Parties involved in the placement of facultative reinsurance of overseas risks into the London Market will be interested in the outcome of a recent appeal on two levels.
The decision should provide some comfort to reinsurers, since it suggests that reinsurance may not be used as an exception to the rule that English proceedings can only be stayed in rare and compelling circumstances. Reinsurers are therefore likely to be able to push for resolution of issues in the English courts even if overseas litigation on the underlying policy is ongoing.
On the other hand, reinsurers may be surprised by comments on the relationship between reinsured and reinsurer and the apparent unfairness on the local reinsured of an outcome which potentially leaves it in an "invidious position".
In 2008, a passenger cargo ship was lost after sailing into a typhoon in the Philippines. 500 people died, and cargoes were lost. Owners of the cargo made claims in the Philippines against Oriental Insurance Corporation ("Oriental"), the ship-owner's cargo liability insurer. Under a reinsurance contract held with the respondents ("Reinsurers"), the Reinsurers had agreed to indemnify Oriental in respect of the Original Policy.
The reinsurance included a clause to follow all the terms, conditions and settlements of the Original Policy and was also expressed to be subject to the exclusive jurisdiction of the English courts. Furthermore the Original Policy contained a warranty that the ship would not sail when there was a typhoon warning, or when the ship's destination was within the typhoon's path.
Reinsurers sought a declaration in the English courts that they were not liable to indemnify Oriental because the typhoon warranty had been breached, and that, for the same reason, Oriental was also not liable under the Original Policy.
Oriental applied for a stay of the proceedings brought by Reinsurers, pending resolution of the outcome of the claims in the Philippines. The First Instance court dismissed Oriental's application, determining that such a stay should only be granted in rare and compelling circumstances. Oriental appealed.
The court had to answer the following questions.
- Do Reinsurers need to wait for the reinsured to settle its claim before determining their own liability? If so, does this provide an exception to the normal rule that a stay of proceedings should only be granted in rare and compelling circumstances?
- Had the judge given too much weight to the English jurisdiction clause in the reinsurance contract?
- In the Philippine proceedings, Oriental argued that despite typhoon warnings, the ship had set sail on a route which ran into the typhoon's path and therefore in breach of its warranty.
However, should proceedings in England be allowed to continue, Oriental would have to argue precisely the opposite, in that although a typhoon warning had been given the ship's route had been intended to avoid its path. Otherwise, Oriental would be agreeing with Reinsurers that there had been a breach of warranty by the insured, and accordingly Reinsurers would not be liable to indemnify Oriental under the reinsurance contract. By allowing the English proceedings to continue, would this therefore undermine the credibility of Oriental's defence in the Philippines, and place Oriental in an inherently unfair position?
The appeal was rejected because:
- Reinsurance contracts did not constitute any general exception to the normal rule that a stay of proceedings could only be granted in rare and compelling circumstances.
- The presence of an exclusive jurisdiction clause was just one of the relevant factors for a judge to bear in mind, when deciding whether or not certain circumstances justify a stay. The judge had borne this factor in mind, when exercising his discretion.
- The risk of inconsistent decisions in the Philippines and England had been in the judge's mind and his assessment of the risk as modest had been well within his discretion. Although there was the risk of inconsistent decisions, this risk resulted from a choice of jurisdiction which the parties had expressly agreed would govern the reinsurance contract.
The decision should be welcomed by reinsurers, since it suggests reinsureds may not use the existence of reinsurance (even including a follow the settlements clause) as an exception to the rule that a stay of proceedings will only be granted in rare and compelling circumstances.
Be that as it may, the decision does not overwhelmingly favour the position of reinsurers. Whilst strictly obiter, Tomlinson LJ (with Rimer LJ agreeing) expressed a great deal of sympathy for the reinsured, stating that "by pressing ahead with their claim for negative declaratory relief, these giants of the London insurance market have placed their reinsured Philippine minnow in a hopeless and invidious position". In dismissing the appeal, he stated that "a conclusion does not have to be reached with enthusiasm in order to be right." It remains to be seen whether or not such sympathy with reinsureds will be shared by judges in future reinsurance disputes.
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 22/10/2012.