England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
COMMERCIAL COURT
COMMERCIAL

		Royal Courts of Justice Strand, London, WC2A 2LL
		04 February 2005

MR JUSTICE CHRISTOPHER CLARKE:

1. This case concerns the correct method of applying the excess in a hull and machinery excess of loss reinsurance contract.

The facts

2. "Treasure Bay" is a floating casino. On 27^th September 2002 she was moored at Biloxi, a city on the south coast of Mississippi, in an area prone to hurricanes, when she was badly damaged by tropical storm Isidore. She was insured for $18,750,000. One of those who insured her was Allianz Marine and Aviation S.A. ("Allianz"), the Claimants in this action. They wrote a 47.5% line which later signed down to 45.238%. The claim that followed was settled for $17,857,901.85.
3. Allianz had reinsured themselves with GE Frankona Reinsurance Limited London ("Frankona"), the First Defendants. Allianz's brokers were Alwen Hough Johnson Ltd ("AHJ"), the Second Defendants. Frankona and Allianz agree that Frankona reinsured the whole of Allianz's 45.238% share. AHJ say that Frankona reinsured 45.238% of 70%. This is a trial of all the issues between Allianz and Frankona and it is not, therefore, necessary for me to reach any decision as to whether AHJ are correct in what they say.
4. The reinsurance came about in this way. In June 2001 Frankona agreed with AHJ a facility the relevant terms of which were as follows:

TYPE	Excess Hull and Machinery Reinsurance
FORM	Mar '91 Slip Policy
REASSURED	Various Insurance Companies and/or Lloyd's Syndicates as declared by Alwen Hough Johnson Limited and/or their agents
ORIGINAL ASSURED	As declared
VESSELS	As declared
EXCESS OF	Including New and/or Acquired and/or Added as original
PERIOD	Declarations attaching during 12 months at 1st July, 2001 and/or period as original
INTEREST	Hull and Machinery and everything connected therewith
SUM REINSURED	As per Original Policy, but limit hereunder USD 10,000,000 any one vessel, over all interests.
CONDITIONS	To follow original settlements of the Reassureds in all respects, being a reinsurance subject to the same clauses and conditions against the same perils as in the original policy or policies, but only to pay claims excess of amount stated each declaration.
	……
	If extended to include Total Loss from Ground-Up, to follow the settlements of the Reassured in all respects, subject to the same conditions and clauses against the same perils as in the original policy or policies, but only in respect of Total and/or Constructive Total Loss and/or Arranged Total and/or Compromised Loss of Vessel.
	….
RATE	As agreed per each declaration.
ORDER	As declared

Frankona stamped the facility beneath the words "100% of Orders".

5. The facility was what its name implies. It did not confer authority on AHJ to bind Frankona. But it enabled AHJ to propose risks to Frankona on the basic terms and conditions set out in the facility with the variants applicable to each individual risk being as declared or agreed. The advantage of such an arrangement is that it streamlines the acceptance of risk and avoids the need for negotiation, in each case, of terms other than those that must necessarily be specific to the individual risk in question. It is of particular utility where the risks are of a relatively small size, when it would be either uneconomic or inefficient to draw up new terms on each occasion when reinsurance was proposed.
6. The facility agreed in 2001 was a renewal of a previous facility in similar terms for declarations attaching for 12 months from 1^st July 2000, which itself was a renewal of a facility in respect of declarations attaching between 27^th June 1999 and 30^th June 2000. That latter facility replaced an earlier facility that had been set up by Mr Keith Chambers, who was the broker at AHJ concerned in the placement of the "Treasure Bay" risk, when he was at Windsor Insurance Brokers Ltd. He moved to AHJ in December 1999, and the facility was transferred to AHJ when he did so. When the facility was first established the underwriters principally concerned at Frankona were Mr Peter Sydenham, who was the Senior Hull Underwriter, and Mr Jerry Carter, who was the Assistant or Deputy Hull Underwriter. They left Frankona at the end of 2001 or the beginning of 2002 and the facility then came to be operated by Mr Michael Southgate and Mr Michael Thompson, both of whom gave evidence before me.
7. The reinsurance of Treasure Bay was agreed on 27^th May 2002 when Mr Thompson scratched two declarations prepared by AHJ. There were two declarations because amendments to what was set out in the declaration as originally drafted were put down on two different copies of it. The final agreement was in the following terms, so far as now material:

