England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBCM1 97/1412/CMS3

(MR JUSTICE CLARKE )

Royal Courts of Justice

Strand

London WC2

Monday 16 March 1998

B e f o r e:

THE MASTER OF THE ROLLS

(LORD WOOLF)

LORD JUSTICE POTTER

LORD JUSTICE MAY

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SKANDIA INTERNATIONAL CORP & ANOR

Plaintiff/Respondent

- v -

NRG VICTORY REINSURANCE LIMITED

Defendant/Respondent

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©Crown Copyright

QBCM1 97/1412 CMS3

1. COMMERCIAL UNION ASSURANCE PLC

2. INDEMNITY MARINE ASSURANCE COMPANY LIMITED

3. OCEAN MARINE ASSURANCE COMPANY LIMITED

4. THE LONDON ASSURANCE (A body Corporate)

5. GAN INSURANCE COMPANY LIMITED

6. BISHOPSGATE INSURANCE LIMITED

Plaintiffs/Respondents

-v-

NRG VICTORY REINSURANCE LIMITED

Defendant/Appellant

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(Transcript of the handed down judgment of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR J SUMPTION QC and MR G LEGGATT QC (16.3.98) (Instructed by Messrs Clifford Chance & Co, London EC1A 4JJ) appeared on behalf of the Appellant.

MR D KENDRICK QC and MR A WALES (Instructed by Messrs Clyde & Co, London, EC3M 1JP) appeared on behalf of the Respondents.

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J U D G M E N T

(As approved by the Court)

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©Crown Copyright

JUDGMENT

LORD WOOLF, MR: For the reasons given in the judgment of Lord Justice Potter which has been handed down, this appeal will be allowed.

LORD JUSTICE POTTER:

In this appeal the defendant/appellant reinsurers ("NRG") appeal against the judgment of Mr Justice Clarke delivered in the Commercial Court on 1st August 1997 whereby he gave summary judgment in favour of the plaintiffs under RSC Order 14 in two actions ("the Commercial Union action" and "the Skandia action") in which the plaintiffs claimed for sums alleged to be due under sixteen excess of loss reinsurance contracts made with NRG.

The background facts are that on 24th March 1989 the tanker Exxon Valdez ran aground in Prince William Sound Alaska, thereby causing a major spillage of oil which led to heavy environmental damage and necessitated a huge clean-up operation. The tanker's owners, Exxon Shipping Company had Protection & Indemnity cover in respect of their liability for spillage of $400 million in excess of US$ 210 million and recovered the full amount insured from their P & I club. The owners of the cargo of oil were the parent company of the ship owners, Exxon Corporation ("Exxon"). Exxon made claims under a General Corporate Excess Insurance Policy ("the GCE Policy"). The plaintiffs were among the insurers who subscribed to the GCE Policy. It was placed through brokers in the London Market and comprised a Lloyds Policy, a UK Companies' Policy and a policy led in the Scandinavian market, all in materially identical terms. The plaintiffs in the Commercial Union action subscribed to the UK Companies' Policy and the plaintiffs in the Skandia action subscribed to Scandinavian-led policy; however, no further distinction need be drawn between them.

The Addendum to the GCE Policy described the Interests insured as:

Section One

Property of the Assured or property held in trust for others for which they have responsibility or elect to insure (including but not limited to Hulls and Machinery, Cargo Drilling Rigs Offshore Platforms Pipe Lines Construction Risks and Onshore Property of every description) including Costs of Control, Removal of debris and/or Residual Structure and Liabilities and Directors and Officers and Fidelity Coverages.

Section Three

All liabilities in respect of Assured's World-wide Operations and all as per form.

Section 1 provided coverage under Article VII (INTEREST AND COVERAGE) on the following terms:

For each loss occurrence covered by this Policy the Insurers agree with the Insured to pay or to pay on their behalf subject to the Basis of Recovery Article VIII:

1. All losses incurred by the Insured as a result of physical loss or damage to Property of any kind or description owned by the Insured or property of others held in trust or for which the Insured may have assumed responsibility, or for which the Insured may have an obligation to insure repair or replace ...

4. All sums which the Insured pays or incurs as costs or expenses on account of:

(a)..........

(b) Removal of or attempted Removal of Debris or Wreck of Property and/or Residual Structure covered hereunder ...... (emphasis added)

Section 1 Article VIII(2)(BASIS OF RECOVERY: CARGO AND STOCK) provided:

(a) Recovery for any loss hereunder shall be determined as follows:

(i) for crude oil ..

(b) .. recovery shall also include costs and expenses incurred in defending, safeguarding, recovering, preserving and forwarding the property, as well as costs and expenses in respect of general average, sue and labour, salvage, salvage charges and expenses incurred in removal or attempted removal of debris or wreck or property even if incurred solely as a result of governmental or other authoritative order and the amount of the reasonable extra cost of temporary repair or of expediting the repair, including overtime and the extra cost of express or other rapid means of transportation. (emphasis added)

Section 1 Article IX, Para 3 excluded from cover under section 1:

Loss of, or damage to property, liability for which is imposed on the insured by law, other than such property as may be included under the terms of this policy.

Section 1, Article IV, Para 3 provided:

Notwithstanding anything else contained herein to the contrary, there shall be no recovery hereon for liabilities as described under Assured Liability Policy(ies) (as more fully defined and covered under policy numbers 8 KM52362 & O3-036-88 as applicable) ...

Similar words were also contained in Article VII.

It is common ground that the specified policy numbers under paragraph 3 above were a reference to Section 3 of the GCE Policy itself. Thus, on the face of it at least, the policy intended that losses sustained which might otherwise fall within the wording of Section 1, but which were recoverable under Section 3, should not also be recoverable under Section 1.

