Claire Walter, Karen Abbott, David F Cutter and John Vishneski review some of the significant reinsurance cases in England and the US in 2004
Claims co-operation clause is a condition precedent
In Eagle Star Insurance Co Limited v JN Cresswell & Others(1) the Court of Appeal held that a particular claims control clause was a "condition precedent" despite the absence of those express words.
The relevant clause (which was entitled a "Claims Cooperation Clause" but which the Court of Appeal agreed was in effect a claims control clause) provided as follows: "The Underwriters hereon shall control the negotiations and settlements of any claims under this policy. In this event the Underwriters hereon will not be liable to pay any claim not controlled as set out above."
The Court of Appeal held that compliance with this clause was a condition precedent to reinsurers' liability and that the failure by the reinsured to comply with it prevented the reinsured from recovering under the reinsurance at all. This was subject to the reinsured showing, in the words of Rix LJ, "some reason for excusing" the failure.
The Court also noted that pursuant to Gan v Tai Ping, reinsurers would be subject to an implied obligation not to exercise their claims control right in bad faith, capriciously or arbitrarily.
The importance of this decision is that the reinsured, whether or not it could have proved a liability to the insured, was barred from making a reinsurance recovery in spite of the presence of a "follow the settlements" clause. What is clear is that the courts will look at how and when reinsureds invite reinsurers to exercise their rights in accordance with any claims control or claims cooperation clause and how reinsurers exercise such rights.
Exxon Valdez reinsurers' retrocession cover not back-to-back
The Exxon Valdez oil spill contaminated hundreds of miles of the Alaska coastline. In King v Brandywine Reinsurance Co (UK) Limited(2) the Commercial Court addressed whether direct insurers had been liable to indemnify Exxon Shipping Corporation for, inter alia, oil pollution clean-up costs under the direct policy.
The Court ruled in favour of retrocessionaires to the effect that there had been no cover under the original policy.
There was no coverage under Section I (first party loss or damage to property) of the direct policy because the key insuring clause " ... Removal of Debris ..." did not cover the oil pollution clean-up costs. The meaning of "Debris" did not encompass liquids, and therefore oil.
Although there were liability coverage sections - Sections IIIA (Marine Liabilities) or IIIB (Public and Third Party Liability) - a specific additional clause precluded recoveries under those sections where on the facts the property damage section did not respond.
This, in turn, meant that there was no liability for the purpose of the retrocession contracts' net loss provisions which had provided that the reinsurers could recover the sum actually paid in settlement of loss, liability, damage or expense, leaving reinsurers with a hefty loss. An appeal to the Court of Appeal is being heard in December 2004.
The decision emphasises the ever present problem of scrutinising the underlying liability from the reinsurers'/retrocessionaires' perspective.
Beware the unapportioned direct settlement
The decision in Lumbermans Mutual Casualty Co v Bovis Lend Lease Ltd(3) has caused some considerable comment in the market. This focuses again on the question of the nature of the underlying liability and its potential implications for reinsured and reinsurers. It was held that a global settlement agreement of various parties' claims and counterclaims did not satisfy the requirement of ascertainment of loss under liability insurance policies, because it did not impose on the insured any identifiable liability for loss in respect of any identifiable insured eventuality.
No doubt reinsurers will seek to use this to argue that there is no ascertained liability under the direct insurance policy in circumstances where the settlement merely identifies an overall monetary sum rather than establishing liability for particular heads of loss. A court cannot cure the deficiency in the validity of the ascertainment of loss by hearing evidence which goes behind the settlement agreement itself.
Breach of warranty at placement
In Toomey v Banco Vitalico de Seguros Y Reasseguros(4) the Court of Appeal upheld the first instance decision that reinsurers were entitled to avoid a reinsurance contract for misrepresentation in relation to a statement in the draft reinsurance slip that the underlying Spanish policy was an indemnity policy with a limit of Pts 2.9bn and not a valued policy. An alternative defence raised by reinsurers on appeal had been breach of warranty to this effect.
The Court of Appeal did not need to consider breach of warranty in light of its finding of misrepresentation, but decided to comment on it anyway. Although the statement in the draft slip was not described as a warranty, the Court of Appeal concluded that it was relevant because (1) reinsurers had entered into the reinsurance without sight of the underlying policy; the term as to the description of that policy went to the root of the transaction and was descriptive of and bore materially on the risk; and (2) the reinsurers' obligation was "back to back", being a proportional reinsurance of the risk insured under the direct policy.
This case is significant because it shows the Court's willingness to look at a document as a whole to determine the intention of the parties. By adopting its own approach in HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co5, the Court of Appeal construed a term, which although not expressly defined as a warranty, to be a warranty in circumstances where the description of the subject matter of the insurance was clearly material to the risk underwritten by reinsurers. As in Eagle Star (see above) the courts have reiterated the importance of looking at the substance of a clause irrespective of how it is described by the parties in the contract.
