Learning curve in the courts

In BP v Aon and Aon Texas (March 2006), the Commercial Court launched yet another attack on brokers. The lengthy judgment covers many significant issues, most importantly the circumstances in which a broker owes a duty of care to an insured in the absence of any contractual relationship.

Aon Texas contracted with Amoco, which subsequently merged with BP, to place open cover to insure offshore construction projects. The insurances were placed and administered by both Aon Texas and Aon, there being repeated direct contact between BP and Aon following the shift in management to London post-merger.

Due to the market hardening, BP declared a number of projects at a very early stage in their development in order to take advantage of the low premium rates before the cover expired.

BP settled several claims with the lead underwriters but commenced proceedings in 2003 against 42% of the following market, in respect of more than £45m of unpaid losses - the Frankona action.

It was held that the projects were eligible for declaration, despite being at an early stage but that the majority of the following market were not on risk as Aon had failed to make declarations. Aon had mistakenly assumed that it was sufficient to notify the two leading underwriters. BP sued Aon for its failure to place effective insurance.

Aon was found liable in tort, having assumed responsibility to BP in accordance with the test laid down by the House of Lords in Henderson v Merrett (1995). Neither the service agreement between Aon Texas and BP, nor the contractual structure, displaced such responsibility. Such responsibility also extended to the other parties for whom Aon had been asked to obtain cover but with whom they had had no contact.

Other assertions were raised by Aon and failed, including that: BP's failure to raise arguments in the Frankona action settlement negotiations had contributed to the loss; and the extent of BP's loss was the cost of purchasing alternative insurance.

The decision underlines the need for clear documentation by brokers where the contract is with a single entity but services are delivered by other companies. This is important not only at the outset but as relationships progress. It is also necessary to consider who may rely on services provided.

This decision, together with those in HIH Casualty and General v JLT Risk Services (March 2006) and Goshawk v Tyser (February 2006), shows that brokers are on a steep learning curve at the hands of the courts.