Two decisions in the English Commercial Court look at the handling and settlement of claims under reinsurance contracts
In England and elsewhere, reinsurance contracts commonly contain ‘follow the fortunes’ or ‘follow the settlements’ clauses. The general purpose of these provisions is to bind the reinsurer to settlements made by the cedant, thereby avoiding the need for cedants to demonstrate their liability to the underlying insured. However, not all reinsurance contracts contain these clauses and bespoke claims wording is by no means unusual. In recent months, the English Courts have been faced with two cases in this area, falling either side of the line. In the first case, The Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Ltd & Ors  EWHC 2002 (Comm), the reinsurance permitted the reinsurers to handle claims 'in a businesslike manner in the spirit of good faith and fair dealing having regard to the legitimate interests' of the parties to the underlying insurance and the reinsurers. In the second case, Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd  EWHC 2105 (Comm), the question for the Court was whether the reinsured had taken all proper and business-like steps when settling the underlying insurance claim; a requirement arising from the unqualified follow clause in a retrocession.
The Federal Mogul case
The Federal Mogul case concerned the insurance and reinsurance arrangements put in place to meet the liabilities of T&N plc (T&N) and its subsidiaries for personal injury claims caused by exposure to the asbestos and asbestos related products which they had distributed over many years. As part of its ultimately doomed strategy for meeting liabilities whilst preserving T&N’s solvency, the decision was taken in 1996 to enter into an Asbestos Liability Policy (ALP) with T&N’s captive insurer, Curzon, providing £500 million of cover in excess of £690 million. With respect to claims handling, the ALP provided that, for as long as T&N was solvent, claims would be handled in accordance with procedures determined by a joint claims-handling and defence organisation consisting mainly of asbestos manufacturers. However, the ALP also specified that in the event of T&N becoming insolvent:
‘…the Insurer shall have (and shall retain until the first to occur of exhaustion of the Limit of Insurance, commutation or the Insurer so determining) the full, exclusive and absolute authority, discretion and control, which shall be exercised in good faith and fair dealing, having regard to the legitimate interests of the parties to the Policy and the reinsurers thereof, of the administration, defence and disposition (including but not limited to settlement) of all Asbestos Claims, including but not limited to the appointment of one or more Claims Handling Designees.’
At the same time, Curzon reinsured one third of its exposure under the ALP. The reinsurance was governed by English law and transferred all of Curzon’s rights and powers under the ALP to its reinsurers. It therefore provided that if T&N were to become insolvent, resulting in the transfer of its claims handling rights to Curzon, ‘that authority, discretion and control shall be exercised by the majority of the Reinsurers…’
T&N was subsequently acquired by Federal-Mogul Corporation. However, the sheer weight of T&N’s asbestos related liabilities resulted in Federal-Mogul Corporation filing for bankruptcy in the US in 2001 at the same time as T&N and its subsidiaries entered into administration in England. This constituted an Insolvency Event under the ALP. As a result, T&N’s claims handling rights passed to Curzon’s reinsurers. Thereafter:
- In 2007, a Trust was established which assumed liability for all claims against T&N. The Trust was empowered to make distributions to claimants from T&N’s assets, with the benefit of a power of attorney to recover from Curzon and the reinsurers.
- In 2010, the Trust outsourced the handling of claims to a processing facility, which was instructed to deal with claims in accordance with procedures with which the Trust was required to comply. Under these arrangements, a personal injury claimant has the option of accepting an initial discounted payment, with the possibility of a higher payout if the Trust recovers under the ALP. If this option is taken, the claim is handled by the reinsurers. However, if the claim is rejected by the reinsurers, the Trust must sue T&N in the US tort system with the attendant legal costs and risk of an elevated jury award.
- In 2012, the Trust presented 200 anonymised claims to the reinsurers. Some months later, the reinsurers rejected these claims on the grounds that they were time-barred or suffered from another deficiency, such as a lack of credible evidence identifying exposure to a T&N product.
