Freely Available British and Irish Public Legal Information
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Kuwait Airways Corporation & Anor v Kuwait Insurance Company S.A.K. & Ors [1999] EWHC 281 (Comm) (15 December 1999)
URL: http://www.bailii.org/ew/cases/EWHC/Comm/1999/281.html
Cite as: [1999] EWHC 281 (Comm)
[New search] [Printable RTF version] [Help]
Case No: 1991 Folio No 1735
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 15th December 1999
| (1) KUWAIT AIRWAYS CORPORATION (2) THE MINISTER OF FINANCE OF THE STATE OF KUWAIT | Claimants |
|
| - v - | ||
| (1) KUWAIT INSURANCE COMPANY S.A.K. (2) WARBA INSURANCE COMPANY S.A.K. (3) AL AHLEIA INSURANCE COMPANY S.A.K. (4) GULF INSURANCE COMPANY KSC |
Defendants |
The Hon. Mr Justice Langley
COPIES OF THIS JUDGMENT ARE AVAILABLE IN WORD 6 for WINDOWS 3.1 ON PROVISION OF A CLEAN DISC. APPLY TO THE CLERK TO THE HONOURABLE MR JUSTICE LANGLEY Telephone 0171-936-6395
Mr Justice Langley:
The Claimants are the national airline and the government of the State of Kuwait. I shall refer to the First Claimant and to the claimants jointly as KAC and to the government of Kuwait as such only when it is necessary to distinguish between them. On August 2, 1990 Iraq invaded Kuwait. 15 of the fleet of 23 civil aircraft which comprised the Kuwaiti national fleet and a large quantity of spares and equipment were then situated at and were removed by the invaders from Kuwait International airport. The aircraft and spares were insured in respect of war risks by the Defendant companies to which I shall refer jointly as KIC. KIC was reinsured in the London market. The reinsurers are conducting the defence to the claim under the insurance pursuant to a claims control clause in the reinsurance. The present applications by KAC are for summary judgment in the sum of US $150m alternatively an interim payment in the same sum. The applications have their origin in the decision of the House of Lords in these proceedings delivered on March 11, 1999 and now reported at [1999] 1LL Rep. 803 to which I refer below.
The contract for the relevant year (12 months effective 1st July 1990) is to be found in KIC's renewal quotation dated June 14, 1990 which was accepted by KAC on June 20. The quotation reflected the terms being offered by reinsurers. That explains the references to "as original" which it is agreed can be ignored. It also provided
All other terms and conditions as expiring ....
That was a reference to the Aviation Hull and Spares War Risks and Allied Perils Policy No. AV/HW/KAC/255 for the period 1st July 1989 to 30th June 1990 to which I will refer as "the Expiring War Risks Policy".
The quotation itself, so far as material, provided that:
TYPE : Aviation Hull and Spares War Risks and Allied Perils insurance.
ASSURED : Kuwait Airways Corporation and/or Kuwait Aviation Services Company and/or Govt. of Kuwait and/or other interests for their respective rights and interests as orig.
PERIOD : 12 months at 1st July 1990
INTEREST : To cover the Assured's fleet of owned or operated aircraft (including spares and ancillary equipment) against the risks of war and allied perils whilst flying and on the ground and/or as original.
SUM INSURED: Max. agreed value US$80,000,000 any one aircraft
Max. ground limit US$300,000,000
Spares/Equipment - not exceeding US$10.000,000 any one item/US$30,000,000 any one sending/US$150,000,000 any one location.
SCHEDULE OF
AIRCRAFT : As attached
SITUATIONS : Worldwide
CONDITIONS :
Original Nett rate 0.045% of Aircraft values plus US$ 46,250 in full in respect of spares.
The "Schedule of Aircraft" attached to the quotation contained a short description of each of the 23 aircraft in the fleet and a figure in US$m as the "Agreed Value" of each aircraft. In simple terms the fleet consisted of 4 Boeing 727s, 4 Boeing 747s, 3 Boeing 767s, 2 Hawker Siddeley 125s, 5 Airbus 310s, 3 Airbus 300s, and 2 Gulfstream G11s. The total agreed value of all 23 aircraft was $1052m. The total value of the 15 aircraft which were at Kuwait International Airport at the time of the invasion was $692m.
The Expiring War Risks Policy, so far as material, provided that:
THE ASSURED KUWAIT AIRWAYS CORPORATION and/or KUWAIT AVIATION SERVICES CO., and/or AUTO MULTI ACCESS SYSTEMS CO., and/or GOVERNMENT OF KUWAIT.
PERIOD OF
INSURANCE 1st July 1989 to 30th June 1990 ...
WHEREAS the Assured has promised to pay the premium specified ....
THE INSURERS hereby agree to insure against loss or damage to the extent and in the manner hereinafter provided in the wording attached hereto which forms an integral part of this policy.
NOW KNOW YE THAT WE the insurers, do hereby bind ourselves to indemnify the Assured ... against all such loss or damage as aforesaid subject always to the terms, conditions and limits contained herein or endorsed hereon or attached hereto.
SECTION ONE: LOSS OF OR DAMAGE TO AIRCRAFT
Subject to the terms, conditions and limitations set out below, this Policy covers loss of or damage to the Aircraft nominated in the Schedule against claims excluded from the Assured's Hull "All Risks" Policy as caused by:
(a) War, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, insurrection, martial law, military or usurped power or attempts at usurpation of power.
....
(e) confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any Government (whether civil military or de facto) or public or local authority.
