Global responsibility

The recent judgment in the professional negligence claim by BP against its insurance brokers could be significant for other international professional service networks, such as those now seen in law or accountancy.

It highlights the vulnerabilities for firms and their insurers when firms within a

network are undertaking work for clients that are not their own. It also throws into sharp focus the importance of putting in place appropriate contractual protection should things go wrong.

The case involved Aon Group's operation of an open cover for BP in 1999. BP entered into a service agreement with Aon Texas, but Aon's global network (in particular, Aon London) was closely involved in broking and administering the cover.

Unfortunately, Aon London understood that declarations to the lead underwriters would suffice, whereas the reality was that the following market was not bound without notice. The result was an uninsured shortfall of some £45m.

Aon London was sued directly by BP despite there being no contractual relationship between them. BP argued that Aon London had by its close involvement assumed responsibility to it, giving rise to a direct duty of care.

To make matters worse, it was not only BP ' ' which had suffered the uninsured shortfall - those losses were shared by its joint venture partners and contractors who were also insured under the declarations made. Aon argued that certain terms in the service agreement were inconsistent with their having assumed a duty of care to BP.

The court followed a line of authorities on assumption of responsibility including Henderson v Merrett, and held that the test in these cases could be distilled down to two broad inquiries:

On the first of these issues the court found that Aon London was closely involved with BP, and handled the declaration placements such that they were "independently responsible".

The court then considered the argument that the existence of the service agreement between BP and Aon Texas made it unreasonable to impose a duty on Aon London.

Contractual terms
Professional indeminity insurers have taken comfort from the established rule that if clear contractual terms exist, which are inconsistent with a tortious duty of care, this will count against such a duty being imposed.

The court used as an example the typical building contract, whereby the employer's sole recourse is to the contractor, so that the sub-contractors are effectively immune from direct claims by the employer.

The difficulty for Aon was that there was no effective protection such as a "sole recourse clause" in the service agreement, and no other contractual terms regulating Aon London's role.

The court was able to neatly sidestep the service agreement on these grounds and find that, in the absence of conflicting contractual terms, a direct duty was assumed. The service agreement included a cap limited to the amount of Aon's fees, but this did not avail Aon London because it was not a party to the agreement, and the cap restricted itself to the liability of Aon Texas.

The case is alarming for placing brokers who historically had thought that in the absence of a contract, their duties were generally limited to their principal wholesale brokers - not to the underlying insured.

The courts are now more readily cutting through the contractual relationships in a variety of professional contexts and focusing on whether the work actually carried out by professionals justifies the imposition of a duty.

The expansion of global networks by brokers, lawyers, accountants and others means that they and their insurers should take notice.

The parallels are obvious - Aon Group has a head office in the US with 400 offices and 30,000 staff worldwide. Its global connections were clear selling points when pitching for the BP account, and various overseas offices contributed to the overall service.

These are all features common to other international networks. For example, international accounting networks often carry out group audits spanning many jurisdictions.

Liability protection
International law firms carry out legal due diligence via their networks in a number of jurisdictions. What this case shows is that unless the contractual arrangements are carefully drafted, local or network firms may be unwittingly assuming duties of care, without the benefit of their normal liability limitation protections (caps, exclusions and scoping of work).

There are at least two possible solutions to this problem:

1. In circumstances where it is apparent that an office with no contract with the client may be assuming responsibility - that office should be included in the principal contract or enter into a direct sub-contract with the client thus achieving its usual limitations on its liability.

2. Carefully drafted sole recourse clauses should be included in the contract or engagement letter with the client (making it clear that the client can only sue the principal firm and excluding the liability for the contributing network firms). This option would then require consideration as to the liability arrangements in place as between the various network firms.

Changing events
A third (or alternative) answer is to ensure that there is no negligence. If only life were that simple. Even the best run firms will be the subject of claims, particularly where different approaches to risk management and litigation exist in different jurisdictions.

For Aon, like many professionals, the nature of its relationship with BP evolved over time and in response to changing events. The major factor in why the service agreement did not address Aon London's involvement was that it was negotiated with Amoco before its acquisition by BP. Amoco's principal relationship had been with Aon Texas, whereas after the acquisition BP's principal relationship was with Aon London.

This suggests that where an assumption of responsibility is not immediately apparent from the outset, firms must be vigilant to either avoid such duties arising (possibly inadvertently), or enter into contractual terms containing the risks.

The case is another example of how the obvious benefits of globalisation carry with them increased risk exposure.

The challenge for professional networks and their insurers is to recognise these situations and actively manage the risks rather than leave matters to chance. IT

' Adam Culy is a solicitor in the accountants and financial services group of Reynolds Porter Chamberlain