These events resulted in the present proceedings, in which the Trust sought certain declarations. The declarations raised the question of how the claims handling wording in the ALP was to be construed and, in particular, whether the reinsurers were in breach of their claims handling obligations by requiring the Trust to pursue claims in the US tort system.
Before considering the ambit of the claims handling provision, the Court was faced with a threshold issue as to whether the Trust had standing to claim declaratory relief in respect of a contract to which it was not a party (i.e. the ALP). As the judge observed, although the law now recognises the possibility that a declaration may be granted in such circumstances, it will only be in exceptional circumstances that a third party may interfere with the rights of parties to a contract. However, there were no exceptional circumstances in this case, the Trust had no standing to seek declarations as to the meaning or performance of the ALP (whether in light of the power of attorney or otherwise). If the judge had decided differently, it would have been the first occasion on which declaratory relief has been granted in a commercial context.
As for claims handling, the judge agreed with the defendants that (1) 'businesslike manner' was a loose constraint, which only excluded courses of conduct which no similarly situated business could take, (2) the exercise of rights 'in the spirit of good faith and fair dealing' required the reinsurers to act honestly and conscionably vis-à-vis the other contract parties and (3) when a decision-maker is to 'have regard to' a matter, he may ascribe such weight to it as he deems fit but must not act irrationally. On this basis, it could not be said that the reinsurers’ conduct in rejecting the Trust’s claims was unbusiness-like, even if the procedures adopted by the Trust may have represented “best practice". The reinsurers were therefore entitled to require the Trust to proceed via the US court system, having regard to the legitimate interests of the relevant parties (including the reinsurers’ own interest, which was to reduce their exposure as far as possible).
The Tokio Marine case
Rather more straightforwardly, the Tokio Marine case concerned a retrocession which contained an unqualified follow clause of the type considered in Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd  1 Lloyd’s Rep 312, namely:
‘Reinsurers agree to follow all settlements (excluding without prejudice and ex gratia payments) made by original Insurers arising out of and in connection with the original insurance and to bear the proportion of any expenses incurred whether legal or otherwise in the investigation and defence of any claim hereunder in addition to limits hereunder.’
It was therefore common ground in light of Scor that the retrocessionaire was bound to indemnify the reinsurer so long as the claim as settled fell within the risks covered by the retrocessionaire as a matter of law (the ‘first proviso’) and the reinsured had acted honestly and taken all proper and business-like steps in making the settlement (the ‘second proviso’).
The underlying claim concerned damage to a number of premises owned by Tesco in Thailand as a result of the widespread and unprecedented floods in 2011. Tesco was insured in respect of property damage and business interruption under a global master policy issued by ACE European Group Ltd (ACE) and governed by English law, which provided difference in conditions/difference in limits cover in respect of policies issued locally by ACE entities. The master policy provided £100 million of cover on an ‘any one Occurrence’ basis, meaning ‘any one Occurrence or any series of Occurrences consequent or attributable to one source or original cause’ and also contained an ‘hours clause’, the general effect of which was to deem all losses occurring during a period of 72 consecutive hours to have been caused by a single Occurrence. ACE was reinsured for a proportion of its exposure by the claimant reinsurer (the Reinsurer), which in turn placed excess of loss reinsurance with the defendant retrocessionaire (the Retrocessionaire).
Tesco initially valued its losses at in excess of £100 million and claimed under the relevant local and master policies. Due to the proliferation of losses, there was an issue whether Tesco’s losses arose from one Occurrence under the master Policy for aggregation purposes, or whether the hours clause meant Tesco’s losses fell into eleven periods of 72 hours with eleven separate deductibles. This dispute was settled, with ACE agreeing a settlement at £82.5 million applying one deductible. However, while the Reinsurer had consented to this settlement, it was entered into before the retrocessionaire’s approval could be obtained.
