QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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(1) Goshawk Syndicate Management Limited (2) SVB Syndicate Limited (3) Goshawk Dedicated (No.2) Limited (4) SVB Underwriting Limited |
Claimants |
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XL Speciality Insurance Company |
Defendant |
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Mr M. Howard QC & Mr T. Howe (instructed by Eversheds) for the Defendant
Hearing date: Friday 7th May 2004
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Crown Copyright ©
Mr Justice Morison :
The Claimants plead:
"30. On the true construction of the Reinsurance Contract, in particular the "SUM INSURED" provision, the Third and Fourth Claimants are not liable to indemnify the Defendant unless and until:
(1) the Annual Aggregate Deductible of US$5,000,000 has been exhausted; and
(2) the Individual Maintenance Deductibles applicable under the Original Policy in respect of the particular loss or occurrence have been exhausted.
31. If (which is not admitted) The Limited Inc sustained a loss by reason of the attack on the World Trade Center on 11th September 2001, the Annual Aggregate Deductible of US$5,000,000 had not then been exhausted.
32. In the premises, and without prejudice to all defences available to
the Claimants under and/or in respect of the Reinsurance Contract, the
Third and Fourth Claimants are not liable to indemnify the Defendant under the Reinsurance Contract in respect of the Reinsurance Claim."
"41. As to paragraphs 29 and 30:
41.1 it is in the premises admitted and averred that the Reinsurers are
not entitled to avoid the 2001 Reinsurance Contract;
41.2 it is denied that the Reinsurers are not liable to indemnify XL
under the 2001 Reinsurance Contract in respect of its Reinsurance Claim,
for the reasons alleged in paragraph 30 or otherwise:
41.3 the construction of the 2001 Reinsurance Contract alleged in
paragraph 30 is denied;
41.4 on the true construction of the 2001 Reinsurance Contract, in the
event of a claim on the 2001 Original Insurance which contributes to the
erosion of the AAD (of US$5 million) and;
41.4.1 which does not exhaust the AAD, then the Reinsurers are liable to indemnify XL in respect of the amount by which such claims exceeds US$1 million (subject to the individual maintenance deductibles applicable prior to the exhaustion of the AAD to the particular loss or occurrence), up to the limit of the 2001 Reinsurance Contract (US$20 million), and the AAD is eroded by the amount of that claim, subject to a maximum erosion of US$1 million, in respect of any single loss;
41.4.2 which exhausts the AAD, then the Reinsurers are liable to indemnify XL in respect of the amount by which such claim exceeds the unexhausted balance of the AAD prior to that claim (subject to the individual maintenance deductibles applicable upon exhaustion of the AAD to the particular loss or occurrence), up to the said limit of the 2001 Reinsurance Contract;
41.4.3 which applies after the exhaustion of the AAD, then the Reinsurers are liable to indemnify XL in respect of the whole of such claim (subject to the individual maintenance deductibles applicable after exhaustion of the AAD to the particular loss or occurrence), up to the said limit of the 2001 Reinsurance Contract;
41.5 save as aforesaid paragraphs 29 and 30 are denied."
A. Annual Aggregate Retention: This Policy shall be subject to an Annual Aggregate Retention of US$5,000,000 for all cargo losses and occurrences resulting in covered losses under this Policy. Only occurrences resulting in paid losses equal to or greater than $25,000 for Property, Business Interruption and Extra Expense, and $2,500 for cargo losses shall be counted towards the accumulation of the Annual Aggregate Retention. Any paid loss which does not meet the applicable threshold shall not contribute to the Annual Aggregate Retention. Any paid loss which is equal to or greater than the applicable threshold shall contribute in full to the Annual Aggregate Retention. The maximum amount applied to the Annual Aggregate Retention shall be no greater than US$1,000,000 any one occurrence or cargo loss. Any one occurrence or cargo loss in excess this $1,000,000 to be paid by the Company.
