Bott & Associates Ltd v Southern California Recyclers Assurance Ltd

• Jurisdiction: Bermuda
• Judgment Date: 07 February 1986
• Date: 07 February 1986
• Docket Number: Civil Jurisdiction 1982 No: 334
• Court: Supreme Court (Bermuda)

In the Supreme Court of Bermuda

Collett, J

Civil Jurisdiction 1982 No: 334

BETWEEN:-

Bott & Associates Ltd.

Plaintiff

-and-

Southern California Recyclers and Processors Assurance Ltd.

Defendant

Mr. Riihiluoma for the Plaintiff

Mr. Hargun for the Defendant

Boston Deep Sea Fishing and Ice Co. v AnsellELR (1888) 39 ChD 339

Great Western Insurance Co. v Cunliffe (1874) 9 Ch App 525

Anglo African Merchants Ltd v BayleyELR [1970] 1 QB 311

Dunne v English (1874) 18 Eq 535

Liquidations of Imperial Mercantile Credit Assn. v Coleman (1874) LRE & 1 App 189

Reinsurance contract — Interpretation — Insurance management agreement — Repudiation of management agreement — Fundamental breach of agreement — Termination of agreement — Commissions payable

JUDGMENT

Collett, J.

The Defendant company, Southern California Recyclers and Processors Assurance Ltd. (‘SCRAP’) was incorporated in Bermuda on or about 12th November, 1981 for the purpose of acting as an association captive reinsurer for the risks of its individual members, who were a group of scrap metal dealers each engaged in that business in the united States of America. The Plaintiff company, Bott and Associates Ltd. (‘Bott’) is another Bermuda-registered company engaged in the business of reinsurence underwriting and insurence management: 80% of its share capital is owned by Michael Frederick Bott, its President and principal executive, who has worked for 18 years in the insurance industry.

The antecedent history of ‘SCRAP'’ and of its relationship with ‘BOTT’ commenced in November, 1980 when Mr. Bott was visited in Bermuda by a Mr. Richard Nadel, who introduced himself as a person engaged in the metal recyclers business in California and by a Mr. John Corcoran whom Mr. Nadel introduced to him as an insurence broker and consultant. Their purpose was to put together a captive insurer on behalf of Mr. Nadel and his trade associates in California and the Plaintiff's name had been recommended to them for that purpose. These three people discussed the need for a feasability study but decided in light of the cost and delay involved in making one, to proceed with the initial steps towards formation of a company without making that preliminary move.

As a result of that meeting BOTT embarked upon preparatory work towards the realisation of the project which, in the course of the ensuring year involved it in expenditure of an estimated $6,000. in cash and $20,000. in professional time spent. A preliminary meeting of potential investors was convened at the Bonaventure Hotel, Los Angeles in mid-February, 1981 which was attended amongst thers by Messrs. Nadel, Bott, Corcoran and by a Mr. James L. Wilson, an attorney practicing in Washington D.C. and specialising in the tax and insurence fields. Prior to that meeting Mr. Bott had prepared a twelve-page document which is reproduced at page 168 of the agreed Bundle of documents and this had been couried to Mr. Nadel. A view has been canvassed at the trial that this was in fact a feasability study but Mr. Bott in evidence denied that suggestion, pointing out that it does not contain any reliable information relative to the particular business of the scrap metal group. In this view he was supported by Mr. Wilson, who said that the kind of information it contains is not such as he would normally expect to find in that kind of study because of the absence of historical data as to the loss experience of the potential assureds. Also it does not contain projections of the future performance of the proposed captive, as is usual in such studies. This view essentially commended itself to Mr. Benevides also, despite the apparant format of the document. Although some parts of it do indeed contain information pertinent to the particular project which emerged for SCRAP, my conclusion on examing its contents in light of all the evidence is that the purpose was merely illustrative and that the document did not purport to be feasability study of a kind which those concerned had already agreed to omit in this instance.

