Reinsureds Required to Disclose Allegations to their Reinsurers

In Brotherton v.†Aseguradora Colseguros†and Another [16th July†2003] Unreported, the†Court of Appeal†considered the duty on a†reinsured to disclose to a†reinsurer the existence of†allegations of misconduct†against the underlying†assured.

In reaching its decision, the Court of Appeal†had to choose between two decisions of a lower†court (the Commercial Court). In The Grecia†Express [2002] 2 Lloyds Rep 88, the Commercial†Court had said that non-disclosure of mere†allegations of an assured's history of scuttling†vessels did not justify an avoidance if the†assured maintained that the allegations were†wrong and would (if allowed) be able to prove†this to the court. The allegations would only be†material if the assured could not prove that the†allegations were wrong.

In the subsequent case of Drake Insurance plc†v. Provident Insurance plc [2003] 1 All ER†Comm 759, a different judge in the†Commercial Court had expressly disapproved†The Grecia Express. A motor insurance†contract had been avoided for non-disclosure†of a speeding conviction. The court upheld†that avoidance even though there was†evidence that, if the speeding conviction had†been disclosed, the assured's whole history†might then have been looked at more closely.†An entirely separate earlier accident might†then have been positively re-rated as a "nofault"†accident, balancing out the speeding†conviction in such a way that the terms of the†insurance would not have changed after all.†This information about the earlier accident†(that had only come to light after the†avoidance) suggested that the avoidance†would not have been justified. This still did†not sway the court. The Grecia Express was†criticised as introducing "an additional and†unwelcome element of uncertainty" because†it put insurers at a greater risk of their†avoidance being re-opened at trial.

In the Brotherton case, the claimants were†London reinsurers who were seeking a†declaration from the English court that they†had validly avoided a reinsurance contract†with two Colombian insurance companies†called Aseguradora Colseguros S.A. and La†Previsora S.A., Compania de Seguros.

The Colombian insurance companies had†provided bankers' blanket bond and†professional indemnity insurance to a†Colombian bank called Caja Agraria.†Amongst other things, the insurance covered†losses caused by dishonest or fraudulent acts†of bank employees.

Leading up to the making of the reinsurance†contract in late 1997, there were seven news†bulletins and...