Michael Mendelowitz looks at the key judgments over the past year

A number of judgments of significance to the reinsurance market have been handed down by English courts during the last twelve months.

This article summarises a selection of the more important decisions.

Aggregation

Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] Lloyd's Rep IR 623 (HL concerned the construction of a deductible clause in proceedings concerned with the mis-selling of personal pension plans. The clause provided: "If a series of third party claims shall result from any single negligent act, negligent error or negligent omission (or related series of negligent acts, negligent errors or negligent omissions) then irrespective of the total number of claims, all such third party claims shall be considered to be a single third party claim for the purposes of the application of the deductible."

At first instance it was held that the real and effective cause of the third party claims was the failure on the part of management to train the insureds' financial sales consultants, which amounted to a single act. The Court of Appeal disagreed, but nevertheless upheld the first instance result on the basis that the numerous individual failures by consultants to provide proper advice amounted to a "related series" of acts or omissions. The House of Lords held that the separate acts or omissions would form a related series only if their combined operation resulted in each claim. The fact that the claims might have arisen from the same underlying cause, or that they were a similar nature, was not enough to bring them within the aggregation provision.

Midland Mainline Ltd and Others v Commercial Union Assurance Co Ltd and Others [2004] Lloyd's Rep IR 22 (QB Com Ct) concerned insurance cover for business interruption losses following the Hatfield derailment. In the wake of the disaster, Railtrack imposed a number of emergency speed restrictions (ESRs) on sections of the network while inspections and repairs were carried out. Justice David Steel held that each individual ESR constituted a separate 'occurrence' in the context of a dispute between insureds and insurers over the number and timing of such occurrences. Neither the decision by Railtrack to impose a programme of ESRs, nor the implementation of that programme, was a relevant 'occurrence' for purposes of the policy provision granting cover for denial or restriction of access to the network.

On the other hand, all of the insureds' losses were to be aggregated for the purposes of a deductible clause in the relevant policies which referred to "loss, destruction or damage... arising out of a single event or series of losses arising from a single event...." The parties agreed that the word 'event' in the deductible must be different from and wider than the word 'occurrence' in the insuring clause. It was held that the relevant event was the original derailment, since that provided the unifying factor leading to the imposition of the ESRs. To restrict the qualifying events to each ESR which proximately caused the claimants' losses would, in the judge's view, have rendered the aggregation provision in the deductible clause nearly redundant.

If P&C Insurance Ltd v Silversea Cruises Ltd [2004] Lloyd's Rep IR 217 (QB Com Ct) appears to be the only reported English case to date concerning the liability of insurers for losses arising from the World Trade Center and other attacks on 9/11. Justice Tomlinson was required to rule on aggregation issues in order to determine the maximum amount that could be recovered under the policy. The insured operated a fleet of luxury cruisers which regularly sailed to New York. Silversea's business was badly affected by the closure of New York harbour to cruise ships following 9/11 and by customer cancellations. Section A(ii) of its business interruption insurance provided cover in respect of "the ascertained net loss resulting from a State Department Advisory or similar warning by competent authority regarding acts of war or terrorism"; the amount recoverable was capped at "US$5m in the annual aggregate and in all". Silversea sought to maximise its insurance recovery by arguing that the annual cap of $5m applied in respect of each vessel and that the aggregate limit applied to losses which arose from each separate State Department warning issued in the aftermath of 9/11. Justice Tomlinson held against Silversea, finding that the annual aggregate of $5m was a total cap on all liability, not a separate cap in respect of each vessel. He further held that the cap applied to all losses which resulted from the attacks of 9/11. This was because he construed the cap as only applying to one event or occurrence - which in this case was the attacks on 9/11 and not each individual State Department warning. Since there had been a large number of State Department warnings, any other analysis would have rendered the aggregate cap virtually meaningless.

Scott v Copenhagen Re [2003] EWCA Civ 688 was a test case brought to determine how, if at all, losses of aircraft following the Iraqi invasion of Kuwait in 1990 could be aggregated. Iraqi forces captured 15 aircraft and a quantity of spares owned by Kuwait Airways Corp (KAC) and one British Airways Boeing 747. The KAC aircraft and spares were taken away almost immediately and flown to secret locations in Iraq and elsewhere; the BA 747, however, remained at Kuwait and was eventually destroyed by Allied fire in the course of Operation Desert Storm. The Commercial Court allowed the aggregation of the 15 KAC aircraft and a quantity of spares under a standard "each and every loss" definition which included a "series of losses... arising out of one event", but not the loss of the BA 747. An appeal against this decision was unsuccessful. The Court of Appeal noted that when the Iraqi army took control of the airport, the KAC and BA aircraft could be both regarded as having been seized. However, the actual event that led to the irretrievable loss of the KAC aircraft (the seizure of the airport) was not the same event that led to the irretrievable loss of the BA plane (the Allied bombing some time later). The seizure of the BA plane was therefore in itself not to be regarded as an irretrievable loss as it was unclear at that stage what the fate of this aircraft would be.

