The Court of Appeal takes a broad, merit-based approach in the recent Kennecott1 decision. By Ian McKenna, Claire Waller and Sara Zemmel.

Whether to join a broker to coverage proceedings between a reinsurer and a reassured, and if so, at what stage, is often a fraught decision for a reassured. A number of factors require careful consideration, not least the reassured's commercial relationship with the broker and the broker's continued co-operation - which may be essential to the reassured's case from an evidential perspective. Joining the broker may have a divisive effect, potentially driving a wedge between the reassured and the broker, when for obvious reasons it is in the reassured's interest for them to present a united front in an effort to establish the reinsurer's liability. The Kennecott litigation highlights the additional practical and procedural factors for a reassured when reviewing its strategic approach in this situation.

The Kennecott decision Kennecott Utah and Copper Corp (KUCC), which owned and operated a copper mine and smelting and refining plant in Utah, US, undertook a smelter modernisation project. An explosion occurred in September 1995 causing significant damage to the flash converter furnace. In December 1995, the acid plant also suffered major damage in a separate incident. KUCC had both Contractors All Risks (CAR) and operational insurance cover in relation to the relevant period. However, the CAR policy did not provide cover in respect of any part of the project once taken over or put into operational use. Neither did it cover business interruption. It was essential, therefore, that in order for the plant to be the subject of seamless cover, it was transferred onto an operational policy at the point when it was taken over or put into operational use. Both the CAR and operation insurances were placed by the same brokers.KUCC claimed on its direct operational policy with its captive for the loss and damage sustained. The claim, including a business interruption claim, was in excess of $200m. The captive claimed on its reinsurance and all parties accepted that the effective claim would be on the operational reinsurance given the quantum involved. The underlying policy extended cover to newly constructed and erected property which had been completed and handed over to KUCC. Importantly, the policy excluded any object before it had been installed and completely tested at a specified location. 'Completely tested' meant that the object had operated at the location in the capacity for which it was designed as part of the normal process. Neither the furnace nor the acid plant had undergone the performance tests specified when the damage occurred. The operational reinsurers accordingly refused to accept liability.KUCC and its captive brought an action against the operational reinsurers2 and joined the broker. Reinsurers successfully denied liability following a trial of preliminary issues. In summary, Langley J held that:

  • the furnace and acid plant had not been 'completely tested' as required by the property exclusion clause in the underlying insurance cover. The components were not covered under the underlying policy nor under the reinsurance contract; and
  • the furnace and acid plant had not attached to the reinsurance because of an agreement between the broker and the lead reinsurer that this was, or would be subject to, the condition that each had been tested and commissioned.
  • The claim against the broker was dismissed on the grounds that reinsurers were held to be entitled to rely on the property exclusion to deny coverage. As a matter of causation, therefore, the broker could not be liable. KUCC appealed against the preliminary issue findings but agreed terms of settlement with its reinsurers before the appeal hearing.KUCC brought a fresh action3 against the broker for breach of duty and negligence in failing to obtain effective reinsurance cover. The broker sought to strike out the claims on the basis of issue estoppel and abuse of process as follows:
  • issue estoppel may arise when a particular issue forming a necessary ingredient in a cause of action has been litigated and decided, and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant, one of the parties seeks to reopen the issue4; and
  • the bringing of a claim in later proceedings may amount to an abuse of process if the court is satisfied that the claim should have been raised in the earlier proceedings if it was to be raised at all. However, unjust harassment of the defendant must be shown to exist.
  • On the broker's case, the action was barred because Langley J found that the claim against reinsurers failed as the plant had not been tested in accordance with the terms of the exclusion in the underlying policy. There was, therefore, no cover for reasons that had nothing to do with the broking process.The broker also advanced the argument that to use this action as a vehicle for challenging the conclusions reached by Langley J was an abuse of process and should not be allowed for that reason.The judge in the action against the broker, Steel J, accepted the broker's submissions on these points and found in its favour.

