Michael Mendelowitz and Kevin Lazarus consider two recent Commercial Court decisions and their practical effect in facultative contacts.
“An unfortunate dispute” is how Longmore J described the long running disagreement between Gan Insurance Company Ltd of France and Tai Ping Insurance Co Ltd of Taiwan, currently being conducted through the English Commercial Court. While this no doubt reflects the parties' view, the case is fortunate for anyone who has an interest in English reinsurance law, because of the issues which it raises.
The dispute has been before the court on a number of occasions, resulting in decisions on jurisdiction, avoidance for non-disclosure, and the operation of claims co-operation clauses (CCCs). The latter issue was dealt with in the two most recent judgments in the case, that of Longmore J on 21 June 2000, concerning a number of preliminary issues, and that of Andrew Smith J given on 8 February this year, which applied Longmore J's judgment to the facts.
The relevant facts can be briefly stated. Tai Ping had a 35% line on an erection all risks policy taken out by Winbond Electronics Corporation in respect of a project undertaken in Taiwan. Tai Ping's line was fully reinsured, with Gan taking 2%. Included in the reinsurance wording was a CCC in the following terms:
“Notwithstanding anything contained in the reinsurance agreement and/or policy wording to the contrary, it is a condition precedent to any liability under this policy that:
(a) the reinsured shall, upon any knowledge of any circumstances which may give rise to a claim against them, advise the reinsurers immediately, and in any event, not later than 30 days.
(b) The reinsured shall co-operate with the reinsurers and/or their appointed representatives subscribing to this policy in the investigation and assessment of any loss and/or circumstances giving rise to a loss.
(c) No settlement and/or compromise shall be made and liability admitted without the prior approval of the reinsurers.”
Following a fire which damaged the insured property, Winbond made a claim which was ultimately settled by Tai Ping and most of its reinsurers. Prior to the settlement, Gan made a number of requests for certain investigations to be carried out, and ultimately refused to settle the claim. In addition to attempting to avoid the policy for non-disclosure, Gan alleged that it was not liable to Tai Ping due to breaches of the CCC.
Although fact-specific in many respects, the judgments of Longmore and Smith JJ raise points of general relevance to CCCs. However, given that the combined judgments run to 60 pages and are probably not required reading for anyone but the committed enthusiast, below is a checklist of the seven things one needs to know about the case and CCCs generally.
1. CCCs will be interpreted contra proferentem with respect to the reinsurer relying on the clause. The general rule in English law is that where there is an ambiguity in an exclusion clause, the ambiguity should be resolved against the party proffering or relying on the clause. CCCs are not exclusion clauses, but they are for the benefit of the reinsurer. It is implicit in Longmore J's decision that the contra proferentem rule applies to CCCs. Smith J took this point further by holding that not only will the clause be construed against reinsurers if ambiguous, but that the reinsurers bear the burden of proving, on the balance of probabilities, that the reinsured is in breach of the clause.
2. A CCC clearly drafted as a condition precedent will be treated as a condition precedent. This is good news for those who draft reinsurance wordings, even if it is a fairly obvious point and was not contested by the parties. It is nevertheless worth making, since many reinsurance cases arise from less than ideal drafting of wordings. It should also be noted in this regard that Gan v Tai Ping stands in stark contrast to the Court of Appeal's decision in Insurance Company of Africa v Scor (UK) Reinsurance Company Ltd  1 Lloyd's Rep 312, the previous leading authority on CCCs. In that case the clause stated:
“It is a condition precedent to liability under this insurance that all claims be notified immediately to the Underwriters subscribing to the policy, and the Reassured hereby undertake, in arriving at the settlement of any claim, that they will co-operate with the ... Underwriters and that no settlement shall be made without the approval of the Underwriters subscribing to the policy.”
Interpreting the clause contra proferentem, the court in ICA v Scor treated the ‘and' italicised above as disjunctive and held that the only condition precedent was the duty to notify the claim immediately, not the obligation to co-operate.
3. Even where the cedant can show it is unavoidably liable to the original insured, the cedant must still comply with the CCC if it is drafted as a condition precedent.
In the hearing before Longmore J, Tai Ping tried to argue that whether or not it complied with the CCC, ultimately it was truly liable to its insured. Therefore the CCC was academic and did not apply. Tai Ping relied on ICA v Scor where the court had found the reinsurer liable to its cedant on the grounds that the cedant was liable to its insured, notwithstanding any breach of the CCC. Longmore J distinguished ICA v Scor as the CCC there was not a condition precedent. In Gan v Tai Ping, Longmore J stated, the clause was “expressed as a condition precedent whether the reinsured likes that position or not”.