"REASSURED	AGF MAT
ORIGINAL ASSURED	TREASURE-BAY CORPORATION
VESSEL(S)/VALUE(S)	"Treasure Bay" Value USD 18,750,000
	……
PERIOD	1.6.2002 - 30.10.2002
SUM INSURED	47.50%
CONDITIONS	To follow the original settlements of the Reassureds in all respects, being a reinsurance subject to the same clauses and conditions against the same perils as in the Original Policy or Policies, but only to pay claims excess of USD 5,000,000 each vessel, each accident.
	…..
RATE	0.75% on exposure
INFORMATION	Warranted no known or reported losses at 1st June 2002.

The issue

8. At issue in this case is the proper method of applying the excess of $5,000,000. Allianz contend that you must apply the excess to the settlement figure ($17,857.901- $5,000,000 = $12,857, 901) so that they then receive their 45.238% share of that, being $5,816,657.74. Frankona say that you should apply the excess to Allianz's share of the settlement figure ($ 17,857,901 x 45.238% = $8,078,557 - $ 5,000,000) making $3,078,557.
9. Before the "Treasure Bay" declaration there had been 80 declarations under the facility. These are contained in the fourth of the trial bundles. The only significant claim in respect of these reinsurances was on the "Treasure Bay". The declarations in this bundle are the final contractual documents from Frankona's files. This documentation was preceded by quotations. These documents are not before the Court. Frankona sought discovery of such material but that was refused upon the ground that, whilst the previous contracts entered into pursuant to the facility were or might be relevant and admissible material, the preceding quotations were not. It is, however, necessary for me to say something about how AHJ went about placing business with Frankona under the facility.
10. Matters would start by AHJ being asked by a client, an underwriter under the original insurance, to see if they could secure reinsurance. The client would give AHJ such details of the insurance as it was prepared to give. AHJ would then go and see Frankona. They might take with them information about the insurance in the form that their client had given it to them, but very often they would prepare a document in the form of the "Treasure Bay" declaration including details of the relevant vessel(s), period, and interest, but usually not the sum to be insured under the reinsurance. Frankona would quote a rate and AHJ would then revert to their client to see if that rate was acceptable. If it was they would come back to Frankona, one of whose underwriters would scratch the now fully completed declaration, and the contract of reinsurance would be made.
11. Sometimes AHJ would be able to acquire a new client along the way. Thus, to take an example: in Declaration 12, the Reassured is described as "Lloyd's and/or Companies" and the sum reinsured is 10% (expressed as "HEREON 10% of Exposed Amounts"). The vessel was an accommodation and work barge. AHJ's original client had been the Hiscox syndicate. Later on AHJ learnt that two other syndicates were interested in reinsurance on the terms that could be obtained for Hiscox, and the 10% line reinsured is, in fact, an amalgam of the lines of all three syndicates. The declaration does not, however, identify the three syndicates, nor is there any Frankona documentation that indicates that Frankona ever learnt which they were.
12. In some cases AHJ had no intention of seeking to secure further orders, either because the order was merely a renewal of a previous one, or because the circumstances of the order were somewhat special and made the likelihood of further orders unrealistic or remote. Mr Chambers identified 11 declarations in that category (Nos 3,12,19,27,28,39,43,54,60,78 and 80), although he stressed that that list was not exhaustive. Even in respect of some of these there was a possibility of further orders, as is apparent from the fact that declaration No 12 is one on his list.
13. The 81 declarations provide for different types of cover. Some of them (about 30) only provide for cover against Total Loss "from the ground up" i.e. without any excess. 9 of them are in respect of excess of loss only and provide no total loss cover. "Treasure Bay" is one of those 9. The rest are declarations where there is both excess of loss cover and either cover against total loss from the ground up or an option to take that cover. These declarations have been termed "hybrids".
14. The declarations have different descriptions of the Reassured. In 5 cases the Reassured is named (in one case, No 56, only in a covering letter). These 5 include "Treasure Bay" where the words "Lloyd's and/or companies" have been crossed out and the letters "AGF MAT", signifying Allianz, have been added in ink against Mr Thompson's scratch. In many cases the Reassured is described simply as "Lloyd's and/or companies". In some cases (15 where there is excess of loss cover, and 10 where there is TLO cover only) there is no reference to the Reassured or the name of the Reassured is left blank.
15. In 17 cases, including "Treasure Bay", the parties have used the expression "x% of Exposed Amounts" to describe the amount of the reinsurance. In those cases there is no further written explanation of what that means. But in 12 cases the value of the Exposed Amount has been calculated either in the body of the declaration or in a schedule. Thus, to take Declaration 7 as an example, the excess figure was $750,000. The first entry in the schedule is:

