Gan V Tai Ping - The Sequel Again!

The Court of Appeal’s recent judgment in this long running saga clears up the previous uncertainty regarding the proper interpretation of the SCOR Claims Control Clause, and provides authoritative guidance on the considerations to be taken into account by reinsurers when deciding whether to withhold approval of proposed settlements.

As previously reported in REINSURANCE (March 2001), Tai Ping was a Taiwanese insurer which insured under an Erection All Risks policy a Taiwanese company in respect of machinery to be installed in its computer factory. Tai Ping obtained facultative reinsurance cover from various reinsurers including Gan. The reinsurance included a Claims Co-operation Clause ("CCC") in the SCOR (UK) (0124/83) form, the relevant part of which provided as follows:

Tai Ping settled the claim in the sum of Taiwan $2.65 billion with its insured on 31st July 1997 following litigation in Taiwan, and then sought to recover from Gan under the reinsurance.

In the Commercial Court, determining preliminary issues, Longmore J held that there was only a breach of sub paragraph (c) of the CCC if there was a settlement/compromise and an admission of liability without the approval of reinsurers.

By contrast, the Court of Appeal held that this interpretation made no commercial sense and cannot have been intended. Endorsing the approach of most if not all reinsurers in the market, the court concluded that there would be a breach of the CCC on the part of Tai Ping if they settled/compromised a claim or admitted liability.

Mance L J held that the clause as drafted had no natural or ordinary meaning, and it was therefore legitimate to consider the intention of the parties in order to arrive at a sensible and businesslike interpretation of the clause, having considered the implications of each rival interpretation. If the second part of the clause had read "and [no] liability admitted" then the word "and" would have split the clause into two topics; the settlement/compromise and the admission of liability, neither of which could occur without the reinsurers’ prior approval. As it stood however, the word "and" arguably introduced an additional element of the same topic. Nevertheless, Mance L J did not consider that the clause as drafted had to be interpreted as Longmore J had done. For example, no-one would suggest that the phrase "Smoking and spitting prohibited" was not intended to prohibit smoking and spitting separately.

Sir Christopher Staughton agreed with the overall result but reached that conclusion by a different route. He also held that the clause as drafted did not have an ordinary English meaning, commenting that "Something has gone wrong." Considering the intentions of the parties in these circumstances, he concluded that it was "highly improbable that they wished to allow a settlement or compromise if it stood on its own, but to ban a settlement and/or compromise together with an admission of liability. It would make no sense." By contrast, there was clear business and commercial sense in construing the words disjunctively. Latham L J agreed with this "straightforward and robust approach."

In the Commercial Court, it was also held that a term should be implied into the CCC, to the effect that "Reinsurers may not withhold approval of a settlement unless there are reasonable grounds for withholding approval."

Longmore J stated that business efficacy demanded the implication of the term. He gave as an example, the possibility of Tai Ping and the underlying insured reaching a reasonable settlement, with 98% of reinsurers agreeing with the proposed settlement. In that situation could Gan with a 2% participation, refuse consent and prevent the underlying settlement? The answer plainly had to be no if there was no tenable objection to the settlement.

The Court of Appeal, however, unanimously declined to imply such a term. Mance L J commented that any implication could only be justified if it represented the obvious though unexpressed intention of the parties or was necessary for the business efficacy of the contract.

Nevertheless, Mance L J held that reinsurers’ right to withhold approval of settlements was significantly qualified:

Addressing the issue of Gan’s 2% share (actually 2% of 35%) preventing a settlement in circumstances where the majority of reinsurers approved, Mance L J stated that the only way to protect against different approaches by reinsurers would be to insert a follow the leader clause into the contract. In the absence of such a clause, each reinsurer was entitled to take its own view.

Sir Christopher Staughton also held that the only way that a term could be implied was "if it is so obvious that the parties did not think it worth saying (the officious bystander), or if it is necessary to give the contract business efficacy." He declined to imply the proposed term (or any other term) on the basis that these requirements were not satisfied in this case. He held, agreeing with Mance L J, that the awkward situation which arose, in that other reinsurers took different views, was a consequence of Tai Ping not inserting a follow the leader clause into the reinsurance contract.

The following guidelines can be extracted from the judgment of Mance L J:

• Reinsurers and reinsureds have a common interest in determining whether a claim should be settled, viewing the claim as a whole;
• Reinsurers are entitled to impose their own judgment and policy on such matters as whether a particular claim is one that should be strictly proved by the direct insured, or to take a view as to appropriate settlement levels;
• Reinsurers should view a claim objectively and as a whole, and form a genuine view as to the appropriateness of a proposed settlement;
• Reinsurers should not look only at their own sectional interests with an eye solely to their own financial exposure. For example, reinsurers should not refuse approval for reasons unconnected with the merits of a claim, but as part of an attempt to influence a reinsured’s mind in relation to a matter arising under another reinsurance, or to harm a reinsured as a competitor in respect of other business or in the eyes of a local regulator. Another example would be a reinsurer who wished to prolong payment of all claims for as long as possible, for reasons unrelated to a particular claim;
• It would be wrong for reinsurers to insist that a claim be fought regardless of its real merits, eg because the reinsurance cover was limited or they hoped some complete defence might emerge;
• Reinsurers should not withhold approval "arbitrarily", i.e. in circumstances so extreme that no reasonable company in their position could possibly withhold approval.