This article from the NYT does not make happy reading for D&O carriers.

It’s about a mortgage underwriter at WaMu, and is a telling, salutory tale (like so many that are emerging) of corporate greed and, more to the point, stupidity.

“If a loan came from a top loan officer, they didn’t care what the
situation was, you had to make that loan work,” she says. “You were
like a bad person if you declined a loan.”

One loan file was
filled with so many discrepancies that she felt certain it involved
mortgage fraud. She turned the loan down, she says, only to be scolded
by her supervisor.

“She told me, ‘This broker has closed over
$1 million with us and there is no reason you cannot make this loan
work,’ ” Ms. Cooper says. “I explained to her the loan was not good at
all, but she said I had to sign it.”

Uh-oh.

No related posts.

In the recent (24.10.08) case of Markel –v- Gothaer Allgemeine & Kontinentale the Commercial Court considered the nature and role of an agent in a dispute over a Claims Co-operation Clause. It’s an oddly fact-specific case, but there are some wider issues in play.

This was a summary judgment application by reinsurers (Markel) to dismiss a claim by the cedants (Gothaer and Kontinentale) in relation to an underlying claim on a D&O book. Markel’s basic case was that it was a condition precedent to liability that “the Reinsured shall upon knowledge of any circumstance which may give rise to a claim against them, advise the Reinsurers immediately, and in any event no later than 30 days”; that the cedant had known of the claim and had failed to notify the claim timeously; and hence Markel were entitled to decline cover.

The crux for present purposes is that knowledge.

Gothaer and Kontinentale were members of a German pool managed by VOV, a company incorporated by the pool members. This particular risk fell outside the pool guidelines, but Gothaer and Kontinentale agreed to write it if VOV could get them appropriate reinsurance. The contract was placed and the slip defined the “Reinsured” as “Gothaer Versicherungsbank VVaG and Kontinentale Versicherungs-AG as per VOV GmbH” (emphasis added).

That VOV knew of the circumstance was not apparently in issue, nor that technically there had been late notification. The debate was thus

1. “Is the definition of the Reinsured … an agreement between the Claimant [Reinsurers] and the Defendants [Reinsureds] that VOV would act as the Defendants’ agent for all purposes in connection with and relating to the Reinsurance?

2. Alternatively …, did VOV when receiving and giving notice of the…claim have ostensible authority to act as the Defendants’ agent for that and all purposes in connection with and relating to the Reinsurance by reason of the definition of the Reinsured in the Reinsurance?”

Markel argued that the phrase “as per” VOV was a definition of “Reinsured” and applied whenever the term was used in the reinsurance contract; and further that the only natural meaning of the phrase was that the Reinsureds were acting by VOV for all purposes connected with the reinsurance and that VOV was their agent for all such purposes.

Smith J did not agree. Indeed, he went on to say that the argument would have “absurd results”:

it would mean that the condition precedent was not triggered if the Reinsureds themselves knew of a relevant circumstance but VOV did not, and it would mean that the condition precedent would not be satisfied if the Reinsureds, not VOV, advised Markel of relevant circumstances. The Reinsureds would be in an impossible position if VOV ceased to exist or their business relationship with VOV otherwise ended during the currency of the reinsurance contract.

He also scotched a secondary argument by Markel that since the Reinsureds held VOV out as authorised to receive information on their behalf VOV’s knowledge was to be treated as their knowledge because of the ostensible authority thereby conferred on VOV.

The true issue, the judge said, was whether VOV as a matter of fact had knowledge of the claim in its capacity as the Reinsureds’ agent. But that was not before the Court on the summary judgment application, as you’d expect.

The main trial of the action is due to take place next month. I’ll be interested to see what happens.

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