In these summary judgment proceedings, the Retrocessionaire argued that ACE had not taken all proper and business-like steps in settling Tesco’s claim with the result that it was not required to follow ACE’s settlement. This was said to be on various grounds, including that ACE failed to analyse the coverage position under the local policy as a matter of Thai law and that ACE should have obtained English law advice on the meaning of ‘Occurrence’ under the master policy, whilst also investigating the causes of the floods in further detail. However, the judge formed a different view, ultimately holding that ACE’s settlement was ‘undoubtedly a good settlement’, notwithstanding that ACE did not explore the coverage and causation issues in further detail. This is consistent with the approach taken in Gan Insurance Ltd v Tai Ping Insurance Co Ltd (No 2)  Lloyd’s Rep IR 667, where it was held that in reaching a proper and business-like settlement the reinsured must have regard to the prospects and risks attaching to the claim as a whole. It also adds to the existing body of well-known case law on the ‘second proviso’.
As a result of this judgment, the Retrocessionaire will be required to follow ACE’s settlement, unless its reported appeal to the Court of Appeal in connection with its other defences based on the true construction of the retrocession succeeds. In those proceedings, the Court of Appeal will be considering (amongst other issues) whether the follow clause requires the Reinsurer to show that the claim as settled falls within the terms of the retrocession on the balance of probabilities, or whether it need only show that the claim arguably does so. In doing so, it is likely that the Court of Appeal will resolve a longstanding issue arising from comments made by Tuckey LJ in Assicurazioni Generali SpA v CGU International Insurance plc  2 All ER (Comm) in connection with the ‘first proviso’.
For further information contact: Charles Weston-Simons.
Amlin Corporate Member Ltd v Oriental Assurance Corporation  EWHC 2380 (Comm)
Amlin were the reinsurers of Oriental under a policy governed by English law and subject to exclusive English jurisdiction. Oriental had insured Sulpicio, a Philippine shipping company in respect of liability for cargo claims. The reinsurance contained a warranty under which an insured vessel was not to sail out of sheltered port when there was a typhoon or storm warning at that port, nor when the destination or intended route may be within the possible path of the typhoon or storm announced at the port of sailing, port of destination or any intervening port. The original policy contained a warranty in similar terms. The vessel Princess of the Stars was lost when she sailed into the eye of a typhoon.
Amlin sought a declaration that the departure of the vessel constituted a breach of warranty. At the time of the proceedings no claim had been brought against Oriental by Sulpicio, but earlier the Court of Appeal had refused a stay of the Amlin’s action even though it was pre-emptive ( EWCA Civ 1341).
Field J held that the warranty was to be construed as applying where there was a typhoon warning even though the warning did not advise against setting sail. On that basis there was a breach of warranty. There was a further breach of warranty in that there was a typhoon warning on the intended route, that route being the usual route which was intended to be taken subject only to the possibility of a change of course if the weather was bad.
For further information: Amlin Corporate Member Ltd v Oriental Assurance Corporation  EWHC 2380 (Comm).
AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd  EWHC 349 (Comm)
AstraZeneca Insurance Company Ltd (AZI) was the captive insurer of the AZ group. The policy was written on the Bermuda Form but was governed by English law and the arbitration clause had been waived. AZI was reinsured by XL and ACE. AZI sought to recover for its reinsurers an indemnity for payments made to AZ in respect of claims by third parties for injury suffered by reason of the use of an AZ pharmaceutical product. The losses consisted mainly of defence costs, although some moneys had been paid by way of settlements. In no case had AZ been found liable to third party claimants, and the argument put forward by AZI was that the policy responded where payments were made in respect of alleged legal liability as opposed to established legal liability. AZ further argued that it was entitled to defence costs on the same basis. Flaux J, on the hearing of preliminary issues, dismissed these arguments on the following grounds:
- The policy was governed by English law and New York principles of interpretation were irrelevant, as was the New York rule of law that liability insurers were liable for bona fide settlements and not just settlements based upon actual legal liability.
- The general rule was that a liability insurer or reinsurer was liable only where the policyholder established its liability as a matter of law. There was nothing in the present policy to reverse that general rule.
- The definition of “damages” included defence costs. There was accordingly no free-standing coverage for defence costs. AZ was only entitled to an indemnity for defence costs where it established that it was or would have been liable for the claim in question under the insuring clause, by showing that on the balance of probabilities it had established and quantified its liability.