Section 3A Article 1, under the heading PROTECTION AND INDEMNITY RISKS ETC, covered inter alia

(a)(i) ... all sums for which the Insured may become liable or incur which are absolutely or conditionally recoverable from or undertaken by The Standard Steamship Owners' Protection and Indemnity Association (Bermuda) Limited and without the application of any limits or excesses contained in the rules of that Association in respect of the vessels and/or craft as per schedule.

(ii) it is further agreed that this insurance is extended to also cover any loss sustained by the Insured or indemnify or pay on behalf of the Insured any sum or sums which the Insured may be obliged to pay or agrees to pay or incurs as expenses, on account of Removal of Debris or Wreck of Vessels and/or craft as per schedule .. even if incurred solely as a result of governmental or other authoritative order....

(c) ... this section of this insurance is also to cover the legal ... liability of the Insured ... cargo owners for ... pollution and/or contamination...

(e) ... all legal and/or contractual liability of the Insured arising out of or incidental to or in any way connected with the Insured's marine operations anywhere in the world.

Section 3B Article 1 of the GCE Policy provided that the Insurers agreed:

1. To pay the Insured ... all sums which the Insured shall .... incur as expenses by reason of the liability imposed upon the Insured by law or by governmental or other local authoritated order, or assumed by the Insured under contract or agreement on account of ..... 'Property damage' caused by or arising out of each loss occurring during the policy period, anywhere World-wide in respect of .... all transportation activities ....

Section 1, Article VI, Clauses 11 and 12 and identical provisions in Section 3A conferred a choice upon the insured (Exxon) where to take proceedings in the event of dispute. In effect it could choose arbitration in New York (under Clause 11) or litigation in New York (under Clause 12) but there was no exclusive jurisdiction clause or any provision to prevent it issuing and serving proceedings in whatever jurisdiction it chose. Further, in the event of arbitration the arbitrators were entitled to abstain from following strictly the rules of law. To the extent that they did, however, such law was to be exclusively the law of New York. Further in Section 3B, Clause 10, it was provided that in relation to the particular liabilities thereby insured, either party could require the other to submit to arbitration in New York, in which event the arbitrators were also entitled to abstain from following strictly the rules of law.

The reinsurances in this case are excess of loss treaties on the XL MARKET STANDARD FORM ("the JELC") and short form Schedule. [In fact the JELC terms are incorporated in all but 4 of the 16 reinsurance contracts, but the parties are agreed that the JELC terms should be treated as applicable in all cases for the purpose of the argument before us]. The words of reinsurance in the JELC REINSURANCE CLAUSE (clause 1) are a promise:

1.1 ... to indemnify the re-assured in settlement of its net loss ... under business accepted by the re-assured as fully described in Section C of the schedule ...

1.3 It is a condition precedent to liability under the contract that settlement by the re-assured shall be in accordance with the terms and conditions of the original policies or contracts.

In Section C (as set out in the Cover Note) the business is typically described( the differences as between the various contracts are immaterial) as:

All losses howsoever and wheresoever arising sustained by the Re-assured in respect of all business allocated to their Drilling Rigs Account ...

Clause 3.1 of the JELC provides:

"Loss under this contract means loss, damage, liability or expense arising from any one of event or as described in Section J of the Schedule."

Section J of the Schedule refers to:

"Any one loss or series of losses arising from one event"

In 11 of the 16 contracts comprising the reinsurance contracts there is a form of Settlements Clause. They are similar in all material respects, 9 being in the form of the "Aviation Settlements Clause 1987" which provides as follows:

"All loss settlements by the Re-assured including compromise settlements and the establishment of funds and the settlement of losses shall be binding upon the Re-insurers, providing such settlements are within the terms and conditions of the original policies and/or contracts ... and within the terms and conditions of this Re-assurance ..." (emphasis added)

In August 1993, Exxon commenced proceedings against the direct insurers including the plaintiffs in a Texas State Court, claiming clean-up costs arising out of the oil spillage under both Section 1 and Section 3 of the GCE Policy. Exxon's object was to recover under both the sections so as to be able to exceed the limits of indemnity under each. Thus, notwithstanding the provisions of Section 1 Article IV Para. 3 of the GCE Policy which, on the face of it, prevented recovery in respect of liabilities under Section 3, and notwithstanding the assertion of Exxon in the proceedings that the clean-up costs represented "the legal .. liability of the Insured as .. cargo owners for .. pollution and/or contamination" (See Section 3, Article 1(c)), Exxon asserted for the purpose of section 1 that such costs were also incurred in the "removal or attempted removal of debris". The direct insurers disputed the claim under Section 1, principally on the ground that coverage for removal of debris or property did not in its context apply to the clean-up of tanker oil spills, and that in any event such spills were covered and denominated as pollution risks under rules of various P and I associations including the International Tanker Indemnity association which covered the Exxon Valdez and thus came within the ambit of Section 3. The Exxon claim was for payment of the coverage limits of Section 1 in the amount of US$600 million plus interest in excess of US$400 million. Exxon also claimed to be entitled to payment of the separate coverage limits of section 3A in the amount of US$250 million plus interest. Finally, it also claimed punitive damages for alleged breach of the Texas Insurance Code.

The direct insurers countered with an action in the Federal Court in New York seeking a declaratory judgment that they were not liable to Exxon under the GCE Policy and asking the court to compel arbitration of the claim under Section 3B. Exxon accepted that the claim under Section 3B be arbitrated in New York but applied to have the declaratory judgment action dismissed. That application eventually failed in January 1996.

In the meantime proceedings in the Texas State Court moved towards trial. In October 1995 Exxon sought summary judgment on its claim under Section 1 only, on the basis that the plain meaning of the language entitled it to coverage for its clean-up costs and expenses. However, despite their defences based on Articles IV and VII of Section 1, shortly before that application was heard the direct insurers (including the plaintiffs) entered into a settlement agreement ("the first settlement agreement") dated 15th March 1996 whereby they agreed to pay US$300 million and Exxon agreed to the dismissal of the section 1 claim from both the Texas and New York proceedings.

