UK: Insurance/Reinsurance Bulletin - August, 2009

WHEN "BACK TO BACK" POLICIES DIVERGE

Article by Edward Rushton

Lexington Insurance Company v AGF Insurance Limited And Wasa International Insurance Company Limited [2009] UKHL 40 (On Appeal From [2008] EWCA Civ 150)

On 30 July 2009 the House of Lords unanimously allowed the appeals of Wasa and AGF in the above matter, overturning the decision of the Court of Appeal.

This result has important practical implications for reinsurers and reassureds with interests in policies that are intended to be "back to back", but which are subject to the laws of differing jurisdictions. The decision also goes to fundamental questions regarding the nature of a contract of reinsurance – it affirms the view that the subject of a proportional reinsurance policy is equivalent to insured interest covered by the underlying policy. This may be contrasted with Sedley LJ's indication in the Court of Appeal that (proportional) reinsurance contracts insure the reassured's liability pursuant to the underlying policy.

The Background

The claim at the heart of the matter was in respect of environmental damage caused at 58 sites, during the 44-year period 1942-1986, by waste products generated and disposed of by Aluminum Company of America Limited (Alcoa), and its subsidiary Northwest Alloys, Inc. (NWA).

Alcoa and NWA were insured by Lexington under an American "all risks difference in conditions" property damage policy. The policy period was from 1 July 1977 to 1 July 1980. The policy contained a US Service of Suit clause which provided that, at the request of the assured, Lexington would submit to the jurisdiction of any Court of Competent Jurisdiction within the United States. Wasa and AGF reinsured Lexington, on substantially the same terms as the original (including the policy period), save that the reinsurance was governed by English law.

Pursuant to a decision of the Supreme Court of Washington (applying Pennsylvanian law), Lexington faced liability for pollution occurring at particular sites, irrespective of when the damage began, provided that part of the contamination occured during the insurance period. Lexington settled its liability to Alcoa and NWA for the sum of US$103 million. Lexington sought an indemnity from its reinsurers who denied liability on the basis that the damage did not occur within the policy period of the reinsurance.

The English court at first instance found in favour of reinsurers. However, its decision was reversed by the Court of Appeal. Its reasoning emphasised the presumption that when a proportional reinsurance policy is placed specifically to cover a particular direct policy, and has been expressed in substantially identical terms, English law should treat the policies as being "back to back" and their language as having the same meaning, notwithstanding differences of governing law (see Vesta v Butcher and Groupama v Catatumbo). An important part of the rationale behind this presumption is that the contracting parties were in a position to ascertain the legal effect of the policy language at the time when the contract was entered into. Longmore LJ in the Court of Appeal considered that this requirement was met in the present case.

The Essential Issue

The essential issue before the House of Lords was whether the loss arising from Lexington's settlement with Alcoa fell within the terms of the indemnity provided by the reinsurance slip. As Lord Mance stated in his judgment, "the issue is one of construction of the particular reinsurance contract against its relevant background and surrounding circumstances".

The Lords did not dilute the force of the presumption that the reinsurance was intended to be "back to back" with the underlying cover. However, they were unanimous in their view that the facts of the present case were different in one crucial respect to those in Vesta and Groupama. Per Lord Mance, "The reinsurance has a clear English law meaning. There was here no identifiable legal dictionary (formal or informal), still less a Pennsylvanian legal dictionary... which could lead to any different interpretation of the reinsurance wording." The House therefore ruled that the policy period was to be construed in accordance with English law.

It was to Lord Mance "clear beyond argument, upon its wording" that, construed according to English law, the only property damage covered by the reinsurance was that which occurred during the three year reinsurance period. On this basis reinsurers' appeal was allowed.

Consequences For Reinsurers And Reassureds

This decision shows that whilst the presumption remains strong that proportional reinsurance contracts are intended to be "back to back" with the underlying policy, it is not so strong as to override the English law rule of construction that the words of a contract should be construed in accordance with their natural meaning. In his submissions before the House, counsel for Lexington, J.Sumption QC, asked what more Lexington could have done to reinsure themselves on a fully back to back basis. Lord Mance suggested an answer, which is to ensure that the insurance and reinsurance are subject to one and the same identifiable or predictable governing law. Failing that, he suggested that steps could be taken at least to make sure the direct insurance is subject to an identifiable governing law.

"NON-EXCLUSIVE" IN THIS CASE, MEANS NOT EXCLUSIVE

Article by Ada Waddington

The Court of Appeal in Highland v Deutsche Bank [2009] EWCA Civ 725 ruled that a non-exclusive jurisdiction clause envisages the possibility of alternative jurisdiction. It allowed the appeal of the Highland companies (based in Bermuda and Dallas), against the Commercial Court's decision to grant Deutsche Bank (based in Frankfurt and New York) an anti-suit injunction against Highland's action in Texas.

