UK: (Re)Insurance Weekly Update 4 - 2015

Last Updated: 9 February 2015
Article by Nigel Brook

Gard Marine & Energy Ltd v China National Chartering

Court of Appeal confirms insurer's right of subrogation depends on underlying contract between the parties

The first instance decision in this case was reported in Weekly Update 32/13. The owners of a vessel had entered into a demise charter which provided that joint insurance would be taken out for the benefit of the owners and the demise charterers (with the premium being paid by the demise charterers). When the vessel became a total loss, the insurers paid and sought to bring an assigned claim against a third party to whom the vessel had been time-chartered by the demise charterers (based on the breach of a safe port warranty). That third party argued that the demise charterers had had no liability to the owners and so had no claim to pass on to it (and hence there was no claim for the insurers to be assigned to either). At first instance that argument was rejected by the judge and the third party appealed. The Court of Appeal has now held as follows:

(1) There had been no breach of the safe port warranty. The appeal therefore succeeded on that point.

(2) Although not required to do so, the Court of Appeal nevertheless went on to consider the subrogation argument because it raised "an important issue of principle". Clause 12 of the charterparty between the owners and the demise charterers provided that the demise charterer would pay for the hull insurance, which would be taken out in their joint names. The question then arose whether: "If a loss occurs as a result of a breach of contract or negligent conduct on the part of the party who pays the premium, can the insurer use the name of the "innocent" party to sue the "guilty" party once the insurer has paid for the loss?" The Court of Appeal answered this as follows: "Since insurance is usually intended to cover an insured for any breach of contract or duty on his part, it is generally thought that the answer to this question must be "No"; otherwise the party paying the premium has not secured the insurance cover he was entitled to expect". The Court of Appeal said that clear words to exclude that result were not required, so long as it was evident that the insurance was intended to be for the joint benefit of the parties.

The Court of Appeal also confirmed that it is vital to construe terms of the underlying contract between the parties (the terms of the insurance policy had not even been disclosed here), and that clear words were not required to exempt liability for negligence. If a contract requires a party to that contract to insure the parties, the prima facie position will be that the parties intended to look to insurers to indemnify them, rather than to each other.

Clause 13 of the charterparty had provided that the owners would pay for the insurance and expressly provided that insurers would have no rights of subrogation against the demise charterer, but that clause had been deleted by the parties. However, the Court of Appeal held that that did not mean that the fact that there was no such express waiver of the right of subrogation in Clause 12 meant that it must be possible for insurers to subrogate against the demise charterers.

COMMENT: This (obiter) Court of Appeal decision on subrogation in a co-insurance context once again focuses the inquiry on the underlying contract between the co-insureds and who they intended should indemnify any loss. In Tyco Fire v Rolls Royce (see Weekly Update 14/08) Rix LJ (again, obiter) did envisage that a co-insured might still be liable to another for negligence, despite the existence of joint names insurance (in the absence of express wording to the contrary). However, in this decision, the Court of Appeal held that "the prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other". Further support for that prima facie position will arise if the insurance is in joint names for the parties' joint interest or where, as in the case of another recent Court of Appeal decision, Rathbone Brothers v Novae Corporate (see Weekly Update 43/14), the underlying contract consisted of an employer's indemnity to an employee. One further issue appears to influence the courts too: did the co-insured against whom subrogation is sought cause the loss in question, or was it in some way "blameworthy? If so, the courts appear to be more likely to allow a subrogated claim to proceed. Here, for example, the claim had not been for negligence but was "concerned only with the (contractual) safe port obligation in the demise charter" and it had not been the demise charterers' actions which had allegedly caused the breach of that obligation.

Western Trading v Great Lakes Reinsurance

Court considers reinstatement issues following fire at insured premises

This fire insurance claim was resisted by the defendant insurer on the grounds of lack of insurable interest and misrepresentation/non-disclosure. Both defences failed on the facts. The claimant sought a declaration that it is entitled to be indemnified for the cost of reinstatement. The property had been destroyed by the fire but no reinstatement had yet taken place and the insurer alleged that the insured showed no signs of planning to reinstate.

Insurance policies often grant an insurer the option of either paying the insured the value of lost property or reinstating the property. However, the policy in this case gave the insured the right to be indemnified for the costs of reinstatement. The policy also expressly provided that no payment would be made "until the cost of reinstatement shall have been actually incurred" and there was also a requirement that reinstatement be carried out "with reasonable despatch otherwise no payment".