The reasoning behind the direct insurers' decision to settle appears from the affidavit of Mr Reasoner, the managing partner of the Texas law firm acting for the insurers, who had the conduct of their defence. In paragraph 13 of his affidavit in support of the Order 14 proceedings he stated:

"In my judgment, liability under Section 1 of the GCE was not going to turn simply on construction of the policy language in the light of the factual matrix. Rather, the outcome of the claim depended upon an interpretation of the parties' intentions as to the meaning of the policy language, as determined by a Texas jury directed by a non-specialised judge. Exxon Corporation was in a position to advance a simple straight-forward case based on policy wording, bolstered by the argument that the GCE Policy provided all-risk coverage for catastrophic losses and that Exxon Corporation suffered such losses in an amount far in excess of the policy limits ... Jurors are often unfavourable to insurers and biased against them when insurers are arguing for a limitation of cover. On the other hand, Underwriters' case depended upon a complex explanation of the structure of Exxon Corporation insurance, the interplay between the GCE Policy and the P & I Cover, market practices and market capacity, and the allocation of risks among the participants in the world-wide insurance market."

He continued at paragraph 16:

"Underwriters' denial of Exxon Corporations' Section 1 claim when viewed purely as a matter of construction in the commercial context, was certainly reasonable and based upon reasonable and credible arguments. However, in my judgment, a jury verdict on Exxon Corporation's Section 1 claim in a District Court in Houston, 189th Judicial District, was going to depend in large part on wider factors. As stated above, after settlement of Section 1, Exxon Corporation's claim under Section 3A of the GCE Policy went to trial in April-June 1996 before a jury in the District Court in Houston, Texas .. the same judge and jury would have tried Exxon Corporation's Section 1 claim had that claim not been settled. Based on my experience at the Section 3 trial, in my opinion it is probable that Underwriters would have lost a jury trial of Section 1."

The claim of Exxon under Section 3A of the GCE Policy was excluded from the first settlement agreement. As indicated by Mr Reasoner above, it eventually came to trial in Texas before the same judge and jury which would have tried the claim under section 1. That claim succeeded, the jury deciding that the insurers were liable to Exxon for US$250 million under section 3. Since there was a deductible of US$210 million, that decision indicated the view of the jury that the recoverable liability was at least US$460 million.

Following judgment against them on the claim under Section 3A, the insurers appealed. By a further settlement agreement ("the second settlement") dated 23rd January 1997, the insurers compromised both the appeal in respect of the Texas judgment under Section 3A and the New York arbitration proceedings on Section 3B (which were still in progress) on terms that they would pay Exxon a further $480 million.

The two actions presently before this Court were begun in June 1996 and April 1997, the sole claim made being for the amounts paid under the first settlement agreement in respect of Section 1. Clarke J gave summary judgment in the plaintiffs' favour on 1st August 1997.

On 19th September 1997 the first three plaintiffs in this action began a new action (1997 Folio No 1893), and on 21st November 1997 a further action (1997 Folio No 2183) was begun by companies including the remaining plaintiffs in the present action and the plaintiffs in the Skandia action, for the purposes of recovering the sums paid in settlement of the claim made by Exxon under Sections 3A and 3B of the GCE Policy ("the Section 3 actions"). On this appeal, NRG's position has been that the plaintiffs are indeed under a liability under Section 3A and that, as a matter of construction of the GCE Policy, the clean-up costs were covered under Paragraph 1(c) of Section 3A. The plaintiffs have applied for summary judgments in the 1997 actions, those applications standing adjourned until after the present appeal has been determined. If the appeal is successful, a number of the issues arising out of the stance taken by each of the parties in the Section 3 actions will fall away.

Before the judge, it was common ground between the parties that in order to recover under reinsurances the plaintiffs must establish that they were liable under the GCE Policies, the only question being whether they had done so. The authorities upon the basis of which both sides proceeded were those of Re London County Commercial Reinsurance Office Ltd [1922] 2 Chancery 67 and Hill-v-Mercantile and General Reinsurance Co PLC [1996] 1 WLR 1239.

In the former, at p.80, P.O. Lawrence J said:

"The fact that the policies are reinsurance policies and that the reassured have paid under the policies which they have issued does not in my judgment operate to enable them to substantiate their claims against the company. It is well settled that (subject to any provision to the contrary in the reinsurance policy) the reassured, in order to recover from their underwriters, must prove loss in the same manner as the original assured must have proved it against them, and the reinsurers can raise all defences which were open to the reassured against the original assured. This is equally true whether the reassured had or had not paid their assured, in as much as it would be inequitable for them to renounce any of their defences so as to prejudice the reinsurers ..."

In the latter, at pp. 1252-3, Lord Mustill, in the context of his consideration of the effect of a "follow settlements" clause said:

"The reinsurers undertake to protect the reinsured against risks which they have written, not risks which they have not written. To allow even an honest and conscientious appraisal of the legal implications of the facts embodied in an agreement between parties down the chain to impose on the reinsurers beyond those which they have undertaken and those which the reinsured have undertaken would effectively rewrite the outward contract; it is this in my opinion which the provisos are designed to forestall.