Whilst acknowledging that parallel proceedings are generally undesirable, the Court said they are not necessarily vexatious or oppressive. It said the starting point in considering whether to grant an anti-suit injunction is the wording. The clause reads:

The parties were considered to have accepted under this clause the possibility of parallel proceedings. The Court said it is incorrect to presume that foreign proceedings were vexatious because of the mere presence of a non-exclusive jurisdiction clause, and that the party who brought the foreign proceedings has the burden to justify them. The parties are international financial institutions which entered into a standard form contract governed by English law, but the dispute itself had little connection with England. The parties chose not to make jurisdiction exclusive, the Court said it should not therefore attempt to bar alternative jurisdiction, unless the interests of justice require otherwise. As there are no exceptional circumstances, the anti-suit injunction was set aside.

The Court commented that there is an element of flexibility in these matters and it is conceivable that a non-exclusive clause may have been drafted to have the effect of barring parallel proceedings. However, to avoid such costly disputes, it is prudent to make jurisdiction exclusive at the outset!

FSA FINES

Article by Kapil Dhir and
Andrew Carpenter

In its 2009/2010 business plan, the FSA states that visible action against market abuse and failure of compliance and risk management strategies is "an important part of credible deterrence". It is clear that they mean to follow up on this: on 2 July 2009, the FSA published the Final Notice it had issued to Richard Holmes, a director of AIF Limited (AIF), fining him £20,020 for appointed representative (AR) failings. Mr Holmes was found to have breached Principle 6 (due skill, care and diligence in managing the business) and Principle 7 (compliance with relevant regulatory requirements) of the FSA's Statements of Principle for Approved Persons.

The Final Notice identified Mr Holmes' shortcomings, which included:

• Appointing an AR without carrying out the necessary checks.
• Accepting the AR's assurances that insurance premiums had been brought up-to-date following complaints by an insurance underwriter, without increasing his monitoring of the AR or investigating how the AR was carrying on business.

By way of mitigation, the FSA took into account the fact that Mr Holmes took remedial action once he became aware that the AR's actions had left some of AIF's clients uninsured, that he did not deliberately set out to contravene the requirements, and that he cooperated with the FSA's investigations.

The FSA is clearly determined to protect any potential loss to consumers by taking action not just against firms but against senior management who fail to provide adequate oversight of their business and this includes correctly monitoring ARs.

"LIABILITY TO PAY" IS NOT AN OCCURRENCE – AND IS AN "EFFICACY" EXCLUSION ALWAYS EFFECTIVE?

Article by Richard Jowett, Celina Fang and Brendan McCashin

In the recent judgment of Selected Seeds Pty Ltd v QBEMM Pty Ltd and Anor [2009] QSC 70 Justice McMurdo of the Supreme Court of Queensland considered a claim by a grain and seed merchant against its insurers which arose from the supply of the wrong type of seed by the insured. The insured was ultimately joined by the buyer of the seed to proceedings brought by the claimants who planted seed derived from the seed supplied by the insured.

The insuring clause provided that the insurer would pay all sums which the insured became legally liable to pay by way of compensation, in respect of property damage happening during the period of insurance and caused by an occurrence in connection with the insured's business.

Occurrence

The policy defined occurrence as an event which results in property damage, neither expected nor intended, from the insured's standpoint.

Justice McMurdo accepted the insurers' argument that the insured's supply of seed was too remote from the damage to the claimants' property for the supply to be an occurrence; holding that the casual connection between the occurrence and the property damage is not necessarily supplied by the simple application of a "but for" test. It was significant that a number of events had taken place between the supply of the seed by the insured and the property damage: the seed supplied by the insured had been planted, resulting in another crop of grass seed which had in turn been planted to produce another crop which produced the seed which caused the property damage.

Justice McMurdo accepted, however, that the planting of seed by the claimants constituted an occurrence. He held that the relevant event was the action of planting the seed and the consequence of that action was that the land came to be in a damaged condition. Therefore, property damage (happening during the period of insurance) was caused by an occurrence and the insuring clause was triggered.

An argument by the insurers that it was the liability to pay compensation, rather than simply the damage to the land, which must have been caused by the occurrence was rejected by Justice McMurdo who identified "nothing within the definition of 'Occurrence' or within the policy as a whole, which suggested that the word 'Occurrence' refers to an act of the insured which rendered it legally liable to pay compensation."

