UK: Proper And Businesslike Settlements And The Thai Floods

Last Updated: 24 July 2014
Article by Simon Cooper and Lucy Espley

It has long been established that where a reinsurance contract requires the reinsurer to follow the settlements of the reinsured the reinsurer will be bound subject to two provisos: "...[1] that the claim so recognised [by the reinsured] falls within the risks covered by the policy of reinsurance as a matter of law and [2] provided also that in settling the claim the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement." (see Insurance Company of Africa v SCOR (UK) Reinsurance Co Ltd [1985] 1 Lloyd's Rep 312).

In his June 2014 judgment in Tokio Marine Europe Insurance Limited v Novae Corporate Underwriting Limited [2014] EWHC 2105 (Comm) Mr Justice Field sitting in the Commercial Court had to consider the meaning of the phrase 'proper and businesslike' in this context. The case arose out of losses suffered by Tesco as a result of the 2011 Thai floods.

The case

Tesco had purchased property damage and business interruption cover with ACE in the form of a master policy with local policies issued in different jurisdictions around the world. The insurance provided cover on an 'any one Occurrence' basis where an Occurrence was broadly defined in the master policy as "any one Occurrence or any series of Occurrences consequent or attributable to one source or original cause." The master policy also contained an hours clause providing that all flood losses in a 72 hour period should be deemed to have been caused by a single Occurrence.

In the wake of the Thai floods in 2011 and consequent extensive property damage and business interruption losses, Tesco made a claim of approximately £113 million under its master and local Thai policies. The claim covered losses which had occurred over a wide area of Thailand and over an extended period of time. The quantum of loss was adjusted down to approximately £125 million and subsequently settled for £82.5 million with a single deductible of £2.5 million on the basis of 'one Occurrence'. Tokio Marine had reinsured a percentage of ACE's exposure on a 'back to back' basis and duly paid ACE's claim against it. Tokio Marine, in its turn, had retroceded a portion of its exposure to the Tesco risk on an excess of loss basis to Novae, again on a 'back to back' form. The retrocession contained an unqualified 'follow the settlements' clause but when Tokio Marine presented its claim under the retrocession, Novae declined to pay and raised a number of issues, principally in relation to the number of underlying 'Occurrences'.

In November 2013, Mr Justice Hamblen ruled on a number of preliminary issues arising from Novae's defence, including issues with regard to the standard of proof required under the first proviso of the unqualified 'follow the settlements' clause in the retrocession. Hamblen J found against Novae on these issues and his decision will be subject to an appeal in October 2014. For more information on this aspect of the case, please see our article "Thai floods: clarity or confusion on follow settlements?"

The recent Commercial Court decision by Field J was in the context of a summary judgment application by Tokio Marine to dispose of Novae's remaining defence which was that the reinsured, ACE, did not take all proper and business like steps in agreeing the £82.5m settlement with Tesco and that, consequently, the second proviso for reliance on the follow the settlements clause had not been satisfied.

It was Novae's case that in settling Tesco's claims under the master and local Thai policies, without considering the coverage position under the local policies as well as under the master policy, Ace had failed to act in a proper and businesslike manner. Novae argued that the requirement to act in a proper and businesslike manner imposes a duty on the reinsured to consider the wording of the direct policy under which liability arises and to determine, on a reasonable interpretation, the scope of cover for the insured's claim. This may require the taking of advice from local lawyers if, as here, the policy involves a foreign risk. The reinsured must also determine the facts in order to apply the wording of the relevant policies to them, and to assess the quantum of the loss; the reinsured must also assess the defences available to it and take any which are likely to succeed.

Novae also submitted that it was unbusinesslike for ACE to have failed properly to have analysed and investigated: (i) the definition of "Occurrence" in the master policy, including by obtaining English law advice; (ii) the different causes of the flooding and heavy rainfall in Thailand in 2011; and (iii) whether Tesco's losses could be attributed to different, (multiple) sources or original causes such as different tropical storms or mismanagement of dams or failure of flood defences.

Finally, Novae argued that the fact that it had not shown that a better settlement with Tesco could have been negotiated if the steps it alleges ACE ought to have taken had been taken, was neither here nor there – the focus had to be on ACE's conduct in entering into the settlement, not the reasonableness of the settlement.


In response, Tokio Marine submitted that: (i) an allegation that a reinsured did not act in a proper and businesslike manner in settling a claim was tantamount to an allegation of professional negligence, as to which the reinsurer had the burden of proof; (ii) the purpose of the second proviso in the Insurance Company of Africa v SCOR case mentioned above was to protect reinsurers against prejudicial settlements; (iii) if the bottom line was that the final settlement figure was a good one, it could not be said that there was anything improper or unbusinesslike in not taking points or pursuing enquires that would not have affected that bottom line.

Alternatively, Tokio Marine submitted that (iv) where there was no further investigation into a point because it would not have an effect on the bottom line, it could not be said that that would be improper or unbusinesslike. Finally, Tokio Marine submitted that even if advice on Thai law had been taken and was completely in favour of ACE, the operation of the deductibles under the local policy would still render a settlement at £82.5 million of a claim of £113 million an excellent one.

The decision

The Judge, Field J, accepted Tokio Marine's submissions and held that Novae's defence that ACE failed to act properly or in a businesslike manner had no real prospect of success, notwithstanding that ACE did not further investigate the coverage afforded by the local policy, including the scope for multiple deductibles, and did not delve more deeply into the question of whether the high rainfall was the sole source or original cause of Tesco's loss before concluding the settlement. Given: (i) Tesco's offer to settle for £82.5m gross/£80 million net of the self insured retention on 14 February 2012, subject to the claim being included within its 2011/2012 financial year; and (ii) that ACE's loss adjusters' final figure for the adjusted loss was between £90 million and £100 million, ACE was clearly entitled, in the Judge's opinion, to conclude that there was nothing additional to be gained by further investigation into coverage under the local policy or by disputing the English law advice which Tesco had obtained on the meaning and effect of the definition of "Occurrence" in the master policy (which was favourable to Tesco). The Judge commented that the settlement at £80 million net was undoubtedly a good settlement and that there was no good reason why the ordinary presumption that Novae as reinsurer will follow the settlement of ACE as the reinsured should not apply.


Although the case is very fact specific, the Judge appears to accept Tokio Marine's submission that an allegation that the reinsured has not been reasonable and businesslike is akin to an allegation of professional negligence. The Court also appears to accept that a reinsured is unlikely to be unreasonable or unbusinesslike if it fails to take steps in its investigation of the claim which would have had no material impact on the outcome.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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