VESSEL	VALUES	EXPOSED AMOUNTS
1."ANTHONY"	US$ 5,000,000	US$ 4,250,000

and there are then 4 other vessels where the figure of $750,000 has been deducted from the original value so as to produce the exposed amount. Frankona accept that in 16 of the 17 cases where the meaning of "exposed amounts" is not spelt out, the excess is to be deducted from the original values. The exception is "Treasure Bay".

16. Whether the Claimants are right in their contention depends, amongst other things, on whether, when the conditions state that the reinsurers are "only to pay claims excess of US$ 5,000,000 each vessel, each accident", the "claims" that are being referred to are the claims of the original insured on its insurers, or the claims by the reinsured on its reinsurers. Before I address that question it is necessary to examine further the context in which it arises and the immediate circumstances in which the contract in issue came to be made.
17. It is common ground between the parties that in all the 80 declarations that preceded the "Treasure Bay" the excess must be deducted from the figure at which the original underwriters have settled the claim (being at the highest the value of the vessel under the original insurance, less any deductible). In all these declarations the expression "claims excess of $x million" must be treated as a reference to the claims of the original assured on the reassured insurers, and this is so regardless of whether or not the cover included total loss cover (optional or otherwise). Allianz rely on that circumstance as constituting either part of the factual matrix by reference to which the Treasure Bay declaration is to be construed, or an agreed understanding between the parties as to the meaning of "claims" which is determinative of the proper construction of the clause.
18. The reasons why, in respect of the previous 80 declarations, it is accepted that Allianz are right in saying that the excess must be deducted from the original values differ. Allianz claim that that is the correct meaning in any event and that the matters to which I am about to refer merely serve to confirm the position. Frankona, on the other hand, point to a number of features of those 80 cases, which, as they accept, show that the Allianz construction is right in all of those cases. But, as they submit, those circumstances do not apply to "Treasure Bay", as a result of which a different conclusion must follow.
19. Firstly, Frankona accept that, where the declaration, or a schedule to it, sets out the calculation of the "Exposed Amount" in such a way as to show that the excess is to be deducted from the original values, the contract must take effect accordingly. (I refer to "original values" for the sake of convenience. Frankona would in fact pay the relevant percentage of the settlement figure, which would take account of any deductible).
20. Secondly, Frankona accept that Allianz's construction is to be applied to hybrids, including hybrids where total loss was optional and the option was not taken up. It is not apparent to me how the fact that Total Loss cover, or an option to take it, is included by way of extension to the excess of loss cover, can affect the way in which the excess is to be applied. Mr Southgate suggested in evidence that where there is total loss cover, the focus is on the whole of the original value, and that it would be anomalous for the excess to be applied to anything else. I do not accept this. In respect of Total Loss cover there is no excess to apply; the fact that it is included tells one nothing about how, where there is an excess, it should be applied.
21. Thirdly, Frankona accept that where the reinsured was described as "Lloyd's and/or companies" Allianz's construction is correct.
22. Take, for example, Declaration No 12, to which I have already referred. In that case there was no total loss cover, the Reassured was described as "Lloyd's or companies", the original value was US$ 8,500,000, the excess was US$ 3,000,000, and the reinsurance was for "10% of Exposed Values". So, if the excess was applied to 10% of US$ 8,500,000 there would be no cover at all.
23. That would seem reason enough for concluding that the parties cannot have intended the excess to be applied in that way, but Frankona submit that the, or an, important feature of a declaration such as this is that the reinsurance was "for the market" as appears from the generic description of the Reassured. So, it is submitted, the only workable basis was for the excess to apply to the underlying risk.
24. The reason for that was said to be this. Suppose that a single vessel was insured for US$10,000,000 by ten original insurers (A, B, C etc) in different proportions (30%, 20%, 10% etc) with consequently different exposures (US$3, US$2, and US$1 million respectively). Suppose then that AHJ has an order from A, and Frankona quoted a rate for US$ 2.7 million excess of US$ 300,000. That would obviously make sense for A. But if AHJ then sought to interest B and C, they could not do anything with that quote for B or C, whose exposure does not reach US$ 2.7 million and for whom an excess of the same percentage of their total exposure as in the quote for A would amount to US$200,000 and US$100,000 respectively. So it would be necessary to tailor the reinsurance terms to the individual cedant. By contrast if the excess is applied to the original value(s) the quote can be taken around the market. If, for instance, the excess of US$1,000,000 and is applied to a US$ 10,000,000 original value, AHJ can seek orders for any proportion of the cover of US$ 9,000,000. Although the declarations in the fourth trial bundle record the concluded contracts of reinsurance, they, or something like them, started out life as quotations and their wording was fashioned so that it could, if occasion arose, be taken round the market, without alteration, in order to interest potential reinsureds other than the original client.
25. Declaration 12 is not the only declaration where the application of the excess to Allianz's percentage of the original value insured would either mean that there was no insurance against partial loss in respect of some or all of the vessels covered by the declaration, or a level of insurance so meagre that this result could not have been intended. I take two further examples.
26. In Declaration No 10 two Reassureds were covered in respect of three vessels valued at US$ 4,000,000, US$ 3,500,000 and US$ 4,000,000 respectively. They were also covered in respect of total loss from the ground up. In respect of the first Reassured the sum insured was 10% and the excess was US$ 1,000,000. If the excess is applied to 10% of the underlying loss, then, in order for there to be any recovery in respect of partial loss, all three vessels would have to suffer a loss exceeding US$10,000,000 in all (but with none of them becoming an actual or constructive total loss) and then the recovery would only be US$ 150,000 at most. In the case of Declaration 26 6 vessels were covered valued at either US$ 6,000,000 or US$ 5,000,000 each. The sum insured was 15%. The excess was US$ 2,000,000. If the excess is applied to 15% of those values, no cover would be provided in respect of any partial loss since 15% of US$ 6,000,000 is US$ 900,000.
27. There are many other examples to the same effect. Of the 81 declarations 34 were either total loss only covers, or renewals. I was told that of the remaining 47, if the excess is deducted from the insured percentage of the original value, then in 42 cases all or some of the vessels would have no excess cover at all and the vessels which would have no cover would have been 224 out of 274. Frankona accept that in these cases the Claimants' construction is correct.
28. In contrast, as Frankona submit, the "Treasure Bay" contract (a) did not on its face, or in a schedule, contain any calculation deducting the excess from the original value; (b) was not a hybrid; (c) involved only one specified insured, no other one being contemplated; and (d) produces, on Frankona's construction, a perfectly sensible level of indemnity, albeit one markedly less than that which would result if the Claimants are correct.

