Fifteen years after the Exxon Valdez grounding and fourteen years after Iraq's invasion of Kuwait, the re/insurance community is still facing legal issues arising out of these events
It is well documented that the unprecedented run of catastrophe losses from 1988 to 1990 caused severe losses from the global re/insurance market. Following the worst storms to hit the UK and Europe for over 100 years (1987) and the destruction of a major North Sea platform (Piper Alpha in 1988), the market had started to anticipate hardening conditions over subsequent years. But then came the worst year of all, 1989, with the Atlantic Richfield (ARCO) loss arising from a pipeline explosion which damaged an oil platform in South Passfield, Louisiana (March), the grounding of the Exxon Valdez which led to the world's worst environmental disaster (also March), Hurricane Hugo devastating the US East coast (September) and the Phillips Petroleum petrochemical plant explosion (October). Just as it appeared that matters could not get any worse for the retrocession market, in 1990 Saddam Hussein invaded Kuwait and snatched the Kuwait Airways Corp (KAC)'s fleet of aircraft along with a large amount of equipment and spares, causing an insured loss of over $500m.Each of these catastrophes resulted in a gross loss in excess of $500m and in most cases in excess of $1bn. In turn, the losses to the retrocession market were magnified many times; in the case of Piper Alpha this was estimated to have resulted in a loss of $15bn, compared to a gross loss to the direct market of approximately $1.5bn. A large proportion of these losses now fall on the run-off market. Two of the losses, the loss of the KAC aircraft and spares and the losses arising from the grounding of the Exxon Valdez, have caused particular legal difficulties for the run-off market.
Aggregation of lossesThe House of Lords decided in Hill v Mercantile & General (which was an application by some of KAC's reinsurers to recover from their retrocessionaires by way of summary judgment their share of the $300m interim payment they had paid to KAC) that there were arguable issues as to whether the KAC aircraft and spares were losses arising out of one or more events, so a full trial was needed. The Hill v M&G case never reached trial, thus the aggregation issues remained outstanding. Although the Commercial Court held in KAC v KIC (the coverage dispute under the primary war risks policy) that the KAC aircraft and spares were lost out of one occurrence - the invasion on 2 August 1990 - and not merely when the aircraft were flown away, so far as excess of loss reinsurers were concerned the findings in relation to the war risks policy were not binding on them. An issue that remained unresolved was whether the loss of the 15 KAC aircraft and spares and the one British Airways (BA) aircraft arose out of one or more events. In order to resolve these issues, approximately 30 participants in the London excess of loss reinsurance market agreed to be bound by the outcome of a test case that was heard in the London Commercial Court, examining the one or more events issue. The court decided that although the KAC aircraft and spares were removed over the course of a number of weeks after the invasion, these losses arose out of one event and thus could be aggregated for the purpose of making excess of loss recoveries.Following the 'unities' test laid down by Rix J in the KAC v KIC proceedings, the court held that there was unity of intent on the part of the Iraqis both to capture the aircraft and spares, and to deprive KAC of them permanently.There was also unity of time: the Iraqis' objective was achieved when the airport was captured, and there was unity of cause, which was the invasion. There was also unity of location as all the aircraft and spares were located at the airport.As far as the BA aircraft was concerned, the court held that it was not lost as a result of the invasion and capture of the airport. On the evidence, there was no intention by the Iraqis to permanently deprive BA of the aircraft, so there was no unity of intent. It was not clear what the Iraqis' intentions were in relation to the plane as it simply remained stranded at Kuwait Airport from the time of the invasion, unlike the KAC aircraft that were flown away, so there was no unity of time. The court also found that there was no unity of cause because the BA aircraft was not, in common sense terms, lost until the eventual destruction of the aircraft some six months later during Operation Desert Storm.The Court of Appeal commented that although it had been referred to the relevant case law, the question that it had to consider was one of impression on the facts. Nevertheless, the practical consequence to the run-off market was that the overwhelming majority (98%) of the Kuwait losses were properly aggregated as arising out of one event.
