common law issues for re/insurers in the wake of September 11.
The September 11 attacks on the World Trade Center have already given rise to insurance coverage litigation in the US. On 22 October 2001, SR Business Insurance Co Ltd (a subsidiary of Swiss Re) commenced a declaratory action in the US District Court for the Southern District of New York against Silverstein Properties asking for a determination that the attacks constituted a single occurrence. Silverstein Properties has commenced actions against ACE and XL in the same US District Court arguing that it is not bound to arbitrate claims in London. Other US lawsuits will undoubtedly follow. No attempt is made here to predict how US courts will answer the $7bn question, namely whether the attacks constituted one or two occurrences. The discussion instead addresses some legal issues facing brokers and reinsurers outside the US from the point of view of common law jurisdictions (such as England and Bermuda).
Brokers' duty to place cover
A number of contracts renewing on 1 September 2001 were still in the process of negotiation on September 11. Brokers instructed to place cover incepting on a particular date are under a duty to use reasonable skill and care to obtain cover by that date and to report to their principals if they were experiencing difficulties. A broker does not, as general rule, undertake that cover will be procured and is only liable if he fails to use reasonable skill and care. See: Eagle Star Insurance Company Ltd v National Westminster Finance Australia Ltd (1985: Privy Council). Brokers will therefore want to ensure that there are binding contracts in place.
Is there a binding contract?
The orthodox view in English law is that a contract of insurance (or reinsurance) is made at the point in time and at the place where the underwriter signs the slip thereby accepting the broker's offer. See: General Reinsurance Corp v Forsakringsaktiebolaget Fennia Patria (1983: Court of Appeal); Assicurazioni Generali SpA v Arab Insurance Group (2001: Morrison J). There is a binding contract on the terms of the slip unless and until the slip is replaced by a signed policy wording. See: General Reinsurance Corp v Forsakringsaktiebolaget Fennia Patria (1983: Court of Appeal); General Accident Fire and Life Assurance Co v Tanter, The “Zephyr” (1984: Hobhouse J / 1985: Court of Appeal). Brokers can take comfort from the fact that if they have a signed slip then they have a binding contract, even though there is no wording.
But if there is no slip, the position is not as simple as it seems, because English law recognises a distinction between contracts of insurance (or reinsurance) and contracts for insurance (or reinsurance), such as line slip or facility. See: Denby v English Scottish Maritime Insurance Co Ltd (1998: Court of Appeal); HIH Casualty and General Insurance Ltd v Chase Manhattan Bank (2001: Court of Appeal). There may be circumstances in which underwriters are bound to issue a policy or sign a slip even though they had not done so prior to 11 September 2001.
English courts have provided some general guidance on the meaning of ‘occurrence' and ‘event'. Unless the contractual context otherwise requires, an ‘occurrence' is synonymous with an ‘event', namely something which happens at a particular time, at a particular place, in a particular way. See: Dawson's Field award (1972, Michael Kerr QC); Kuwait Airways Corp v Kuwait Insurance Co (1996: Phillips J); Mann v Lexington Insurance Co (2001: Court of Appeal). An ‘originating cause' is something wider than an ‘occurrence'. See: AXA Re v Field (1996: House of Lords). None of ‘occurrence', ‘event' or ‘cause' is necessarily equivalent to a single ‘loss' or the happening of an insured peril. See: Kuwait Airways Corp v Kuwait Insurance Co (1996: Phillips J).
The question whether several losses constitute one occurrence/event and/or arise out of a single originating cause is to be determined objectively, in the context of the particular insured perils, by considering:
(a) whether there was, overall, a sufficient ‘degree of unity' or ‘common factor' by reference to the words used;
(b) whether there was sufficient proximity in time and space;
(c) whether there was a sufficient causal connection.
See: Caudle v Sharp (1995: Court of Appeal).
On the facts as they are presently understood, it appears that there was a causal connection and that the attacks on the twin towers constituted a single occurrence or event as a matter of English (and Bermuda) law. However, the meaning of ‘occurrence' in a particular contract wording will depend on the context in which the word is used.
What is the position of reinsurers if ceding companies present claims on the basis of either (a) a finding by a US court that there were two occurrences, or (b) a settlement with insureds on the basis of more than one occurrence?
There is no automatic principle of ‘follow the fortunes' applicable to reinsurance contracts governed by English law. In Hill v Mercantile & General (1995: House of Lords), Lord Mustill summarized the common law position:
“There are only two rules, both obvious. First, the reinsurer cannot be held liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. Second, that the parties are free to agree on ways of proving whether these requirements are satisfied.”
It has been said that where a court of competent jurisdiction finds a reinsured liable under the contract of insurance to its insured, that determination of liability is binding (subject to limited exceptions) upon the reinsurer. See: Commercial Union v NRG Victory (1998: Court of Appeal). The exceptions to this include cases where the reinsured has not taken all proper defences and cases where the decision of the foreign court is ‘manifestly perverse'. One can foresee disputes over whether the principle of law stated in Commercial Union v NRG Victory is correct (it was not followed in a 2000 Bermuda arbitration award) and if so, whether any of the exceptions apply.
If a reinsured settles a claim, the reinsurer is not bound by it unless the reinsurance contract contains an effective ‘follow the settlements' clause. See: Insurance Company of Africa v SCOR (1985: Court of Appeal); Hill v Mercantile & General (1995: House of Lords). If there is a ‘follow the settlements' clause then the reinsurer is bound unless he can prove the settlement was unbusinesslike. If there is no ‘follow the settlements' clause then the reinsurer bears the burden of proving that the claim was covered. It is not sufficient to show the claim was arguably covered and that the settlement was reasonable.