The guideline

29. The facility provided that the limit under it was $10,000,000. In addition there was an internal guideline that the maximum order thereunder was not to exceed 20%. A notation to that effect was written by Peter Sydenham on the cover sheet, giving details of the facility, which was included with the declarations in the relevant Frankona file. The guideline was usually followed, or only departed from to a modest extent (5% or so). But it was what it was stated to be, namely a guideline. On occasion a more substantial order was accepted. The potential significance of the guideline lies in the fact that, in respect of the "Treasure Bay" declaration, if the excess is deducted from the original value, as Allianz claim, their recovery will exceed 20%; if deducted from the Allianz proportion it will not.
30. There is an issue as to whether or not AHJ were made aware of the guideline. As to that, there is no evidence that Mr Chambers, or anyone else at AHJ, was shown the cover sheet or that he saw it at any stage. The cover sheet was first filled in by Mr Carter, who I was told may be unwell, and who made no note of the guideline on it. Mr Sydenham, who made the note on the cover sheet, was not called, although he is presently employed by Frankona. Presumably he cannot, and in any event he did not, say that he ever discussed it with AHJ. Mr Thompson's oral evidence to me was that he had no conversation with Mr Chambers about a 20% underwriting guideline, but that he had a vague recollection of "talking to him about individual declarations", although he could not recall exactly what he said. Mr Southgate's evidence was that he certainly mentioned the guidelines to Mr Chambers before the "Treasure Bay" and that Mr Chambers was well aware that, if he approached Frankona for cover, it would be extremely unlikely that underwriters would accept shares in excess of about 25% of original values exposed or $10,000,000 other than in exceptional circumstances.
31. Mr Chambers' written evidence was that he was not aware of any 20% guideline, either when the facility was established or when it was renewed, and that to the best of his belief such a guideline was never discussed in the course of negotiating individual declarations. But in his oral evidence he accepted that from time to time Mr Southgate or Mr Thompson would have told him, in relation to a particular risk "We can't take more than 20%", although he would not have been able to say whether that was on account of a guideline or not.
32. I regard Mr Chambers' evidence on this as convincing and in accordance with the probabilities. I am not satisfied that Mr Thompson and Mr Southgate made it clear to Mr Chambers that they were bound by an underwriting guideline rather than indicating to him, on occasions, that they could not go above 20%. That circumstance does not, however, seem to me to cast much light on the question at issue, not least because in October 2001 Frankona quoted for a reinsurance of "Treasure Bay" which itself would exceed the 20% guideline. It is consistent with this conclusion (i) that, in his written statement of 29^th September 2004 Mr Thompson said that the only "given" was that Frankona's exposure would never exceed $ 10,000,000, each vessel, each accident, (ii) that no one at Frankona appears to have suggested to Allianz that the 20% guideline had any significant bearing on the construction of the cover until reference was made to it in Mr Southgate's statement of 7^th January 2005. Nor do I think that the position would have been any different if Mr Chambers had been told in terms that there was a 20% guideline.