At the Los Angelas meeting, following presentations by Mr. Bott and others present, considerable enthusiasm was by all accounts generated amongst the potential investors. It was sufficient certainly to encourage the prime movers of the project, Messrs. Nadel, Bott and Corcoran, to go ahead with it towards the incorporation of the company. Pertinent information as to the loss history and financial data of the proposed investors was then obtained and collated. In June, 1981 a further meeting was held in Bermuda at the (then) Holiday Inn Hotel, St. George's, attended by those same three leading personalities; also by Mr. Wilson and by representatives of Appleby, Spurling & Kempe and of the Provident Bank and by some 60–70% of those who subsequently became shareholders in the Defendant Company, all of whom went on to subscribe for shares in SCRAP. Mr. Bott gave a further presentation to this meeting during which he outlined the mechanics of reinsurence in such cases and indicated the potential reinsurers whom he had in mind. These were Kansa General Insurence (‘Kansa’) a Finnish based international reinsurence company and General Reinsurence which Mr. Bott described as the largest reinsurer in the U.S.A. at the time. At this meeting a number of those present signed subscription forms and paid over cheques for an initial investment in the Company.

It was specifically agreed by those present at St. Georges that Mr. Stephen Kane should become President of the company that Mr. Nadel, who had been prime mover amongst the scrap metal merchants in its setting up, should become its first chairman and that Mr. Corcoran should be responsible for its underwriting business in the U.S.A. The role of BOTT was envisaged as being manager to the company in Bermuda, responsible amongst other things for maintenance of its reinsurence programme. A 6% management fee calculated on its annual nett written premium was to be paid to BOTT, but 2/3 of this, or 4% was to be paid over by it to Mr. Corcoran's company, Association Underwriting Services Inc. as renumeration for the underwriting work, to be performed by the latter as delegate of the former. A brokerage commission of 15% was also subsequently agreed upon of which BOTT was to share 1/3 or 5% with Mr. Corcoran's company. Immediately following incorporation, a management agreement in writing was entered into on 16th November 1981 between SCRAP and BOTT and this was ratified by a resolution of SCRAPS newly appointed first Board of directors. That agreement is at pages 19–23 of the Bundle and is central to the dispute which has subsequently arisen between these parties.

The project in its final and approved form called for the issue of policies of insurence to the individual members of SCRAP covering three distinct lines of risk in the course of their business; worker's compensation, auto liability and general liability. As usual in such projects the primary policies were to be issued by a licenced U.S. insurence company, called a “Fronting Company” and Transit Casualty Inc. of California (‘Transit’) was chosen for this purpose. The role of SCRAP as offshore captive reinsurer was to reinsure 100% of the risks directly insured by Transit and in turn to cede to reinsurers of its own a sufficient portion of these risks to safeguard it from damaging losses while at the same time retaining a sufficient portion of the premiums paid (together with concomitant risk) so as to enable it to remain a profitable business entity. It was the function of BOTT to place appropriate reinsurence for this purpose and that involves, as Mr. Bott testified, a degree of professional underwriting judgment on his part.

The eventual reinsurence policies effected were of two varieties; excess of loss reinsurence, providing a limited protection against losses exceeding the limits retained by SCRAP and in addition an aggregate stop loss reinsurence to ensure that the Company's total aggregate retention of losses would not exceed a stated proportion of its gross nett premium income after it had incurred a stated minimum of losses. Both types of policy was effected with Kansa and written by the Plaintiff as underwriter. The slip issued, which is at page 53 of the Bundle, shows that they were to indemnify both SCRAP and Transit, the fronting Company, ‘for all losses with a maximum limit of $300,000 combined single limit ultimate nett loss per occurrence (including loss adjustment and legal fees)’ in excess of a retention by the reinsured of $200,000 per occurrence of the same. The second type of policy obliged that same Reinsurer to meet ‘all losses in excess of an overall annual aggegate retention by the reinsured (including loss adjustment and legal expenses) of 90% of (their) gross nett premium income or $1.1 million, whichever is the greater’ arising out of the reinsured's $200,000 retention under the first policy. To complete the picture it should be mentioned that 25% of these reinsurences was in turn ceded by Kansa to an English company River Plate Reinsurence Services Ltd, 20% was ceded to Aneco Reinsurence Ltd, another Bermuda based reinsurer and the remaining 55% was retained by Kansa group of companies itself.

Not long after incorporation and the commencement of business it became apparant that the SCRAP project was already suffering from internal stresses. The principal causes was an evident personality clash between Mr. Bott and Mr. Corcoran. In evidence Mr. Bott said he regarded Mr. Corcoran as a ‘complete disaster’. On the other side there is evidence from a Mr. Leroy Abbot, that Mr. Corcoran approached him during December, 1981 to see if he could move the management of SCRAP, as well as of another captive called Herald which the Plaintiff was managing out of the hands of BOTT.

One of the bones of contention between these two was the provision of financial information to BOTT...