Omar Hameed reviews some of the most significant reinsurance decisions of the last year.
Underwriting pools continue to be a feature of the modern insurance market. Unfortunately, they have often given rise to litigation. Kingscroft Insurance Company Ltd and Ors v Nissan Fire & Marine Insurance Company Ltd (Commercial Court, 29 July 1999) is of particular interest, principally because of the way in which many of the issues in dispute were analysed and ultimately decided by reference to market practice.
The claimants were all members of HS Weavers (Underwriting) Agencies Ltd (Weavers/the pool). The defendant (Nissan) was a reinsurer under two quota share reinsurance treaties placed by Weavers commencing in April 1976 (the FQS treaties). Weavers underwrote on behalf of various companies whose names appeared on the underwriting stamp (stamp companies). Since some companies were unable to write directly, a number of companies joined the pool by reinsuring the existing stamp companies through a whole account quota share treaty (WAQS reinsurers). The administration for both the stamp companies and WAQS reinsurers was the same. The composition of the underwriting pool changed from time to time.
For some time prior to the negotiation of the FQS treaties, Weavers had maintained an extensive programme of excess of loss reinsurance. Nissan subscribed to one or more of these protections during 1970 to 1976 and had wordings for each of these treaties which made it clear that these protections covered Weavers' casualty business, including its umbrella liability business. The excess of loss reinsurance programme continued throughout the duration of the FQS treaties. In defence of the claimants' claim for an indemnity under the FQS treaties, Nissan alleged that it was entitled to avoid the treaties on the grounds of misrepresentation and non-disclosure concerning the participations of the WAQS reinsurers and the existence of the pool's excess of loss reinsurance programme. Nissan also alleged that six of the claimants were not members of the pool at the time of its acceptance of the treaties and that five of those six which had not been incorporated never became parties to the treaties.
Moore-Bick J decided the following points of construction.
1. Did companies which became members of the pool after the conclusion of the FQS treaties become parties to the treaties? Moore-Bick J held that they did. Apart from Walbrook, the FQS treaties referred to the “companies underwritten by Weavers”. It was the understanding of the market that the composition of any pool changes over the course of time. Nissan expected to receive the same proportion of the risks regardless of the identity of the members of the pool. Both as a matter of business common sense and as a matter of law, the treaty was to be construed as containing an offer on the part of reinsurers to any new member of the pool to enter into contractual relations on the terms of the treaty. On this analysis, it was irrelevant that a company had not been incorporated at the time when the FQS treaties were made.
2. Were Weavers entitled to enter into excess of loss reinsurance contracts in respect of their retained share of business ceded under the treaties? The experts accepted that the purchase of excess of loss reinsurance to protect Weavers' retention represented a means by which a prudent reinsured managed his business. The words “retains for their own account” meant retain as part of their own underwriting account, preventing Weavers from purchasing additional quota share treaties, thus ensuring that there was the incentive to write responsibly, but did not apply to the purchase of excess of loss protection. To construe the treaties in any other way would have disregarded evidence of commercial background and given a meaning to the clause which was contrary to commercial good sense.
3. Did the expression “companies underwritten by Weavers” include the WAQS reinsurers? The purpose of the WAQS treaties was to enable non-stamp companies to remain members of the pool where they would otherwise not be allowed to participate. It would make no difference to Nissan whether non-stamp companies reinsured stamp companies under the WAQS treaties. What did “companies underwritten [for] by [Weavers]” mean? This phrase was used broadly and encompassed quota share reinsurers who would be regarded as reinsureds for this purpose. Nissan as well as other reinsurers of Weavers knew nothing about the formal structure of the Weavers pool and, on the basis that most pools would have operated in this way, Weavers wrote on behalf of both stamp companies and WAQS reinsurers as a single underwriting unit. The statement in the preamble of each treaty that Weavers were to issue policies of insurance meant policies written by the pool as an underwriting entity and therefore encompassed business written by the WAQS reinsurers.
4. Were Weavers entitled to cede business to other members of the pool, whether stamp companies or WAQS reinsurers, under whole account quota share reinsurance treaties? On the basis of the findings at paragraph 3, Weavers could cede business to other members of the pool.
