Biting the hand that feeds ?

On 7 February the Court of Appeal reversed a controversial decision made by the Commercial Court in 2005 that effectively granted permission to Lloyd's brokers to withhold documents later requested by underwriters.

The original ruling stated that broker Tyser & Co was within its rights to refuse underwriter Goshawk access to placing, claims and accounting documents which they had already seen at an earlier stage.

However, the judges in last week's appeal decided that there was, in effect, a contractual obligation on the part of brokers to provide these documents, assuming the request was made "in good faith".

According to the judges, brokers have for so long held on to documentation on behalf of both parties that it has become an 'established practice,' thereby making it unreasonable for brokers to refuse.

The case has received a lot of attention because it touches on many of the most pertinent issues in a market place obsessed with change, such as: contract certainty; technology; tradition; and the role of the insurance broker in today's regulatory landscape.

From an outsider's perspective it is staggering that the issue of access to documentation should arise at all. It is unimaginable in almost any other industry that both parties on either side of a business transaction would not keep copies of documents essential to the effective running of that business.

Aside from the obvious need to prevent potential disputes, underwriters should have instant access to their placing and claims documents on the simple grounds that it allows them to understand and monitor their own business. If an underwriter needs to see documents pertaining to a client, why should he have to pester the placing broker to do so?

Jonathan Sacher, senior partner at Berwin Leighton Paisner, the law firm which represented Goshawk, says: "From a practical point of view it is essential that Lloyd's underwriters make copies of all placing and claims documentation presented to them in future."

For the large part, the imposition and proliferation of terms of business agreements (Tobas) between underwriters and brokers has meant that disputes like this one have become a thing of the past.

Contract certainty, and the threat of hefty FSA fines for companies failing to achieve it by the end of the year, will surely also prove to be a major driver in dragging the market kicking and screaming into the 21st century.

As former Lloyd's chief executive Nick Prettejohn has pointed out, the market is forking out around £500m a year in legal fees in relation to disputed claims - a large chunk of which one would reasonably expect to be eradicated if there was contract certainty uopn inception.

The Goshawk v Tyser judgment was not just concerned with the practicalities of transacting business though. The dispute was indicative of a wider philosophical debate over the role and responsibilities of the broker following the clampdown by New York Attorney General Eliot Spitzer on the likes of Marsh and Willis.

Although this was predominantly confined to the US, a number of UK national brokers changed their business models accordingly.

Is the first responsibility of the broker to the insurer, the insured or some muddled combination of the two? And is this driven by post-Spitzer ideals of business propriety and due diligence, or simply grounded on where the broker gets his pay-cheque?

Lawyers for Tyser argued unsuccessfully that forwarding documents to underwriters was not always in the best interests of the insured - to whom the broker should ultimately be responsible.

Ken Underhill, partner at Reynolds Porter Chamberlain, says: "Often, brokers are suspicious of document requests by underwriters, which they see as being attempts to look for reasons to avoid a policy or repudiate a claim. However, they will now have no choice but to meet these requests."

While some brokers may feel hard done-by, the conflict remains largely academic. As Anthony Holden, of Williams Holden Cooklin Gibbons, points out: "Remuneration more often than not comes from the insurer. Not many brokers would be prepared to jeopardise that."

In other words, not many brokers would be foolish enough to bite the hand that feeds them, regardless of the legal standing of their position.

The judges in the case have refused to grant leave for appeal. So, unless Tyser takes the unlikely step of petitioning the House of Lords, the matter is now closed.

The over-riding impression is that of a market that has relied on tradition and gentlemanly conduct for too long.

Goshawk prevailed on the grounds that the sharing of documents between brokers and underwriters has been going on for hundreds of years, without the need for mechanisms to guarantee the contractual standing of both parties.

Hopefully, contract certainty will prove to be the very mechanism to prevent such disputes arising again. IT