4. There is an implied term that the reinsurer will not unreasonably withhold its consent to a settlement under the CCC. Before Longmore J, Gan argued that, in the absence of any express clause limiting the withholding of its consent to a settlement, the terms of the CCC gave it total discretion to decide whether to allow Tai Ping to settle. Traditionally, English courts are reluctant to imply terms into contract wordings on the basis that they do not want to rewrite the otherwise clear intention of the parties. However, Longmore J took a robust approach and held that a reading of the CCC such as Gan wanted to give it would deprive the contract of business efficacy. Effectively, Gan would make its own performance of the contract optional as it would be able to decide – possibly for reasons which were arbitrary or capricious – whether any claim should be paid by Tai Ping and in turn whether it should be bound to indemnify Tai Ping. This would defeat the purpose of the contract.
5. The requirement to comply with the CCC has its limits. Smith J's judgement highlights a different aspect of the previous point. The court made it clear that not only may the reinsurer not unreasonably withhold its consent to a proposed settlement, but also it cannot make unreasonable demands on the reinsured under the CCC. In this hearing, Gan alleged that Tai Ping had failed, despite Gan's instructions, to instruct a loss adjuster to investigate certain matters which may have allowed Tai Ping to avoid its policy.
Smith J held that even if it was true that Tai Ping had not complied with Gan's instructions (which was not necessarily the case), there was no requirement on the reinsured to carry out “unnecessary or pointless investigations.” On the facts, it was held that the investigations requested by Gan would have been pointless, as they presumed the original insured had made certain representations about the nature of the fire precautions which, in fact, it had not made. In addition, Smith J made two findings based on the specific terms of the CCC which limited Tai Ping's obligations to comply with the CCC. Although these findings were fact specific, it may well be that the points will be relevant in other cases.
First, Smith J held that on a proper interpretation of the wording, Tai Ping did not need to carry out investigations with a view to determining whether Tai Ping had a right to avoid. Rather, the reinsured only had to co-operate with respect to claim specific matters, that is, matters which fell within the words “circumstances giving rise to a loss” in paragraph (b) of the CCC. Secondly, Smith J held that the motivation of Gan in requesting Tai Ping to carry out the investigations was to determine whether it (Gan) could avoid its reinsurance of Tai Ping. In the absence of clear words, the judge held Tai Pings's duty to comply with the CCC did not extend that far.
6. References to liability in a settlement agreement may not amount to admitting liability in breach of a CCC. By the time of the litigation, Tai Ping had settled the inwards claim of its insured. In the hearing before Smith J, Gan submitted that certain phrases in the settlement agreement concluded between Tai Ping and its insured amounted to an admission of liability, in breach of paragraph (c) of the CCC. Specifically, Gan noted that one of the recitals to the agreement referred to “a fire within the scope of coverage” of the policy, that the sum paid was expressed as “due under the Policy” and that the insured was given the right to dispose of salvage (implying that the insurers, being liable under the policy, had a right to salvage, which they were waiving).
Smith J dismissed these arguments. The reference to “a fire within the scope of coverage” stated nothing more than was obvious. It did not refer to possible defences, exclusions or breaches of other clauses and as such did not admit that Tai Ping was liable to its insured.
With regard to the reference to sums “being due under the Policy,” there was no admission “that aside from the [settlement] agreement there was any liability under the policy. The compromise was that the insurers agreed that they should become liable under the policy..., not that they admitted that they would have been so liable apart from the agreement.” As for the salvage point, Smith J considered that the parties' agreement on salvage rights did not give any indication of what they considered their rights might have been in the absence of such agreement.
Clearly the points raised here are fact-specific, but they do demonstrate there is a clear dividing line between, on the one hand, an admission of liability under a policy and, on the other, an agreement to become liable within the terms of a compromise settlement.
7. Proper and businesslike settlement of claims does not require the consent of the reinsurer where there is a CCC. Finally, Smith J was asked to decide whether Tai Ping had settled the inwards claim in a proper and businesslike manner. Gan made a number of specific submissions in this regard, all of which were dismissed. The only argument which is of more general interest in this context is Gan's assertion that, in order to settle the claim in a proper and businesslike manner, Tai Ping was required to obtain Gan's consent as required by the CCC. Smith J dismissed this point summarily. Although his comments are brief, it is apparent that the judge was of the view that the duty to settle in a proper and businesslike manner only arose when the reinsurer's consent to settlement had been unreasonably refused. Accordingly the cedant was at this point left to its own devices in settling the claim and matters had gone beyond the point when the cedant could be expected to turn to its reinsurer for approval.
“An unfortunate dispute” Gan v Tai Ping may be. Nevertheless, the guidance provided by the above decisions on CCCs is invaluable. The saga may not, however, be over: Smith J noted that his judgment could take effect only subject to the outcome of an appeal against Longmore J's judgment, which is due to be heard in April.