While the oil spill from the Exxon Valdez disaster may have been cleaned up, the arguments over coverage continue to flow through the courts, as Peter Taylor explains
The recent decision of the Court of Appeal in King v Brandywine Reinsurance Co  EWCA Civ 235 (10 March 2005) is the latest stage of a legal saga that began a generation ago in the icy waters of Prince William Sound, Alaska. The ruling contains few messages of comfort for London Market reinsurance practitioners going forward, despite the specific conclusion by the Court that there was at the end of the day no coverage under the sections of the policy which were in issue. Good news for reinsurers? Not really.
The Exxon Valdez grounded on Bligh Reef, on Good Friday 1989, and discharged 11 million gallons of crude which polluted over 3,000 miles of coastline and engendered a clean-up operation costing over $2bn dollars. Claims against Exxon by government agencies and local bodies then added another $1.5bn in compensatory damages and $4.5bn of punitives.
Exxon blew through its $400m of Tanker Owners Voluntary Agreement concerning Liability for Oil Pollution (TOVALOP) coverage in short order, and then turned to its Global Corporate Excess (GCE) policy, placed in London and Scandinavia. That policy had several sections of cover. The limits were substantial and the stakes were equally high. The most obvious source of cover was Section IIIA, which covered marine risks and third party liabilities, in a layered programme covering up to $250m excess of $210m. A claim was duly made under this section. Underwriters inevitably denied it, but the matter went to trial in Texas and underwriters lost comprehensively - but they appealed against the $410m verdict, before settling in 1997.
Just the beginning
If that had been the end of the matter - or indeed all of the matter - it would have deserved no more than a footnote in the annals of marine insurance and an entry on the catastrophe statistics for 1989. The London Market would have been shown to be capable of responding properly to the loss, and then could spread it through the reinsurance and retrocessional markets to ease the pain. But matters were not so simple.
Two years after making the claim under Section IIIA of the GCE, but before the trial and settlement, Exxon had made further claims against underwriters under different sections of the GCE in respect of the same loss. Firstly, they alleged that the loss was covered under Section I, on the basis that they had incurred costs or expenses on account of "Removal of Debris" - ie the spilled crude. Underwriters disagreed with that contention, but were rattled by an opinion from their Texas lawyers to the effect that Texas jurors would have driven a stage-coach and horses through the policy language "in light of the factual matrix". The lawyers recommended that underwriters settle the claim, which they did, at $300m, being about 30% of the available Section I coverage limits plus interest. This put an end to the proceedings brought by Exxon in Texas and by underwriters in New York relating to Section I.
But there was another claim, under Section IIIB, for a further $250m and interest. Section IIIB gave every appearance of being a separate policy, sitting alongside Section IIIA, but with its own premium and policy number. The coverage was for a further $250m of general third party liability coverage. That claim was subject to arbitration, in New York.
After much skirmishing, and as part of an overall settlement of both of the Section III claims, underwriters agreed in early 1997 to pay $480m in discharge of their liabilities in respect of both Section IIIA and Section IIIB. No apportionment was made of the settlement amount between the two parts of Section III of the policy.
So insurers paid out $300m in 1996 to compromise the Section I claims, and $480m in 1997 to compromise both the Section IIIA claim ($410m at first instance, but under appeal) and the Section IIIB claim ($250m, but still subject to arbitration).
The fun begins
Now the lawyers' fun really began. The US courts and arbitrators, ably assisted by Texan jurors, had had their say. Now it was for the London Market to divide the bones between them in the form of excess of loss reinsurance.
Reinsurers, for some reason, were not happy with the settlement of the Section I claim, believing the underwriters should have fought the claim to the bitter end. The bout of judicial second-guessing of the settlements and their reinsurance coverage had started with the review of the first settlement (Section I) by Clarke J and then the Court of Appeal - who disagreed with him as to its recoverability under the JELC follow settlements clause (CU v NRG Victory Reinsurance  2 Lloyd's Rep 600).
The omens were therefore not good for the outcome of the recent King v Brandywine case, to which the market was looking for ultimate guidance. In this decision, the Court of Appeal was asked to review the decision of Colman J, who had had to deal with the following points (although this is not the complete shopping-list of inter-related issues):
- Were insurers ever actually liable in law to Exxon on the Section I claim? In short: Did the clean-up count as "Removal of Debris"?