Efficacy Clause Exclusion

The policy also contained an exclusion headed "Efficacy Clause" which provided that the policy did not cover liability arising from the failure of any product to correctly fulfil its intended use or function.

The insurers argued that the exclusion was engaged because liability arose from the failure of the seed to correctly fulfil its intended use or function, which was to produce Jarra grass and seed. Justice McMurdo accepted that this was the intended use but held that the insured's liability arose not from what the product failed to do (grow Jarra grass) but what it did do to the claimants' property. He held that the clause did not exclude liability for the claimants' losses from the detrimental impact upon their land.

Comment

This case can be seen as turning on its own facts, in particular the wording of the policy in question, but it highlights that a causal link between an event or alleged occurrence and insured damage will not necessarily be established by an application of a "but for" test and that occurrences are not restricted to acts of the insured which cause it to be liable to pay compensation. This case also highlights that clauses which purport to exclude liability for products which fail to fulfil their intended use or function may not provide the level of protection which an insurer might expect. Careful consideration of the types of risk the insurer intends to exclude should be undertaken by insurers and brokers when drafting such clauses.

ARBITRATION CLAUSE - LOCATION, LOCATION, LOCATION

Article by Saman Salimi

Midgulf International Ltd v Groupe Chimique Tunisien [2009] EWHC 1684 (Comm)

The claimant was a sulphur trader and the defendant a company owned by the state of Tunisia. In June 2008, the parties entered a contract for the sale and purchase of sulphur. They entered a second contract in July 2008. The first contract had a London arbitration clause but this clause's existence in the second contract was disputed. The disputes arising under the first contract were to be referred to London arbitration. The claimant wished to do the same regarding the disputes under the second contract. The defendant wanted this to be decided by Tunisian courts. The claimant made a court application to appoint an arbitrator regarding the second contract under section 18 of the Arbitration Act 1996. The defendant issued proceedings in Tunisia and sought a declaration that there was no arbitration agreement between the parties and made a court application in England challenging the court's jurisdiction to appoint an arbitrator. The claimant applied for an interim anti-suit injunction claiming that the second contract was contained in or evidenced by an email from the claimant to the defendant of 2 July 2008 and an email from the defendant to the claimant of 7 July 2008. The claimant also relied on the content of a telephone conversation on 4 July.

The English court granted the injunction and ordered a speedy trial of the issue as to the terms on which the second contract was agreed and to continue the anti-suit injunction until that issue was determined.

On hearing the evidence Teare J held that the defendant's fax dated 7 July did refer to the claimant's "offer by fax" dated 2 July. The defendant responded to the claimant within the offer's duration and did not request an extension of time. The formal response from the defendant was within the fax and its language was of a concluded deal not inviting further discussion as to terms. On the facts, the fax of 7 July could reasonably be understood to be an acceptance of the offer made on 2 July. The fax itself contained information regarding the purchase which confirmed the purchase "at the following conditions", which reproduced only half of the terms contained within the offer of 2 July. Therefore, the omission of those other terms suggested that the defendant did not intend to contract on the terms of the 2 July offer. The 7 July fax did not specifically state that the terms offered by the claimant were accepted either. The fax was hence a counter-offer accepted by the claimant's e-mail on 9 July. The terms of the 7 July counter-offer were the ones on which the defendant intended to purchase, as opposed to merely listing the most important terms of the 2 July offer. Teare J held that these terms did not contain a London arbitration clause and the application to appoint an arbitrator and continue the anti-suit injunction was dismissed.

Comment

The case highlights the importance of scrutinising the terms on which the parties enter into a contract, make an offer and acceptance and their conduct in doing so. In case of ambiguities, it pays to err on the side of caution and seek to clarify and agree material terms such as arbitration clauses with precision. Whilst the court in this case adopted a technical approach in construing the incorporation of the terms and the inception of the contract, the decision promotes certainty and provides some guidance for companies in negotiating and protecting their interests.

CONTRACT TERMS - DO YOU MEAN WHAT YOU SAY?

Article by Geoffrey Conlin

Chartbrook v Persimmon [2009] UKHL 38

Chartbrook v Persimmon provided an opportunity for the House of Lords to consider the rules applicable to contractual construction where contract drafting has gone wrong. The case concerned the interpretation of a contract term - not the meaning of the words but their syntactical arrangement - in the context of a development agreement. The House of Lords found in favour of Persimmon (5-0) reversing the rulings of Mr Justice Briggs and a majority of the Court of Appeal.