In relation to the question whether the plaintiffs were liable to Exxon under Section 1 of the GCE Policy the judge found it was unnecessary to decide, as it seems to me unnecessary for this court to decide, whether the GCE Policy was governed by English law as Mr Sumption submitted for NRG, or alternatively New York law, as Mr Kendrick submitted for the plaintiffs. The judge said he was prepared to assume that the policy was governed by English law and to assume it was correct that, if Section 1 of the GCE Policy were construed in accordance with English law by an English court, the plaintiffs would have had at least arguable defences to Exxon's claim. However, he accepted the submission of Mr Kendrick for the plaintiffs that such assumptions were irrelevant, in that, so long as the plaintiffs proved that they were, or would have been, held liable under the GCE Policy by a court of competent jurisdiction (in this case the Texas Court), they thereby established the necessary liability under the original policy in order to satisfy the principle that the reinsured can only recover in respect of payments for which they were liable in law under the policy. In this respect the judge said:

"In many policies such as the GCE Policy it will be open to the insured to proceed against the insurers in one of a number of jurisdictions. The result of such an action might be different depending upon which jurisdiction is chosen. Some courts may have more experience of insurance disputes than others. It would or ought to be within the contemplation of the plaintiffs when they entered into the GCE Policy that was so. The same is, in my judgment, true of NRG and the other reinsurers. If they had thought about it, they would have appreciated that the insured might be sued in several jurisdictions of varying experience. They would also have appreciated that the nature and extent that the liability which they were reinsuring would or might depend on where Exxon Corporation sued the plaintiffs. In my judgment it would make no sense to hold that reinsurers were only reinsuring the liability of the insurers as it would be established by an English judge in an English court. The position might I suppose be different if there were an English exclusive jurisdiction clause in the underlying insurance, but in circumstances where it was permissible for the insured under the underlying insurance to sue in any of a number of jurisdictions, the reinsurers were in my judgment reinsuring the insurers' liability in the jurisdiction in which they were in fact sued. It is in my judgment irrelevant what view an English court might have taken if Exxon Corporation had sued the plaintiffs in England. I shall therefore not embark upon an analysis of the liability of the plaintiffs to Exxon Corporation on that hypothesis."

Later in his judgment he said:

"Mr Kendrick submitted that it was reasonably foreseeable by the parties when the policy was made that the insured would choose the forum which seemed most favourable from its point of view. I accept that submission. It was no doubt because Texas seemed to satisfy that test that Exxon Corporation chose the State Court in Texas in which to proceed against the insurers. By the time that suit was commenced, its head office was in Texas and it has not been suggested that the Texas Court was not a court of competent jurisdiction. It plainly was ... as Mr Kendrick pointed out, it must have been obvious that the claim arising out of business allocated to the reinsured's "Drilling Rig Account" might well be litigated in Texas.

In these circumstances it was to be expected that the insurers' liability might be determined in any one of a number of different courts ... In my judgment, if the insured was entitled to proceed in Texas against the insurers, any liability established in Texas would be liability under the policy and (subject to any relevant terms of the insurance) the reinsurers would be liable in respect of it, provided only that all proper defences were advanced in Texas ...

The question here is what was the liability of the insurer under the GCE Policy. The answer to that question depends or may depend on where that liability is established. If it is established in Texas, as a court of competent jurisdiction, the answer is the liability of the insurer is whatever liability is established in the Texan Court, subject of course to any appeal and to the insured having taken all the points open to it ...

The crucial point is that the liability under the terms of the policy, which is what in effect is being reinsured, is not the liability of the insurer in a vacuum but that liability as determined by a court of competent jurisdiction ... any other conclusion would, as I see it, be unjust, because if insurers are sued in a court in which the insured is entitled to proceed under the terms of the policy and if the insurers take every point open to them, but are still held liable and (say) all appeals fail, if those insurers cannot recover under their contracts of reinsurance, they will not in truth be covered in respect of their liability under the policy, which is the whole point of the reinsurance."

Having stated what he regarded as the appropriate principle in a case where a court of competent jurisdiction has pronounced judgment in favour of an insured against the original insurer, the judge turned to consider the position where a claim, and in particular the claim of Exxon against NRG, had been made but settled before adjudication.

He summarised the rival contentions of the parties in the Texas proceedings for summary judgment under Section 1 much as I have summarised it above. He emphasised that there was no suggestion (as indeed there has been no suggestion on this appeal) that the insurers did not seek to advance all the points which NRG considered should be made as to why there was no liability under Section 1 of the policy. He then set out the passages in Mr Reasoner's affidavit which I have already quoted. He observed that there was no evidence to contradict the evidence of Mr Reasoner that, if the action against the insurers had continued, it would have succeeded. He went on to say:

"a judgment in favour of the insured, while arguably wrong as a matter of construction of the policy from the viewpoint of an English lawyer, would be readily understandable, and indeed in my opinion arguably right. However that may be, there is uncontradicted evidence of the liability of the insurers to the insured in Texas, namely liability for at least US$600 million in respect of principal. I am not sure of the position with regard to interest."

Having so decided, the judge proceeded to deal with two further matters advanced by NRG. In relation to a "Seepage and Pollution Exclusion" to which several of the plaintiffs only were parties, the judge held that it was not apt to exclude liability. He also considered a submission for NRG that the plaintiffs had failed to provide evidence reasonably required by NRG relating to the make up of their claim. In relation to that, he held that the evidence relied on established both the fact and amount of the insurers’ liability to Exxon and it was not arguable that it was reasonable for NRG to require any more evidence. Although the judge's decision in relation to those two matters is the subject of Grounds 5 and 7 in the Notice of Appeal, they have not been pursued before this court. The judge concluded that:

"The plaintiffs are in principle entitled to succeed against NRG under the contract of reinsurance and ... NRG has no arguable defence to the plaintiffs’ claim ..."

Much of the time spent on this appeal has been taken up in submissions as to the appropriate classification of the contract between the parties beneath the umbrella heading of "reinsurance". As stated in McGillivray on Insurance Law (9th Ed. 1997) at Para 33-1, the English authorities do not provide a satisfactory definition of reinsurance and the evolution of reinsurance in its various forms has made it difficult to achieve a comprehensive definition. As pointed out by Hobhouse L J in Toomey -v- Eagle Star Insurance Co Ltd 1994 1 Lloyds LR 516 at 522, the word "reinsurance" is often used loosely (i.e. in a broad sense), simply to describe any contract of insurance which is placed by or for the benefit of an insurer. In Toomey, Hobhouse LJ described a reinsurance contract as "properly defined" in the narrow sense enunciated by Buckley L J in British Dominion General Insurance Company -v- Duder [1915] 2 KB 394 at p400 ("a contract of reinsurance is a contract which ensures the thing originally insured .. not the interest of the reinsurer in the ship by reason of his contract of insurance upon the ship") and by Viscount Cave L.C. in Forsikringsakteieselskabet National of Copenhagen -v- Attorney General [1925] A.C. 639 at p.642 ("the reinsuring party insures the original insuring party against the original loss, the insurable interest of the original insuring party being constituted by its policy given to the original assured").

