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QUEEN'S BENCH DIVISION
Commercial Court
Strand, London. WC2A 2LL | ||
B e f o r e :
____________________
Wasa International Insurance Company
Limited |
Claimant/Part 20 Defendant | |
and |
||
Lexington Insurance
Company |
Defendant/Part 20 Claimant | |
And between: |
||
AGF Insurance
Limited |
Claimant/Part 20 Defendant | |
and |
||
Lexington Insurance
Company |
Defendant/Part 20
Claimant |
____________________
Mr Neil Calver QC and Mr Stephen Midwinter (instructed by
Charles Russell LLP) for AGF Mr John Lockey QC (instructed by Chadbourne &
Parke) for Lexington
Hearing dates: 13-15 February, 25 April 2007
____________________
Crown Copyright ©
The Hon. Mr Justice Simon: Introduction
The Contracts
Insurance Contract
$20,000,000 loss or damage arising from any one occurrence.
The 'occurrence' was defined as:
... any one loss(es), disaster(s), or casualty(ies) arising out of one event or common cause;
and there was a property damage deductible of $250,000 per occurrence.
In the event of the failure of this Company to pay any amount claimed to be due hereunder, [Lexington] at the request of the Insured, will submit to the jurisdiction of any Court of Competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.
Reinsurance Contract
TYPE: | CONTRIBUTING FACULTATIVE REINSURANCE |
FORM: | Jl. or NMA 1779 covering All Risks of Physical Loss or Damage excluding Fire and Allied Perils &/or as original. |
REASSURED: | LEXINGTON INSURANCE COMPANY |
ASSURED: | ALCOA ALUMINIUM |
PERIOD: | 36 months 1.7.77 L/U &/or pro rata to expiry of original. |
INTEREST: | All Property of every kind and Description and/or Business Interruption and O.P.P. &/or as original. |
SUM INSURED: | Policy to pay up to $20,000,000 each occurrence and in the aggregate annually in respect of Flood and Earthquake |
SITUATED: | Worldwide &/or as original |
CONDITIONS: | Retention $1,675,000 subject to excess of
Loss &/or Treaty R/I Full R/I Clause No. 1 amended C.C. as original plus 30 days |
PREMIUM: | Calculated at GOR |
BROKERAGE: | 25% and tax |
The 25% brokerage was divided, with 10% payable to Lexington and 15% to CE Heath as brokerage.
Features of the Reinsurance Contract
i) The risk was placed in London with London reinsurers by London insurance brokers in 1977, prior to the coming into force of the Rome Convention. It is common ground that the governing law is to be determined in accordance with English common law principles. It is also common ground that by the proper application of those principles, the Reinsurance Contract is governed by English Law, since the contract was broked in the London Market on one of two alternative London forms. It follows that the construction and legal effect of the Reinsurance Contract is governed by English Law.
ii) Since it appears that no contract was ever drawn up, it is common ground that the terms of the Reinsurance Contract are contained in the Slip.
iii) The Slip refers to a choice of forms (Jl or NMA 1779). This reflects an administrative practice in the London market for the issue of formal policy documentation. The Jl form is a 'policy jacket' containing a policy, which is then put to various underwriters for subscription. The NMA 1779 form was generally used as an attachment to a Slip, obviating the need to issue a formal Policy.
iv) The Jl form contains the words:
Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the [reassured].
The NMA 1779 form does not have a follow settlements clause. However it contains an obligation:
... to pay or to make good to the Reinsured all such Loss as aforesaid as may happen to the subject matter of this Reinsurance, or any part thereof during the continuance of this Policy.
v) Although the 'Full R/I Clause No.l as amended' referred to in the 'Conditions' has not been identified, it is common ground that the 'Full R/I Clause No.l' was a standard clause used in the London market and that it was in the following terms:
Being a Reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the ... Company and that said Company retains during the currency of this Policy at least ... on the identical subject matter and risk and in identically the same proportion on each separate part thereof, but in the event of the retained line being less than as above, Underwriters' lines to be proportionately reduced.
