Implied Terms in Reinsurance Contracts: Bonner v. Cox
London and Bermuda Newsletter
The recent case of Bonner & Ors. v. Cox & Ors. (EWCA Civ. 1512, 8 December 2005) has provided some clarification to the question of implied terms in the context of reinsurance contracts. (Issues of avoidance were also the subject of the appeal, but are not considered here.)
The case involved reinsurance of an open energy cover known as the '77 Cover 1999 ("the cover"). Reinsurance had been arranged by the broker in advance of the underwriting of the primary cover. A declaration subsequently made under the cover proposed that the cover should accept a non-proportional reinsurance of risks which were probably bad, and which in fact exposed the reinsurers disproportionately in relation to the premium which was to be paid. None of the reinsurers raised any query or objection as to these risks, although the aggregate excess on the reinsurance had been exhausted at that point, and they would be exposed to the first $10 million of any loss (the cover retaining $5 million of any loss excess of $10 million). A loss ensued which the reinsurers declined to pay arguing, inter alia, that there had been a breach of duty on the part of the reinsureds to the reinsurers.
Morison J held that, while some terms should be implied into the reinsurance contract, no breach had been established in respect of the declaration. The appellant reinsurers challenged that finding.
The Court of Appeal noted the fundamental difference between proportional reinsurance, where there is a sharing of the risks (premium and losses), and non-proportional, where there is not. The Court further noted that, in the case of non-proportional reinsurance, the reinsurer and reinsured had adverse and competing interests; the Court concluded that it was unlikely that any general duty on a reinsured to act prudently or reasonably carefully could be implied into such a contract of reinsurance.
The judge at first instance had found that two terms could be implied into the contract at issue: (1) that risks would only be accepted to the cover which the lead underwriter would write in the ordinary course of business; and (2) that the reinsured would write its risks with the ordinary skill and care of a reasonable underwriter. The Court of Appeal ruled that there was no need to imply any such terms in respect of non-proportional reinsurance: doing so would introduce a significant element of uncertainty and might open up the spectre of retrospective underwriting by reinsurers who had underwritten loss-making business. The alleged duties would also be difficult to reconcile with the Marine Insurance Act 1906.
In any event, reinsurers could protect themselves by other means. In this regard (and noting that the parties accepted that the reinsurance in this case had been written imprudently), the Court emphasised the importance of pre-contract disclosure and careful attention to wordings, for example to clearly define the nature of the risks to be reinsured and to provide reinsurers with rights to monitor the progress of the business being ceded. Reinsurers were more likely to be protected from a reinsured's dishonesty, wilful misconduct or recklessness on the basis of a proper construction of the policy, than by reference to any implied term.
The somewhat curious result of this decision is that the law appears to offer more protection to a proportional reinsurer (who probably needs it less) than to a non-proportional reinsurer. Further emphasis is thus given to the need for careful attention to express contract terms.