UK: Follow The Lead Clauses And Whether A Following Underwriter Is Bound By A Settlement Which Is Expressed Not To Be Binding On Him

Last Updated: 8 January 2015
Article by Jon Turnbull and Michelle M. Radom

The insured's vessel was covered by two insurance policies: (1) a policy issued by three Lloyd's syndicates covering 50% of the interest in the vessel; and (2) a policy issued by the defendant covering 30% of the interest in the vessel (the remaining 20% interest was uninsured). The policy issued by the defendant contained a Follow Clause which read as follows: "Agreed to follow [two of the Lloyd's syndicates] in claims excluding ex gratia payments" (thus, although the syndicates were not expressly referred to as lead underwriters, this was in effect a follow the lead underwriter clause).

Following damage to the vessel and a claim under both policies, a settlement agreement was entered into between the three syndicates and the insured. The loss was agreed by those parties to be USD 1.5 million and the syndicates agreed to pay their respective shares of an aggregate sum of USD 779,500 (ie just over 50% of the loss). The insured argued that the defendant was bound by this settlement to pay 30% of the agreed loss (ie USD 450,000). However, the defendant argued that it was not obliged to follow this settlement for the following reasons:

1) The Follow Clause authorised only the Lloyd's syndicates to act on the defendant's behalf to settle claims and did not bind it to the follow any settlement. That argument was rejected by Teare J. The insured's interpretation of the clause was said to "ignore, and add to, the simple words of the Follow Clause". Nor was there any need to introduce a concept of agency into the clause. Although there is uncertainty as to the basis on which a follow clause operates, the issue of what duty the Lloyd's syndicates owed to the defendant did not fall to be decided in this case.

2) The settlement agreement contained the following clause (Clause 7): "The settlement and release pursuant to the terms of this Agreement is made by each Underwriter for their respective participations in the Policy only and none of the Underwriters that are party to this Agreement participate in the capacity of a Leading Underwriter under the Policy and do not bind any other insurer providing ... cover in respect of [the vessel]."

Teare J accepted that the insured had, by virtue of Clause 7, agreed that the settlement agreement would not be binding on the defendant (and this conclusion was unaffected by the absence of a reference to the Follow Clause in Clause 7). However, the defendant had not been a party to the settlement agreement. The judge went on to find that it was unable to rely on the Contracts (Rights of Third Parties) Act 1999 because Clause 7 did not purport to confer a benefit on it. It has been previously held that a contract does not confer a benefit on a third party just because the third party's position is incidentally improved by the contract – instead, it must be shown that one of the purposes of the contract was to confer that benefit (see Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans [2009] EWHC 716 (Comm)).

Teare J held that the purpose behind Clause 7 was the protection of the syndicates from any possible liability to the defendant (in light of the current uncertainty as to what duty a lead owes to a following underwriter when entering into a settlement with the insured). The judge said that, even if he was wrong in that conclusion, although the syndicates had acknowledged, by the inclusion of Clause 7, that the settlement was not binding on the defendant, that did not prevent the insured from relying on the Follow Clause against the defendant (which was contained in the policy entered into between the insured and the defendant). Clear words would be needed to show that the insured was giving up the benefit of the Follow Clause.

3) The Follow Clause was not triggered by the settlement agreement. The judge rejected an argument that it was an implied term of the Follow Clause that it would not apply to settlements which have been expressly agreed not to be binding on the defendant: "The lead underwriter is, in my judgment, unable to countermand the effect of the Follow Clause if, as I have held, the effect of such clause is to oblige the following underwriter to follow any settlement made by the lead underwriter, whether or not the lead underwriter purported to act as agent from the following underwriter".

COMMENT: This case confirms that, once a "Follow the Lead" clause has been included in a policy, nothing in a later settlement agreement will prevent a following underwriter being bound by that settlement, even if the lead purports to agree that the following underwriter would not be bound. The following underwriter might attempt to circumvent this position by asking to be joined to the agreement, but it would be arguable that there has been no consideration provided from the following underwriter in return for an agreement that the settlement will not bind him (especially where, as here, the leads were settling only their share of the loss).

A separate problem is that a lead underwriter might potentially leave himself exposed to a claim by the following underwriter for a breach of the duty of care which might be owed by the lead to him when reaching the settlement (although it is unclear at present whether leads do indeed owe such a duty to the following market). Accordingly, the lead might, in such a situation, seek to agree directly with the following underwriter that no breach will occur if the settlement with the insured is concluded.

San Evans Maritime Inc v Aigaion Insurance Co SA [2014] EWHC 163 (Comm)

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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Jon Turnbull
Michelle M. Radom
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