UK: Whether A Non-Reinsured Can Get A Declaration Of Liability Against A Reinsurer/Whether Reinsurer Had Acted In "Businesslike Manner"

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

T&N, an English company which was a major producer and distributor of asbestos in the 20th century, entered into a liability policy with its captive insurer. The liability policy provided that "the Policyholder [ie T&N] shall have full, exclusive and absolute authority, discretion and control, which shall be exercised in a businesslike manner in the spirit of good faith and fair dealing". On an "Insolvency Event" (which did subsequently take place) this authority, discretion and control, and the requirement to act in a businesslike etc manner, passed to the insurer. The insurer then transferred all its rights and powers under the liability policy to its reinsurers under a reinsurance contract.

The claimant was a trust (set up when T&N started Chapter 11 proceedings in the US) which assumed liability for all asbestos personal injury claims against T&N and which was, in effect, authorised to bring claims against the captive insurer on behalf of a very large number of personal injury claimants in the US. The trust established a mechanism for valuing these asbestos claims and argued that the value which it gave to the claims was considerably lower than a likely settlement or award should litigation be brought in the US tort system. It sought various declarations against the reinsurers to the effect that if the reinsurers used a different method to handle claims, that would cause the reinsured to breach its duty to T&N to act in a businesslike manner. Eder J held as follows:

1) Although the law on granting declaratory relief has "moved on" in the last 20 years, and this relief is discretionary (so not subject to rigid rules), it is not appropriate (save in exceptional circumstances) to grant this relief to a third party where the parties to the relevant contract (here, the reinsurance contract) are not themselves in dispute. To hold otherwise would be to open up potentially "remarkable consequences" which would allow third parties to intervene in the contractual relations of others by way of declaration. Nor did the terms of a power of attorney granted by T&N to the trust make any difference.

2) The judge held that, even if he was wrong on that point, he would not have granted relief in this case anyway. The terms of the reinsurance contract required the reinsurers to exercise "authority, discretion and control" in a businesslike manner and in good faith. Eder J agreed that this was only a "very loose constraint", excluding only courses of conduct which no similar reinsurer could take. The concept of good faith and fair dealing required reinsurers only to act "honestly and conscionably vis-a-vis the other parties to the contracts" (see Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB)). However, it could not be said that the court cannot intervene at all in the exercise of the reinsurers' contractual rights.

Here, the judge concluded that the reinsurers were not acting in an unbusinesslike manner by requiring the trust to pursue any claims in the US tort system: "there is no monopoly of what may be 'business-like'". The court could not at this stage know how many claims might eventually be brought in the US if the reinsurers' approach was followed and whether the reinsurers' strategy would end up costing more in the long run. If it could be shown that it would "inevitably" cost more, the judge conceded that there might be an argument that the reinsurers were being "unbusinesslike", but that was not the case here. Furthermore, if the reinsurers' decision to contest claims was ultimately shown to have unreasonably increased claims handling and defence costs, such costs would have to borne by the reinsurers themselves.

3) A further issue in the case concerned the definition of "payment in fact" (the liability policy being a "pay to be paid" policy). Here, certain payments made by T&N to the Trust were set-off against a debt owed to T&N by the Trust and, separately, a "pre-payment" was made by the Trust to T&N pursuant to this debt, in order to enable T&N to satisfy its liability to third party claimants. Eder J held tha,t in both situations, there had been a payment of fact by T&N and, furthermore, these payments were "in cash" rather than "in kind": "I would only say that the reference to a payment "as cash" cannot be taken literally as meaning only payment in money bills or other legal tender: cf The Chikuma (1981) 1 Lloyd's Rep 371, 375-376 in the context of similar words in the shipping context". The set-off and pre-payment achieved the result of payment and counter-payment, as if physical transfers had taken place.

COMMENT: There has been little English caselaw to date on the duties of a reinsurer under a Claims Control Clause. However, in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047 the Court of Appeal held that there was no implied term that reinsurers' approval of a settlement should not be withheld unreasonably. The only limitation to be implied into the clause was that the right to withhold approval should be exercised in good faith, after consideration of the facts giving rise to the particular claim (and not by reference to extraneous matters) and should not be exercised arbitrarily.

Should a clause contain an express obligation to act in businesslike manner, though, this case will be a useful indication of what constraints that requirement will place on a reinsurer. This case supports the argument that a party is acting in a businesslike fashion even if its decisions may end up increasing costs in the long run (provided, possibly, that that is not an inevitable outcome of the reinsurers' strategy) and "best practice" has not been followed. Furthermore, if the reinsurance contract provides that the reinsurer should have "regard to" the interests of the reinsured (or anyone else), he can choose to attach no weight at all to those interests, provided he is not thereby acting irrationally.

Federal-Mogul Asbestos Personal Injury Trust v Federal-Mogul Ltd (formerly T&N Plc) [2014] EWHC 2002 (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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