Since the Jl form contained a similar provision, it can reasonably be inferred that the Full Reinsurance clause was specifically referred to in the Slip in the event that the NMA 1779 form was used.
vi) There is no express clause in the Reinsurance Contract which provides an indemnity to Lexington in respect of legal costs incurred in defending claims brought under the original Insurance Contract.
The insurance claim and the settlement
i) Question 1 required the jury to answer "yes" or "no" to the question whether
there was property damage at each area of each of three Phase 1 test sites.
ii) Question 2 required the jury to identify each year in which property damage occurred at each area of the three sites under headings: 1977-1978, 1978-1979 up to 1983-1984.
iii) Question 11 required the jury to state the costs of repair of fortuitous property damage at each area of each site without allocating repair costs to specific years.
iv) Question 12 asked the jury to say whether or not there was a reasonable basis to allocate to each separate policy year the costs related to the property damage that occurred during that year.
v) Question 13 asked, in relation to any damages and repair costs which the jury concluded could be allocated on a year by year basis, what portion of the total repair cost was attributable to the various policy years, with answers to be given either in percentage terms or dollar figures.
The DIC policies issued by the Defendants cover only damage that occurred during the policy period. Therefore, if you find there are covered damages, once you have calculated the total costs incurred by Alcoa to repair, build, or replace its damaged property, you must determine whether the costs can be allocated to fairly and reasonably assign to each policy year the cost to repair the property damage which occurred during that year. Your determination must be based on the evidence and not on speculation or conjecture. If you find that it would be possible to allocate the costs of repairing the property damage, but the evidence does not provide you with an appropriate and reasonable method to do so, you should so indicate in response to Question No. 13 on the Special Verdict Form. If you find that the total repair costs are divisible over time, you will be asked to determine what amount of damages should be charged to each of the policy years as well as lump sum allocations for periods before and after the policy years. In allocating damage between years, you are not required to allocate 100% or the total to the insurers. If you find from the evidence that some or all of the damage occurred prior to or after the policy period, you may so allocated. If you do allocate a part or all of the damage to time periods other than July 1 1977 - July 1 1984, you need not allocate those damages by specific year.
The Court finds progressive environmental damage of the type found at the three Phase 1 sites to be divisible as a matter of law and subject to allocation on a yearly basis. On the record produced at trial, the best estimate of actual damage is reached by simply dividing the damage over the time it took to develop, as reflected in Appendices A and B. In the alternative, if such damage is indivisible, the terms of the DIC contracts nevertheless require an allocation on a pro rata basis.
Appendix A set out actual damage at the three Phase 1 test sites, divided over the time the damage took to develop. It recorded that damage had occurred over substantial periods of time at all sites. At each site damage had occurred many years before the inception of the Insurance Contract in 1977. For example, in the West Fill area at Massena, damage began in 1942 and continued until 1996 (over 54 years); and in the Landfill-East area at Vancouver, damage began in 1946 and continued until 1996 (over 50 years). The judge held that the appropriate method of allocation was to divide the total repair costs by the years in which the damage occurred. Applying this method in Appendix B, Lexington was under no liability in respect of Point Comfort and Vancouver where the repair costs were within Alcoa's deductible. Lexington's prima facie liability in respect of two occurrences at the Massena site was calculated to be $366,327.86. However, Lexington's liability for the three Phase 1 test sites was reduced to zero by the end of the trial as a result of other rulings in Lexington's favour on suit limitation.
i) held that Lexington was not entitled to rely on the suit limitation provisions in the Insurance Contract; and
ii) reversed the judge's ruling on allocation, holding that the insurers were jointly and severally liable to Alcoa for all property damage, including damage which had occurred before the policies incepted.
