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 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:
explain the practical reasons why it is not appropriate to join the broker in the action against reinsurers;
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  2AC 93.5 Johnson v Gore Wood  2 AC 1.6 Aneco Reinsurance (Underwriting) Ltd v Johnson & Higgins Ltd  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.