- Although the point did not arise, a judgment against an assured (or reinsured) was capable of being challenged by the insurer (or reinsurer) and was not conclusive proof that the assured (or reinsured) was liable.
For further information: AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd  EWHC 349 (Comm)
Beazley Underwriting Ltd v Al Ahleia Insurance Company  EWHC 677 (Comm)
The Kuwait Oil Company (KOC) was insured under an open cover construction all risks liability policy by AIC and others. AIC reinsured with Beazley, AIG and others. KOC subsequently entered into a contract with Hyundai Heavy Industries (HHI) for the construction of 5 new crude oil storage tanks in Kuwait. The risk was declared to AIC and to the reinsurers. The declaration contained a claims control clause compliance with which was a condition precedent to recovery under the reinsurance. It provided that:
“(b) The Reinsured shall furnish the Reinsurers with all information available respecting such loss or losses and the Reinsurers shall have the right to appoint adjusters, assessors, surveyors or other experts and to control all negotiations, adjustments, and settlements in connection with such loss or losses. (c) No settlement and/or compromise shall be made and no liability admitted without the prior approval of Reinsurers.”
One tank was found to be defective. A claim was made. Following detailed communications between AIC, KOC and AIG, Beazley and other reinsurers asserted that there were breaches of the claims co-operation clause in that: contrary to paragraph (b) of the claims control clause, AIC had failed to allow Beazley to control the negotiations with KOC, and instead the negotiations had been conducted by AIC behind the backs of the reinsurers; contrary to paragraph (c) of the claims control clause, AIC had admitted liability to KOC without the prior approval of the reinsurers; and contrary to paragraph (c) of the claims control clause, AIC had settled or compromised the claim without the prior approval of the reinsurers.
Eder J held that none of the communications infringed the claims control clause. As to its interpretation, Eder J ruled as follows:
- The clause was an exemption clause and had to be construed narrowly to the extent that the words were clear and, fairly construed, excluded liability.
- As to paragraph (b), the losses referred to were those under the reinsurance, and if IAC refused to allow the reinsurers to control the negotiations then there was no liability.
- As to paragraph (c): the paragraph applied only where the settlement impinged upon the rights of reinsurers, so that it did not apply where the settlement was within IAC’s retention or to IAG’s share of liability; a “settlement” was within the paragraph only if it was legally binding, even if was expressed to be “without prejudice”; the two limbs were alternative, so the paragraph applied where a settlement had been made or liability had been admitted; and an admission of liability did not have to be legally binding as long as it was clear and unequivocal.
For further information: Beazley Underwriting Ltd v Al Ahleia Insurance Company  EWHC 677 (Comm)
AXA Seguros, SA De CV v Allianz Insurance Plc  EWHC 268 (Comm)
AXA Seguros, a Mexican insurance company, obtained facultative reinsurance from Allianz, the defendant reinsurers. The reinsurance covered AXA’s participation in a policy which covered risks of physical damage to a “Toll Road Network concession” in Mexico for the period 1 November 2000 to 31 December 2001. The reinsurance stated that cover extended only to those roads “constructed to internationally acceptable standards”, and surveys were to be conducted within a reasonable time from inception to confirm the quality. In February 2001, Grupo Mexicano was appointed by AXA to survey the roads. The reinsurers were not satisfied with the level of detail in the report, and imposed a reverse onus of proof clause under which AXA had to prove that the roads were of the right standard.
Between 30 September and 2 October 2001 Hurricane Juliette caused torrential rainfall in parts of Mexico and the Don Nogales highway was damaged. Halcrow were appointed by the reinsurers to survey the road, and reports were produced in 2002 and 2003. At the end of 2003 the assured obtained an arbitration award against AXA, and in 2008 AXA sought indemnity from the reinsurers. Their defence was that the roads were not constructed to the appropriate standards. AXA sought disclosure of reports produced by Halcrow, and the reinsurers claimed litigation privilege.
