New reinsurance-related and arbitration developments from Carlton Fields
A subscription-only reporting service on the London reinsurance market cases is available at Lloyd’s Law Reports: insurance and reinsurance, with commentaries on cases by Ian Hunter (QC) and Professor Robert Merkin. This company also sells a reinsurance treatise titled Reinsurance Practice and the Law.
This post written by Rollie Goss.
According to a recent decision from the UK Commercial Court, a reinsurer’s obligation to “follow the settlements” of its cedent does not apply when the reinsurance contract contains terms making its scope narrower than the original policy. In this case, the cedent, Aegis, sought to recover from its reinsurer, Continental Casualty Company (“CCC”), for claims arising from incidents at an oil refinery. Aegis had settled the claims made by the refinery owner. CCC denied the claim relying on the fact that additional conditions and definitions relating to boiler and machinery cover were attached to the slip which, if found to apply to the entire contract, would exclude recovery. The same definitions did not appear in the underlying policy. The Court found against Aegis on the issue of contract interpretation, and held that since the original policy and the reinsurance policy were not entirely “back to back,” Aegis could not rely on the follow the settlements provision. Aegis Electrical and Gas International Services Co. Ltd. v. Continental Casualty Company, [2007] EWHC 1762 (Comm. July 25, 2007). This opinion is not available on the UK Court site, but is available on WESTLAW at 2007 WL 2041964.
This post written by Lynn Hawkins.
In a July 12, 2007 post, we reported on issues relating to HIH Casualty and General Insurance Limited (“HIH”). The question before the court was whether it had jurisdiction to entertain a request under the Insolvency Act for directions to the liquidators in England to transfer assets collected by them to the liquidators in an Australian liquidation. The Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors. The House of Lords disagreed, allowing an appeal and ruling that the English assets of the insolvent insurer should be remitted to the Australian liquidator. There were sharp differences of opinion as to why exactly that should be the case.
The HIH group presented winding up petitions to the Supreme Court of New South Wales in 2001. Some of the assets, which consisted mostly of reinsurance claims on London policies, were situated in England, so English provisional liquidators were appointed. The Australian judge subsequently issued winding up orders and sent a letter to the High Court in London asking that the provisional liquidators remit the assets to the Australian liquidators for distribution in accordance with Australian law. The question on appeal was whether the English court could and should accede to the request. The alternative was a separate liquidation and distribution of the English assets under the English Insolvency Act of 1986. The manner of distribution mattered because Australian law generally gave priority to insurance creditors at the expense of other creditors, while the same result would not obtain under English law.
The decision was resolved primarily by analyzing the tension between section 426(4) of the Insolvency Act, which allows an English court with insolvency jurisdiction to assist designated foreign courts (including Australian courts), and section 426(5) of the same Act, which allows a court discretion to provide assistance in accordance with the rules of private international law, including the common law principle of “modified universalism.” That principle requires United Kingdom courts to cooperate with Australian courts to ensure that all the assets are distributed under a single system of distribution. While the court stated that a refusal to remit the assets might be appropriate if it causes a manifest injustice to a creditor, it ultimately found that the Australian distribution was not unacceptably discriminatory or contrary to public policy.
The dispute was focused on whether the basis of jurisdiction ought to be grounded in the common law considerations allowed by section 426(5) or the discrete statutory authority of section 426(4). Lord Hoffmann would have allowed the remission solely through the exercise of common law principles. He argued that under the common law doctrine of ancillary winding up, English courts may “disapply” parts of the statutory scheme by authorizing the English liquidator to allow actions he is obliged by statute to perform in accordance with English law to be performed by the foreign liquidator in accordance with foreign law. Others, including Lord Phillips, rejected this view: “I do not propose to stray from the firm area of common ground [of allowing the appeal under section 426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law.” Lord Neuberger, too, opposed Lord Hoffman’s view, stating that he took “the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act.” McGrath v. Riddell [2008] UKHL 21 (Apr. 9, 2008).
This post written by Brian Perryman.
Coromin, a Bermuda based captive insurer, sought indemnification from its reinsurers for physical damage and business interruption losses suffered by its insured as a result of a defective mill motor at a copper mining and processing facility in Chile. The reinsurance policy was an ‘all risks’ property cover with an exclusion for damage or business interruption caused by a defective condition due to design defect, but with an additional extension which reintroduced that element of cover with a form of wording on which the dispute centered. The reinsurers argued that the extension did not apply because Coromon failed to comply with one of four conditions of the extension clause.
The Court, relying on principles of policy construction set out in Absalom v TCRU [2006] 2LLR 129, found that each of the four requirements of the extension were met in respect of the defective mill motor. The English Court applied the following principles of construction: (1) examine and interpret terms in their contractual context; (2) take into account surrounding background matters, but exclude evidence of negotiations and subjective intent; and (3) reject a conclusion that “flouts business common sense.” These principles are generally consistent with contract construction in the United States. Coromin Ltd v AXA Re & Ors [2007] EWHC 2818 (Comm).
This post written by Lynn Hawkins.
On November 28, 2006, we reported on a ruling by the UK Commercial Court that Lloyd’s Names did not have a cause of action against the government for alleged damages due to the improper implementation of an EEC Insurance Directive. The UK Court of Appeals has affirmed that decision, holding that the assumed failure to transpose the requirements of the Insurance Directive into national law can not be the basis for claims against the national government by the Names. Having disposed of the appeal on this issue, the Court of Appeals did not reach the alternative holding that the claims of the Names were barred by the statute of limitation. Poole v. Her Majesty’s Treasury [2007] EWCA Civ 1021 (Oct. 24, 2007).
This post written by Rollie Goss.