The jury found pollution damage to all three test sites occurred during the entire time the various DIC policies were in effect. The jury also found, however, pollution damage had occurred to portions of the three sites prior to the inception of insurance coverage. Because the pollution damage occurred both before and during the various policy periods, a question arose as to how to attribute the remediation costs of the pollution damage: The jury was unable to reach a verdict on whether there is a reasonable basis or bases to allocate to each separate policy year costs related to the property damage that occurred during that policy year.
At the conclusion of the trial, Alcoa filed a motion asking the trial court to hold as a matter of law the pollution damages were indivisible - that is, there was no way to distinguish between pollution damage occurring prior to policy inceptions and pollution damage occurring after policy inceptions. The trial court denied the motion, holding as a matter of law the pollution could be allocated on a pro-rata, yearly basis.
….
Missing from the trial court's analysis of this issue is a close examination of the applicable policy language. The insuring clause of the DIC policy states: "Perils Insured: this policy insures against all physical loss of, or damage to, the insured property as well as the interruption of business, except as hereinafter excluded or amended." This language is very broad and contains no limitation as to the time of the physical loss of damage to property. There is no exclusion in the policy for physical loss or damage that may have begun spreading before the policy inception.
The policy definition of occurrence likewise compels a broad reading of the policy: "The word 'occurrence' shall mean any one loss(es), disaster(s), or casualty(ies) arising out of one event or common cause(s)." There are no words of limitation here. It seems clear from the policy language that any physical loss or damage manifesting itself during the time a DIC policy was in effect covered by the policy, including pollution damage starting before the policy inception.
The Supreme Court then considered the case of JH France Refractories Co v. Allstate Ins. Co. 534 Pa, 626 A.2d 502 (1993), a decision of the Pennsylvania State Supreme Court in which the pro-rating approach in a case of asbestos disease was rejected. The Supreme Court noted the distinction drawn by the trial judge between asbestos disease . and environmental contamination, but stated:
It may be true, as the trial court stated, that the progression of pollution damage can be measured and apportioned more certainly year to year than can the progress of asbestos disease, but that understanding begs the question of whether the express DIC policy language compels proration. It is the policy language that determines the scope of coverage. The policy language here does not provide for any limitations as to the scope of coverage .. .The insurers vigorously contend that while J.H. France may be correct as to third party coverage, it is not appropriately applied to first party coverage, citing the "all sums" language from the policy in J.H. France. We are not persuaded by this distinction. The language of the insuring agreement in the DIC policies is exceedingly broad, covering all physical loss or damage to Alcoa's property. This language is at least as broad as the policy language in J.H. France. Moreover, if DIC policies mean what the insurers claim they mean, the policy language should reflect that meaning. The policies in this case do not, and we decline to write a proration of coverage into the policies when the insurers failed to do so themselves. The trial court erred in its decision to prorate coverage according to the years the various DIC policies were in force. We reverse the trial court on this issue and remand the case for further proceedings relating to Alcoa's judgment for insurance coverage.
The [State] Supreme Court based its decision in part on the language found in the policies issued by [Lexington] and subject to reinsurance by Wasa. As the Court noted, the policy language does not exclude damage that may have been begun before a policy incepted. Similarly, the policy defines the term 'occurrence' without limitation to mean any one loss 'arising out of one event or common causes.' Finally, the [State] Supreme Court based its decision on policy language under which Alcoa was insured for 'all physical loss or damage' to its property.
The present claim
i) as against Wasa for:
a) US$ 1,031,405, being 1 % of the settlement figure, and
b) US$283,747.53, being 1% of the defence costs;
ii) as against AGF:
a) US$ 1,547,107.50, being 1.5% of the settlement figure, and
b) US$452,621.30, being 1.5% of the defence costs.
The issues
(2) There is a subsidiary issue in relation to the Retention: is there a one-off retention (as Lexington contend) or a per-occurrence retention (as Wasa and AGF contend)?