SECTION FOUR: GENERAL CONDITIONS
1. This Policy is subject to the same warranties, terms and conditions (except as regards the premium, the obligations to investigate and defend, the renewal agreement (if any) the amount of deductible or self insurance provision where applicable AND EXCEPT AS OTHERWISE PROVIDED HEREIN) as are contained in or may be added to the Assured's Hull "All Risks" Policy.
....
AIRCRAFT SPARES AND EQUIPMENT EXTENSION
It is noted and agreed that the indemnity provided by this Policy other than Paragraph (a) of Section One is extended to include loss or damage to Aircraft Spares and equipment which is the property of the Assured or for which they are responsible.
Subject to a limit of US$10,000,000 any one item, US$30,000,000 any one sending and US$150,000,000 any one location.
....
Whenever the term 'Aircraft' is used in the Policy to which this extension applies the same will also be deemed to mean Aircraft spares and equipment.
As explained by Lord Hobhouse in the House of Lords, the references in the Expiring War Risks Policy to the "Assured's Hull All Risks Policy" were to the All Risks Policy which excluded War Risks from the scope of cover provided. Reliance is placed on some provisions of the "All risks Policy" (as I shall call it) under General Condition 1 of Section 4 of the Expiring War Risks Policy.
Those provisions are:
Section 1.2 Spares and Equipment
This section of the policy is also to cover Spares and Equipment owned or operated by the Assured or for which the Assured is responsible against all risks of loss or damage howsoever occasioned except as hereinafter excluded, at all times including on board the Assured's aircraft, including engines whilst transported in pods and the pods and attachments thereof, and including engine running.
Section 1.6 Agreed Value
1.6.1 In the event of total loss or constructive total loss or arranged total loss of any Aircraft ... the Company will pay the Agreed Value as set forth in the Schedule.
1.6.2 In the event of total loss or constructive total loss or arranged total loss of Spares and Equipment the Company will pay the full replacement costs C.I.F. to the Assured's home base.
Section 1.8 No Abandonment
Unless the Company elects to take the Aircraft as salvage the Aircraft shall at all times remain the property of the Assured who shall have no right of abandonment to the Company.
Section 7 Definitions
7.2 The words "Spares and Equipment" shall mean engines, spare parts, tools, aircraft material and equipment (including supporting ground equipment).
The Writ was issued in July 1991. KAC claimed for the full insured value ($692m) of each of the 15 aircraft, 3 of which were the property of the government of Kuwait. The claim was advanced on the basis that there were separate losses and occurrences and thus that the maximum ground limit of $300m did not apply. There was also a claim for spares in a sum of nearly 85m Kuwaiti Dinars. KIC contended that the maximum liability under the Policy was $300m, a sum which KIC had paid or agreed to pay.
Issues of quantum were directed to be tried separately from and subsequent to the other issues. Rix J gave judgment on December 21, 1995. The judgment is reported at [1996] 1 Ll Rep 664. Rix J held that all of the aircraft and all of the spares and equipment were totally lost in a single occurrence on August 2, 1990 by virtue of the invasion. That decision stands and it is the basis on which the parties have put forward their cases before this court. Rix J also decided that KAC was not entitled to any sum in excess of $300m. KAC appealed against that decision. KAC's appeal was unsuccessful in the Court of Appeal, but successful in the House of Lords. The House decided that KAC was entitled under the Policy to "indemnification in respect of the value of lost spares and equipment up to the maximum amount of $150m" in addition to the ground limit of $300m for aircraft and remitted further proceedings back to this court.
In the course of his judgment Rix J had also considered certain questions which had arisen on KIC's claim to be subrogated to a share of the recoveries made by KAC. In particular, between about June 1991 and August 1992 KAC recovered 8 of the 15 aircraft and some spares. As Rix J put it, at page 694 col. 2 of the report:
The Scheduled (insured) value of the aircraft recovered is US $395m. The Scheduled value of all 15 aircraft was US $ 692m. By coincidence the scheduled value of the unrecovered aircraft, therefore, US $ 297m, is almost identical to the US $ 300m ground limit which has been paid out.
It was in this context that Rix J addressed one of the major issues which is now before me. It was KIC's submission before Rix J and before me that credit for the value of the 8 recovered aircraft should be shared proportionately by giving 300/692 parts to insurers and 392/692 parts to KAC on the basis that the payment of $300m represented in respect of each aircraft 300/692 of its insured value and thus that when an aircraft was recovered KAC had recovered the value of the aircraft and so must credit insurers with the payment made in respect of that aircraft under the policy. It was KAC's submission before Rix J and before me that the recoveries should be allocated entirely to KAC until KAC had received a full indemnity of $300m for the insured value of the 15 aircraft lost, the so-called "top-down principle".
In addressing this question, at page 695 col. 1 of the report, Rix J said:
In support of the top-down approach is the decision of the House of Lords in Lord Napier and Ettrick v. Hunter, [1993] 1 Lloyds Rep. 197; [1993] A.C. 713. It was there decided that an underwriter at Lloyd's who takes out a stop-loss policy to pay for losses within a band of (say) excess of £25,000 up to £125,000 but loses £160,000 on his underwriting and then recovers £130,000 from a third party in respect of those losses, holds £95,000 for his stop-loss insurer. Although self-insured above £125,000, he is entitled to first call on the recoveries in respect of the top slice of his losses, leaving the balance of £95,000 for the stop-loss insurer who insures the next slice. Lord Templeman at p. 200 col. 2: p. 731C appears to have considered the top-down approach applicable to competing claims to subrogation in the context of --
... under-insurance or partial insurance or layers of insurance.