- Were insurers ever liable to Exxon on the Section IIIB claim?
Colman J had concluded that they were not liable under either section, but had based his conclusion on the proposition that the policy was - from an English "conflict of law" perspective - governed by English law. He further ruled, however, that, had the policy been governed by New York law, as was alleged, there would have been cover under these two key provisions. (There were, it is true, a number of additional and inter-dependent issues which are frankly too involved to entertain any but the most dedicated student of the Exxon Valdez saga, and so which are not analysed here!)
A red rag had been shown to the disappointed reinsureds. Not only had the judge decided they had been wrong to regard the claims of Exxon as being valid in the US - where they were faced by the legendary and draconian vagaries of the US jury and judicial/arbitration system, but he also felt that under US laws, and New York law in particular, they "would" have been liable. Appeal was launched against what was regarded as a most uncommercial and unrealistic ruling.
The appeal was resisted inter alia on the basis that the finding of the judge that the insurers were liable under New York law was one of "fact", because it was based on a finding as to the meaning and effect of a foreign (New York) law. That peculiarity of English law - that foreign laws must be proved as evidence, not as matters of law - is a convenient fiction in most cases. Not here, though. The Court of Appeal ruled that it was a finding of fact, but it was a "rather special finding of fact". So they could overturn it. And they proceeded to do so.
The Court of Appeal was "struck by the ... thought ... that the terms of an insurance contract placed in the London market could have a different meaning depending on whether it is being construed by a court in England under English law or a court in New York under New York law".
Pausing there, it is clear that the Court of Appeal was coming at the problem from a linguistic and cultural perspective that would be recognised by most exponents of the art of transatlantic re/insurance as wholly unreal. The cases where an American court has construed "plain and ordinary words" to reach a decision utterly removed from that which the (English) underwriters intended are legion. Never is the division of two cultures by their common language so clear as in the practice and jurisprudence of the courts of the US, where even one state court can and will differ from another on the meaning of such simple concepts as "sudden".
Nevertheless, the Court of Appeal was clearly more holistic in its approach to the misuse of English (the Queen's) by transatlantic judges - and by Texas juries! The Court concluded that the GCE policy was governed by New York law, and not English law - thus disagreeing with the judge; but they went on to conclude that that did not matter because under New York law the answer would actually be the same as in England. The judge had got that bit wrong. The claims under Sections I and IIIB were thus not covered - so the judge was right there - under either English or New York law.
The humble claims staff of the average London market reinsurance operation - and the unfortunate insurers who had and have to face the prospect of financial disaster by jury in the USA - can be forgiven, surely, for thinking that "there ain't no justice in this world". You're damned if you do (fight it) and you're damned if you settle and don't.
So what, you may ask, are London market reinsurers going to do about it? The answer is right there in the first paragraph of the Court of Appeal's judgment - lengthy though the body of it is.
The Court stated in its opening remarks that, "if the judge (Colman J) is right, the case demonstrates the perils of settling under primary insurance when the reinsurance is not subject to a full follow the settlements clause". Well actually, as it turned out, in the perception of the Court of Appeal, the judge was indeed right - but for completely the wrong reasons! The judge was wrong in his view on the meaning of New York law.
The US lawyers were dead right about US practice and the propensity of juries to ride roughshod over insurance wordings - but wrong about the law of their own state(s). No doubt they will all be immensely grateful to the Courts of Appeal in both King v Brandywine and CU v NRG Victory for their judicial debate and ultimate guidance as to the correct interpretation and application of US laws to a claim in the US in respect of a US policyholder whose vessel ran aground and polluted the US coastline.
But the perils of a "skinny" follow the settlements clause remain. After all of the above, there was no liability in law to be reinsured, save for the Section IIIA loss - which was not disputed in London, and which is now irretrievably buried and wrapped up in the composite and unapportioned settlement of the Section III claims concluded back in 1997.
The spiral has not yet collapsed back into the original settlements; the law remains supreme; the problem of trans-border re/insurance continues to keep lawyers and judges well employed, on both sides of the Atlantic.
And so: a reasonable settlement is not to be followed; the Commercial Court is shown to be a little too commercial; and the US are shown to be anything but united in their approach to the language that links us and binds us to our cousins over the water.
Peter Taylor is a partner in Lovells' insurance/reinsurance practice.