According to ICS Ltd v West Bromwich Building Society, when the language used gives rise to difficulties of construction, the process of interpretation is to decide what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood the parties to mean by using the language which they did. Although the Court will not easily accept that people have made linguistic mistakes, particularly in formal documents, in exceptional cases where it is clear that something has gone wrong with the language, the law does not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.

Their Lordships found in favour of Persimmon adopting, subject to two qualifications, the statement of Mr Justice Brightman in East v Pantiles (Plant Hire) Ltd which states the conditions for the "correction of mistakes by construction":

As to the qualifications, firstly the "correction of mistakes by construction" is not a separate branch of the law, but is a summary version of an action for rectification. Secondly, in deciding whether there is a clear mistake, the Court is not confined to reading the document without regard to its background or context. This conclusion was enough to dispose of the appeal. However, their Lordships were also invited to consider two further arguments advanced by Persimmon.

First, their Lordships were invited to depart from a long and consistent line of authority (see Prenn v Simmonds) and to allow evidence of pre-contractual negotiations to be used as an aid to construction. Their Lordships held that there is no clearly established case for departing from the exclusionary rule, even though this may mean that the parties are sometimes held bound by a contract in terms which, on a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. Their Lordships added that such a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes.

The second further argument advanced by Persimmon was whether the agreement should be rectified. Their Lordship's opinion was that rectification requires a mistake about whether the written instrument correctly reflected the prior consensus, not whether it accorded with what the party in question believed that consensus to have been. In considering rectification, the question was what an objective observer would have thought the parties' intentions were. In this case, both parties were mistaken in thinking that the agreement reflected their prior consensus so Persimmon was entitled to rectification.

Comment

Although this decision re-states the exclusionary rule, it is possible to get prior negotiations before a Court by raising arguments of rectification and estoppel. The case is a reminder to those who negotiate and draft contracts of the importance of ensuring that the contract wording reflects the parties' intentions.

OCCUPIERS' LIABILITY - WHO IS TO BLAME?

Article by Alison Zobel

Bourne Leisure Limited t/a British Holidays v Marsden [2009] EWCA Civ 671

In August 2004 while on holiday in Greenacres holiday park, Matthew Marsden, a small boy aged 2½, after wandering off from his mother, drowned in a pond on the site. The pond was surrounded by wooden horizontal rails approximately 2 feet high, several feet from the edge of the water and fenced with wire mesh below the rails. Less than a year before, in September 2003, a boy of 4 years old had been rescued from that same pond. As a result of that incident, the holiday park operators, after liaising with environmental health officers from the local authority, produced an open water policy covering all their 53 sites and which included fixing the wire mesh beneath the rail surrounding the pond.

There was no question of any lack of care by the parents. At first instance, the Court awarded damages to the parents ruling that Bourne Leisure Limited, the operator and occupier of the site, had failed to discharge the duty it owed to visitors to the site under the Occupiers' Liability Act 1957. Specifically that Bourne Leisure Limited ought to have done more to draw the attention of parents to the lakes and ponds around the park and that by failing to give warnings of that nature, they were in breach of their common duty of care and that if they had fulfilled that duty, it would have made "every difference".

The Court of Appeal disagreed, ruling that there was no basis for concluding that the occupier was under any obligation, in the exercise of reasonable care, to bring to the attention of the parents the existence of this pond, when the danger it presented to small unaccompanied children was obvious. Especially when, as here, the site occupier had already provided the parents with a plan showing the location of the ponds on site.

Lord Justice Moses emphasised that in such cases there is often a quest to attach the blame either to the parent or the occupier. Liability is not necessarily to be attributed on the basis that one or other must be to blame and simply because the parents are not at fault, it does not follow that the defendant was in breach of its duty.

Lord Justice Stanley Burnton concluded by commenting that; "accidents do happen to young children without anyone being at fault". This seems to be a very common sense judgment which allows that accidents can happen without someone always being to blame.

PROFESSIONAL INDEMNITY FORUM CONFERENCE

Article by Nigel Wick and Alison Zobel

Nigel Wick and Alison Zobel presented a talk on recent case law developments on the notification of circumstances at the Annual Professional Indemnity Forum at Cambridge University on 6-8 July 2009.

The talk covered all aspects of recent case law in relation to notifying circumstances under a "claims made" policy. The talk addressed the issues of: circumstances/loss; awareness; causal link between circumstances and prospects of a claim; forum; breadth; notification to whom; timing; effect; and waiver/ estoppel. Providing an update on recent case law from Kidsons, Laker Vent, and Kajima, amongst others. The talk was attended by over a hundred delegates including underwriters, brokers, solicitors and other professionals.

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.