Litigation may be thin on the ground, but some recent landmark cases have set new standards for future disputes in the reinsurance sector

Reinsurers have taken a detour off the bumpy road to litigation in recent times. Experts attribute the marked drop in lawsuits in the sector to the arrival of the soft market. “The current soft market has only been around a short while, and legal disputes usually follow a soft market,” explains law firm Barlow Lyde & Gilbert partner Clive O’Connell. “The last one was quite a while back, so there has been a significant drop in disputes.”

In addition, budget constraints mean reinsurers are much more likely to opt for arbitration where possible, which is much cheaper than litigation, with the added bonus of confidentiality.

But there are suggestions that this could be the quiet before the storm. The fall-out from the subprime crisis of 2008 continues to rumble on, and legal experts predict we will soon see a flurry of lawsuits against financial institutions hitting the reinsurance sector.

The much-anticipated Supreme Court final ruling on the EL trigger case at the end of this year is also predicted to have ramifications for the reinsurance market, as it is set to dictate the course of future asbestos litigation.

And even during this period of relative calm, a small number of rulings have caused the reinsurance sector to sit up and take note. According to Elborne Mitchell partner Edmund Stanley, recent decisions show the courts have become increasingly claimant-friendly and hostile to technical defences.

Global Reinsurance outlines the legal cases over the past 18 months that are set to leave their mark on the landscape of future reinsurance litigation.

Equitas Ltd v R&Q Reinsurance Ltd

The case centred on claims made by Warren Buffet-owned Equitas, the entity set up by Lloyd’s in 1996 to reinsure and run off its pre-1993 liabilities. Equitas took

on the rights of various Lloyd’s syndicates under excess-of-loss reinsurance contracts. Most of the claims related to the Kuwait Airways losses from the invasion of Kuwait in August 1990, and the pollution losses from the Exxon Valdez oil spill in 1989.

The awards were called into question when court decisions cast doubt on whether certain parts of the claim had been covered long after the original insurance claims had been paid. This presented a huge conundrum for the reinsurance sector. “No one had any way of knowing which bits were valid and which were not, as this would have involved re-opening the accounts on millions of underlying contracts,” Elborne Mitchell’s Stanley says.

Equitas responded to the challenge by investing in an actuarial model to take account of all the parts of the claim that were in doubt. They presented the losses to run-off reinsurer Brandywine, which was renamed R&Q Reinsurance after its purchase by run-off specialist Randall & Quilter. Brandywine disputed the findings and insisted that Equitas had to unravel the accounts on the underlying contracts.

The court disagreed, however, and held that there was no reason in principle why the reinsured could not rely on an actuarial model to disentangle its claim from wrongly aggregated elements of a claim.

Why is this case important?

The case shows that courts are willing to accept actuarial modelling, especially when the claimant fails to suggest a viable or reasonable solution. “It does show that the English courts will generally embrace a constructive attempt by a party to do its best in difficult circumstances and be unsympathetic to someone whose response is simply to take pot shots at them without having a constructive alternative of its own,” Stanley says.

IRB-Brasil v CX Re

In this case, CX Re, a run-off reinsurer formerly known as CNA Reinsurance Company Ltd, was reinsured by Brazilian state-owned reinsurer IRB on a number of excess-of-loss contracts in the 1970 and 1980s that protected CX’s casualty and liability account.

CX Re faced large claims under product liability covers sold in the USA to manufacturers of asbestos products, silicone breast implants and blood plasma factor, and to companies that had caused pollution. IRB questioned whether the original settlements made by CX Re were covered under the original contract and also questioned how CX Re could prove that certain “continuous losses” occurred during their particular years of cover.

The case first went to private arbitration, where the arbitrators were unsympathetic to IRB. They held the settlements in question were within the terms and conditions of the original contract and that the losses had occurred during the relevant periods of cover.

However, the arbitrator’s confused terminology ensured that IRB was able to appeal the decision in the High Court. “They made a howler because they referred to ‘cause’ rather than the word ‘event’,” Weightmans partner Ling Ong explains.

Despite this confusion, however, the judge decided the High Court had no jurisdiction to interfere with the findings of the arbitrator.

Why is this case important?

The case demonstrates that courts are reluctant to challenge an arbitrator’s decision even when there has been a fundamental flaw in the proceedings.

“There have been few reinsurance disputes in the English courts over the past 12 months, as most reinsurance matters now tend to be arbitrated. IRB-Brasil vs CX Re showed that such appeals can be difficult, with the courts being reluctant to interfere,” Ong explains.

AXA Corporate Solutions v National Westminster Bank
Between 1998 and 2004, AXA insured The Royal Bank of Scotland (RBS), which took over NatWest in 2000, against employers’ liability, public liability and public/products liability exposure.

