UK: Reinsurance: Strict Interpretation Of Claims Co-operation Clause

Last Updated: 26 June 2008
Article by Eve O'Brien and Andrew Symons

In a recent case the Commercial Court has reaffirmed the importance that should be placed on claims co-operation clauses in insurance/reinsurance policies. Christopher Clarke J adopted a literal interpretation of the claims settlement provision by finding in favour of reinsurers where the reinsured had let commercial considerations override its coverage interests by failing to comply with the terms of the clause.

There are a number of important lessons to be derived from the decision (although these must be viewed in the context of the specific claims settlement clause in issue):

  1. A reinsured should not act on a unilateral basis in investigating the nature and/or extent of a claim.
  2. A reinsured should seek the prior written approval for any action and/or decision it wants to take.
  3. A reinsured should not act against/to the detriment of reinsurers.
  4. Investigations into a claim can take many years to reach a firm conclusion and the time in which an insured can bring the claim will continue to run throughout the course of the investigations.
  5. The parties should make it a priority to understand potential time bar issues from the outset of the notification of a claim to avoid a claim being wholly rejected on this basis.
  6. A reinsurer is entitled to assert a claim for breach of a condition precedent and to continue to assist in the commercial resolution of the settlement and adjustment of a claim.
  7. A reinsured cannot rely on the co-operation of reinsurers in the investigation of a claim as constituting the waiver of any defence to liability that reinsurers may have.

Last, but certainly not least, it is important not to let commercial pressures override fundamental contractual obligations. The decision in Lexington v Multinacional illustrates that losing sight of what is important when dealing with a claim could leave a reinsured without any cover.

Further reading: Lexington Insurance Co v Multinacional De Seguros SA [2008] EWHC 1170 (Comm)

To view the article in full, please see below:




Full Article

The recent decision in Lexington v Multinacional, on a preliminary issues hearing, reaffirms the importance that should be placed on claims co-operation clauses in insurance/reinsurance policies. The Commercial Court adopted a literal interpretation of the claims settlement provision by finding in favour of reinsurers where the reinsured had let commercial considerations override its coverage interests by failing to comply with the terms of the clause.

Background

Multinacional, one of Venezuala's largest insurers, fronted a property and business interruption insurance for reinsurers. The underlying insureds were companies in the Corporacion Venezolana De Guyana Group. CVG had a long standing relationship with Multinacional.

The reinsurance contracts incorporated the following claims settlement clause:

"Notwithstanding anything contained in the reinsurance agreement and/or the policy wording to the contrary, it is a condition precedent to any liability under this policy that:

(a) Upon the reinsured being advised of any circumstances which may give rise to a claim against this policy, the reinsured will advise reinsurers of such notification as soon as is reasonably practicable;

(b) The reinsured shall furnish the reinsurers with all information in respect of such circumstances and shall co-operate with the reinsurers in the adjustment and settlement of the claim."


A claim was made by CVG in April 1998 following a malfunction at one of its facilities. Adjusters and technical experts were appointed to assess the claim. The reports of the adjusters were fairly inconsistent, apparently as a result of a lack of information provided by CVG. A sixth adjuster's report concluded that CVG had failed to mitigate the claim and that a nil loss reserve should be posted. Multinacional disagreed (but without providing reasons) and sought to appoint a further adjuster, indicating to reinsurers that it had instructed another expert.

Reinsurers objected to the independent stance Multinacional was adopting without prior consultation. In January 2000, almost two years following notification of the loss, reinsurers advised Multinacional that, as a result of its failure to co-operate in accordance with the claims settlement clause, reinsurers were entitled to be discharged from all liability as a result of the breach of the condition precedent that it would co-operate. At the same time, reinsurers opened without prejudice negotiations with Multinacional to try to bring about the satisfactory settlement of the claim.

Reinsurers issued proceedings in London for a declaration of non-liability in April 2000, although without prejudice discussions continued between the parties.

In Venezuala Multinacional unilaterally applied to the Superintendencia de Seguros for an order that the final adjuster's report be issued.
As a result of the protracted adjustment discussions, CVG's claim against Multinaconal became time-barred in April 2001. Reinsurers thereafter halted discussions with Multinacional in order to investigate the time bar point.

Without consultation with reinsurers, Multinacional once again went to the Superintendencia to seek a decision as to whether the claim was time barred. It was clear that Multinacional did not want to accept the time bar point and directed the Superintendencia accordingly. In addition, Multinacional proceeded to meet with CVG following which it issued a further application to the Superintendencia to 'confirm that time had not elapsed'. It was increasingly apparent that Multinacional's interests were in settling the claim to the benefit of its long-standing business partner, CVG, and not acting in accordance with the co-operation provisions in the reinsurance policy.

A meeting then took place between Multinacional and reinsurers in which a strategy was agreed for Multinacional to invoke the time bar against CVG, as well as rejecting the claim on coverage grounds (at this stage, reinsurers were not aware that Multinacional had approached the Superintendencia or met with CVG). Multinacional's lawyers made it clear following this meeting that it did not agree with the time bar point but reinsurers requested a formal action plan to implement the strategy agreed at the meeting. Against this background, reinsurers agreed to stay the London proceedings on the proviso that the time bar issue between CVG and reinsurers would be resolved to reinsurers' satisfaction.