Marine insurance was not there in issue ....
It seems to me, however, that KAC are entitled to the benefit of the top-down principle either because it is the principle which most closely conforms to the underlying rationale of subrogation; or because any variation from that principle is confined to marine insurance.
However, I make no judgment about how the application of the top-down principle will work out in practice. In particular I am not happy about deciding a matter raised at a very late stage, by amendment, and which was only addressed in written submissions after the close of oral argument, to the effect that, even if the top-down principle did apply, each recovered aircraft should be looked at by itself on the basis that the underwriters had paid 300/692 of the value of each, with the effect, so it was alleged, that KAC were entitled to retain from the recovery of each only what would indemnify them in respect of that aircraft by itself and not on any overall basis. I intend no criticism whatsoever in declining to decide this further question; but it seems to me that such refinements will be better dealt with at the next stage in the context of some working figures, which will enable the different consequences of different approaches to be properly considered.
For the purpose of these proceedings, there is no dispute that the "top-down principle" is to be applied, but it is the point about its "application" on which Rix J expressly made no judgment which is one of the major issues which does arise on KAC's applications. It has come to be called the "Aircraft by Aircraft" point and I shall so refer to it.
On July 29, 1999 Timothy Walker J gave directions for statements of case to be served in relation to the matters remaining in issue between the parties and gave directions for the hearing of the present applications including directions for the service of evidence.
The principal matter in KAC's case is the claim to recover all or part of the $150m for the loss of spares and equipment. KAC's computer and other records of spares holdings were substantially destroyed. From information which did survive and enquiries of suppliers, KAC's expert accountant advisers, Littlejohn Frazer, have prepared a reconstruction of holdings at August 2, 1990. The principal surviving document relied upon was a stock valuation at June 30, 1989. The reconstructed valuation at August 2, 1990 resulted in a figure for what is described in paragraph D1 of the statement of case (and in this judgment) as "Aircraft Spares" of US $208m (in round figures). In addition KAC claimed to have lost "Ground Support & Other Equipment" with a value of some US $36m; loaned and deferred payment items with a value in excess of US $11m; spare aircraft engines with a value of some US $67m and Simulators valued at over US $5m. The total loss claimed (paragraph D1.2) is US $328m to which 10% is added as "freight" giving a total of $360m.
KAC's statement of case (paragraph D1.3) reads as follows:
D1.3 Insofar as the same is material (which is denied given the limitation on recovery of US $150m. in the policy) KAC will give credit to underwriters in the amount of the salvage value of the items recovered. The best information which KAC is presently able to furnish of the net value of the recoveries puts the same at US $98,407,485.80.
A Footnote to this paragraph reads:
Calculated as follows: US$ 69,849,086 being the average cost price of the aircraft spares and equipment recovered and US$ 52,387,927 being the average book value of the engines recovered less the following deductions : (1) US$ 1,618,786.34 in respect of the costs of returning the Baghdad consignments; (2) Repairs in respect of spares and equipment totalling US$ 13,674,860.33 (paid to outside agencies) and US$ 2,995,733.26 (in house); (3) repairs to the recovered engines in the amount of US$ 6,759,328.20; and (4) Repairs to simulators in the amount of US$ 776,079.96
KIC's statement of defence and counterclaim "in broad summary" (paragraph 2) contends that KAC's claim includes items not covered by the policy and over valuations. It also alleges that proper credit has not been given for recoveries and that at its maximum the claim can be for a sum of only about $118m. In addition it is alleged (and counterclaimed) that insurers are "entitled to be repaid a sum of $151,102,774 in respect of aircraft recovered by KAC" and that the true accounting position is that KAC is liable to repay KIC "at least $33m and probably more".
Apart from what may be described as detailed criticisms of the Littlejohn Frazer reconstruction, the figures and various items included in KIC's claim (many of which have been sensibly resolved for the purposes of these applications), a number of issues of principle underlie KIC's case and in particular the counterclaim :
(1) The Aircraft by Aircraft point.
(2) A claim by KIC that the recoveries of aircraft are to be valued at the "agreed values" ascribed to each aircraft in the schedule to the quotation whereas KAC submit they are to be valued at their market value. This is referred to as "The Valuation of Aircraft Recoveries" Point.
(3) A claim by KIC that, while it is accepted that the salvage value of recoveries of spares is to be credited under the "top-down" principle, the credit must be applied separately to the $150m limit for spares. This has come to be called "The Divided Recoveries" point. KAC's case is that it can retain the value of all recoveries (whether of aircraft or spares) until that value would result in a double recovery agaist the combined policy limits of $450m for both aircraft and spares. KIC's case is that recoveries of aircraft must be credited against the policy limit (300m) for aircraft and recoveries of spares against the policy limit (150m) for spares.
The effect of these points of principle upon the sums claimed and counterclaimed and the present applications is remarkable and not substantially in issue as such:
(1) If KIC is right on the Aircraft by Aircraft and the Valuation of Aircraft Recoveries Points, KIC claim to be entitled to be paid 300/692 of the combined insured values of the 8 recovered aircraft ($375m) less a sum of $20m which was paid to the government of Iran in connection with the release of 7 of the Aircraft , namely some $151m. That is the sum counterclaimed.
(2) If KAC is right on either of the Aircraft by Aircraft or Valuation of Aircraft Recoveries Points the counterclaim must fail entirely.
