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The
Court of Appeal dismissed an appeal from the March 2003 decision of
the Commercial Court concerning fronting arrangements.
Various
pool members entered into separate underwriting agreements with an agency,
whereby risks would be written on a pool basis. The agency had authority
to front pool members, but, irrespective of fronting, it was agreed
that the agency would divide all premium and claims among the members
in their fixed pool shares.
The agency
arranged common account reinsurance protection for the pool members.
The agency's authority had been cancelled and the agency dissolved.
Under the underwriting agreements, pool members had agreed amongst themselves
to divide up claims against solvent fronting companies in the event
of any pool members becoming insolvent (which three had). Since the
solvent pool members had to pay such claims in full, they claimed the
full benefit of the common account reinsurances. However, the insolvent
pool members also claimed their net pool share of the proceeds of the
reinsurances. The court was asked to decide who had the benefit.
At first
instance it was held that for so long as the agency remained the authorised
agent of all the pool members, they were bound, amongst themselves,
by the terms of the agency agreements to allow the agent to apply mutual
net accounting, namely collect the reinsurances and apply the proceeds
in accordance with the agency agreements. Cooke J held, however, that
this did not continue beyond the demise of the agency (although rights
created as between pool members under the fronting arrangements still
survived). Thereafter, each pool member, solvent or insolvent, could
itself collect its fixed pool share of losses from reinsurers even though
only the solvent pool members were paying the entirety of claims fronted
by a solvent company.
Waller
LJ, with whom Tuckey LJ and Jacob LJ agreed, concluded that each pool
member had authorised the agency to underwrite for an amount not exceeding
a fixed percentage of the risk and each accepted its share of liability.
The fronting arrangement did not alter this and liabilities as between
pool members remained the same. It was the risk of each pool member
which the agency was authorised to reinsure. Each member was liable
for its share of reinsurance premium, and each was entitled to the benefit
of the reinsurance arrangement for which it had paid.
In dealing
with the appellants' arguments that mutual net accounting obligations
survived, Waller LJ expressed dissatisfaction with the proposition that
contractual rights ceased simply because the agent empowered to produce
the mutual net accounts had had his agency terminated. He approached
the issue differently and concluded that an arrangement between pool
members as to how reinsurance collections were to be dealt with once
collected could not affect the right of a liquidator to collect the
asset for the benefit of general creditors, unless a trust was established.
It was held that no such trust had been established.
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