Contrary to the action plan, Multinacional held discussions with CVG (on a unilateral basis) to discuss the progression of the claim. Indeed a letter was drafted from Multinacional to CVG by which CVG was given the clear impression that Multinacional had: (a) achieved the non-prescription of the claim initiated by reinsurers regarding breach of the condition precedent and possibly, (b) a positive ruling by the Superintendencia. It was unclear from the words used, but CVG believed that not only had it acted in the interests of CVG in achieving the above, but that Multinacional had also "rejected" reinsurers request to claim time bar against CVG on the grounds that it was "legally incorrect" and applied "all the legal resources, sparing no expense, both in Venezuela...and in London in order to reverse this state of affairs and ensure the continuation of the adjustment and the suspension of the proceedings, which to date has been achieved." This was untrue.

Decision

In light of the above, the court accepted that the correspondence between Multinacional and CVG had: (a) waived the time bar defence available against CVG; (b) encouraged CVG to continue to pursue its claim; and (c) completely undermined the strategy agreed between Multinacional and reinsurers. Christopher Clarke J concluded that such events released reinsurers from any liability to indemnify Multinacional in respect of the underlying claim.

The judge rejected Multinacional's argument that reinsurers had waived any breach of the claims settlement clause by continuing to co-operate in the settlement and adjustment of the claim. The judge made some interesting remarks about election of a defence to a claim on the grounds of a breach of a condition precedent.

The judge held that reinsurers were entitled to continue to co-operate on a without prejudice basis following the initiation of a claim on the basis that it was reasonable commercial practice to do so. As he aptly stated "if the reinsured is, as a matter of construction, to be released from any further obligation to co-operate on account of reinsurers' initial denial of liability certain odd and undesirable consequences would follow". The judge adopted reasonable commercial logic in the construction of his response. Principally, he stated that both parties must be encouraged to resolve claims, notwithstanding any investigations and/or issues in respect of liability. Indeed in the present case both parties did continue to co-operate together. Secondly, Christopher Clarke J stated that by repeating the 'without prejudice' nature of discussions, reinsurers did not make their co-operation extra contractual. The process of settlement and adjustment of a claim involves considering and determining whether and, if so, to what extent it is well founded. In the present case, the parties were considering whether or not there was an effective time bar applicable to the claim of the original insured. If there was, reinsurers would be under no further obligation to indemnify the reinsured, as the expiry of time would extinguish the underlying right.

The judge also considered the doctrine of waiver by election The judge reviewed the recent Court of Appeal decision in Kosmar v Trustees of Syndicate 1243 (to read our law now on the Court of Appeal decision click here). The judge concluded that the decision in Kosmar did not assist Multinacional as reinsurers were not presented with a choice between two mutually inconsistent rights at the time of initiating the claim. The judge opined that if reinsurers were right to contend that Multinacional was in breach of a condition precedent then they were automatically discharged from liability. If they were wrong then they were not.

The judge also considered the relevance of the fact that Kosmar was an application on the grounds of waiver of a past breach of a condition precedent, whereas in the present case, reinsurers were said to have waived future performance. The judge concluded it had no relevance. In brief, he stated that the assertion by reinsurers that it had a defence to liability arising from the breach of the condition precedent was an unproved assertion and not a choice between inconsistent remedies. Most importantly, it was not an irrevocable decision. Reinsurers were entitled to change the nature of their defence, abandon it or indeed rely on another one (or none at all). The reinsurer had made a 'choice' but it was not an irrevocable contractual election.

Comment

There are a number of important lessons that can be derived from the Lexington v Multinacional decision :

  1. A reinsured should not act on a unilateral basis in investigating the nature and/or extent of a claim.

  2. A reinsured should seek prior written approval for any action and/or decision it wants to take.

  3. A reinsured should not act against/to the detriment of reinsurers.

  4. Investigations into a claim can take many years to reach a firm conclusion and the time in which an insured can bring the claim will continue to run throughout the course of the investigations.

  5. The parties should make it a priority to understand potential time bar issues from the outset of the notification of a claim to avoid a claim being wholly rejected on this basis.

  6. A reinsurer is entitled to assert a claim for breach of a condition precedent and to continue to assist in the commercial resolution of the settlement and adjustment of a claim.

  7. A reinsured cannot rely on the co-operation of reinsurers in the investigation of a claim as constituting the waiver of any defence to liability that reinsurers may have.


Last, but certainly not least, it is important not to let commercial pressures override fundamental contractual obligations. The decision in Lexington v Multinacional illustrates that losing sight of what is important when dealing with a claim could leave a reinsured without any cover.

Further reading: Lexington Insurance Co v Multinacional De Seguros SA [2008] EWHC 1170 (Comm)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 19/06/2008.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.