Warranties

In Toomey v Banco Vitalicio de Espana SA de Seguros y Reaseguros [2003] EWHC 1102 (Comm), a policy issued by a Spanish insurance company provided for payment of Pta2.9bn in the event that the insured, a Spanish football club, suffered relegation from the Spanish first division. The policy was reinsured facultatively on the basis of a slip policy containing the terms 'As original' and 'Full reinsurance clause'. The judge held that the reinsurers were entitled to reject the reinsured's claim because, upon the proper construction of the reinsurance contract, the reinsured gave an undertaking by way of a warranty that the original insurance was properly described in the statement of interest. This statement contained a fundamental misdescription of the reinsured interest, namely that the policy was one of indemnity against actual loss, subject to a maximum of Pts2.9bn, whereas in fact it was a valued policy, so that the insured sum became payable upon relegation of the club, whether or not it could show that it had actually sustained any measurable financial loss.

Pre-contractual representations

Drake Insurance plc (in provisional liquidation) v Provident Insurance plc [2003] Lloyd's Rep IR 781 (CA) involved an attempt by an insurance company to avoid a motor policy. The essential facts were that an insured renewed his motor policy without declaring on the proposal form a speeding offence of which he had been convicted the previous year. The proposal form also incorrectly declared a separate incident (involving the insured's wife, who was a named driver on the policy) as a 'fault' accident, whereas there had in fact been no fault on her part. Had the insurance company known of the full facts regarding the so-called 'fault' accident and the speeding offence, it would (so the court found) have renewed the policy on the existing terms on the basis of the standard rating criteria which it operated at that time. The majority of the Court of Appeal held that the insurance company had not been induced by the non-disclosure of the speeding conviction and, on those grounds, could not avoid cover. In a separate judgment concurring in the result, Lord Justice Pill considered that in the circumstances, the insurer's failure, prior to "taking the drastic step of avoiding the policy", to make any enquiry of the insured regarding the status of the 'fault' accident (which would have revealed that the company's assessment of the risk had not actually changed) amounted to a breach of the duty of utmost good faith. This had the effect of disentitling the insurer from avoiding. In other words, Lord Justice Pill held that a right of avoidance can be contested if the insurer's purported exercise of that right is not in the utmost good faith. If this suggestion is correct, it would be an example of the imposition upon an insurer of a continuing post-contractual duty of utmost good faith. Drake is a decision relating to personal lines insurance, where, possibly, public policy considerations may have played a part in the judgment.

In Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705, the Court of Appeal held that materiality must be determined by reference to the position as it existed at the date of placing of the risk. The case involved a facultative reinsurance of a banker's blanket bond and professional indemnity insurance written in favour of a Colombian bank. The reinsured was aware that certain allegations of dishonesty had been made against senior directors of the bank, but did not disclose the existence of these allegations to reinsurers. The reinsured accepted that the allegations had been made but sought to introduce evidence for the purpose of contesting their validity. The court held that such evidence would be inadmissible as it was irrelevant whether the directors had subsequently been exonerated; what mattered was the existence of the allegations when the risk was placed and the issue for consideration was simply whether those allegations were material matters for disclosure.

Follow the settlements

In Assicurazioni Generali SpA v CGU International Insurance plc [2004] EWCA Civ 429, Generali unsuccessfully appealed the decision of the Commercial Court that an undertaking to "follow without question the settlements of the reassured except ex-gratia and/or 'without prejudice' settlements", remained subject to the two provisos laid down in Insurance Co of Africa v Scor (UK) Reinsurance Co [1985] Lloyd's Rep 312 (CA). Generali's liability was reinsured with the defendant companies and a number of Lloyd's syndicates.

While the Lloyd's syndicates settled their share of Generali's claim on the reinsurance, the defendants refused, relying on the two Scor provisos: (a) that the claims as recognised by the reinsured must fall within the risks covered by the reinsurance as a matter of law; and (b) that the reinsured should have acted honestly and taken all proper and business-like steps in settling the claim. Generali argued that the wording of the reinsurance (in particular the words 'without question') precluded reinsurers from asking whether the two Scor provisos had been met. The Court of Appeal held that a reinsured cannot hide behind such wording to absolve itself from the obligation to act honestly and take reasonable and proper steps in settling the claim. The Court of Appeal did not say that it could never be possible to exclude the second Scor proviso; however, very clear words would be required to do so. The words 'without question' were not clear enough.

Michael Mendelowitz, is a partner in the reinsurance and international risk team at London law firm Barlow Lyde & Gilbert.