    The Court of AppealKUCC appealed against this decision and won. A central factor in the Court of Appeal's decision was its finding that Steel J failed to recognise that KUCC's case against the broker did not involve a challenge to Langley J's earlier decision, namely, that the reason why the furnace and acid plant did not attach under the policies was that there had been no operational testing in any meaningful sense. KUCC accepted that these components did not attach; in fact, its case was that the broker knew that there was serious risk that these items would not attach to the operational insurance and failed to advise it to seek cover elsewhere. Court of Appeal also disagreed that KUCC's action against the broker was an abuse of process. Whilst agreeing with Steel J that it is proper practice for claims against a broker to be made in the same action as claims against reinsurers taking a coverage defence (Steel J referred to Cresswell J's judgment in Aneco6 where it was suggested that it was highly desirable that in the interests of justice, wherever practicable, claims against brokers be heard at the same time and before the same tribunal that determines whether reinsurers are liable), the Court of Appeal restated that what was required was a broad, merits based judgment taking into account all the facts of the case. Both KUCC and its broker had favoured the prior determination of the action against the reinsurers for reasons which each of them considered cogent, including the belief that KUCC would succeed in its action. The broker was party to the course of events that took place, with full knowledge of the case against it. On the facts, the Court of Appeal found that the broker had not been unjustly harassed.

    Practical effectThe Kennecott litigation does not alter the fact that reassureds may be reluctant to join brokers into proceedings with reinsurers. What it does mean is that a reassured must identify, at an early stage, all of the elements on which it intends to rely in its cause of action against reinsurers. If the same elements are necessary to found the cause of action against its broker, the reassured may have no choice but to join the broker to the proceedings or run the risk that an issue estoppel may arise. A similar, but distinct, issue is whether it would be an abuse of process not to bring the claim against the broker as part of the proceedings against reinsurers. The starting point must now be that the proper practice is for claims against the broker to be heard at the same time. However, the Court of Appeal made it clear that it would not deny a claimant the opportunity to bring a claim unless there is clear evidence that the broker is being 'unjustly harassed'.The practical effect of this decision is that, where the reassured has a potential claim against its broker, it should identify the elements on which it intends to rely to found its causes of action against the reinsurer and the broker. If there is an obvious overlap, it may be necessary to join the broker or run the risk of issue estoppel in subsequent proceedings. If there is no obvious overlap and the reassured does not wish to join the broker, it should:

  • set out in correspondence with the broker all its potential claims;
  • explain the practical reasons why it is not appropriate to join the broker in the action against reinsurers;

  • if possible, obtain the broker's agreement to this decision; and
  • if there are limitation concerns, a reassured can either enter into a standstill agreement with its brokers or issue proceedings against the broker on the basis that these will be stayed pending the outcome of the claim against reinsurers.
  • One final point is that the position is of course different for reinsurance contracts which contain arbitration clauses. As the broker is not a party to the arbitration agreement, it cannot be forced into any arbitral proceedings between the reassured and reinsurers, so that it may be necessary for a claim against the broker to be held over and determined in subsequent litigation in any event.

    References1 Kennecott Utah Copper Mining Corp & Others v Minet Ltd & Others (Court of Appeal judgment 2 July 2003 - unreported).2 Kennecott Utah Copper Corporation and Others v Cornhill Insurance Plc and Others 2000 Lloyd's LRLR 179.3 Supra at 1.4 Arnold v Natwest Bank [1991] 2AC 93.5 Johnson v Gore Wood [2002] 2 AC 1.6 Aneco Reinsurance (Underwriting) Ltd v Johnson & Higgins Ltd [1998] 1 LLR 565.By Ian McKenna, Claire Walter and Sarra ZemmelIan McKenna (Partner), Claire Walter (Assistant) and Sarra Zemmel (Assistant), are with Mayer, Brown,Rowe and Maw LLP, London.