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Legal - The 'law of the jungle'?
(From Reinsurance)
The action Bonner and Others v Cox1 was brought by a number of Lloyd's Syndicates who participated as reinsurers on the 'Aon 77 Cover', under which a large volume of energy business was written. The cover operated such that participating Cover Underwriters were bound to all risks written by the leader, Syndicate 535. Aon broked the business to the Cover, as well as placing reinsurance for the Cover Underwriters.
A feature of the reinsurance was that, for most risks, it had an aggregate deductible and no overall limit of cover. In practice, this meant that once the aggregate deductible had been exhausted, Cover Underwriters could write business where they retained significant premium, but passed the lion's share of any losses to their reinsurers.
Reinsurers alleged that, in reliance on this reinsurance arrangement, Cover Underwriters proceeded to write risks they would not otherwise have written, knowing that they would make a profit while reinsurers would suffer a loss - a practice sometimes referred to as 'writing against the reinsurance'.
Reinsurers then argued that they should be able to deny cover on the basis that such risks were written in breach of implied terms that declarations to cover would be made with the skill and care of a reasonable underwriter, and would not be made if, by reason of the reinsurance cover available, underwriters were indifferent as to whether a gross underwriting profit would be made.
Terms and risks
In support of these terms, reinsurers relied on two previous cases concerning proportional reinsurance contracts where a duty to act reasonably in the writing of its business was found. At first instance, Morison J rejected these arguments and found for the Cover Underwriters. In his judgment, there was scope only for two more limited implied terms: that a reinsured would exercise an underwriting judgement before writing a risk; and that any risks accepted would be those which the underwriter would write in the ordinary course of business, taking account of the available reinsurance.
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