Hobhouse L J went on to say:

"The fact that the insurance is a reinsurance means that the extent of the reinsurer’s insurable interest has to be identified by reference to the terms of the original policy and that the reinsured must therefore give to the reinsurer the benefit of any protection which the reinsured is entitled to enjoy or may have obtained under the original policy."

In that connection he also quoted the passage from P.O. Lawrence J in Re London County Commercial Reinsurance Office Limited to which I have already alluded.

In Toomey, an argument was advanced by Eagle Star which sought to equate reinsurance with Liability insurance. Hobhouse J stated at p.522:

"This is not and never has been correct. Liability insurance is a species of original insurance whereby an assured insures the risk of his becoming liable to others."

He went on to point out at p.523:

"The element of ‘liability’ was effectively introduced into this branch of insurance by the attempts of insurers, through the use of special clauses, to get round the need to prove their loss by proving an insured loss of the original subject matter. The history of this part of the law is reviewed in the judgments of the Court of Appeal in Insurance Company of Africa -v- Scor (U.K.) Reinsurance Co Limited [1985] 1 Lloyd’s Rep.312. The original form of the relevant clause required reinsurers ‘to pay as may be paid thereon’ a wording which Mr Justice Matthew in Chippendale -v- Holt (1895) 1 Com Cas 157 held only went to the quantum of any payment that had been made by the reinsured, not to the question whether a loss covered by the original insurance had ever taken place. The market then introduced the clause which required the reinsurers to ‘follow the settlement’ of the reassured. This clause was successful in requiring the reassured to accept any bona fide settlements made by the reassured with the original assured. The position was summarised by Lord Justice Robert Goff in Scor at [1985] 1 Lloyd’s rep at p.330 .. the effect of a clause binding reinsurers to follow settlements of the insurers, is that the reinsurers agree to indemnify insurers in the event that they settle any claim by their assured .. provided that the claim as so recognised by them falls within the risks covered by the policy of reinsurance as a matter of law and provided also that in settling the claim the insurers have acted honestly and have taken all proper and business like steps in making the settlement ...

Over the years, Judges have on a number of occasions, when dealing with reinsurance policies containing various types of settlement or payment clauses used the language of indemnification in respect of liabilities ...

In my judgment these references to liability must not be read out of context. They derive in part from particular reinsurance clauses which have been included in policies and from the basic proposition that a reinsured must prove a loss and must give the reinsurer the benefit of all rights of subrogation. These, and similar, statements do not alter the character of reinsurance or make it into something which is a mere liability insurance."

Hobhouse L J went on to hold that the particular contract in that case, whereby Eagle Star agreed to pay "all claims, returns, reinsurance premiums and other outgoings" in respect of particular underwriting years of account, was in fact equivalent to a 100% "Stop Loss" policy and amounted neither to a reinsurance contract properly so described nor a "mere liability" insurance.

The reinsurance in this case is non - proportional Excess of Loss reinsurance. The promise is:

"to indemnify the reinsured in settlement of its net loss ... under business accepted by the reassured as fully described in Section C of the schedule [i.e.] .. all losses howsoever and wheresoever arising sustained by the reassured in respect of all business allocated to their Drilling Rig Account".

Mr Kendrick has submitted to this court that those words are appropriate to a reinsurance of liabilities, there being no reinsuring words referring to the many underlying risks. However, it seems clear that such doubts as might arise from the wording as to whether or not the reinsurer should only be liable to the extent of the insurers’ liability in respect of the original risk, are dispelled by reason of Clause 1.3 of the JELC which provides that it is a condition precedent to liability that settlement by the reinsured shall be in accordance with the terms and conditions of the original policies or contracts. Thus, while language of indemnity against loss is used, it is still in effect an indemnity against risks falling within the original policy or policies.

In Charter Reinsurance Co Limited -v- Fagan 1997 AC 313, the House of Lords was concerned with the meaning of the words "actually paid" in the context of the "ultimate net loss" clause of two whole account excess of loss reinsurances. The terms of the reinsuring clause were "to pay all losses howsoever and wheresoever arising during the period of this Reinsurance on any Interest under Policies ... underwritten by the Reinsured in their Whole Account", i.e. terms effectively indistinguishable from the contracts of reinsurance in this case. In construing the clause, Lord Mustill said at p.385:

"This is not the place to discuss the question, perhaps not yet finally resolved, whether there can be cases where a contract of reinsurance is an insurance of the reinsured’s liability under the Inward policy or whether it is always an insurance on the original subject matter, the liability of the reinsured serving merely to give him an insurable interest."