(3) If KAC is also right on the Divided Recoveries point then the evidence of loss less recoveries is such that granted no greater sum than $150m can be recovered from insurers, KAC would be entitled to summary judgment for that sum as the net loss would inevitably be greater than that amount.
(4) If KAC succeeds on either or both of the Aircraft by Aircraft and Valuation of Aircraft Recoveries points but not on the Divided Recoveries point KAC will not be entitled to a summary judgment and the question would arise as to whether any and if so what interim payment would be appropriate for the spares claim viewed separately.
The importance of the three points is reflected in the fact that they are scheduled to KAC's applications and for convenience I have attached them as an Appendix to this judgment. They have also provided the structure for the parties' submissions.
There remains one further matter which can conveniently be dealt with in this context. There are other proceedings or claims in which KAC (and KIC) seek to recover their losses from certain Iraqi companies and compensation funds established by the United Nations. If those claims are successful it is possible, as KAC acknowledges, that KIC may be entitled to benefit from the recoveries made. That remains uncertain. It also forms no part of the proceedings before this court. KAC has given an undertaking to the court that should a situation arise where further recoveries are made in which KIC claims to have an interest no jurisdiction or statute bar points would be taken by KAC in an attempt to defeat such a claim. On that basis, Mr Gaisman submitted, rightly in my judgment, that if I decided the counterclaim as pleaded was unsustainable it would be right to dismiss it and not merely to order it to be stayed as Mr Gilman had submitted because of KIC's understandable (even if over-cautious) concerns on the two matters which the undertaking covers.
There are two sets of figures (produced in the course of submissions) which illustrate the issues to which this judgment relate. The first addresses the counterclaim and whether or not it has any prospect of success even if KAC were to lose on the Aircraft by Aircraft point but to win on the Valuation of Aircraft Recoveries point. The second set of figures assumes KIC is successful only on the Divided Recoveries point and so addresses the level of any Interim Payment the court might order. I set the figures out here because they also serve to explain what is in issue on each of the three points and the extent to which the parties remain at issue over the items which underlie the figures. Thus, in the first illustration, subject to the notes, the figures used assume the best case for insurers on the evidence.
1. 5 AIRBUSES RECOVERED. Agreed Policy Values : $60m each.
Actual value on recovery :$36m each.
(A) Amount paid for loss of each aircraft
by insurers (300/692) x 60m $26m
(B) KAC uninsured loss (392/692) x $60m $34m
(C) Actual value recovered $36m
(D) "Overpayment" by insurers (C-B) $2m
(E) Total "Overpayment" for 5 Aircraft $10m.
2. 1 AIRBUS RECOVERED. Agreed Policy Value $70m.
Actual Value on Recovery $40m.
(A) Amount paid by insurers (300/692) x 70m $30.35m
(B) KAC uninsured loss (392/692) x 70m $39.65m
(C) Actual value recovered $40m
(D) "Overpayment" by insurers $0.35m
3. 1 BOEING 727 RECOVERED. Agreed Policy Value $20m.
Actual Value on recovery $12m.
(A) Amount paid by insurers (300/692) x 20m $8.67m
(B) KAC uninsured loss (392/692) x 20m $11.33m
(C) Actual value recovered $12m
(D) "Overpayment" by insurers (C-B) $0.67m
[Insurers did submit that the value on recovery was, or should in the absence of evidence be taken to be, 20m. However a Lloyds Aviation Survey Report exhibited to the evidence filed on behalf of KIC stated that since the Gulf War there had been an approximate 40% downturn in aircraft prices. The expert evidence filed on behalf of KAC valued the aircraft on recovery at 5.54m. In my judgment, on this evidence, the "actual value on recovery" figure of 12m is probably substantially in excess of the true figure and thus gives more credit than is right to insurers.]
4. 1 HS 125 Agreed Policy Value : $5m
Actual value on recovery : $4.6m
(A) Amount paid by insurers (300/692) x 5m $2.17m
(B) KAC uninsured loss (392/692) x 20m $2.83m
(C) Actual value recovered $4.6m
(D) "Overpayment" by insurers(C-B) $1.77m
The "overpayments" would therefore be 10m, 0.35m, 0.67m and 1.77m, a total of 12.79m. But there is no dispute that KAC are entitled to be credited against recoveries for the sum of $20m paid to Iran. Therefore, on these figures and hypotheses, any counterclaim must fail.
This illustration, helpfully prepared by Mr Rainey, sets out, subject to the comments which I have added beneath it, the figures in relation to what may be called "the Spares claim" viewed in isolation and on the basis that it is subject to a separate limit of $150m and so that KAC lose on the Divided Recoveries point. Further, in the course of preparation for the hearing, KAC informed KIC that KAC proposed only to rely in the application for summary judgment on the first head of the claim for "Aircraft Spares" in paragraph D1.2 of the claim. It is therefore the figures for that item only which appear in the illustration albeit it remains KAC's position that should the court consider the amount of an interim payment it can take comfort in doing so from the knowledge that the other claims remain and, so it is said, must have at least some substantial recoverable value.
INSURERS POSITION KAC's POSITION
ITEM A. LIKE FOR LIKE B. NEW FOR OLD
Aircraft Spares 172m 202m 202m
Deduct items not
covered (1.3m) (1.5m) --
Add 10% Freight -- -- 20.2m
Deduct Recoveries (87.1m) (87.1m) (87.1m)
Add repair costs
for Recoveries -- -- 13.6m
Add Engine recoveries
repair cost 5m 5m 5m
------ --------- -------
TOTALS 88.6m 118.4m 153.7m
The quantities of the Aircraft Spares reconstructed by Littlejohn Frazer is now accepted by KIC. For the purposes of the applications the figures of 172m and 202m are accepted as such. The choice between them depends on the construction of the relevant wording and in particular clause 1.6.2 of the All Risks Policy. "Items not covered" refers to a disputed issue as to the terms and scope of the policy wording. The recoveries figure of 87.1m is accepted by KIC for the purposes of the present applications only.