The October 2001 quotations

33. The brokers to the original insurance of "Treasure Bay" were Craven and Partners Ltd ("Craven"). The vessel was insured for a period of 12 months from 1^st November 2001. In October 2001 Mr Hudson of Craven sought a quotation for reinsurance from Frankona. On 19^th October Mr Southgate of Frankona scratched a quote which provided as follows:

"$8.5.m X $ 1.5. (for AGF share)

@ 40% ONP

- 10% bkge

100%"

This quotation made plain that the excess was to apply to the Frankona share. On 31^st October Mr Southgate gave another quotation as follows:

"XS $2m each acc (for 100%)

@ 0.65% cro

on exposed amts

limit $16.75m

- 15%

100% of order (max 53% of whole)

This quotation made it plain, by the reference "(for 100%)", that the excess was to apply to the original value.

34. No record of that quotation appears to have been retained by Frankona. A copy of Craven's notes of the two quotations had to be obtained by Frankona from them during the course of these proceedings. In Allianz's record sheet in respect of the "Treasure Bay" there is a note of what appears to be the second October quotation. Neither of these quotations was accepted by Allianz.
35. Nothing material happened thereafter until May 2002. On 23^rd May 2002 two important events occurred. First, Frankona entered into a contract of reinsurance, pursuant to the facility, whereby they reinsured seven vessels belonging to Clearwater Fine Foods Inc. The Reassured was described as "Lloyd's or Companies", although it was in fact Allianz. The sum insured was for "25% of values", and the excess was Can$ 5,000,000. There was no TLO cover. The rates were put at various percentages of what must be exposure (although the word is not used on the face of the declaration). A Schedule set out details of the seven fishing vessels insured, their values in Canadian dollars and the exposed value, which was calculated by deducting Can $ 5,000,000 from the original value. The declaration was scratched by Michael Thompson "per MJS", indicating, as was the case, that Mr Thompson had bound the risk but that Mr Southgate had negotiated the business. The Allianz line that Mr Chambers had sought to place was 45%. In the event he had to place the additional 20% with the Goshawk syndicate, where Mr Sydenham was by now an underwriter.
36. In his witness statement Mr Chambers said that he was not clear, from looking through his file, whether he produced the schedule at the quotation stage;

"however my presentation would have covered the risks involved and the basis on which the excess was to apply, and, if the schedule was not in that format originally, I would have drawn it up to summarise the basis of my presentation. I definitely would have presented a schedule of values. Before accepting the risk Mike Thompson would also have considered the schedule himself and would not have initialled the slip unless he was confident that his boss, Mike Southgate, was happy with it".

