UK: Marine Reinsurance Dispute - Getting The Paperwork Right

Last Updated: 24 August 2009
Article by Patric McGonigal

This article first appeared in Maritime Risk International, June 2009

Allianz Insurance Co Egypt (A company incorporated under the laws of Egypt) v Aigaion Insurance Co SA (A company incorporated under the laws of Greece)1.

A recent judgment of the Court of Appeal in a marine reinsurance dispute between Allianz Insurance Co Egypt ("Allianz", the reinsured) and Aigaion Insurance Co SA ("Aigaion", the reinsurers) raises a timely reminder of the risks posed by incomplete placing slips communicated entirely by e-mail.

The dispute centred around the formation of a contract of reinsurance agreed entirely by e-mail between Allianz's broker's office in Beirut and Aigaion in Greece. Aigaion appealed against a decision of the Commercial Court which found that it was liable to indemnify Allianz in respect of the constructive total loss of one of a fleet of reinsured tugs.

Prior to the negotiations on cover, Aigaion confirmed to Allianz's broker that it was prepared to participate subject to "Warranted vessels IACS classed [International Association of Classification Societies] and class maintained...All other terms per your slip." Negotiations then followed culminating in an e-mail from Aigaion requesting a slip to be forwarded recording the parties' agreement. A slip was sent the same day but without reference either to the IACS warranty or to the fact that it had already been stipulated and agreed between the parties. Aigaion's senior marine underwriter sent an e-mail in response saying: "Cover is bound with effect from 31.03.05 as we had quoted, i.e. 1.33% H&M and 0.4% IV for our 30% line. Our documents to follow."

The issue for the Court to decide was whether Aigaion's final message was an agreement of cover with or without the class warranty, or whether it was a counter-offer on terms which included the warranty, an important distinction which carried different consequences. Therefore, while the question of whether or not the class warranty was incorporated in the cover was an important element in the court's consideration, this was not because there had been any breach of warranty prior to the loss which would have brought the reinsurance contract to an end from the time of the breach, but because it was a key element in Aigaion's case that if the warranty had not formed part of the offer, the parties were not ad idem, i.e. were not contemplating the same terms, and could not therefore have entered into a binding contract.

Aigaion argued that there was no consensus between the parties that what it had accepted was not what had been offered: Allianz had made an offer without the class warranty clause and Aigaion had accepted on terms that depended upon there being such a clause. Accordingly, Aigaion submitted there was no contract.

Judgment

The Court of Appeal disagreed and concluded that it was "impossible to read the IACS warranty into the slip offer...The slip was intended to be the definitive reference point...pending the issue of any policy document." By e-mailing its reply agreeing to the terms set out in the slip, it was as if Aigaion had appended its signature to the slip. Consequently, by confirming that cover was to be "bound" by the terms of the slip, it was impossible that Aigaion could at the same time be considered to have been making a counter-offer. The Court also pointed out that had Aigaion in fact signed the slip in the normal way, it could not then have argued that the slip included the IACS warranty without pleading rectification of the contract. However, while rectification may have been of assistance in circumstances where the issues turned upon a breach of warranty, it was of little assistance in this instance given that Aigaion's case was that there was no contract at all. In short, the Court held that the slip determined all; there was a contract, but not one which included the IACS warranty.

Market practice in Singapore

Frequently in London, insurance is placed by means of a slip contract, which will contain the essential elements of the proposed cover. It is a practice which has developed to allow risks to be placed quickly without the need to issue an immediate formal policy. It has the advantage of speed and is at least better than an exchange of e-mails but is also liable to result in ambiguity and conflict between the slip and the final policy.

A slip is designed to be concise but once scratched (signed-off) or, if electronic, once accepted, the underwriter is contractually bound whether a policy is then issued or not. Indeed, even once a policy is drawn up, if there is an apparent inconsistency in wording between it and the slip, the court may refer to the slip to construe the policy2. Hence, it hardly needs stating but the slip is a crucial document in the placing of insurance and any debate as to the scope of cover.

Thus, there are already substantial opportunities for contract uncertainty even without "e-mail intervention". The Aigaion judgment is, therefore, a timely reminder of the risks posed by incomplete or inaccurate electronic placing slips. Recently, there has been some discussion in Singapore amongst the syndicates concerning the placement of cover within the market by e-mail and the fact that with separate e-mail slips being circulated to the underwriters involved, variations in wordings were occurring on different lines of the same cover.

In this regard, Lloyd's latest Market Bulletin dated 18 March 20093, sets out guidance regarding contract certainty in the placement of business in overseas territories but, in particular, the Singapore market. Based on feedback that Lloyd's received from managing agents at the end of last year, a number of important issues of concern have been identified, mainly where documentation is developed by local brokers, including:

  • wording not confirmed or not complete
  • risk details not completed correctly
  • status of warranties/subjectivities/ conditions not made clear
  • payment terms not clearly defined
  • absence of subscription agreements (risks accepted on coinsurance basis, via e-mail, thereby losing the efficiencies of subscription placements)
  • slip leader not identified
  • no provision for agreement of contract changes
  • responsibility for production and despatch of insurance documentation not defined.

As is self-evident from this partial list, and as is noted by Lloyd's in its March bulletin, these aspects represent "significant risks" for the managing agents and while it is accepted that it is not possible to impose all Market Reform Contract London market procedures across the board, managing agents in Singapore "are encouraged to adopt Lloyd's subscription business processes where risks are co-insured, to assist in the delivery of contract certainty, and for greater process efficiency for all parties".

Conclusion

Conducting any business by e-mail, whether it concerns the placing of insurance or the sale of goods, always demands extra vigilance, especially when such correspondence may be based upon a chain of e-mails and/or varying attachments. As the Aigaion judgment illustrates so effectively, and as Lloyd's has recognised with its latest Market Bulletin, the agreement of terms in this way is binding and will be construed strictly. It is, therefore, essential for brokers to pay particular attention when negotiating terms and conditions with parties based in different countries or in situations where the exchanges are conducted primarily by e-mail. Failing this, the omission of commercially important terms such as the type discussed in Aigaion are most likely to lead to litigation.

Footnotes

1 [2008] EWCA Civ 1455

2 Standard Life Assurance v Oak Dedicated Ltd [2008] EWHC 222

3 Lloyd's Market Bulletin Ref: Y4253

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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