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Markel/QBE defrauded for 'secret profits'

Markel International and QBE have won their bond fraud case brought against executives of Surety Guarantee Consultants Ltd (SGC) and a former Templeton Insurance director in the UK High Court.

In a judgment last Tuesday (3 June), Mr Justice Teare ruled that the defendants had acted dishonestly, conspiring to defraud the insurers, and obtaining “secret profits” at their expense.

In a statement, Markel said it would pursue “all avenues to effect a recovery”.

The insurer’s chief administration officer, William Stovin, commented: “Markel is delighted with this result and will be referring the matter to the relevant regulatory and other authorities.”

“We take these kinds of issues extremely seriously and will always pursue them with the ultimate vigour,” he added.

The trial jointly heard actions brought by Markel and QBE, together with underwriting agency Amalfi, alleging fraud in connection with the writing of surety bonds between January 2005 and 2006 outside the limits of coverholder agreements.

As part of its action, Markel had obtained worldwide freezing injunctions and a search and seizure injunction against SGC after identifying the fraud.

The case concerns coinsurance of surety bonds written by then Markel underwriter Peter Smith through SGC with Isle of Man insurer Templeton.

A proportion of bonds issued by SGC were intended to be coinsured on a 50:50 split with Templeton.

When Smith, who was not a defendant in the case, left Markel in January 2006 to set up Amalfi, backed by QBE, he took the bond business with him, with the facility – now cancelled – allowing a 50:50 split on a several basis where clients were satisfied with Templeton paper.

In his verdict, delivered almost 12 weeks after the five-week trial ended in the Queens Bench Division of the Commercial court on 13 March, Mr Justice Teare ruled that SGC director Tim Higgins and his colleague Cliff Felstead acted in breach of their personal fiduciary duties, and induced breach of contract of SGC’s contracts with Markel and QBE/Amalfi, conspiring to defraud the claimants.

“Mr Higgins and Mr Felstead plainly did act in breach of those duties. They conspired to defraud Markel and QBE/Amalfi,” he said.

“SGC owed duties as a fiduciary to Markel and QBE/Amalfi and those duties were broken by SGC obtaining a secret profit. Mr Higgins and Mr Felstead knowingly assisted SGC to breach its duties as a fiduciary.

“They each acted dishonestly. Each is therefore liable for dishonestly assisting SGC to breach its duties as a fiduciary,” he continued.

Former Templeton director Ralph Brunswick was found to be “party to the fraud perpetrated by Mr Higgins and Mr Felstead”, providing “valuable support” to the SGC duo in inducing the breach of contract.

“They shared the same object, namely, the obtaining of secret profits at the expense of Markel and QBE/Amalfi. Whilst they had different roles in that conspiracy they are each liable to the full extent of the losses caused by that conspiracy,” Mr Justice Teare said.

The judge held that the “secret profit” was obtained by SGC writing bonds in breach of financial limits and failing to account fully for premium due, “namely, the difference between the sum paid to it as a premium and the premium in respect of which SGC accounted to Markel and QBE/Markel”.

He said evidence showed that the “secret profit” was paid to “unjustly enrich” British Virgin Islands-registered General Commercial Ltd (GCL) – also a defendant in the action – in which Brunswick, Higgins and Felstead were “the owners and controlling minds”.

The fourth individual defendant, SGC director Barry Williams – who with no ownership interest in GCL “did not stand to benefit directly from the fraud” – was found not to be party to the conspiracy to defraud.

However, although Mr Justice Teare praised Williams’ “frankness when giving evidence”, he ruled he did act in breach of his fiduciary duty to Markel and QBE/Amalfi by signing bonds outside the coverholder limits.

“When signing bonds in excess of the stated limits he was reckless as to the rights and interests of Markel and QBE/Limit. This was not mere incompetence, which would not amount to a breach of fiduciary duty. It plainly crossed the line.

“He neither acted honestly nor in the best interests of Markel and QBE/Amalfi,” he ruled.

Action against SGC, which was a named defendant in the case, was stayed at the start of the trial, with the company in liquidation.

Reynolds Porter Chamberlain acted for Markel in their successful case, with QBE and Amalfi represented by Davies Arnold Cooper.

Part of the defendants’ case hinged on Higgins’ claims that Smith was aware that the non-compliant bonds were being written, had consented to them being written, and had led the SGC director to believe that the agency had consent to write the non-compliant bonds, with a silent co-surety arrangement in place.

But Mr Justice Teare summarised: “There is no clear evidence that Mr Smith knew or accepted that bonds would be written which bound Markel or QBE/Amalfi to sums in excess of the agreed financial limits.

“Further, there is no cogent or contemporary evidence that Mr Smith accepted that Templeton was to be a silent co-surety or that Templeton actually was a silent co-surety. The probabilities suggest very strongly that Templeton was not a silent co-surety and that Mr. Smith did not accept any such arrangement.”

Higgins’ defence also focussed on his suffering from the early stages of Alzheimer’s disease in 2005 and 2006, with defects in memory and executive functions leading him to either confuse or forget the relevant binder limits.

However, the judge found: “On the contrary I find that it is more likely than not that, although he was suffering from the early stages of Alzheimer's disease in 2005 and 2006, Mr Higgins was aware of the importance of adhering to the limits of his underwriting authority and that he remembered those set out in the agreements with Markel and QBE/Amalfi.”

Mr Justice Teare ruled that each of the four defendants is liable to the claimants for the sums “reasonably paid out by them in settlement of claims made on unauthorised bonds”, and in respect of the “secret profits”.

Markel claims that it has so far paid out £877,572.20 in respect of unauthorised bonds, while QBE settled a claim in the sum of £772,929.04 after reinsurance.

But with 18 bonds issued under the Markel binder in excess of the £1mn individual bond limit, a further issued above the £2.5mn per principal limit, and a total of 31 issued outside limits under the QBE/Amalfi binder, the judge called an inquiry to determine the level of damages to be ordered, together with an indemnity to cover future losses.

A total of £200,000 has been traced as being transferred to GCL on the Markel business, with £288,000 traced in respect of premium proceeds on the QBE/Amalfi book.

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