Thus, he left open the possibility that, in some cases, a contract of reinsurance may more properly be regarded as liability insurance than a reinsurance of the original subject matter, but the burden of his observation appears to be that such a case would be rare. Certainly, at p.387 it is clear that Lord Mustill did not think that was the case in the policy before him when he observed:

"As I have already suggested, under this form of words, although perhaps not under all forms, the policy covers not, as might be thought, the suffering of loss by the reinsured in the shape of a claim against him under the Inward policies, but the occurrence of a casualty suffered by the subject-matter insured through the operation of an insured peril. The Inward policies and the reinsurance are wholly distinct. It follows that in principle the liability of the reinsurer is wholly unaffected by whether the reinsured has satisfied the claim under the Inward insurance .. "

Again, against the background of the whole account excess of loss reinsurances before the court, Lord Hoffmann said of contracts of reinsurance at p.392:

"Such a contract is not an insurance of the primary insurer’s potential liability or disbursement. It is an independent contract between reinsured and reinsurer in which the subject-matter of the insurance is the same as that of the primary insurance, that is to say, the risk, the ship, the goods, or whatever might be insured. The difference lies in the nature of the insurable interest, which in the case of the primary insurer, arises from his liability under the original policy: see Buckley LJ in British Dominions General Insurance Co Ltd-v-Duder [1915] 2KB 394, 400"

I do not think it is necessary on this appeal further to consider the general question whether, or where, the line should be drawn between reinsurance "properly" or "narrowly" so-called and "mere" liability insurance effected by a reinsurer. That is because clause 1.3 of the JELC specifically provides the answer to the particular question in relation to which such an exercise in classification usually requires to be performed. In the light of its provisions, it seems to me that the parties were correct to pursue the matter before the judge on the basis that the first question which required to be answered for the purposes of the order 14 proceedings was whether NRG had demonstrated an arguable defence that the plaintiffs were not liable to Exxon in respect of the claim under Section 1 of the GCE policies.

In holding that NRG had not done so, the judge's reasoning involve two essential steps. First, he dealt with the question of whether, if the Texas Court (as a court of competent jurisdiction) had given judgment for Exxon despite the insurers’ having advanced all reasonable defences (as Mr Reasoner predicted was the likely outcome), the plaintiffs would have established their liability under the original policy for the purposes of indemnity by NRG under the reinsurance policy. He answered that question in the affirmative. Second, having done so, he treated the prediction in Mr Reasoner's affidavit, (uncontradicted as it was by evidence to the contrary), as conclusive of the likely outcome of the Texas proceedings and thus held that liability was similarly established by virtue of the settlement agreement.

Before this court, Mr Sumption has attacked the judge's reasoning upon the following grounds.

(1) He relies upon certain passages in the judgment of Clarke J to suggest that the judge misunderstood the nature of reinsurance and that, by adopting the approach he did, he dealt with the matter essentially as a reinsurance of the insurers’ liability and not a reinsurance of the original risk i.e. losses in respect of which it was necessary for the plaintiffs to prove that they were in law losses for which they were liable under the terms of the original policy, as opposed to simply being losses sustained by the plaintiffs in respect of business allocated to the plaintiffs’ Drilling Rig Account.

(2) Mr Sumption submits that the judge was wrong to approach the question of liability under the reinsurance policy from the starting point of a notional decision of the Texas Court in favour of Exxon for two reasons:

(a) In Mr Sumption’s submission, such decision would not in itself have been definitive that the loss was recoverable under the terms of policy, that question depending on the view of the English court as to the proper construction of the policy according to its governing law and not (as Mr Reasoner treated it and as the judge appeared to accept) of predicting the uncertain outcome of a Texas jury trial.

(b) In any event, no trial had in fact taken place. That being so, the settlement, and the question of whether or not it was a settlement in respect of a loss for which the insurers (and hence the reinsurers) were liable, fell to be considered by the court seised of the question of liability under the reinsurance contract, i.e. the English court. That question in turn fell to be decided according to the appropriate rules of construction under the applicable law and not according to the predicted findings of a Texan jury which, on the basis of Mr Reasoner’s affidavit, might well not approach its task from the same standpoint.

(3) Finally, given the necessity for the plaintiffs to establish their liability under the terms of the original contract, Mr Sumption submits that Mr Reasoner’s affidavit was neither appropriate nor sufficient. It did not assert that it was, or purport to be, an affidavit of Texas law, or of any law different in substance from English law as applied to the proper construction of the original insurance contract. In effect, all that the affidavit did was to set out the arguments advanced by Exxon on one side and the insurers on the other and assert the likelihood that a Texas jury, charged with the task of deciding the case, would have found in favour of Exxon. Further, the affidavit was in terms which, expressly or by implication, suggested that such a result was likely to follow, at best, by reason of the jury’s inexperience and lack of expertise in insurance law, and at worst, by reason of bias in favour of an insured which had suffered heavy losses.

As to Mr Sumption's submission (1), I do not consider that any individual passage in the judgment indicates that the Judge misunderstood the nature and boundaries of reinsurance in general or as applicable in the particular context. The passage particularly relied on by Mr Sumption is that in which the Judge said:-

"The question here is what was the liability of the insurer under the GCE Policy. The answer to that question may depend on where that liability is established ... the crucial point is that the liability under the terms of the policy, which is what is in effect being reinsured, is not the liability of the insurer in a vacuum, but that liability as determining by a court of competent jurisdiction .. if those insurers cannot recover under their contracts of reinsurance, they will not in truth be covered in respect of their liability under the policy". [Emphasis added].

I consider that passage to have been no more than an acknowledgement of the fact that, in considering questions of liability, especially those which turn on the construction of a contract of insurance, different courts of competent jurisdiction may reach different conclusions, but that, if the effect of a decision of one such court as to the liability of an insurer to his original insured is not honoured or recognised by the (different) court which later determines the liability of the reinsurer to his reinsured, the overall purpose of the reinsurance will not have been achieved.

The Judge well understood, and proceeded on the basis, that, in relation to the particular contract of reinsurance before him, it was common ground that the Plaintiffs must establish that they were liable under the GCE Policy. It was also common ground that, in the absence of special wording, NRG as reinsurers did not agree to indemnify the Plaintiffs in respect of any payments which they considered it in their business interest as insurers to make, as to which the Judge quoted Lord Mustill in Hill-v-Mercantile in commenting on the terms of the "follow the settlements" Clause at pp.1252-3 (already set out above).