Exxon ValdezIn contrast to the aggregation issues arising in Kuwait, the underwriters of Exxon's global corporate excess policy (which provided coverage of over $800m), were sued in Texas by Exxon for up to $5bn in respect of the costs Exxon had spent in cleaning up and removing the oil debris, punitive damages, interest and costs. Faced with the prospect of a jury trial in Texas and having already lost the first part of the claim under section III of the policy, the primary insurers settled all of Exxon's claims under their policy for $780m.In 1997, in Commercial Union v NRG Victory, some of the primary insurers sued their reinsurers for their share of the settlement. The reinsurers argued that the insurers were not liable to Exxon under the primary policy and deployed some of the defences that insurers had raised in the Texas proceedings against Exxon. The insurers sought to argue that the settlements were reasonable and businesslike and therefore reinsurers were liable under the follow the settlement clause. However, this clause also required the reinsured to prove that the settlement fell within the terms of the underlying direct policy as well as the reinsurance.The Court of Appeal determined that this provision required the reinsured to prove that they were under a legal liability under the primary policy.A judgment awarded against the insurer was sufficient to establish that the insurers were liable provided that:- the judgment was made by a court of competent jurisdiction;- the judgment had not been obtained in the foreign court in breach of an exclusive jurisdiction clause;- the insurers had taken all proper defences (and therefore these had been rejected); and- the judgment was not manifestly perverse.The insurers put forward evidence from the Texan lawyers saying, in effect, that although there were arguable coverage issues under the primary policy, the fact that the case was to be heard by a Texas jury, which is often unfavourable to insurers and biased against them when insurers are arguing for a limitation of cover, meant that underwriters would lose. The lawyers had therefore recommended settlement.The Court of Appeal did not accept that this was sufficient to show that the insurers were legally liable under the policy, as the recommendation to settle appeared to be based on the lawyers' prediction of human behaviour (i.e. the Texas jury) rather than any legal grounds. As a result, the court refused permission for summary judgment and directed that the matter had to go to a full trial where, in effect, the issues relating to the construction and coverage under the policy would effectively be re-argued in order to show that the insurers were under a legal liability to the insured. Although the insurers settled with Exxon, the dispute switched to being one between the insurers and their reinsurers.As a result of this decision, most, if not all, of the LMX market stopped paying Exxon claims or paid under a reservation of rights. However, there are ongoing proceedings in the London Commercial Court, which will effectively determine these coverage/liability issues, and determine whether, as a matter of applicable law, the settlements made by the primary insurers fall within the terms and conditions of the primary policy. This action may, if successful, finally unblock the Exxon claims settlements, which are locked up in the LMX spiral.
Exxon ValdezThe Exxon Valdez ran aground in Prince William Sound, Alaska, in March 1989 spilling 11 million gallons of oil. In the weeks and months following the spill, the oil decomposed and contaminated hundreds of miles of ocean and shoreline creating the world's worst ecological disaster. Exxon Shipping Co (ESC), the owner of the Exxon Valdez, spent over $850m to clean up the oil from the ocean and shoreline (not to mention from many hundreds of seals and otters that are native to Alaska). After ESC became insolvent, Exxon Corp - the cargo owner - took over the cleanup and spent a further $1.2bn.At the time of the loss, the Exxon Valdez was insured under a global corporate excess (GCE) policy. Section I covered, amongst other things, removal of debris costs, Section IIIA covered marine liability and Section IIIB covered third party liability. Exxon asserted claims on all three sections of the GCE policy. Exxon's Section I and IIIA claims were brought in proceedings in Harris County, Texas and the Section IIIB claim was brought in arbitration in New York.Following a jury verdict in the Section IIIA trial and separate settlements encompassing Section I and III, claims were brought by the GCE policy primary insurers upon their primary reinsurers, and by the primary reinsurers on their retrocessionaires, and so on through the spiral.
The Kuwait lossesThis case arose from Iraq's invasion of Kuwait on 2 August 1990. In the days, weeks and months following the invasion, the Iraqis plundered Kuwait.At the top of the list were 15 Kuwait Airways Corp (KAC) aircraft at Kuwait International Airport with a total insured value of approximately $692m, along with the spares for the KAC fleet (worth in excess of $150m). As well as the immediate targets such as the airport, the national banks and reserves, no aspect of Kuwaiti life avoided systematic plundering.From government offices to schools, universities, public libraries, from industrial plants to ports, military hardware, livestock and even the animals from Kuwait Zoo. Also present at the airport was a British Airways Boeing 747, which was preparing to depart Kuwait for Delhi when Iraq invaded.The BA aircraft was eventually destroyed during Operation Desert Storm at the end of February 1991. BA's war risk insurers paid a total loss of $28m for it.Andrew Symons is a partner and Richard Tosh is a lawyer in the insurance and reinsurance group of London law firm CMS Cameron McKenna.