QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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AEGIS ELECTRICAL AND GAS |
Claimant |
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INTERNATIONAL SERVICES COMPANY LIMITED - and - CONTINENTAL CASUALTY COMPANY |
Defendants |
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Colin Wynter QC (instructed by Davies Lavery) for the Defendants
Hearing dates: 2, 3 and 4 My 2007,
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Crown Copyright ©
MR JUSTICE ANDREW SMITH :
Introduction
The Refinery
The Visbreaker loss
The D1AR loss
i) First, there is an undated report presented by the insured, which has been referred to as the "CARC" report. Some photographs of damage to the reactor unit were presented with it, and the photographs have captions, some of which are difficult to understand. It is impossible to say whether the photographs illustrate all the damage or only examples of it. (The report is headed "Draft Incident Report Form", but no later version of it is in evidence and I was told that it is the final version.)
ii) Secondly, there is a report of Engineering Design & Testing Corp. of Houston ("EDT") dated 9 November 2003, which was prepared for the Syndicate and El Paso's other underwriters. The Syndicate also put in evidence a graph which had been provided to them by EDT in the course of the trial. It is not entirely easy to interpret, but apparently it traced measurements, taken at hourly intervals during the incident, of the temperature measured at various points inside the vessel, of the pressure inside the vessel and of the flow of hydrogen into the vessel.
iii) Thirdly, there is a report dated 9 January 2004 that was written by Bateman Chapman Limited ("BCL"), who were engaged as loss adjusters by the Syndicate and other underwriters of the direct cover.
The direct cover
i) In clause 10 of the wording there is a provision headed "Hazardous Substances Coverage", which is in these terms:
"If, as a result of an accident, property is damaged, contaminated, or polluted by a substance declared by a government agency to be hazardous to health, insurers shall be liable under this endorsement for the additional expenses incurred for cleanup, repair or replacement, or disposal of that damaged, contaminated or polluted property, including any resultant damage for business interruption. Asbestos material removal resulting from an "accident" as defined in this policy is limited to the coverage provided in this clause."
ii) Clause 21 was concerned with suspension, and read as follows:
"Upon the discovery of a dangerous condition with respect to any object, any representative of the insurers may immediately suspend the insurance with respect to an "accident" to said "object" by written notice ... Insurance so suspended may be reinstated by insurers..."
"Accident shall mean a sudden and accidental breakdown of an object or a part thereof and resulting in physical damage that necessitates repair or replacement of the object or part thereof."
The term "object" was defined as
"any boiler, fired or unfired pressure vessel, refrigerating or air conditioning system, piping and its accessory equipment, and any mechanical or electrical machine or apparatus for the generation, transmission or utilization of mechanical or electrical power including any electronic computer or electronic data processing equipment and its associated media".
The reinsurance
The claims under the direct cover
"The damage was caused by cracks on the vessel wall and bulging of the vessel. The cracks started because the temperatures exceeded the design temperatures of the vessel. The design temperatures were exceeded because of four causes:
• There were very high temperatures in the catalyst beds,
• No action was taken on the alarms,
• The temperatures were not monitored,
• There might have been some faulty transmitters."
The claims under the reinsurance
The "Additional Conditions"
i) The "follow the terms" provision in the reinsurance slip militates in favour of a match between the terms of the insurance slip and the reinsurance slip, and therefore any mismatch between them should be minimised.
ii) Any ambiguity is to be resolved contra proferentem and therefore against the reinsurers, both because they proposed the Additional Conditions for inclusion in the contract (and were proferens in contrahendo) and because they seek to rely upon the exception in the Additional Conditions (and are proferens coram judice): see Youell v Bland Welch. [1992] 2 Lloyd's Rep 127 at p.134.
Conclusion about the Visbreaker loss
The dispute about the D1AR loss
Was the D1AR loss "from explosion"?
The "follow the settlements" provision
8S. Mr. Foulger's evidence was that when settling the El Paso claims he relied upon the BCL report. I have set out the most relevant parts of it. It recited the argument of El Paso that the proximate cause of the loss was the turbine failure on 26 September 2001, and rejected that contention. It said that there was serious damage to the reactor "when exceedingly high temperatures were generated", but it said nothing of the manner in which the high temperatures caused the damage: that is to say, it did not consider whether they brought about an event that was properly to be described as "explosion".
"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, provided that the claim so recognized by them falls within the risks covered by the policy of reinsurance as a matter of law, and provided also that in settling the claim the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement. ... In particular, I do not read the clause as inhibiting reinsurers from contesting that the claims settled by the insurers does not, as a matter of law, fall within the risks covered by the reinsurance policy; but ... I do consider that the clause presupposes that the reinsurers are entitled to rely not merely on the honesty, but also on the professionalism of insurers, and so is susceptible of an implication that the insurers must have acted both honestly and in a proper and businesslike manner."
"First, that the reinsurer cannot be held liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. Second, that the parties are free to agree on ways of proving whether these requirements are satisfied. Beyond this, all problems come from the efforts of those in the market to strike a workable balance between conflicting practical demands and then to express the balance in words.
These practical demands can be seen most easily in the context of traditional reinsurance, where the party reinsured is the insurer under a contract made directly with the person whose property or other interest is at risk. Two impulses act in opposite directions. The first is to avoid the investigation of the same issues twice; and, moreover, an investigation on the second occasion by a reinsurer whose knowledge of what happened when the risk was written, and whose facility for investigating the claim, are inferior to those of the direct insurer. The second impulse, acting in the other direction, is to ensure that the integrity of the reinsurer's bargain is not eroded by an agreement over which he has had no control.
This conflict is quite easily managed when the insurance and the reinsurance are on the same terms and where the parties are essentially co-adventurers; for example, in participatory reinsurance, or facultative reinsurance with a large retention. Here, the interests of the direct insurers and the reinsurers are broadly the same, and it is not imprudent for the reinsurers to put themselves unconditionally in the hands of the reinsured for the settlement of claims which will be passed on to them.
The problems are more acute when ... the terms of the successive policies are not the same ... For example, in the former case it may well happen that a claim under the direct policy does not require the determination of issues which are crucial to liability under the reinsurance: as happened in the "constructive total loss" cases like Chippendale v Holt, (1895) 1 Com. Cas. 197; and indeed in the present case where there can be no doubt that the loss, whatever exactly it was, fell within the direct contracts, whereas this was not necessarily the case under the reinsurances."
"... none of the earlier cases have considered how the first proviso [in Scor] works in practice in a case such as this. Here the judge has done so. By reference to the words "the claim so recognised" he has concluded that the insurers do not have to show that the claim they have settled in fact fell within the risks covered by the reinsurance, but that the claim which they recognised did or arguably did. I think this gives effect to what Robert Goff LJ said and gives some sensible added meaning to the clause. It gives substance to the fact that the reinsurer cannot require the insurer to prove that the assured's claim was in fact covered by the original policy, but requires him to show that the basis on which he settled it was one which fell within the terms of the reinsurance as a matter of law or arguably did so. This and the need for the insurer to have acted honestly and taken all reasonable and proper steps in settling the claim provide adequate protection for the reinsurer."
"... I should not ignore a further possible case where the insurers settle a claim on the basis of facts that demonstrate that the loss claimed by the assured is fair wear and tear in circumstances where the insurers overlook the legal implications of those facts and ignore the exclusion clause. In this last case, it seems to me (irrespective of the possible relevance of the second Scor proviso) that, according to the basis on which it was settled and in the absence of any recognition by admission or compromise that the exclusion in respect of fair wear and tear did not or arguably did not apply, the claim so recognised falls outside the contract of reinsurance as a matter of law."
Conclusion