No contract but still liable

Last month saw the Commercial Court hand down judgments in two significant pieces of litigation involving insurance brokers and the duties owed to clients.

In BP v Aon Ltd the relevant policy required each oil and gas project to be declared to underwriters. Twelve of the projects declared led to claims of $220m (£126m). Mr Justice Cresswell decided in 2003 that declarations had to be made to each underwriter, not just the lead.

Since declarations had not been made to GE Frankona Reinsurance and certain other underwriters (referred to by the judge as "the Frankona defendants") they declined to meet the claims.

Aon Risk Services of Texas was appointed under a service level agreement by BP. However, it was agreed that sister entity Aon Ltd would make certain of the declarations. In these proceedings BP alleged that Aon Ltd owed a duty of care and that it had failed to make declarations to the Frankona defendants.

The judge found that a duty of care was owed notwithstanding the fact Aon Ltd was not party to the service level agreement and that Aon Ltd was in breach. The fact that BP failed to obtain alternative insurance after becoming aware of the potential problem did not break the chain of causation or amount to a failure to mitigate. BP could recover what it would have recovered had the declarations been made to the Frankona defendants.

In HIH Casualty And General Insurance v JLT Risk Solutions the insured was a company which acted as a trustee in respect of loan notes which were used to raise money to finance film projects. It obtained a pecuniary loss indemnity policy (PLIP) to insure against losses if it could not repay the loans because the sales of films were lower than expected. Sales were much lower than expected and HIH paid out £55m in claims.

JLT acted as brokers for insurance and reinsurance. Previous Court Of Appeal litigation had established that there was a warranty in the reinsurance policy as to the number of films, which meant that HIH could not pass on the claims to the relevant reinsurers. HIH claimed in these proceedings that JLT should have alerted HIH to the low film sales.

Mr Justice Langley found that there was a breach of duty, but causation had not been established for two reasons.

First, there was no evidence that had HIH been alerted to these concerns that the reinsurance arrangements could have been changed. Second, HIH had not shown that on being so alerted it would have acted any differently in meeting the claims. If there had not been a causation defence the judge would have made a 70% discount for contributory negligence.

The BP v Aon decision is particularly informative in considering circumstances in which a professional can owe a duty to a party with whom there is no contract.

It is all the more relevant because a duty of care was found to be owed by one entity within a global professional services organisation when another entity within the same organisation had the contract with the client. In addition, the analysis of alternative measures of damage in brokers' cases is of particular interest.

Both cases also highlight the very real difficulties which claimants can face in trying to establish that a breach of duty on the part of the broker has had an impact on the claimant's conduct. IT

' Matthew Hirst is a partner in the insurance group of DLA Piper Rudnick Gray Cary UK