The Assured shall be responsible for all loss amounts up to the amount of the above Annual Aggregate Retention for any one policy year. All such losses paid by the Assured shall be reported to the Company at the end of each calendar quarter.
All loss amounts in excess of the Annual Aggregate Retention shall be paid by the Company subject to the application of the Individual Maintenance Deductibles as set forth below.
Notwithstanding that the Company may pay covered losses directly to third parties, to the extent any portion of said payments is subject to the Annual Aggregate Retention, the Assured agrees to indemnify the Company for any amount falling within the Annual Aggregate Retention within 30 days of payment by the Company.
In the event of an occurrence or cargo loss under this Policy triggering multiple Individual Maintenance Deductibles, only the largest Individual Maintenance Deductible triggered by said occurrence shall be applied to any and all covered losses arising out of that occurrence.
Individual Maintenance Deductibles: Once the Annual Aggregate Retention has been exhausted, the following Individual Maintenance Deductibles shall apply to each and every occurrence or cargo loss.
Section I: Global Transits.
All claims under this section are subject to the following deductibles: US$2,500 per cargo loss except for claims at Local Delivery Agents which are subject to a deductible of US$750 per carton or two cartons maximum per cargo loss.
Notwithstanding the foregoing, claims recoverable under the Institute Cargo clauses….shall be payable in full.
Section II. Property and Where Insured Physical Loss or Damage Causes Insured Business Interruption or Extra Expense under Section III.
All claims except California Earthquake under this section are subject to deductible of US$25,000 per store, per occurrence, subject to a $250,000 maximum per occurrence, per mall.
California Earthquake: Real property and personal property losses are subject to a deductible of 5% (five per cent) of the total insured value with a minimum deductible of US$250,000 per occurrence.
In the event of an occurrence or cargo loss under the Policy triggering multiple Individual Maintenance Deductibles, only the largest Individual Maintenance Deductible triggered by said occurrence shall be applied any and all covered losses arising out of that occurrence.
For the purpose of administering recoveries it is agreed that where the Assured assumes responsibility for payment of a claim under the above annual aggregate deductible then they shall be entitled to receive 100% of any recovery amount obtained from third parties for such claim regardless of whether the annual aggregate amount has been exhausted or not".
i. Interest clause. "ALL AS PER ORIGINAL POLICY" but only in respect of the risks covered by the reinsurance.
ii. Basis of Valuation Clause: "VALUED AS PER ORIGINAL POLICY".
iii. Sum Insured Clause: "USD 20,000,000 any one loss, disaster or casualty, and in the annual aggregate in respect of California earthquake. This policy to respond only for losses in excess of original annual aggregate deductible of USD5,000,000 and original underlying deductibles."
iv. Conditions clause: "ALL AS PER ORIGINAL XL INSURANCE COMPANY POLICY- the risk hereunder commencing and terminating exactly as under the original policy."
v. Claims clause: "(1) The Reassured shall control and settle all claims with binding effect on Reinsurers who will bear their proportionate part of the losses and expenses connected therewith according to the settlement of the Reassured.
(3) The Reinsurers shall in all respects follow the fortunes of the Reassured and pay as may be paid in connections with the original insurance including any expenses……"
vi. Information clause. This contained a summary of the provisions of the original policy regarding limits of liability and deductibles:
"Original policy terms are:
LIMITS OF LIABILITY:
Original Policy Limits:
USD 20,000,000 (first loss where applicable)
Or equivalent in other currencies.
Deductibles: USD 5,000,000 annual aggregate
However, only individual claims equal to or greater than:
Stock-USD25,000 per occurrence
Cargo-USD 2,500 per occurrence
Shall contribute to this aggregate.
Additionally, maximum individual claim contribution to the aggregate retention shall be set with a USD 1,000,000 stop loss
Should the annual aggregate be exhausted the following deductibles per occurrence shall apply:
All claims except California Earthquake:
a)USD 25,000 per store, subject to a USD 250,000 maximum, per occurrence per mall
b) USD 100,000 all other locations
In the event an occurrence involves deductibles described in (a) and (b) above, a USD 250,000 maximum deductible per occurrence shall apply.
