Legal - Brokers, do your duty - to clients and reinsurers alike.

(From Reinsurance)

In March 2006 Mr Justice Langley handed down his judgment on the HIH v JLT case, the most recent film-finance insurance case to go to trial. This article considers the judgment and the consequences for brokers in a similar position in the future.

Case history

The origins of the dispute lay in HIH's decision to pay three claims with a total value of $55m in February 2000. At the time, HIH believed it had no valid defence to the claims. It also knew that it had significant protections with reinsurers. These reinsurances had been placed by JLT and were supposedly 'back to back' with the original insurance HIH had written. However, by the time HIH decided to pay the claims, certain major reinsurers, including Axa and New Hampshire, had indicated they would not pay. This decision was based on information that was also available to HIH.

If HIH paid the claims, it knew it would face a battle to recover from its reinsurers. HIH chose to pay the claims for reasons that later proved to be unfounded. According to Mr Justice Langley's judgment: "HIH backed the wrong horse in a race it did not have to bet on."

The claims against HIH were brought by the Law Debenture Trust, a trust that held the benefit of three insurance policies for investors in certain film-finance arrangements known as 'Hollywood 1, 2 and 3'. As part of these complex financing arrangements, HIH's underwriter, Stephen Mitchell, had agreed to a wide-ranging 'waiver of rights clause'. This waiver clause was thought at the time to exclude insurers' rights to avoid for non-disclosure or misrepresentation. It was also thought to exclude insurers' remedies for breach of warranty. In effect, the waiver clause was intended to turn the insurance policy into a financial guarantee.

This proved to be based on a misunderstanding of the policy, which had fatal consequences for HIH. A clause in the policy was found to be a warranty as to the number of films to be made under each Hollywood project. Because fewer films were made under each of the Hollywood 1, 2, and 3 arrangements than had been warranted, HIH found it could not recover from its reinsurers despite having paid the underlying claims itself. The waiver clause was held not to apply.