Following the 9/11 terrorist attacks, AXA introduced a terrorism exclusion when the time came for renewal terms. The insurer faxed around the renewal terms, which proposed the addition of a terrorism exclusion excess of £10m for employers’ liability cover and £5m cover for public/products liability.

NatWest and its broker, Marsh, argued that the renewal indication was not agreed and therefore did not form part of the parties’ agreement. When NatWest was sued in 2005 by the relatives of the victims of a suicide bomb attack in Israel, who accused it of helping a charity raise money that funded Hamas, AXA relied on the exclusion.

RBS tried to argue that the exclusion was insufficiently certain to have legal effect. The judge disagreed and said that the exclusion had taken effect.

Why is this case important?

“This is a classic textbook case on incorporation of terms and worthy of mention, if only to show that even in these days of contract certainty, the basics can still be wrong,” Stanley says.

AXL Resources v Antares Underwriting Services Ltd & Another

This case threw up an issue never previously determined by the English courts: the meaning of a ‘mysterious disappearance’ exclusion.

AXL owned a consignment of 20 metric tonnes of cobalt, which was stored in a bonded warehouse in Antwerp. When the company asked the owners of the warehouse to release a sample of the cobalt to a potential buyer, they discovered that the cobalt had gone missing.

AXL was covered by underwriter London All Risks, which said the cover excluded “mysterious disappearance and stocktaking losses”. The company argued that unless AXL could explain how and in what circumstances the cobalt was lost, the loss was a mystery and excluded from cover.

AXL’s argument was that the cobalt must have been stolen, and during the court proceedings a gang of thieves was caught in Belgium and confessed to stealing the cobalt. Consequently, the court ruled that the underwriter had no reasonable prospect of rejecting the claim.

Why is this case important?

This case clarifies the legal burden of proof in relation to mysterious disappearance exclusion clauses. Cargo insurers should be aware that the burden will fall on them to prove that there has been a mysterious disappearance and they cannot pass the burden back to the insured to prove the precise cause of the loss.

Gard Marine & Energy Ltd v Tunnicliffe
This case involves another spat over jurisdiction. Gard Marine & Energy Ltd (Gard), a Bermudian company, presented claims to its reinsurers following losses sustained in the Gulf of Mexico. Glacier Reinsurance disputed the way the claims had been calculated. Gard began proceedings in England against Glacier and the two other reinsurers that also disputed the claim.

Glacier, based and domiciled in Switzerland, had written a 5% line in Switzerland on an excess-of-loss cover that was mainly placed in the London market. Therefore, it issued proceedings in Switzerland and also applied to the English court for dismissal of the action brought against it.

The Court of Appeal upheld that there had been a real choice of English law as the law of the contract, however, and stressed the London market nature of the placement. It held that the contract had its closest connection with England. Both of those were sufficient to establish jurisdiction of the English courts.

Why is this case important?

It shows that English courts are increasingly open to accepting jurisdiction when such disputes arise.

“Given the international nature of reinsurance contracts, jurisdictional disputes can emerge from time to time and these cases show that the English court is prepared to assert jurisdiction in appropriate cases,” Ong says.

Stonebridge Underwriting Ltd v Ontario Municipal Insurance Exchange (OMEX)
OMEX is a Canadian not-for-profit insurance exchange that insures various municipalities in Ontario. Jardine Lloyd Thompson Canada Inc (JLT Canada) arranged excess-of-loss reinsurance cover for two of the risk pools in the OMEX programme. The dispute involved the refusal of the reinsurer Stonebridge (now XL London Market Ltd) to pay sums OMEX alleged were due. Stonebridge denied cover on the basis of a breach of the claims notification clause. OMEX applied for an order to set aside service of the English proceedings on the grounds that England was not the proper jurisdiction for the case between the parties to be heard.

OMEX began proceedings in Ontario claiming damages, and asserted that the contract was governed by Ontario law. However, English law offered a number of advantages to Stonebridge. Most notably, the main issue in dispute – the proper construction of the excess/deductible provisions – is suited to the English court because of its considerable experience and expertise in reinsurance matters, particularly those concerning Lloyd’s. In addition, a lot of the evidence relating to the case was located in London.

The court ruled that there was a risk that if proceedings were held in Ontario, the court would apply a different law. This was regarded as unfair because it would deny Stonebridge a defence otherwise available to it under English law. The fact that OMEX was the first to begin proceedings, in Ontario, held little weight as jurisdiction had not been determined and English proceedings were further advanced. The court ruled there was nothing sufficiently special about the circumstances to mandate Canadian jurisdiction and OMEX’s application was refused.

Why is this case important?

According to Herbert Smith partner Chris Foster, the Stonebridge decision provides a guide to the factors that may be taken into account by the English court when considering the governing law of a reinsurance contract.

It also confirms that reinsurance placed in the London market by London brokers is likely to be found to be subject to English law, particularly if it contains standard London market terms. GR