However, Mackie QC HHJ agreed with the insured that where, as here, the insurer has wrongly denied liability and repudiated the policy, it cannot rely on the proviso that the costs of reinstatement will only be paid once they have been incurred, and there cannot have been an absence of "reasonable despatch". The judge, citing with approval an extract from MacGillivray on Insurance Law, held that a requirement to carry out reinstatement cannot arise until the insurer has confirmed that it will indemnify. Furthermore, that applies not just to insureds who cannot afford to pay for the reinstatement, but also to successful businesses: "Even a profitable business will reasonably defer a decision whether or not to reinstate until it knows whether the funding will come from insurers or will have to be diverted from elsewhere to the detriment of some other business activity".

The judge also rejected the insurer's argument that, since the policy had been avoided, the remedy for the insured was damages rather than a declaration. He noted that it is very common to grant declarations in an insurance case. Here, the claimant had an express right to be indemnified for reinstating the property and a declaration to that effect was appropriate here. Any dispute about what is, or is not, reinstatement could be resolved once it is known what form any reinstatement project will take.

Although not required to decide the point, the judge also held that, had he not granted a declaration, the claimant would have been entitled to recover as damages the cost of reinstatement. The value of the site before and after the fire was irrelevant (unless the claimant decides not to reinstate on this basis). Although the insurer would not have to pay if there is to be no reinstatement, the judge accepted the claimant's evidence that he did wish to reinstate.

COMMENT: The approach of the court adopted in this case can be contrasted with that adopted in the recent decision of Ted Baker v Axa (see Weekly Update 41/14), where the judge appeared to implicitly accept that the insured was still bound to comply with a claims provision even though insurers had rejected the claim. Here, the insurer could not insist on compliance with the reinstatement clause where it had wrongfully rejected a claim.

Monde Petroleum v Westernzagros

Whether the parties should arbitrate or litigate their dispute

The parties entered into a contract which provided for any dispute to be settled by London arbitration. Following a dispute, they entered into a settlement agreement which conferred exclusive jurisdiction on the English courts. The claimant commenced both court and arbitral proceedings and when the arbitrators found that they did not have jurisdiction to hear the case (involving the issue of whether the settlement agreement had been induced by misrepresentation), the defendant applied to court pursuant to section 67 of the Arbitration Act 1996 to challenge that ruling.

Popplewell J recognised the presumption (laid down by the House of Lords in Fiona Trust v Privalov (see Weekly Update 40/07)), that rational businessmen normally intend all questions arising out of their legal relationship to be determined in the same forum. He held that, although that presumption may have particular potency where a settlement agreement is reached: "Where the settlement/ termination agreement contains a dispute resolution provision which is different from, and incompatible with, a dispute resolution clause in the earlier agreement, the parties are likely to have intended that it is the settlement/ termination agreement clause which is to govern all aspects of outstanding disputes, and to supersede the clause in the earlier agreement".

Although that is the parties' likely intention, the language of the clause and other surrounding circumstances should be considered by the court. In this case, he concluded that the parties had intended the English courts to hear the case.

The judge also ordered security for costs to be provided by the claimant. The claimant's solicitors had offered to provide an undertaking, supported by a personal guarantee by the senior partner. It was held that that form of security was not as good as security by payment into court or provision of a first class London bank guarantee (the conventional forms of security), and so was not suitable. The evidence about the solicitors' (and partner's) financial position had been unsatisfactory.

PCL v The Y Regional Government of X

Service of an arbitration claim form and the State Immunity Act

An arbitration tribunal ordered the defendant (the government of a federal region with sovereign powers) to pay the claimant USD 100 million. When the defendant did not comply, the claimant applied to court pursuant to section 42 of the Arbitration Act 1996 to enforce the order. The claimant was given permission to serve the arbitration claim form on the defendant's solicitors. The defendant applied to set aside that order on the basis that service should be carried out in accordance with the State Immunity Act 1978 ("SIA") instead. This provides that any writ or other document "instituting proceedings" must be served through the Foreign and Commonwealth Office.

Hamblen J held that the arbitration claim form did "institute proceedings": "Although the proceedings thereby instituted may be ancillary to existing arbitration proceedings they are nevertheless distinct proceedings brought in Court for the purpose of invoking the powers of and obtaining an order from the Court. The arbitration claim form is the document which institutes those proceedings".

Section 12(6) of the SIA provides that the claim form can be served in any other manner to which the State has agreed. Here, the defendant's solicitors had confirmed they were instructed to represent the defendant "in this arbitration" and that communications should be sent to them. The judge held that this authorisation covered only the arbitration and did not extend to service of documents relating to court proceedings connected with the arbitration. Section 12(3) of the SIA provides that a state "which appears in proceedings" cannot thereafter object that the service requirements of the SIA were not complied with. Hamblen J noted that defendants now enter an appearance by filing an acknowledgment of service. Although an acknowledgment of service was filed here, the defendant had also applied to dispute the court's jurisdiction and hence it could still insist on service in accordance with the SIA.

Accordingly, the order was set aside.

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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Nigel Brook
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