Turning to Mr Sumption's submission (2), I do not consider that the Judge was wrong to hold in principle that, had it been the case that Exxon's claim had proceeded to trial in Texas (being a court of competent jurisdiction) and had it been the subject of a verdict against the insurers (they having taken all proper defences) then liability would prima facie have been established so as to render NRG liable as reinsurers, subject to any reversal on appeal. My reasons are essentially the same as those of the judge, which I have already quoted in extenso.

The broad purpose of reinsurance, if only as a corollary of its conventional definition, is for the reinsured to be covered (within the limits stated in the reinsurance) in respect, and to the extent, of his liability under the original policy, pursuant to which the original insured is entitled to recover from him. In a reinsurance giving world-wide cover of the kind in this case, it is within the inevitable contemplation of the parties that the reinsurance will apply to large numbers of insurance contracts made with corporations in various parts of the world and that the liability of the reinsured will be determined by courts of competent jurisdiction, or arbitrators, in many countries or states who will apply the law applicable to the original insurance. Indeed it may even be, as in this case, that the contract of insurance between the reinsured and his assured will provide for arbitration of those parties' disputes by an arbitrator who is not to be bound by strict rules of law. Thus the law applied to determine the original liability of the reinsured may differ to a greater or lesser extent in its content and approach from the law governing the reinsurance contract. However, it would be quite impracticable, productive of endless dispute, and against the presumed intention of the contract of reinsurance (absent contrary or special provision of a kind which does not exist in this case) for an English court trying a dispute concerning the reinsurers' liability to the reinsured not to treat the judgment of a foreign court as to the reinsured's original liability as decisive and binding, save within the most circumscribed limits.

Like the Judge, I would hold those limits to be:

(1) That the foreign court should in the eyes of the English court be a court of competent jurisdiction.

(2) That judgment should not have been obtained in the foreign Court in breach of an exclusive jurisdiction clause or other clause by which the original insured was contractually excluded from proceeding in that court.

(3) That the re-insured took all proper defences.

(4) That the judgment was not manifestly perverse.

Mr Sumption has resisted that approach as one of convenience rather than logic. He has argued that, since the reinsured must establish that he was legally liable i.e. liable on a proper application of the applicable law, the decision of a foreign court can be no more than evidence of such liability which ultimately falls to be decided by the court deciding the dispute as to the liability of the reinsurer to the reinsured. He concedes that, in many cases, the foreign decision is likely to be treated as conclusive evidence of liability, but says that should not affect the principle. In my view, the matter is better treated as a question of implication into the reinsurance contract, the implied term being that, absent any provision to contrary effect, the insurer will treat the decision of a foreign court of competent jurisdiction as to the liability of the reinsured to his original insured as binding, subject only to reversal on appeal and the limits which I have mentioned.

I would only add that, as to the ambit of limit (4), it does not seem to me necessary or desirable in the course of this judgment to explore the situations in which a plea of perversity might successfully be raised in respect of the decision of a foreign court. That is because there has been no such decision in this case. While I accept that the judge was correct in his view as to the effect of a judgment of the Texas Court had that position been reached, it seems to that, (given no such judgment existed) he fell into error in his approach to the question of whether or not the liability of the plaintiffs to Exxon under Section 1 of the GCE Policy was proved.

In my view, in the absence of such a judgment, it was for the Judge to form his own view of whether or not an arguable defence had been shown by the reinsurers that the plaintiffs were not liable to Exxon under Section 1 of the GCE Policy according to the applicable law and rules of construction. There had been debate before him as to what was the applicable law (i.e. New York law or English law), but he had no evidence before him that New York law differed in any relevant respect from English law, or indeed that Texas Law (which was not in fact advanced as the applicable law) differed from either. Nor did he have before him any assertion that, by reason of any particular law or rule of construction properly applied to the provisions of Section 1 and Section 3 of the GCE Policy, Exxon were entitled, under the scheme of policy, to recover their clean-up costs under Section 1. It therefore fell to the judge to deal with the question of whether there was an arguable defence on the basis of English law. It seems to me that, had the Judge sought to embark upon the question of whether the insurers were indeed liable to Exxon under Section 1, he could not have failed to find that there were at least strong arguments that they were not. However, he never did embark upon that task. He simply stated at page 8 of his judgment, when proceeding to answer the question whether the Plaintiffs were liable to Exxon under Section 1:

"I shall assume for the moment that the GCE Policy was governed by English law. I shall also assume that Mr Sumption was correction in submitting that if Section 1 were construed in accordance with English law by an English court the Plaintiffs would have had at least arguable defences to Exxon Corporation’s claim."

He then went on to accept the submission of Mr Kendrick that:

".. so long as the Plaintiffs were or would have been held liable under the GCE Policy by a court of competent jurisdiction they have established the necessary liability under the original policy in order to satisfy the principle that the re-insured can only recover in respect of payment which they were liable in law to make under that policy... Provided only that any such court was a court of competent jurisdiction and that the Plaintiffs took all the defences available to them."

Thereafter, having reached his conclusion as to the position had judgment been obtained against the Plaintiffs in the Texas court, the Judge simply treated the question of the plaintiff's liability to Exxon as answered by Mr Reasoner’s predictions. He thus, in effect, treated Mr Reasoner’s opinion as to the likely outcome if the matter had proceeded before the jury as evidence of what the law was.

I now turn to Mr Sumption's Submission (3). The difficulty with the judge's approach as just described was that Mr Reasoner did not purport to predict the jury’s verdict by reference to the answer which a proper application of the law and appropriate rules of construction would produce. He stated that, in his judgment, liability was not going to turn "simply upon construction of the policy language in the light of the factual matrix", as to which he stated that the insurers’ case was "certainly reasonable and based upon reasonable and credible arguments." Rather he made his prediction as to the verdict of the jury based upon the fact that they were likely to be directed by a "non-specialised judge" in an area in which they lacked expertise, and that "jurors are often unfavourable to insurers and biased against them when insurers are arguing for a limitation of cover."