California earthquake:
"Stock Only" personal property losses are subject to a deductible of 5% of the total insured value with a minimum deductible of USD 250,000 per occurrence."
(1) There are two types of deductible under the policy: the AAD of US$5 millions and deductibles that arise after the AAD has been exhausted [the maintenance deductibles]. These latter deductibles vary in amount and are affected by whether the damage has been caused by a Californian Earthquake.
(2) It is common ground that at the date of the disaster, the AAD had not yet been exhausted. Therefore, looking at the words of the second sentence of the Sum Insured clause in the slip policy, the policy did not respond to it. The policy was to respond "only" for losses "in excess of" the AAD and thereafter only after the maintenance deductibles had been exceeded. The word "and" in that sentence confirms this interpretation: the "underlying deductibles" are the maintenance deductibles which only 'come into play' [my words] after the AAD has been exceeded. The underlying deductibles are not apt to include the threshold points, which are not properly called deductibles. These words also do not cover the $1 million stop loss which is not a deductible. If it were, then there would have been no need for a reference in the Sum Insured Clause to the AAD; it would have been sufficient simply to say "in excess of original underlying deductibles".
(3) The Insurers' argument is posited on the basis that the Reinsurers' liability is back-to-back with them, but this is not supported by the wording of the policy itself: the natural and ordinary meaning of words. There is a plain difference between saying that there is a liability to indemnify the Insurer for sums in excess of $1 million, any one claim or occurrence, and what the clause actually says. It would have been easy for the draftsman to have used clear words had it been the parties' intention to produce the result for which the Insurers are contending.
(4) On the Insurers' interpretation, the Insurers would retain no risk in relation to the matters covered by the reinsurance. They would effectively have been 'fronting' for the Claimants, and in such an event it would have been unlikely that the Reinsurers would have been content for the Insurers to retain claims control, with a follow the fortunes clause.
(5) The Insurers also say that the result contended for would be 'uncommercial'. In answer to that point, it is not for the court to re-write the parties' bargain, even if it perceived the contract to be one-sided or even lop-sided. I should make no 'a priori' assumption about the distribution of risk between the parties; I should simply construe the words they have used to express their bargain.
(1) The reinsurance contract must be construed as a whole. In respect of the risks which were covered, the policy made it clear that it was "all as original". The words of the Sum Insured clause referred to the "original" AAD and the "original" underlying deductibles. In respect of the risks covered by the reinsurance it was plainly intended that the cover should be 'back-to-back'. The Reinsurers are liable to follow the fortunes of the Insurers. Accordingly, the provision for an annual aggregate deductible is varied with respect to large losses so that the Insurers, and thus the Reinsurers, are liable for large losses in excess of $1 million, before the AAD has been exhausted. The effect of the Reinsurers' argument is to give them a different excess provision from that in the Insurance policy, thus subverting the concept of 'all as original'.
(2) The Sum Insured Clause tracks the scheme of the original policy both as regards limits and retentions and deductibles. The words "original" AAD and "original" deductibles reflect no more and no less than the whole of the terms of clause 5A of the underlying policy.
(3) The AAD referred to in the Sum Insured clause incorporates within it the special arrangement relating to a claim in excess of $1 million.
(4) The Reinsurers' argument is contrary to commercial and common sense. The Reinsurers received almost two thirds of the whole premium for reinsuring only part of the risk. For a series of low losses below $1 million the Reinsurers would be on back-to-back terms with the Insurers. But for the larger losses the respective position of the parties is radically altered. Had the World Trade Centre been attacked after the AAD had been exhausted then, subject to the maintenance deductibles, the Reinsurers would have borne the whole loss. If the disaster occurred when the AAD had been eroded to the extent, say, of $3.5 million, then the Insurers would, on the argument of the Reinsurers, be responsible for the whole loss. This is a capricious and unlikely result.
The Decision