The principles to be applied to these applications are not in doubt but should be stated.
KAC is entitled to summary judgment if KIC has no real prospect of successfully defending the claim and there is no other reason why the case should be tried: CPR rule 24.2
KAC will be entitled to an interim payment only if KAC obtains a judgment for damages to be assessed or the court is satisfied that, if the claim went to trial, KAC would obtain judgment for a substantial amount of money against KIC: CPR rule 25.7 (1)(b) and (c). In either of these events the court may order an interim payment of no more than "a reasonable proportion of the likely amount of the final judgment". CPR rule 25.7(4).
THE CONTEXT
Following the judgment of Rix J, it is no longer in dispute that all of the aircraft and all of the spares and equipment were totally lost by one occurrence on August 2, 1990. Nor is it or can it be contended that the "top down" principle does not apply. In that connection I should refer to the rationale of the principle as stated by Lord Templeman in Lord Napier v. Hunter to which Rix J referred in the passage from his judgment which I have already quoted. The assumed extent of the stop loss cover in question for an actual loss of £160,000 was £100,000 excess of £25,000, so that the assured had no cover from the ground up to £25,000 nor for the final £35,000 excess of £125,000. Recoveries were made of £130,000 and the question was how that sum was to be divided between the assured and insurers.
Lord Templeman, at page 730, said:
The problem must, in my opinion, be solved by assuming that the name insured the first £25,000 of any loss and also insured the excess over £125,000 as well as insuring the £100,000 payable under his policy with the stop loss insurers. There would then be three insurance policies as follows: (1) a policy for the payment of the first £25,000 of any loss; (2) a policy for the payment of the next £100,000 of any loss; (3) a policy for payment of any loss in excess of £125,000.
When the name suffered a loss of £160,000 the name received £25,000 under the first policy, £100,000 under the second policy and £35,000 under the third policy. The damages payable by Outhwaite were £130,000. The third insurer is entitled to be the first to be subrogated because he only agreed to pay if the first two insurances did not cover the total loss accordingly the third insurer must be paid £35,000. The second insurer is entitled to be the second to be subrogated because he only agreed to pay if the first insurance cover proved insufficient; accordingly the second insurer must be paid £95,000. The sum of £35,000 payable by way of subrogation to the third insurer and the sum of £95,000 payable by way of subrogation to the second insurer exhausts the damages of £130,000 received by the name from Outhwaite. There is nothing left to recoup to the second insurer the balance of £5,000 out of the £100,000 he paid under his policy. There is nothing left by way of subrogation for the first insurer in respect of the first £25,000 which he agreed to bear.
Under the stop loss insurance the name agreed to bear the first £25,000 loss and any loss in excess of £125,000. In my opinion the name is not entitled to be in a better position than he would have been if he had taken out the three insurances I have mentioned. The name in fact acts as his own insurer for the first £25,000 loss and acts as his own insurer for any loss in excess of £125,000. So the name must pay £95,000 to the stop loss insurers just as he would have been liable to pay £95,000 to the second insurer if he had taken out three policies. In the result, out of the loss of £160,000, the name will have borne the first £25,000 because he agreed with the stop loss insurers that he would bear that loss. The stop loss insurers having paid £100,000 under the policy will receive back £95,000 by way of subrogation.
THE SUBMISSIONS
KAC's submission is straightforward. The policy limit of $300m was an aggregate limit. Insurers in fact paid on an aggregate basis. The analogy, following Lord Templeman, is insurance from the ground up to $300m and self- insurance for $392 excess 0f $300m (the agreed value of all the aircraft covered being 692m). Thus the top down principle itself requires that recoveries be applied first to the "layer" $392 excess of $300m because the notional insurer (in fact KAC) is "entitled to be the first to be subrogated because he only agreed to pay if (the $300m) did not cover the total loss."
KIC's submission is that each aircraft loss was a separate loss, exemplified by the fact that each had its own agreed value in the policy, the premium was based on that value and indeed of the 15 aircraft concerned three were the property of the government of Kuwait of which one was included in the eight aircraft eventually recovered. Hence, it is submitted, the payment made of $300m was in effect a payment of 300/692 of the agreed value of each aircraft.
CONCLUSION
In my judgment KAC is plainly right on this issue. I do not think there can be any justification for "disaggregating" recoveries where there is an aggregate limit to the indemnity. Moreover the aggregate limit (in the case of one occurrence) applied regardless of the number of aircraft lost or of whether they were the property of KAC or the government. Whether or not there were a number of losses or only one loss (there was certainly only one occurrence) is in my judgment nothing to the point. Once the top down principle applies, I think it provides the answer as KAC submitted. Moreover that conclusion accords with commercial good sense. Had KAC lost only the 7 aircraft which were in fact destroyed, insurers would unarguably have had to pay up to the limit of the indemnity without any recovery. It would be remarkable if the policy was to be so construed that because KAC lost those 7 aircraft but also 8 (or any other number of) others which were later recovered intact insurers became entitled to a credit of a proportion of the value of the aircraft recovered. For the same reason I do not think the basic principle that an assured is entitled to a full indemnity for his loss but no more has any impact on this Question, save that if KAC was not to recover the aggregate limit I do not think it could be said to have received a full indemnity for its losses (or loss). The effect of insurers' submission is that the aggregate limit of £300m only applies in limited circumstances (where there are no recoveries) but otherwise is an unpredictable figure depending on recoveries and their value. That is not what I think the policy says and means. It is also arguably inconsistent with the established principle that the cause of action for breach of a contract of indemnity accrues at the time of loss.
