UK: When Not To Follow The Leader

Last Updated: 16 November 2001

Unum Life Insurance Company of America v. The Israel Phoenix Assurance Co. Ltd. (Commercial Court – Andrew Smith J., 16 March 2001)

Policy wordings are often not produced and agreed until some time after the slip is completed and the insurers or reinsurers go on risk. Indeed, it is often the case that the policy wordings are only produced and agreed after a dispute has arisen (as here). Phillips J. held in Youell v. Bland Welch [1990] 2 Lloyd’s Rep. 423 that: "An insurance slip customarily sets out a shorthand version of the contract of insurance, in terms which may be neither clear nor complete. Where, as here, the slip provides for the formal wording to be agreed by the leading underwriter, the other subscribers to the risk anticipate and agree that the leading underwriter will, on their behalf, agree the final wording that will spell out their rights and obligations." In Unum v. Israel Phoenix, the court had to decide whether such agreement extended to permit the leading underwriter to bind the other subscribers to an arbitration agreement, and whether and, if so, in what circumstances, the authority given to the leading underwriter by the slip, could be revoked.


Unum participated in the reinsurance of the Defendant’s ("IPA") personal accident business through a quota share reinsurance placed by London brokers. Unum sought to avoid the policy and issued proceedings in London for a declaration to that effect. IPA sought to stay the proceedings on the basis that the reinsurance wording included an arbitration clause. The wording had been agreed some considerable time after the slip was signed, and after the proceedings had been commenced by Unum, by Liberty Mutual as "leading underwriter", pursuant to the terms of the slip, which provided that the wording was to be agreed by leading underwriter only (a standard provision).


Unum’s position was that it was not bound by the arbitration clause because:

  1. Liberty Mutual was not the "leading underwriter" within the meaning of the reinsurance slip, or if it was, it could only bind members of LIRMA, which did not include Unum;
  2. If Liberty Mutual was the leading underwriter, it could not bind Unum to the arbitration clause;
  3. If Liberty Mutual was the leading underwriter and had at the outset the authority to bind Unum to the arbitration clause, such authority ended before the wording was agreed, either by (a) effluxion of time; (b) revocation by Unum; (c) the avoidance of the policy by Unum; or (d) the commencement of the litigation by Unum.

The Judgment

  1. Liberty Mutual was recorded on the slip as the leading underwriter and so, not surprisingly, Andrew Smith J. held that Liberty Mutual was the leading underwriter entitled to agree the wording of the policy. As Liberty Mutual was the only LIRMA member participating in the quota share, it was also not surprising that the judge held that it had to ‘lead’ others, including Unum.
  2. However, Andrew Smith J. held that the slip did not authorise Liberty Mutual to bind Unum to the arbitration clause. He held, relying on Excess Insurance v. Mander [1995] Lloyd’s Rep I.R. 358 (a case decided before the enactment of the UK Arbitration Act 1996), and Trygg Hansa v. Equitas [1998] 2 Lloyd’s Rep. 439 (a case decided thereafter), that in absence of special circumstances (and here there were none) general words of incorporation are not sufficient to incorporate an arbitration agreement. He held that the entering into of an arbitration agreement did not "spell out rights and obligations, nor is it by way of formal wording", adopting the words of Phillips. J, quoted above.
  3. Andrew Smith J. proceeded on the basis that the leading underwriter operates under some kind of agency conferred upon it by the following market, a view which is supported by Youell v. Bland Welch (supra) and Roadworks v. Charman [1994] 2 Lloyd’s Rep. 99 (though not by Mander v. Commercial Union [1998] Lloyd’s Rep. I. R. 93). He held that there was no implied term that this agency lapsed by effluxion of time. He also held that it was not usually the case that the agency could be revocable, as potentially there would be serious implications if it were. However, in this case, had he held that the authority included a power to bind to arbitration, then he would probably have been inclined to the view that this was revocable on notice. The Judge held, however, that avoidance by Unum of the policy (but not the commencement of litigation per se) ended the power of the leading underwriter to bind it to the reinsurance wording.

On this basis, Andrew Smith J. rejected IPA’s application for a stay of the English proceedings.


The cases of Excess Insurance v. Mander and Trygg Hansa v. Equitas deal with the question of whether a reinsurance wording which contained a phrase providing that its terms were to follow the underlying insurance was sufficient to incorporate into the reinsurance policy (and therefore bind reinsurers and reinsured to) an arbitration agreement contained in the underlying insurance policy (which bound the insured and insurer/reinsured). These decisions are based on the premise that an arbitration clause (which deals with the treatment of disputes) is of a special nature different to the majority of the clauses in a contract – namely those which deal with its performance, and thus the parties to the reinsurance contract are not taken to have intended to incorporate an arbitration clause unless there is some clear expression of their intention to do so.

In applying these cases to limit the scope of the leading underwriter’s authority to bind the following market, Andrew Smith J. has set a difficult precedent, and one which in some senses does not logically follow. The following market puts a substantial degree of trust in the leading underwriter to protect their interests and it would seem odd that this does not extend to the agreement of an arbitration provision which the leading underwriter considers to be appropriate to the contract, for example to avoid litigating in foreign courts if disputes arise. This is a slightly different situation to the cases on incorporation, where reinsurers were being asked to bind themselves to an arbitration clause which they had neither seen nor contemplated, in circumstances where the rationale for the inclusion of that clause in the underlying insurance may well not have applied to the reinsurance.

However, in the light of the judgment, leading underwriters, and the brokers who approach the following market to participate in the risk by signing the slip, would be well advised to obtain the consent of the following market to an arbitration clause at the outset, if that is what is intended for the policy wording once it is produced.



"© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us."

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