Non-disclosure and misrepresentation
Nissan's case was that the wordings forming the basis of the offer of reinsurance contained a representation that the stamp companies (who alone constituted the reinsured) intended to retain a proportion of the risks for their own account uninsured whether by excess loss reinsurance or by quota share insurance of any kind. These representations were alleged to have been made in the contract. Moore-Bick J held that there was no misrepresentation since under his interpretation of Article 1, it did not prohibit the use of excess of loss reinsurance.
Nissan also alleged that the stamp companies, failed to disclose:
(a) that they reinsured their lines to other members of the pool through the WAQS treaties;
(b) the maintenance of the excess of loss reinsurance programme protecting their retention; and
(c) in the case of one of the reinsureds, that they had an additional quota share treaty, not arranged by Weavers, which reduced its retention even further. That Nissan's underwriter was not expressly told about the WAQS reinsurances was accepted, but it was held that he knew, or should have known, from both his participation in other pools and market knowledge generally, that these arrangements existed. On the basis of his findings in relation to the construction issues, Moore-Bick J held that the precise structure of the pool and the identity of the individual members were not material to the risk being offered. Even if it had known, Nissan would have participated anyway.
Nissan, through its underwriter, was aware of Weavers' excess of loss programme in which it participated and must be taken to have been aware of the fact that it covered business which was to be ceded under the FQS treaties. Even if the underwriter had not been so aware, it would have been a matter which he ought to have known as being within the scope of his own business. Weavers were therefore under no duty to disclose it. In any event, the existence of the excess of loss programme would not have been material. Moreover, there would have been no inducement as Nissan would not have turned down a share in the treaty.
Where one of the reinsureds had separate quota share protection accepted independently of Weavers, and the reinsured had obtained quota share reinsurance without the knowledge of the pool manager, it would have no effect on Weavers' incentive to write responsibly. Thus, the quota share treaty was not material to Nissan's decision and its existence need not be disclosed. In any event, the judge held that it would not have affected Nissan's underwriter's assessment of those treaties and would not have been material to him.
Provisional notice of cancellation
Even though there was no provision in the FQS treaties for provisional notices of cancellation, Nissan sought to send such notices on a number of occasions after initially subscribing to the treaties. The treaties provided for cancellation by the giving of notice by either party and, in accordance with those terms, the giving of notice by Nissan ought to cancel the treaties. Labelling the notice as “provisional” did not entitle Nissan to withdraw it unilaterally at a later date. The giving of provisional notice of cancellation therefore meant that the treaties would terminate automatically in the absence of some further agreement between the parties.
By submitting new statistics to Nissan, Weavers was “inviting” Nissan to continue the relationship on the same terms. In negotiating the withdrawal of the provisional notices, the parties continued to owe each other a duty of utmost good faith but it was a duty which was conditioned by the existing relationship between them. Any misrepresentation or non disclosure made at the time the treaties were originally placed would still be presumed to be in effect in the mind of the underwriter unless subsequent events had overtaken it. As such, the agreement was that the notices were withdrawn, allowing the old contract to continue in existence.
The judge also held that, even if there had been a misrepresentation or non-disclosure, Nissan had lost the right to avoid the treaties and had affirmed them by its subsequent actions with knowledge of the facts relied upon as founding the misrepresentations or non-disclosures pleaded.
In Ethniki v AIG Europe, (Court of Appeal, 26 November 1999), the appellants, an insurance company domiciled in Greece, succeeded to the rights and obligations of another Greek insurance company, Astir Insurance Company SA, (Astir) who had insured factory buildings and machinery owned by a third Greek company, “Hellenic”, against damage caused by earthquakes, for a period of 12 months. Astir had reinsured 34.5% of that risk with the respondents, “AIG”. During the period, an earthquake damaged one of Hellenic's factories. Consequently, Hellenic started proceedings in Athens against Astir. Ethniki issued the equivalent of third party proceedings against AIG.