The Judge accepted the evidence of Mr Reasoner as to the matters to which I have just referred with the observation: "that evidence seems to me to make good sense." While it seems to me that such an observation might appropriately have been directed to the decision of the insurers to settle in the light of their predictions, it did not bite on the question of whether the evidence demonstrated legal liability under the insurance contract.

As to the decision of the insurers to settle in the light of Mr Reasoner's prediction, as Mr Sumption in my view rightly submitted, it was not enough for the plaintiffs to establish that the settlement was business-like and sensible. They were required to demonstrate liability to Exxon, and could only be entitled to recover on some wider basis if they could show some kind of "follow settlements" clause binding the reinsurers to the plaintiffs'’ settlement. However, as already noted, of the 16 contracts making up the GCE Policy, five contained no follow settlements clause at all and 11 contained clauses in substantially the same form as in Hill-v-Mercantile. None bound the reinsurers to reasonable or business-like settlements regardless of the scope of the direct insurance. All provided that settlements should be binding upon the reinsurers only "providing such settlements are within the terms and conditions of the original policies and/or contracts".

The Judge found that it was unnecessary to consider the terms of the follow settlement clauses because he found that the Plaintiffs had:

".. in the words of Lawrence J, proved the loss in the same way as the original assured must have proved it against them. They have proved the amount of the insurers’ liability in the court of competent jurisdiction, where they were properly suable. Since it is not suggested that they did not take all points available to them, it follows that none of the defences now suggested by NRG, whether relating to liability or quantum (which are the same as those which were advanced by the Plaintiffs) would have been of any avail."

In that passage the judge appears to have equated Mr Reasoner’s prediction with an actual verdict of the Texas court. In my view he was wrong to do so. A judgment of the court would have given rise to a source of obligation conclusive as between the plaintiffs and Exxon (subject to any appeal) and conclusive as between the plaintiffs and NRG subject to a possible argument of perversity, if later study of the issues as deployed at trial and the form of any judgment or verdict realistically give rise to such a plea. Without it, if the plaintiffs wished to claim from NRG as reinsurers, there was an independent necessity to demonstrate legal liability which the affidavit of Mr Reasoner did not attempt to achieve other than by a prediction directed to other considerations than those of legal merit.

In this context, the judge's reference to proof in court after taking "all points available to them" does not seem to me relevant. The matter did not proceed to judgment and payment was made pursuant to a settlement in which the insurers (no doubt for good and business-like reasons) decided that they would not submit the points available to them to the decision of the court, but would rather reach a compromise. It is in just such a position, that the reinsurer, in response to the reinsured's claim for indemnity has the right to require the reinsured to show that he was legally liable to the original assured, unless there is in the reinsurance contract an effective "follow the settlements" provision which precludes such right: see Insurance Co of Africa-v-Scor.

In finding as he did, the Judge placed his decision in large measure upon the fact that there was no evidence proffered by NRG to contradict the evidence of Mr Reasoner that, if the action against the insurers had continued, it would have succeeded. However, in the context of this case, and in the light of the nature of the contents of Mr Reasoner’s affidavit, it does not seem to me that the reinsurers were obliged to file such evidence in order to make their point. Their point was simply that, in the absence of any evidence as to a different law to be applied, the Judge should apply English law which would treat the question of liability as dependent on the construction of the documents rather than upon the uncertain approach which it appeared Mr Reasoner was suggesting a Texas jury might bring to the case.

In my view, there was evidence before the Judge on the documents alone which not only entitled but obliged him to assume (as he did) that under English law NRG would have an arguable defence that the Plaintiffs were not liable to Exxon under Section 1 of the GCE Policy. I do not think there was good reason for him to accept Mr Reasoner's assessment that the jury, properly directed, would not decide the matter in favour of Exxon. There should be an instinctive reluctance in any court required to make predictions about a decision in another court, to conclude that such decision, whether in the form of a judge’s ruling or a jury’s verdict, will not be arrived at according to law.

The statement by Mr Reasoner that in his opinion, based on his experience at the Section 3A trial, it was probable that underwriters would have lost the trial under Section 1, seems to me to be objectionable on a number of grounds. First it was not said to be based on the principles of law or construction properly to be applied. Second, it was, in truth, no more than a prediction of human behaviour based on the jury's consideration of different matters in the Section 3A trial. Third, it ignored the fact that it was the decision of the Plaintiffs to settle the Section 1 claim which prevented the jury having the opportunity to consider the provisions of Section 1 and Section 3 together, so that, even assuming they were inclined to give judgment on a broad basis rather than one of strict legal principle, they would have had the opportunity to apply their minds as to whether it was right to give judgment under Section 1 as well as Section 3, in the light of the overall scheme of the insurance and the clear provision in Article IV, para.3 of Section 1.

Finally, I would observe by way of footnote that, given the nature of NRG's defence and the need for an early resolution of this dispute, it does seem to be one particularly appropriate for early determination in the proceedings as a matter of law. That result might well have been achieved had the judge been asked to determine the question of law as to the liability of the plaintiffs to Exxon under Section 1 of the GCE Policy at the same time as the Order 14 proceedings. In the absence of such a request, it remains the unhappy position following this appeal that the question has yet to be determined despite two lengthy hearings relating to it.

I would allow this appeal and order that the judgment of Mr Justice Clarke under Order 14 Rule 3 be set aside and the plaintiff' application by Summons dated 20th May 1996 be dismissed.

LORD JUSTICE MAY: I agree.

LORD WOOLF, MR: I also agree.

Order: Appeal allowed. Order of Clarke J under Order 14 rule 3 will be set aside. Plaintiffs' application by summons dated 29 May 1996 dismissed. Respondents to pay 2/3rds of appellant's costs of appeal and full costs in the court below. Respondents's application to appeal to the House of Lords refused.