In my judgment therefore KAC is entitled to apply the value of recoveries to the uninsured loss of aircraft ($392) excess of $300m (or of aircraft and spares excess of $450m if KAC is also right on Question 3) and no credit is due to insurers for so long as recoveries do not (as they in fact do not) exceed that sum.
THE CONTEXT
The question is whether, as KIC submits, recoveries of aircraft are to be valued at the agreed values in the schedule to the policy or, as KAC submits, at market or actual value at the time of recovery.
THE SUBMISSIONS
KAC submits that the scheduled values are the agreed value of the indemnity which insurers have agreed to provide. That value has no relevance to recoveries whether they be made by way of subrogation, abandonment or salvage each of which is a reflection of the principle that an assured is entitled to a full indemnity but no more than a full indemnity. A "full indemnity" in this policy means on a total loss payment of the agreed value, which could be more or less than market value. If a recovery in fact worth less than that value (even adjusted for the cost of repairs) has nonetheless to be credited to insurers at the agreed value that is to deprive the assured of the worth of the full indemnity for which he has bargained and which (in this case) formed the basis for the calculation of the premium he paid. If the boot was on the other foot and the agreed value was less than the market value, insurers would no doubt say they were then entitled to the higher market value. Indeed in this case that might have arisen through the operation of the "No Abandonment" clause, clause 1.8 of the All Risks policy. The same answer follows from the fact that once a full indemnity has been paid on a total loss, the right of the insurer (subject to the top down principle) is to any property salved or the proceeds of any recoveries, not to a sum of money said to represent other than the real value of the property or proceeds in question.
KIC's submission is that the court should take "the insured value" as the starting point and assess the extent to which it has been diminished by the operation of the insured perils and recovery expenses. Thus, if an aircraft was recovered in the same condition as when it was lost, it is said it would be wrong that the insurer should bear the difference in value because the difference would not be in any way attributable to an insured peril and the insured would get a windfall. It is accepted that this approach may not apply in cases of abandonment or salvage, because insurers will get back the property as it is and worth what it is worth, but submitted that it should apply where, as here, the recovered property is retained by the assured in order to ensure that the assured receives no more than a full indemnity.
CONCLUSION
Again, in my judgment, KAC is right in its submissions. I think KIC's submission is in effect to seek to re-write the policy by qualifying the agreement to pay the agreed value of the aircraft in the event of a total loss. The submission has the effect that in the event of recoveries, a loss in the agreed amount has not occurred. Further I can see no justification for different principles applying in the case where an assured retains recovered property from cases where it does not. In each case the purpose is to ensure that no more than a full indemnity is paid and received and in each case that is achieved by restoring to insurers the actual value of recoveries. The only distinction with a valued policy is that it fixes the amount of a full indemnity. If KIC was right that would often be an illusion and a costly one for assureds.
In my judgment therefore recoveries are to be taken at their actual value not their agreed values set out in the policy.
It follows from my answers to Questions (1) and (2) that KIC's counterclaim in these proceedings must fail and as I have explained above should be dismissed.
CONTEXT
The question is whether aircraft recoveries fall to be credited top down only against the $300m limit for aircraft and spares recoveries only against the $150m limit for spares or whether, as KAC contends, recoveries of aircraft and spares combined fall to be credited top down against a total limit of $450m. The relevance of the question is as to whether or not KAC is entitled to a summary judgment for $150m or only to an interim payment (albeit one which Mr Gaisman submits should be in the sum of $150m). That is because the combined value of recovered aircraft and spares cannot on any view of the figures and my decisions thus far be at a level which would exceed the difference between $692m (the agreed value of the aircraft lost) plus the value of spares lost and $450m, whereas if the spares are properly to be considered separately there is not the same degree of comfort in the figures: see Illustration 2 above.
THE SUBMISSIONS
KAC's submission is that "there is no reason in practice or principle why, in the case of a total loss under a single policy followed by the subsequent salvage of items of a particular category insured such salvage should go only to reduce the loss experienced directly in relation to that category". KAC acknowledges that the House of Lords has decided that the policy contains two separate limits in respect of aircraft and spares, but it is said it is a single policy in respect of which insurers may be liable to pay as much as $450m provided KAC can show it has lost at least $300m of aircraft and $150m of spares and should do so where one loss results from a single occurrence and exceeds that total sum.
KIC's submission is that the consequence of the fact that the policy imposes two separate aggregate limits is that recoveries should be applied separately to each. That, it is said, is reinforced by the fact that spares, unlike aircraft, are not separately valued in the policy so that computing the loss in each case is a different exercise.
CONCLUSION.
In my judgment KIC is right on this question. The cover for spares is provided by way of an extension to the policy. The separate aggregate limits point to separate treatment of recoveries. The policy is not expressed as a single aggregate limit of $450m with separate sub-limits for aircraft and spares and in my judgment that at least would be necessary for KAC to succeed on this Question. It is KAC's submission which seeks to re-write the policy in this instance.
