Reinsurers cannot collect duty-of-care (January 01, 2006)

The UK Court of Appeal recently ruled that excess-of-loss coverage can not be denied even on the grounds that reinsurance buyers owe their reinsurer a duty of care to underwrite original risks prudently, unless this duty of care is stated in policy wordings.

In the nonproportional energy reinsurance coverage case of ‘Bonner & Others vs. Cox & Others’ – aka “Aon 77” – the appellate court ruled that a cedent does not have to pay a duty of care so that a reinsurer can select and underwrite its own risks.

The Aon 77 case is based on the fact that Lloyd’s of London energy syndicates that were covered by a policy brokered by the U.K. arm of Aon Corp. (Aon 77) for their energy insurance, were reinsured on a nonproportional basis.

The cedents claimed approximatley $90 million under their Aon 77 coverage after experiencing underwriting losses. However, the claim was denied in part because the reinsurers felt that a duty of care for the buyer to underwrite prudently was implied in the contract.

In 2004, a lower court in ruled the buyers did not owe a duty of care.

“The fact that the reinsurer does not exercise his own judgment about the individual risks to be reinsured is a feature…of almost all reinsurance,” Lord Justices Waller, Tuckey and Moses said in their ruling. “The reinsurer exercises his judgment as to which underwriter he will reinsure and upon what terms.”