AIG commenced its action in London against Ethniki, seeking declarations of non-liability on the grounds that Astir/Ethniki had failed to comply with the claims control clauses in the reinsurance policy by failing to give notice to AIG within 72 hours of becoming aware of Hellenic's claims and failing to provide AIG with all information about the losses concerned. (Astir appointed its loss adjuster on the day the loss occurred but failed to report the loss to AIG until several weeks later, by which time AIG's own adjuster had been deprived of the opportunity to visit the site immediately after the loss.)
AIG started its action in London under Article 5(1) of the Brussels Convention, on the basis that the obligations “in question” were the obligations under the claims control clause, all of which required performance in London. Ethniki applied for the writ to be set aside, or alternatively for the proceedings to be stayed, on the grounds that the court had no jurisdiction by reasons of Article 5(1) of the Brussels Convention. Relying on Fisher v Unione Italiana de Riassicurazione, at first instance Coleman J held that the obligations “in question” were the obligations from which the action arose and that, therefore, in this case, there were no good grounds for declining jurisdiction or for setting aside service of the London proceedings.
The Court of Appeal reviewed the proper interpretation of Article 5(1) and concluded that the correct enquiry was to ask whether AIG's claim for a declaration of non-liability depended or was based principally, (“or substantially”) on the alleged breaches of the conditions precedent or on the accompanying allegations of breaches of the insurance company's obligation to investigate the claim. The Court of Appeal agreed with Coleman J, ruling that the principal obligation should be identified by reference to the substance of the matters in issue - the insurance company's alleged failure to investigate the loss properly or timeously in Greece. The plaintiff cannot camouflage the principal obligation by relegating it to a subordinate role by the way he chooses to express his claim. The court's decision does not rest in the plaintiff's hands. The court also upheld the decision of Colman J, that the words “as original” in the slip did not operate to incorporate into the reinsurance contract the exclusive (Greek) jurisdiction clause because, like an arbitration clause, a jurisdiction clause is ancillary to and separable from the contract.
In Gan Insurance Company Limited & Anor v Tai Ping Insurance Company Limited, (Court of Appeal 28 May 1999), Tai Ping, a Taiwanese insurance company, had underwritten a policy of insurance for a Taiwanese factory in Taiwan. Tai Ping obtained facultative reinsurance from reinsurers, including Gan. After Tai Ping had settled a claim with the insured, Gan successfully applied to the commercial court to be allowed to take action in England for a declaration of non-liability in respect of the facultative reinsurance. The defendants applied under Order 12, Rule 8, contending that the court had no jurisdiction.
Considering what was the proper law of the reinsurance contracts, the court held that, in the light of the placement of the reinsurance contracts in London with London market reinsurers, and the terms of the slips which included standard London market wordings, in particular the claims co-operation clauses, there was an implied choice of English law “demonstrated with reasonable certainty by the terms of the contracts and the circumstances of the case” (the test under Article 3 of the Rome Convention). Moreover, considering Vesta v Butcher, the words “as original” in the slip did not operate so as to incorporate into the reinsurance contract the choice of Taiwanese law in the underlying insurance cover; this would conflict with the other terms of the reinsurance contract. In any event, under Article 4 of the convention, it was to be presumed that the reinsurance contracts had their closest connection with England. The court concluded that the proper law of the contract s was English law.
The second issue was whether the plaintiffs were simply forum shopping. Tai Ping argued that they should be the natural plaintiffs entitled to bring a claim for payment under the reinsurance contracts in Taiwan. The court considered New Hampshire v Phillips Electronics, which held that a court would only hear proceedings for negative declarations where there was a good reason for seeking relief and on condition that the relief served a useful purpose. It accepted the argument that the reinsurers needed to seek relief in England on the basis that this was the only way to ensure that their rights would be determined in accordance with the proper law of the contracts. Accordingly, the reinsurers were not forum shopping.Thirdly the court ruled that England was clearly the appropriate forum - a decision that followed naturally from the resolution of the preceding issues.
Omar Hameed is a member of the reinsurance and international risk team, Barlow, Lyde & Gilbert, London.