The consequence of my decisions on the three questions is that whilst the counterclaim fails entirely, it is necessary to consider the spares claim separately and thus to address the issues which lie behind the figures (so far as they differ) in Illustration 2 above. It is apparent from those figures that at best for insurers there is a liability of some $88.6m in respect of spares. It also follows that KAC is entitled to judgment against KIC for a sum of money to be assessed and I am also satisfied that KAC would obtain judgment for a substantial amount of money against KIC if the claim went to trial. That fulfils the condition for making an order for an interim payment. The remaining questions are to determine the "likely amount" of the final judgment in favour of KAC and what is "a reasonable proportion" of that amount in order to decide what level of interim payment is appropriate as in principle I am satisfied that this is a case in which such an order is fully justified and it has not been submitted to the contrary.
VALUE
The first difference between the figures advanced by the parties relates to the valuation of the lost spares. It is a difference of $30m (202m - 172m). It depends on whether the policy entitles KAC to claim for the lost spares on the basis of a "new for old" value or cost or only on the basis of "like for like" or market value.
The relevant provision of the policy is agreed to be Clause 1.6.2 of the All Risks policy incorporated by Section 4.1 of the Expiring War Risks policy. The clause is entitled "Agreed value". It provides that in the event of a total loss of spares KIC "will pay the full replacement costs C.I.F. to" KAC's home base.
KAC submits that "full replacement cost" means that KIC must pay the cost of buying in a replacement for what is lost regardless of any betterment. That is the view of the editors of Clarke on The Law of Insurance Contracts, 3rd Ed para 28-3C and MacGillivray on Insurance Law, 9th Ed. para 19-18.
KIC submits that Clause 1.6.2 applies only in a case where spares are both lost and in fact replaced and in cases where no replacement is obtained "the ordinary common law measure of indemnity applies as it would if Clause 1.6.2 was not present at all ... viz. actual value as at time of loss." Alternatively it is submitted that "replacement" means only replacement in the same condition as the part lost and, if that is not possible, then credit must be given to insurers for any betterment resulting.
In my judgment KAC is right and KIC wrong in these submissions. Clause 1.6.2 is plainly intended to provide for the measure of the indemnity that "will" be paid in the event of a total loss. Payment becomes due the moment such a loss occurs: The Fanti [1991] 2 AC 1 per Lord Goff at pages 35-6. It is expressed without qualification. It does not await the eventuality of actual replacement or not. Nor do I think the reference to C.I.F. leads to any other conclusion. Again, in context, I think it is simply part of the agreed measure of indemnity.
As to KIC's alternative argument, that is equivalent to reading the Clause as if it meant no more than market value. In which case it would be otiose. The commercial purpose of the clause is, I think, to enable the assured to buy in promptly replacements on the basis that it will be likely and may need to do so in order to keep its fleet airworthy and operational. Whilst there might be particular instances where the word "replacement" would not be apt to describe the purchase of new for old, in my judgment in principle the clause sets the measure of indemnity on a new for old basis and in the absence of any evidence of any specific item to which that might not sensibly apply, for the purposes of the present exercise I accept KAC's case and so the figure of $202m.
Non-Spares
There is a small difference of 1.5m (in view of my decision on Value) which arises because KIC submit that some items are not properly within the meaning of the words "spares" in the policy. The particular items which have been used to illustrate the point are "simulator spares". KAC had simulators for training pilots. The simulators themselves were not included in the insurance claim. Spares for simulators were. It can be assumed that the spares, albeit the same as those used in aircraft, are not certified for such use.
The first issue is whether or not the policy defines "spares".
The "Interest" stated in the Quotation was KAC's fleet "including spares and ancillary equipment". The sum insured referred to "Spares/Equipment". The Expiring War Risks Policy by the "Aircraft Spares and Equipment Extension" extended the indemnity provided by the Policy to "Aircraft Spares and equipment." KIC submits that is as far as it is legitimate to go in searching for what is covered and that the word "Aircraft" qualifies both "spares" and "equipment". As to the latter I think KIC is right, but the expressions "Aircraft spares" and "Aircraft equipment" are themselves somewhat vague and imprecise.
Under the All Risks policy:
(1) There was cover under Clause 1.2 for "Spares and Equipment" in terms which I have quoted but which did not refer to "Aircraft Spares and equipment" unlike the Extension to the Expiring War Risks Policy.
(2) There was a definition of the words "Spares and Equipment" which I have also quoted: "engines, spare parts, tools, aircraft material and equipment (including supporting ground equipment)".
(3) Declarations were made to insurers giving a total figure for the value of the spares. That value formed the basis for the final calculation of the premium payable which was rated at a percentage of the declared monthly values at risk.
KAC submits that the definition of "spares and equipment" in the All Risks Policy is incorporated in the War Risks Policy by virtue of general condition 4.1 of the Expiring War Risks Policy. KIC submits it is not because the Expiring War Risks Policy "otherwise provides" by using the expression "Aircraft spares and equipment" which is its own definition or, if narrower than the definition in the All Risks Policy, must prevail.
This is a somewhat arid dispute as both parties also submit that each expression has the same meaning in any event. However, in my judgment there is nothing inconsistent between the two; both are concerned with spares and equipment designed and intended for the purpose of keeping the aircraft both operational and operating and the Expiring War Risks policy does not purport to contain any definition. There is therefore nothing to preclude the incorporation of the All Risks definition and General Condition 4.1 has the effect of incorporating it as KAC contends.
That said, I do not think "simulator spares" are within the definition. They could only qualify as "supporting ground equipment". I think that means equipment used for the servicing of or installation of spare parts in aircraft. I do not think it can sensibly be applied to equipment used to train pilots to fly aircraft. It follows that $1.5 must be deducted in Illustration 2 as KIC contends.