(3) Finally there is an issue in relation to the costs of defending Alcoa's claim. Is there an implied term of the Reinsurance contract which enables Lexington to recover the costs of defending that claim (as Lexington contend) or not (as Wasa and AGF contend)?
The submissions on the principle issue
i) Wasa reinsured Lexington in respect of the risk of loss and damage to the Alcoa plant for a three year period, not a fifty year period. The period of cover was fundamental to the scope of the bargain between reassured and reinsurer. Notwithstanding the existence of a 'follow the settlement' provision and the decision of the Supreme Court as to the effect of Lexington's insurance contract as a matter of Pennsylvania law, Wasa did not contract to indemnify Lexington against any liability that might be incurred under the Insurance Contract. In order to be recovered the relevant loss must be within the scope of the Reinsurance Contract.
ii) If Wasa was correct in that overarching submission, two consequences followed.
a) Wasa was not bound to follow the Settlement Agreement since the settlement (and the claims recognised by the settlement) did not fall within the risks covered by the Reinsurance Contract as a matter of law.
b) Lexington's claim for indemnity failed since Lexington did not advance its claim against Wasa on the basis that, if the Reinsurance only responded to the cost of remedying damage caused during the three year period of cover, the cost of remedying that damage would (after exhaustion of the relevant retention and deductibles) give rise to a claim under the Reinsurance Contract.
i) The Reinsurance and Insurance Contracts were intended to be, and were in fact, back-to-back.
ii) Although the Reinsurance Contract was governed by English Law and the Insurance Contract was not, that fact alone was not sufficient to disturb the back-to-back nature of the insurances.
iii) It was necessary to look at the Reinsurance Contract (and its factual background) in order to identify the presumed intention of the parties. On this basis the parties would have acknowledged:
a) the likelihood that disputes between Alcoa and Lexington (two companies incorporated in the United States) would have been litigated in the US; and might reasonably assume (since Alcoa was based in Pennsylvania and there was a favourable Service of Suit Clause) that a dispute would be decided in Pennsylvania under Pennsylvania State Law; and
b) the possibility that disputes might be decided in any US state forum and under any system of US state law.
iv) The Period Clause in the Reinsurance Contract was one of a number of provisions which reflected the back-to-back nature of the reinsurance; and there was no reason to read a limitation into the provision. In a facultative reinsurance there was no special feature of a period clause which required it to be treated differently to any other type of clause.
v) It was easily possible to formulate a declaration as to the extent of recovery under the Reinsurance Contract which could have been sought in 1977; and which would have been wide enough to embrace the sums which were claimed in this action.
vi) The Reinsurance Contract did not indicate with precision what was covered. It was the construction of the Insurance Contract which provided the definition of what constituted an occurrence and the financial consequences of there having been an occurrence; and it could have been anticipated that the scope of the original policy would be determined by the law of any state within the US.
vii) Where the meaning and effect of the terms of an insurance contract have been determined as between the insured and the insurer by a court of competent jurisdiction, the presumed intent of the parties to the Reinsurance Contract must have been that, in relation to the same claim, the same meaning and effect would bind the reinsurer, absent any provisions to the contrary in the Reinsurance Contract. Mr Lockey described this submission, based as it was on the judgment of the Court of Appeal in Commercial Union Assurance Co. Plc and ors v. NRG Victory Reinsurance Ltd [1998] 2 Lloyd's Rep 600, as 'an alternative and non-essential basis' for finding that Wasa and AGF were bound to follow Lexington's settlement.
