doha also failed to disclose to the claimant, a previous fire at the superyacht facility.

Judgment

HE Justice Jhangianai gave judgment in this matter.

The first point was that the Court found that the Liberty Cancellation notice was valid as a matter of Qatar law. The clause required that at least 30 days notice of cancellation must be given (not as the broker argued 30 days exactly), and there was no bar to the notice being provided at inception.

Duty of care

The Court then set out the standard of care applicable to brokers in contract and in tort, citing various English authorities, as follows:

Insurance brokers are required to exercise the degree of skill and care of a reasonably competent insurance broker.
This includes the duty to procure the cover sought by the client, and in the case of reinsurance the broker must usually ensure the risk reinsured is defined in identical terms to the risks covered by the primary insurance.
The broker must keep the client properly informed as to the presence or absence of cover and notify the client promptly if the insurance cannot be effected on the required terms.
The broker was bound to act with care and skill and solely for the benefit of the claimant in all matters connected to its agency pursuant to Articles 136 – 137 of the Contract law.

Breach

The Court “had no hesitation” in finding that the broker had breached its duties. The broker had been instructed to procure the retrocession on the same terms as the reinsurance, had stated that Liberty would write 5% of the risk, and failed to bring to the claimant’s attention that the Liberty cover ended after a year due to the cancellation notice. This was compounded by confirmations given by the broker that the retrocession coverage brokered was for two years.

Causation and loss

The broker argued that the breach of duty had caused no loss.

It was said that the claimant had not subjected this large underlying claim to the appropriate scrutiny and loss adjustment but had instead relied on the loss adjustment carried out by QBE as the leading underwriter on the AON Slip, which was a different contract of insurance. The broker argued that two of the heads of loss (dismantling and removing the superyachts and unrepaired damage to the superyacht hall) were not prima facie covered by the underlying insurance. The Court rejected this argument finding that there was cover for all heads of loss claimed under the underlying policy as a matter of Qatar law.

The broker also made arguments based on Article 790 of the Qatar Civil Code that were rejected. The broker argued that this provision, which requires the insurer to pay the indemnity within thirty days of the date from which the beneficiary provides the required statements and documents, meant that in Qatar law there is no completed cause of action against an insurer until the documents were provided. The broker said that Liberty’s obligations to the claimant had not been triggered as proper documentation had not been provided to it in respect of the damage and costs involved in the claim. Further, it was argued that the underlying insurer and insureds breached their duty of good faith in making or paying a claim on the basis of inadequate evidence, also annulling the obligation to pay.

The Court found that under Qatar law the insured’s cause of action arises upon the loss, not upon the provision of sufficient documentation, and further that the broker had not shown insufficient documentation was provided to substantiate the claim.

Loss of a chance

In English law, where the courts are required to consider the hypothetical actions of a third party in relation to a claim, it will do so on a loss of a chance basis. Provided that the claimant shows that it has a real and substantial chance of achieving a better outcome than was achieved, then the court will assess the chance of that outcome on a percentage basis.

The Court considered the application of loss of a chance principles in DIFC law and Article 11 of the Law of Damages and Remedies (applicable to contractual damages) and Article 27 (applicable to tort claims) which provides that

“(1) Compensation is due only for loss, including future loss, that is established with a reasonable degree of certainty.

(2) Compensation may be due for the loss of an opportunity in proportion to the probability of its occurrence.

(3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the Court.”

A key plank of the claimant’s case was that had the cancellation notice not been given, there was a 100% chance of Liberty paying the retrocession claim, because Liberty had in fact already paid in respect of the claim due to its participation under the AON Slip, on materially identical wording. There was no evidence that Liberty would take any different position or any defence relating to a lack of documentation or material non-disclosure in relation to the claimant in relation to the retrocession.

The claimant also pointed to English case law including Norman Hay v Marsh which cites Fraser v Furman which indicate that in assessing the claimant’s loss in a broker’s negligence claim, the court is not strictly concerned with what the insured was entitled to recover under the insurance, but what would have happened if there had been no breach of duty. Therefore, if the court finds an insurer would or might have made a payment, the claimant will recover damages, even if (as a matter of law) the claimant might not have been entitled to a payment from the insurer. The insurer’s liability remains relevant however, in assessing the loss of chance lost by the claimant (in particular in that the claimant must show there was a real and substantial chance of receiving a payment).

The Court accepted that its task was to determine what would have occurred had there been no breach of duty and to assess the likelihood that the claimant would have received a payment from the insurer, and if there was any uncertainty as to the likely recovery it would be resolved in favour of the claimant.

The Court found that it was correct that a loss of chance analysis would only be relevant if there was a valid claim under a putative insurance policy, but the court had already dismissed the broker’s argument that there was no prima facie cover under the Underlying insurance.

The Court found that the whole prospect that Liberty might reject cover under the retrocession where it had already approved payment under the AON Slip had an air of unreality about it and was “completely unrealistic”. It was not plausible that Liberty would decline cover (on the same material terms) for any of the reasons put forward by the broker, none of which were put forward by any other insurers involved in the insurance scheme.

The Claimant was therefore entitled to be put in the position that it would have been in had the broker not breached its duty. Applying the principle from English and other common law jurisdictions that the courts should not speculate where it knows, the Court could take into account events since the breach in assessing the claimant’s loss of chance. The Court found that if the retrocession had been in place Liberty would have paid all claims already paid and any future claims that were also paid under the AON Slip.

On the material non-disclosure of the previous fire argument, no insurers involved including Liberty had raised this as an issue although they were made aware of the previous fire by loss adjusters. However, the court found that if it should in future be taken under the AON Slip then the parties were free to return to court.

The claimant was awarded damages and compound interest.