Dear Friend,

As a former broker, this morning’s breaking news that Lloyd’s is going to sue brokers Aon and Benfield over their role in the famous £500m Central Fund dispute with Swiss Re and others sent a little shiver down my spine.

Any broker who has been involved in an errors and omissions (E&O) case will sympathise with those involved. The action began in April 2003 — so the main brokers involved have suffered had nearly three years of grief — and their troubles are only just beginning.

Benfield’s last interim accounts said that “on the basis of legal advice it has received, the Company [Benfield] takes the view that this matter will not result in a material liability.”

Well somebody else begs to differ — since Lloyd’s wanted £500m from reinsurers and only ended up settling for £152m — this looks like becoming the £348m ($615m) question.

The trouble is that in the previous paragraph when describing the preliminary decisions of the arbitration panel Benfield said that it had “found that with respect to the presentation of the risk, Swiss Re was prima facie entitled to avoid the policy.”

Ouch — “presentation of the risk” — that old classic. The one you learn all about on E&O awareness courses as a young broker — “Pine Top” and that case where the unwitting broker mistranslated the original Spanish “watches” for “clocks”, when the watches in question turned out to be a consignment of Rolexes.

That brings it all back! Funnily enough I still have these words ringing in my ears, memorised word for word in readiness for an insurance exam:

“The insured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the insured. If the insured fails to make such a disclosure, the insurer may avoid the contract.”

And since then I’ve read enough about non-disclosure law to know that as a broker one’s fate is pretty much in the lap of the Gods as is the definition of a “material fact” is anyone’s guess after the event. And when there’s a potential $615m involved, the ambiguities are amplified still further.

One of my Spanish local authority clients on a visit once asked a lead liability underwriter what he was supposed to do about the claims reporting procedure on his claims-made policy.

It contained something along the lines of having to tell underwriters about “any material circumstance, event or series of events that may give rise to a claim under this policy” — probably within a wholly impractical timeframe, like 72 hours.

My client asked that since he was ultimately responsible for thousands of kilometres of Spanish roads, did the underwriter want to be sent copies of the police reports on all the 15,000 traffic accidents that occurred in the region every year, just in case any developed into a claim?

Happily the underwriter blushed, politely declined the offer and amended the wording — our claims manager breathed an enormous sigh of relief that day! (thank goodness we were in a soft market).

But quite apart from the minutiae of this or any other case, which will doubtless make it into the CII text books of tomorrow, a small and mischievous part of me wonders what share of Aon and Benfield’s E&O insurance cover is placed at Lloyd’s!

Enough non-disclosure talk!