|
The writing
of reinsurance contracts under a binding authority on an "arbitrage"
or "net underwriting" basis involved dishonest breaches of
fiduciary duty and fraudulent misrepresentations. The fact that premiums
were far less than the reinsured knew that it would need to pay out
in satisfaction of claims was concealed.
The court
considered issues of dishonesty, misrepresentation and fraud arising
out of the operation of a reinsurance market in the 1990s which traded
in losses generated by US Workers' Compensation (WC) insurance. Typically,
a standard WC policy would be reinsured after business comprising section
B of the Workers' Compensation Act had been carved out. This reinsurance
was known as "WC carveout".
Sphere
Drake, as reinsurers, claimed against Euro International, who held their
binding authority, brokers Stirling Cooke Brown ("SCB") and
certain of the individuals concerned. Sphere Drake alleged that the
writing of reinsurance concerning WC carveout under the binding authority
was an act based on conspiracy, fraud and dishonest breach of fiduciary
duty. In essence, reinsurance was provided at a premium that was far
less than the reinsured knew it would have to pay out by way of claims.
This was not for conventional "loss leader" reasons, but was
"arbitrage" or "net underwriting", described by
the Judge as "deliberately accepting business known to produce
losses in excess of the premium charged on the backs of reinsurers who
would be expected to pay the losses for even less premium". They
were not assessing the risk and premium in the manner of conventional
insurance. The reinsurers then retroceded their participation to the
same and so on, with SCB "deliberately" constructing tight
spirals.
The court
held that a market that traded in losses of this type was one in which
no rational person would have participated if he had understood the
market and proper disclosure had been made. The carveout market spiral
was, according the court, in turn adopting the words of an expert witness,
aptly characterised as "pass the parcel" or "Russian
roulette by proxy". In the only document before the court which
had been provided to the then regulator, the DTI, the true nature of
the business was deliberately and fraudulently concealed.
All the
defendants were found to have acted dishonestly, although to differing
degrees and so Thomas J found for Sphere Drake on all material grounds.
It has been predicted that, as a result, Sphere Drake will be able to
reject claims totalling $250m.
|