Putting a premium on reinsurance

A broker's purported attempt to cancel an insolvent client's reinsurance will be the focus of an Appeal Court battle, says Roger Pearson. Judgment is now pending in a three-cornered legal battle in the Court of Appeal over the legality of the cancellation of reinsurance policies.

In a case of considerable importance in insurance circles, the Pacific and General Insurance Company (P&G) is lined up against broker JH Minet & Co, reinsurer Richard Hazell and Munich Reinsurance Company.

P&G has appealed against a High Court decision by Mr Justice Moore-Bick in October 1996 dismissing its claim for declarations that four excess of loss contracts placed on its behalf remain valid and enforceable.

Minet was retained on behalf of P&G to obtain reinsurance, which it did at Lloyd's and in the London Companies market, between June and August 1984.

As part of its mandate it submitted premium advice notes to the Lloyd's Policy Signing Office and its Policy Signing and Accounting Centre, the effect of which was to compel Minet to pay to reinsurers the premium specified in the notes.

It was compelled to pay whether it had any prospect of reimbursement by P&G or not. In effect, the court was told, Minet had extended credit to P&G. Subsequently, though, P&G became insolvent and a provisional liquidator was appointed.

However, Minet, fearing for its money, was not content to prove itself a general creditor.

Instead, the Court of Appeal was told, it orchestrated the purported cancellation of the reinsurance policies by reinsurers, in a bid to recover the premium it had paid and to avoid paying more.

It was in these circumstances that P&G went to the High Court seeking declarations that the reinsurance policies were still effective, or, alternatively, seeking damages against Minet for procuring their cancellation.

It was these claims which were dismissed by Mr Justice Moore-Bick in the Commercial Court in October 1996. He held that Minet's fiduciary duties did not require it to protect P&G's interests as opposed to its own once P&G had refused to pay premiums.

When he opened the appeal before Lords Justices Hirst, Hutchison and Thorpe, Gabriel Moss QC, counsel for P&G, said the undisputed facts of the case were "extraordinary".

He said that if the High Court judgment stood, the effect of Minet's conduct would be to elevate it above P&G's other creditors, which are the effective plaintiffs because P&G is now in liquidation. That, he said, would be unfair.