Discussion
i) The effect of the Full Reinsurance clause is that the subject matter of the original risk is effectively incorporated into the reinsurance contract. To this extent the Insurance and Reinsurance Contracts are accurately described as 'back-to-back'.
ii) Just as it is common ground that the Reinsurance Contract is (and was at inception) governed by English Law; so it is common ground that the Insurance Contract is (and was at its inception) governed by a system of law that was other than English Law. It follows that, although in many respects the Insurance and Reinsurance contracts were back-to-back, they were plainly not at least in this respect.
iii) The subject matter of the reinsurance was Alcoa's property. It was not a reinsurance of Lexington's liability to Alcoa under the Insurance Contract; see for example the analysis of Hobhouse LJ in Toomey v. Eagle Star [1994] 1 Lloyd's Law Rep 516 at 552, quoting Buckley LJ in British Dominion General Insurance Co v. Duder [1915] 2 KB 394 at 400.
iv) Under English law a reinsurer is not obliged to indemnify the reassured unless the loss falls within (a) the scope of the cover of the insurance contract; and (b) within the scope of the cover created by the reinsurance contract, see for example Hill v. Mercantile & General Reinsurance Co Plc [1996] Lloyd's Law Rep 341, Lord Mustill at p.350.1.
v) In the absence of any express clause in the reinsurance contract, it is for the reassured to prove both matters. However, the parties can agree how either or both matters may be proved; see again Lord Mustill in Hill v. Mercantile at p.350.1. A Follow Settlements clause is one way in which parties can agree on how the reassured proves these matters, see Assicurazioni Generali v. CGU International Ins Plc [2003] 1 Lloyd's Law Rep 725 (Mr Kealey QC) at §35.
vi) In reaching their bargain potentially conflicting considerations may have to be weighed: the undesirability of investigating and litigating the same issues twice, on the one hand; and the importance of ensuring that the reinsurer's bargain is not eroded by an agreement over which the reinsurer has no control, on the other. A Follow Settlements clause is intended to give proper weight to both considerations.
vii) Under a Follow Settlements clause a reassured does not have to prove that the loss actually fell within the scope of the insurance, only that it acted honestly in making the settlement and took all proper and business-like steps in settling the claim, see the second Scor (or proper and business-like steps) proviso, as described by Robert Goff LJ in Insurance Co of Africa v. Scor (UK) Reinsurance Ltd [1985] 1 Lloyd's Rep. 312 at p. 330.
... one is examining the claim recognised by the insurers by their settlement of it by admission or compromise and whether on that basis the claim falls within the reinsurance cover as a matter of law
In my judgment, the reinsurer is always entitled to raise issues as to the scope of the reinsurance, and where the risks are co-extensive with those of the underlying insurance he is not precluded from raising such issues, even when there is a 'follow the settlement' term of the reinsurance contract. Ultimately, this is the only sure protection which the reinsurer has against being called upon to indemnify the reinsured against payments which were not legally due from him to the original insured, however reasonable and businesslike the payments may have been.
This passage was cited with approval by Tuckey LJ in the Court of Appeal in the Generali case [2004] 1 Lloyd's I & R Law Rep 457 at §16.
It is wrong in principle to distort or disregard the terms of the reinsurance contracts in order to make them fit in with what may be a different position under the original cover. The words 'conditions as underlying' cannot contradict either the period or limit provisions of individual reinsurance contracts.
He also noted that the Judge at first instance:
... came to the surprising conclusion that each reinsurance contract covered liability in respect of physical loss or damage whether or not it occurred during the period covered by the reinsurance contract and he went on expressly to contemplate that the same liability for the same loss and damage might be covered under a number of separate contracts of reinsurance covering different periods. This is a startling result and I am aware of no justification for it.
