John Butler considers the courts' approach to wordings in excess of loss reinsurance contracts.
The recent decision of the Court of Appeal in Municipal Mutual Insurance Ltd v Sea Insurance Co Ltd (unreported) has emphasised that when interpreting reinsurance contracts, the English courts will be largely guided by the words used by the parties to express their intentions in the context in which they are found, very much in accordance with the line taken in 1996 by the House of Lords in Axa Re v Field and Hill v M&G Re.
In this particular case, two dismantled drag-lines were delivered to the Port of Sunderland Authority some time in May 1985 and suffered extensive damage from theft and vandalism while in its custody. The port authority was found liable in an action brought by the owners of the drag-lines to pay £3,159,401.56 including interest and costs. The trial judge also held that the huge bulk of the loss and damage suffered by the drag-lines in all probability had occurred between March 1987 and September 1988.
The plaintiffs had insured the port authority throughout the whole of that period against liability for physical loss or damage to property. Since there was no aggregate limit and the occurrence limit was in excess of the amount awarded, it made no difference to the plaintiffs, in this instance at least, when the losses had occurred and they had chosen, in effect, to disregard the policy years in discharging their liability to the port authority.
The defendants had facultatively reinsured the plaintiffs in respect of the renewals of the original policy for periods of 12 months commencing on the 24 June 1986, 1987 and 1989 respectively under three slips which were identical except that the first two had limits of £20 million in excess of £500,000, while the third had limits of £3.5 million in excess of £1.5 million.
At first instance, Waller J concluded that it was incumbent upon him to construe the reinsurance contracts as being back-to-back with the original policy, as they were expressed to be on the same terms as underlying. He then held that provided some material loss or damage had occurred during a period covered by reinsurance, then the reinsurers on risk at that time were liable and if more than one period was involved, then there was a right of contribution between the reinsurers. On this basis he allowed the plaintiffs to amend their pleading to claim for the whole amount under the second year, rather than on the basis that the loss and damage had been spread evenly over the 18 months involved as they had previously. He gave judgment against the second year reinsurers in proportion to their lines for £3,159,401.56, less the excess.
On appeal, Hobhouse LJ rejected this approach saying: "It is wrong in principle to distort or disregard the terms of reinsurance contracts in order to make then fit in with what may be a different position under the original cover."
The use in the slips of the words "conditions as underlying" could not contradict either the period or limit provisions of the individual reinsurance contracts. The difficulty for the plaintiffs arose, not so much from the conditions of the original policy, but the way they had chosen to operate it and the way in which they had chosen to take out their reinsurance covers as three distinct and independent annual contracts.
Hobhouse LJ held that in order to recover, the plaintiffs had to satisfy the court that there had been physical loss or damage which had occurred in the year covered by the relevant contract of insurance which exceeded the excess applicable to that contract and the amount by which it did so. These were questions of fact which had to be decided on the balance of probabilities. He was unable to find on that basis that the loss and damage which occurred during the periods of the first and third contracts was likely to have exceeded the applicable excess. Where the second contract was concerned, again on the balance of probabilities, he was prepared to find that two-thirds of the loss and damage probably occurred while it was in force. This meant that the defendants' appeal succeeded to the extent that the amount of their liability was reduced from £3,159,401.56 to £1,606,267.68.
It may be noted that Hobhouse LJ specifically remarked that he found the American asbestos cases cited by the plaintiffs, interesting though they were, of no assistance as they arose from the special problems associated with long periods of potential exposure and were clearly governed by policy decisions relevant to special factors in the insurance market in the United States.
John Butler is president of the International Association for Insurance Law (Association Internationale de Droit des Assurances -AIDA) and a consultant to Barlow Lyde & Gilbert, London. Tel: +44 (0) 171 782 8598. Fax: +44 (0) 171 782 8509.