10% Freight.
The figure of 20.2m represents an uplift on the value of the spares of 10% which is claimed as representing the C.I.F. cost of "full replacement" under clause 1.6.2 of the Expiring War Risks Policy. KAC submits that the 10% uplift represents either a conventional figure or compelling evidence of an appropriate figure because it was the figure used in the declarations made under the All Risks policy and was accepted by insurers as such and used for the final calculation of premium under that policy. KIC submits that a C.I.F. cost is only payable if incurred and/or that it is for KAC to prove item by item what the CIF cost would have been pointing out that the geographical source and hence likely CIF cost of delivery of each item of the vast range of spares concerned would vary enormously.
Whilst I cannot accept KAC's submission that the uplift is a conventional figure as it was accepted only for premium calculation purposes under another, albeit closely related, policy, I do accept that the figure and its use provides good and compelling evidence of a probable across-the-board or average CIF price, and, of course, the loss of spares suffered by KAC in this case was on a massive scale involving some 240,000 items.
I have already decided that the "full replacement costs CIF" is the agreed value of the indemnity in respect of spares and not a requirement that such costs actually be incurred and so for the purposes of the present exercise in my judgment it is appropriate to include the 20.2m in the "likely amount" of a final judgment in favour of KAC.
Repair Costs for Recoveries
The figure of $13.6m represent the costs claimed for repairs carried out by third parties to spares which were recovered. KIC submit that this figure is substantially "unaudited" on the evidence. 13 volumes of invoices are available and have been supplied to KIC. But there are real doubts as to the amounts of the costs incurred which may relate to matters other than repairs, for example the cost of dealing with previously existing wear and tear. Nor has it been possible for KIC to check whether the invoices in fact amount to the total sum of $13.6m.
In these circumstances, whilst I am confident that the substantial part of the $13.6m will fall to be deducted from the figure for spares recovered I am not satisfied on the present evidence that it will be greater than a sum of $10m. I recognise that this can only be a rough estimate, but in the context of an interim payment I do not think that such an approach is inappropriate.
"The Comfort Zone"
It was Mr Gaisman's submission that, although KAC had limited their application to the Aircraft Spares, the other claims for items such as spare engines and loaned items were nonetheless obviously sustainable in some significant amounts, and if the figures in Illustration 2 left some doubt as to whether the full indemnity of $150m would inevitably be recovered, the court could take comfort from the other claims (and the fact that the figures in Illustration 2 themselves were minimum figures) and so conclude that $150m represented the "likely amount" of a final judgment as the full claim would be likely to exceed that sum by some margin. For example there is no dispute that 4 spare engines were removed and never recovered. Those engines alone have a value of some millions of dollars.
In principle I think I am entitled to take some limited account of such "comfort factors" in considering the "likely amount" of a final judgment and particularly so in a case where that judgment cannot exceed the policy limit of $150m and the factors are material to the conclusion that the limit is likely to be exceeded.
THE LIKELY AMOUNT OF A JUDGMENT
My findings are such that following the figures in Illustration 2, the column representing KAC's position has to be adjusted only by a reduction in the figure for repair costs from 13.6m to 10m and a further reduction of $1.5m for "items not covered". The total therefore becomes just less than $150m ($148.6m). Bearing in mind the "comfort zone", however, I am quite satisfied that the likely amount of a judgment in favour of KAC would be $150m because the claim would exceed that sum by a significant amount and there is no set-off or counterclaim available to KIC.
THE INTERIM PAYMENT
Mr Gaisman submits that "a reasonable proportion" of the likely amount of the judgment should in this case be the full sum of $150m. There is no doubt that the parties are able to meet or repay that sum. The claim itself arises from events which are now many years in the past. On the other hand, until the decision of the House of Lords in March 1999, there was no claim available to KAC. In my judgment there is no good reason in this case why "a reasonable proportion" should not be the full sum of $150m and none has been suggested. I also think there is a good reason why it is appropriate to order a payment in that amount because, as I have found, the operation of the Policy limit provides added comfort that the "likely amount" of a judgment will indeed be $150m. There are degrees of likelihood. In this case in my judgment the degree is a high one that KAC will establish at a trial that its loss exceeds the limit.
For these reasons I shall order that an interim payment be made by KIC to KAC in the amount of $150m. I will hear the parties at a later date on questions of costs and interest and any other issues to which this judgment may give rise.
(1) The Aircraft by Aircraft Point: Are KAC entitled to retain from the value of those aircraft lost on 2nd August 1990 but subsequently recovered amounts sufficient to indemnify them in respect of their losses on an overall basis (KAC's case) or only amounts sufficient to indemnify them in respect of their loss of each such particular Aircraft (Underwriters' Case)?
(2) The 'Valuation of Aircraft Recoveries' Point: Do those aircraft lost on 2nd August 1990 but subsequently recovered fall to be valued in accordance with their market value (KAC's case) or in accordance with the values ascribed to each such aircraft in the policy (Underwriters' Case)?
(3) The 'Divided Recoveries' Point: Are KAC entitled to retain from the value of those spare parts and equipment lost on 2nd August 1990 but subsequently recovered amounts sufficient to indemnify them in respect of their losses on an overall basis, i.e. in relation to both aircraft and spares and equipment (KAC's case) or only amounts sufficient to indemnify them in respect of their losses relating to spare parts and equipment (Underwriters' case)?