The general position was set out at p.436 of the judgment:
When the relevant cover is placed on a time basis, the stated period of time is fundamental and must be given effect to. It is for that period of risk that the premium payable is assessed. This is so whether the cover is defined as in the present case by reference to when the physical loss or damage occurred, or by reference to when a liability was incurred, or a claim made. Contracts of insurance (including reinsurance) are or can be sophisticated instruments containing a wide variety of provisions, but the definition of the period of cover is basic and clear. It provides a temporal limit to the cover and does not provide cover outside that period; the insurer is not then 'on risk'
... the plaintiffs in support of their argument on construction cited a line of United States cases which adopt a different approach, in particular Keene Corp v. Insurance Co of North America 667 F2d 1034 and Stonewall Ins Co v. Asbestos Claims Management Corp 73 F3d 1178. Interesting though they are, I am not assisted by these cases. They arise from the special problems of liability for asbestosis claims arising from long periods of potential exposure and are clearly governed by policy considerations relevant to special factors affecting that part of the insurance market in the United States. I do not consider that they provide guidance for the much simpler questions raised by the present case which are already covered by established principles of English law and authority ... The correct approach is to see to what extent the plaintiffs have established that they are entitled to recover from the relevant defendants under ... the ... contracts of reinsurance.
i) A Period Clause in a time policy is of fundamental importance.
ii) Ordinarily, the reassured must satisfy the court that there has been physical loss or damage which has occurred in the year covered by the relevant contract of reinsurance.
iii) The fact that the insurance and reinsurance contract are expressed to be back-to-back 'as original' does not have the consequence that the natural meaning of a period clause in a time policy can be 'distorted' or 'disregarded'.
These are important points to have in mind when trying to establish the presumed intention of the parties and the proper construction of the Period Clause in the present case.
to pay or make good to the reassured all such loss as aforesaid as may happen to the subject matter of this Reinsurance, or any part thereof during the continuance of this Policy, (emphasis added)
might be used. That the parties envisaged that such a term would be incorporated in the Reinsurance Contract militates against the construction favoured by Lexington.
The parties to [the reinsurance contract] are deemed to have used the same dictionary, in this case a Norwegian legal dictionary, to ascertain the meaning of the terms and conditions in wording No.V, including the conditions relating to the 24-hour watch and the words 'failure to comply'. There is, in my view, no need to treat the reinsurance contract as partly governed by Norwegian law, except in the special sense that one must resort to Norwegian law in order to interpret and understand the meaning and effect of the No.V wording in both contracts.
Since the package was designed for use by Norwegian fish farmers, it could not have been intended that a breach of the No.V wording would give rise to one consequence under Norwegian law in the insurance contract and a different consequence under English law in the reinsurance contract.
In my judgment, the warranty of existing class maintained in the present reinsurance must take its precise meaning and application from any equivalent warranty incorporated in the original insurance, when as here (a) the two contracts were on their face intended to be back-to-back and moreover (b) the equivalent warranty was itself also incorporated in the reinsurance by the words "All terms, clauses, warranties ... as original". A harmonious result is thus achieved.
Tuckey LJ proceeded on the basis that there was,
... a presumption, in the absence of clear words to the contrary, that the scope and nature of the cover afforded [by the reinsurers] is the same as the cover afforded by the insurers (see §17);
and Mance LJ stated at §26:
The reinsurance is however a contract which in terms relates to and must be read in conjunction with the terms of the original insurance. The two contracts were clearly intended to be back-to-back. As regards the vessel(s) covered, its period, its terms and all decisions, settlements and agreements, the reinsurance expressly follows the original...
However, Tuckey LJ (at §23) considered the issue was one of construction in each case rather than a question of overarching principle.
At the end of the day each of these cases depends upon the construction of the contracts in question in their context and so each case (must) depend upon its own facts.
... the reinsurers are entitled to say that they rated the policy by reference to its chronological and geographical extent, to the types of casualty insured, to the boundaries of the insured layer, the mode of calculating the loss, and so forth, (p.351.1. emphasis added)
The Retention issue
The costs of defending Alcoa's claim
Conclusion
i) Wasa and AGF are not obliged to follow Lexington's settlement with Alcoa; and
ii) in any event,
a) the $1,675,000 retention is a 'per occurrence' retention, and
b) Lexington is not entitled to recover against Wasa and AGF in respect of the costs of defending the claim of Alcoa