Christopher Clarke J held that there was no litigation privilege.
- There was a distinction to be drawn between circumstances which afforded a reasonable prospect of litigation and circumstances which merely gave rise to a possibility of litigation, although the dividing line was not always clear. In the present case the court was satisfied that there was a reasonable prospect of litigation in January 2002. The reinsurers had stipulated that they would provide cover only if the roads were constructed to internationally acceptable standards, to be confirmed by surveys. The surveys commissioned by the reinsured were inadequate so the reinsurers insisted upon a reverse burden of proof clause requiring the reinsured to show that the roads were properly constructed. There was a reasonable prospect that the Halcrow report would show that the roads were not constructed up to the appropriate standard, so that in the event of a loss there was a clear prospect of litigation.
- However, that was not of itself sufficient. It had to be shown that the predominant purpose of the generation of the relevant document was anticipated litigation. That was not the case here. The reports were commissioned for two purposes:
- assessing whether the highway had been constructed to internationally acceptable standards; and
- determining to what extent any damage had been caused by the hurricane and verifying the correctness of Grupo Mexicano’s figures. There was no evidence of any issue between the parties in respect of either matter.
- If the reinsurers wished to use Halcrow as their experts in the trial, the reports would fall to be disclosed, and it was unsatisfactory for a plea of privilege to be maintained at the outset when privilege would be lost at a later point.
For further information: AXA Seguros, SA De CV v Allianz Insurance Plc (t/a Allianz Global Risks) & Ors  EWHC 268 (Comm) (02 March 2011)
Gard Marine & Energy Ltd v Tunnicliffe  EWHC 1658 (Comm)
For the period 1 July 2003 to September 2006 Gard subscribed to a 12.5 per cent share of a policy issued to Devon Energy Corporation, an oil exploration and production company with interests in a number of wells and platforms in the Gulf of Mexico. The policy was subject to a combined single limit of US$400,000,000 (for 100 per cent interest), for any one accident or occurrence arising out of a named windstorm in the Gulf of Mexico. In the event that Devon’s interests in a well was less than 100 per cent, the combined single limit of liability and the retention were to be reduced proportionately as against the full value of the well.
Devon’s interest was about 46 per cent. Gard reinsured its line, 7.5 per cent was reinsured with Lloyd’s syndicates (including Advent) and five per cent with Glacier Re. The reinsurance was subject to all terms, clauses, and conditions as the original and was to follow the original in every respect. The “Sum Insured” clause stated that it would “pay up to original package policy limits/amounts/sums insured excess of USD250 million (100 per cent) any one occurrence of losses to the original placement.” Substantial losses were caused in September 2005 by Hurricane Rita. The claims were settled for US$365 million. Gard’s 12.5 per cent share was US$45,625,000. A dispute arose between Gard and Advent as to the operation of the excess point in the “Sum Insured” clause. Gard asserted that the words “100 per cent” meant that it was necessary to “scale” the deductible to match Devon’s actual interest in the insured subject matter.
The total loss of assets was around US$912.5 million. As Devon's interest was about 46 per cent, its loss was US$416 million. By scaling the deductible by the same percentage, it was reduced from US$250 million to US$114 million. Thus, on the total claim of US$365 million, the deductible was scaled down to US$114 million, giving a sum recoverable of US$251 million. Gard’s five per cent share reinsured by Advent gave rise to a recovery of US$5,020,737. Advent’s calculation of the loss was that the deductible was not to be scaled. Accordingly, the full US$250 million was to be deducted from the loss of US$365 million, giving a loss of US$115 million. Five per cent of that sum reinsured with Advent came to US$2,300,000. David Steel J, relying upon market evidence and the need to construe the insurance and reinsurance back to back, held that Gard’s interpretation was correct. David Steel J also rejected the suggestion that Gard’s brokers had misrepresented the effect of the policy to the reinsurers.
For further information: Gard Marine & Energy Ltd. v Tunnicliffe & Ors  EWHC 1658 (Comm) (30 June 2011).