37. Mr Bernard Eder, Q.C., submitted to me that this evidence indicated that Mr Chambers perceived the need to explain that the excess would apply in the manner argued for by the Claimants, and that he did so, whereas this was something that he did not do in the case of the "Treasure Bay".
38. I do not think that Mr Chambers was saying anything more than that the effect of his presentation of the risk, including whatever schedule he presented, would have been such as to make clear how the excess was to be applied. Mr Chambers told me that he thought it unlikely that the schedule which he presented when he sought a quote was in the form in which it appears in the fourth bundle, and that that schedule was produced later. He believed that what he would have produced would have been a copy of the original placing, which would not have referred to an excess.
39. When I questioned him on what, if anything, he recalled saying, he told me that he thought that he would have said nothing at all about the application of the excess, assuming that it would apply in the usual way, and this seems to me to be likely to be so.
40. On the same day Mr Thompson gave a quote to AHJ by writing on the second page of a copy of the original insurance for "Treasure Bay" the following:

"12m 1/11/02

XS $ 5m

@ 1% on exposed".

Neither Mr Thompson nor Mr Chambers had any recollection of discussing how the excess was to be applied or what the exposure was to be, and I conclude that there was none.

41. Thus it was that on the same day reinsurance was bound under the facility which indicated that the exposed value was the original value less the excess, and a quote was give for "Treasure Bay" where the sum insured was "25% of values" which, as appears from the schedule that is attached to Frankona's copy of the declaration, referred to exposed values, being the original values less the excess. Allianz submit that the reference to "exposed" or "exposure" must mean the same in each case. Frankona say that there is a critical difference in that the meaning of exposed was shown in the schedule to the Clearwater declaration but not in the "Treasure Bay" quote or declaration.
42. Mr Chambers' evidence was that in May 2002 he was unaware that Frankona had previously given Craven & Partners a quote for excess hull and machinery cover on the Treasure Bay, and that Allianz had not told him. Mr Thompson's evidence was that, when Mr Chambers first approached him for a quote, he said words to the effect that Michael Southgate had previously quoted for this risk for Craven but he, Mr Chambers, was AGF (i.e. Allianz)'s preferred broker. Mr Thompson told me that he remembered this because it seemed incredibly self important.
43. I think that the likelihood is that Mr Chambers did make some reference to Michael Southgate having previously quoted and did so in terms which indicated that he was now the broker through whom Allianz wanted to act. I do not believe that Mr Thompson is entirely wrong in his recollection of what Mr Chambers said. His recollection of the self importance of the statement seemed to me to have the ring of truth about it, and that impression was reinforced by Mr Chambers' acceptance that it was the sort of statement that he would make in jest, although he could not imagine that he made it on this occasion. Further, when cross examined by Mr Eder, Mr Chambers accepted that it was quite likely that Mr Hensman of Allianz told him that they had tried to get reinsurance earlier in the year, and that what he would expect Mr Hensman to have done was not to prejudice the possibility of getting a better quote by telling him the terms of the quote previously obtained.
44. But I do not accept that, contrary to his evidence to me, Mr Chambers was aware of the terms of the October quotations, or that it was Craven who had obtained them, or, which is of greater importance, that the May quote was discussed by reference to the October quotation. I reach that conclusion for a number of reasons. Firstly, Mr Thompson's evidence, insofar as it was to the contrary, was of the vaguest kind ("Keith Chambers was obviously aware of the terms of the quotation(sic) provided by Michael Southgate to CP in October 2001 and made reference to them during our discussions for the cover eventually provided"). That vagueness is consistent with the fact that Frankona had no documentary record of the October quote, which had not been given by Mr Thompson. Secondly, I found Mr Chambers convincing when he told me that, when he brokered "Treasure Bay", he was not aware of the terms of the October quotes or that Craven had been involved. If he had been I would expect him to have made a note of them. He did not. Thirdly, if in May 2002 there had been discussion of the "Treasure Bay" reinsurance by reference to the October quotes, I would expect Mr Thompson and Mr Chambers to be able to tell me what the nature of that discussion was, and that there would have come into existence some note to the effect that the excess was, despite the use of the usual wording, to apply to Frankona's share.
45. The "Treasure Bay" declaration was scratched by Mr Thompson on 27^th May. It is common ground that nothing was then said about the operation of the excess.