Fair presentation of the risk: waiver
In WISE (Underwriting Agency) Limited v Groupo Nacional Provincial SA6, the reinsurer complained that they were not advised that the underlying insured retailer imported Rolex and other high-value branded watches, as opposed to more generic goods. Reinsurers had been advised that the original policy covered "Relojes" (Spanish for "clocks"). Of significance is the Court of Appeal's disagreement over the approach to the waiver principle that there is no duty of disclosure of "any circumstance as to which information is waived by the insured" - section 18(3)(c) Marine Insurance Act 1906.
Rix LJ approached the question by asking whether the presentation was unfair or whether it would be unfair of the reinsurer to seek to avoid on a ground on which he was put on inquiry.
Longmore LJ (with whom Peter Gibson LJ agreed) asked (1) was there a material non-disclosure? and (2) if there had been a material non-disclosure, was the reinsurer put on inquiry by the disclosure of other facts so that a reasonable reinsurer might suspect that there were other circumstances which would vitiate the presentation? On the facts, there had been nothing in the presentation that would have raised a suspicion that high value branded watches were to be included in the cargo and the reinsurers were entitled to take the slip at face value. This was in stark contrast to Rix LJ who concluded that there was nothing special or unusual about a Cancun retailer retailing high value branded watches.
This decision is of importance because the notion of fairness, as applying to both parties, seems to be evolving into an overriding test, at least for Rix LJ.
The outcome of the dispute was that, as the reinsurer had given notice of cancellation which was inconsistent with the right to avoid the policy, the reinsurer had affirmed the contract.
Follow the settlements applies to cedant's allocation decision
In North River Ins Co v ACE American Reinsurance Co7, the issue in dispute was whether the post-settlement allocation decisions of the cedant were subject to the "follow the settlements" rule.
The Federal Second Circuit Court of Appeals answered this question with a resounding "yes". North River sought $49m pursuant to its reinsurance with ACE following a $335m asbestos settlement. ACE estimated that it owed North River only $24m because it disagreed with North River's use of the Wellington Agreement's "rising bathtub" allocation methodology. ACE argued that the fact that North River's post-settlement allocation approach differed from its pre-settlement risk analysis deprived the follow the settlements provision of any effect. The Court disagreed, however, noting that "it is precisely this kind of intrusive factual inquiry into the settlement process, and the accompanying litigation, that the deference prescribed by the follow-the-settlements doctrine is designed to prevent."
This position appears to be different to the principles adopted in England. Following Lumbermans (above), re/insurers may only be liable if the loss is ascertained by reference to an identifiable liability in the settlement agreement for an insured event.
This case reveals the vast scope of the follow-the-fortunes doctrine, at least in the Second Circuit, and provides a caveat emptor lesson for reinsurers. The Court in North River did point out that "(c)edants must make good-faith allocations, and reinsurers also cannot be held accountable for any loss not covered by the reinsurance policy". However, the decision makes clear that courts are hesitant to scrutinise the details of underlying settlement decisions. It is yet to be seen how other US jurisdictions will view the North River approach.
Late notice no bar to reinsurance recovery absent prejudice
In a recent case applying New York law, a US court held that late notice will not bar a reinsurance claim absent prejudice caused to the reinsurer. In Folksamerica Reinsurance Co v Republic Insurance Co8 2003, the court noted that although under New York law notice to direct insurers under a direct insurance is a condition precedent even where the policy does not make it so, New York law only offers such relief in the reinsurance context when the provision clearly and expressly requires notice as a condition precedent.
The Court determined that the provision was not a condition precedent and, therefore, required the reinsurer to establish prejudice or "tangible economic injury". Folksamerica was unable to articulate any real harm. This matter will be before the Second Circuit shortly.
This case is important because prejudice is a relatively high hurdle to overcome and may necessitate a time consuming (and costly) trial.
Utmost good faith inapplicable to reinsurance agreement
American courts have long held that the duty of utmost good faith is a key part of all reinsurance relationships. However, in PXRE Reinsurance Corp v Lumbermens Mutual Casualty Co9, the Federal court held that in a reinsurance contract governed by Illinois law, utmost good faith had no part in determining PXRE's extensive discovery requests intended to support a right to rescind a reinsurance contract.
The contract's integration clause provided that, other than the contract, "there are no general or specific warranties, representations or other agreements by or among the parties". Given the lack of Illinois case law applying the doctrine to reinsurance relationships, the Court concluded on the basis of this clause that the doctrine of utmost good faith was inapplicable to the particular dispute.
It will be interesting to observe whether this decision is followed elsewhere, or whether it is confined to the wording of the particular contract.
(1)  EWCA Civ 602.
(2)  EWHC 1033 (Comm).
(3)  EWCA 2197 (Comm).
(4)  EWCA 622.
(5)  EWCA Civ 962.
(6)  EWCA Civ 962.
(7) 361 F.3d 134 (2d Cir. 2004).
(8) 2003 WL22852737 (S.D.N.Y.) Dec 2, 2003.
(9) 330 F. Supp. 2d 981 (N.D.I11.981).
Claire Walter and Karen Abbott are in the London office and David F Cutter and John Vishneski are in the US office of the insurance and reinsurance group, Mayer, Brown, Rowe & Maw LLP.