Construction

46. I have set out the history at some length because, in deciding what meaning is to be attached to the contract of reinsurance for the "Treasure Bay", it is necessary to know its genesis and context, the market in which it was made, any other circumstance of which the parties to it were or could reasonably be expected to have been aware and, in Lord Hoffman's words "anything which would have affected the way in which the language of the document would have been understood by a reasonable man", with the exception of previous negotiations and declarations of subjective intention.
47. Mr Mark Howard, Q.C., for Allianz, submits that the key to the true construction of the declaration is to be found in the fact that the excess provision is contained, not in the description of the sum insured, but in the follow the settlements clause. In Insce Co of Africa v SCOR [1985] 1 Lloyd's Rep 312, Goff, L.J., as he then was, after an exhaustive review of previous authority, said:

"In my judgment, 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 a claim by their assured, i.e. when they dispose, or bind themselves to dispose, of a claim, whether by reason of admission or compromise…

(italics added)

So, in the present case, he submitted, there has been a claim by the original assured, which has been settled by the reassured. The reinsurer agrees to follow the reassured in his settlement of that claim but only to pay claims in excess of US$ 5,000,000. In that context "claims" must mean claims on the original insurer. If the parties had wanted to make the excess applicable to the insured percentage of the original value they could readily have done so by other means, including simply omitting the word "claims" from the follow settlements clause.

48. Mr Eder submitted that use of the word "claims" in a contract of insurance or reinsurance naturally refers to the claim of the assured in the former, and of the reassured in the latter case; and that the passage in Lord Goff's judgment took the matter no further. "Claims" could mean either claims of the assured or the reassured and, in the context in which Lord Goff was using, it had plainly to relate to the former. (Indeed he was referring to a claim against that insurer with whom the claimant had a contract of insurance). That did not mean that the word meant the same in the present context. At any rate the word "claims" was ambiguous and, since the wording of the facility was provided by Allianz's brokers, the ambiguity should be resolved against Allianz .
49. Whilst I see the force of Mr Eder's submission, I accept the submission of Mr Howard that the inclusion of the excess wording in the follow the settlements clause is apt to shift the focus of attention to the claim of the original insured, which the insurers will settle, and to limit the amount, in respect of which the reinsurers are to follow the insurer's settlements, to settlements by him of claims on him insofar as they exceed $5,000,000 each vessel, each accident.
50. If the declaration stood alone, and there was no facility, that is a conclusion that I would reach with some hesitation. But I do not have to construe the declaration as if it stood alone, nor should I do so. It has to be seen in the context of the facility and the 80 declarations that preceded it. That is of significance in at least two ways. The first is that the purpose of the facility was that AHJ should make declarations of the type that were in fact made, including in particular, modest reinsured lines, such as 10% or less, with relatively large excesses. As has already been pointed out, many of these declarations would be meaningless unless the Claimants' construction is adopted because the apparent cover for partial loss would thereby be rendered illusory. That itself would point powerfully to the correctness of their construction.
51. The second is that one of the purposes of a facility such as this is that certain terms will be standard for each declaration. The understanding of the relevant parties, i.e. AHJ as broker and Frankona as reinsurer under the facility, must be that the standard terms will mean the same thing in each case, unless there is some agreement that they will not. Otherwise they would cease to be standard. Here, as is common ground, in all the previous 80 declarations (save those where the question does not arise because the cover was in respect of total loss only) the parties recognised and accepted that the reference to "claims" meant the original claim, and that the excess was to be deducted from that. Against that background, known to both, the reasonable man in their position would understand that, in the absence of agreement to the contrary, the same words would mean the same thing in the 81^st declaration. Unless there is some characteristic of the reinsurance of the "Treasure Bay" that makes all the difference, the context in which the 81^st declaration was made compels that conclusion.
52. In The "Karen Oltmann" [1976] 2 Lloyd's Rep 708, 712, Kerr, J, as he then was, stated the following principle which he derived from the cases:

" If a contract contains words which, in their context, are fairly capable of bearing more than one meaning, and if it is alleged that the parties have in effect negotiated on an agreed basis that the words bore only one of the two possible meanings, then it is permissible for the Court to examine the extrinsic evidence relied upon to see whether the parties have in fact used the question in one sense only, so that they have in effect given their own dictionary meaning to the words as a result of their common intention. Such cases would not support a claim for rectification of the contract, because the choice of words in the contract would not result from any mistake. The words used in the contract would ex hypothesi reflect the meaning which both parties intended."

53. It seems to me that that principle applies here. The parties have, in effect, negotiated and concluded a long series of contracts of reinsurance, under the umbrella of the facility, upon the basis that in the facility, and the declarations thereunder, the reference to "claims" is a reference to the claims of original insureds and that the reference to "exposed amounts" or "exposure" is to original values less the excess. Mr Eder was disposed to accept that the sequence of contracts could be relied on in construing the "Treasure Bay" contract if they evidenced an agreement that the word "claims" should mean original claims whenever they appeared. In my view when brokers arrange a facility with underwriters, which contains standard or, as it is sometimes said, "boiler plate" terms, and then execute declarations under that facility incorporating those terms, they impliedly agree that the terms shall mean the same whenever they appear. So, in the present case it does not seem to me to matter whether one speaks of interpreting the contract in its factual matrix or an agreed understanding. The matrix and the agreed understanding are one. In any given case the parties may, of course, agree that the standard terms shall have a different meaning; or the terms that they have specifically agreed may mean that they must do so.
54. I turn then to consider whether there was some feature of the "Treasure Bay" declaration, or the circumstances surrounding it, that showed that, in that case, the word "claims" now meant something different, or that the excess should be differently applied. In my view there is no such indication. It is true (a) that the "Treasure Bay" contract was one for excess of loss only; (b) that it was made between Frankona and a reinsured, who was named and identified at the time of contracting; and (c) that it was made about half way through the period of the underlying insurance in circumstances where it was most unlikely that there would be anyone else interested in such reinsurance. It was also for a larger percentage of the total value than was usual under the facility. None of these considerations strike me as differences which show that in this contract the word "claims" must have changed its meaning. In my judgement AHJ were entitled to assume that it had not, unless either they were told that the facility was to operate differently on this occasion, or circumstances of which they were or ought reasonably to have been aware meant that that must be so. That was not the case.
55. The fact that, in the case of the "Treasure Bay", a specific reinsured was identified does not seem to me to be material for present purposes. In previous declarations there had been either (a) a specified reassured, or (b) a blank against the word "Reassured", or (c) a generic description of the reassured that was consistent with there being either one or several of them. In the latter case there had, on occasions, in fact been only one reinsured. In some of those cases the cover had been for excess of loss only. In respect of all these declarations, whether in category (a), (b) or (c), Frankona accept that the excess applies to original values.
56. Reliance is, also, placed on the fact that in respect of "Treasure Bay" there was no Total Loss cover; but, as I have said, that does not seem to me to have any effect on the construction of the excess.
57. Lastly, it was suggested that this was a "distressed" risk and that that circumstance should influence the approach to construction. I do not agree. It is true that the hurricane season was approaching, as it does every year, and that it would occupy a substantial part of the period of insurance. But, on the Claimants' construction, the cover was less (because of the excess) and the rate of premium greater than would have been the case under the October quotations. That probably reflects the changed circumstances in which the cover was taken up; but it cannot affect the meaning of the terms. Nor can the size of the sum insured, which, subject to signing down, was the same as in October.
58. In addition I do not regard the cover as "distressed" if by that is meant that Allianz was desperate for reinsurance. Allianz had, in the person of Mr Bishop, its then underwriter, regarded the reinsurance terms offered in October as unacceptable. Mr Bishop then left and Mr Graham Hensman, his deputy revisited the question of reinsurance and sought to obtain it through Mr Chambers. I accept his evidence that this was neither in desperation nor panic.
59. If Mr Chambers had been aware of the October quotations, the position would not, I think, have been any different. There were two quotations in October, offering a measure of indemnity at that stage in the region of US $ 7 - 8,000,000 for a 47.5% line. One offer was on the basis that the excess was now to be deducted from the Claimants' reinsured portion; the other was on the basis that it was, as in all previous cases, to be deducted from the original value. If Frankona intended to secure the result for which they now contend, they would have, in my view, to have told AHJ that, although using the wording of the facility, they intended the method of calculation embodied in their quotation of 19^th October.
60. Allianz also put their case, in the alternative, on the basis of rectification or estoppel by convention. In the light of my conclusions it is not necessary to say much more than that I reject both. As to the former, the declaration recorded, with complete accuracy, the terms upon which the parties intended to contract. There was no mistake. As to the latter, the parties did not proceed, once the contract was made, upon a conventional basis, in relation to this contract, from which it would not be fair for one of them to resile.
61. Accordingly I give judgment for the Claimants.