England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		29/07/2010

Mr Justice Hamblen :

Introduction

1. The Claimant and its predecessors (for convenience together referred to hereafter as "Axa") insured the Royal Bank of Scotland Group ("RBS") against employers' liability ("EL"), public liability and products liability ("PPL") from 1998 to 2004. From May 2000 when it was acquired by RBS, National Westminster Bank Plc ("Nat West") was one of the companies insured by Axa under the liability policies. RBS's liability insurance was placed annually from 31 March each year in primary and excess layers. Axa underwrote 100% of the primary layer, acting as a front for RBS's captive insurance company, Glensure Insurance Company Ltd ("Glensure"), in respect of the self insured retention ("SIR").
2. The agreed issues for determination in the present proceedings are (1) whether there was an express term excluding liability for terrorism under the public liability and products liability sections of RBS's primary contract of insurance with Axa for the period 31 March 2002 to 30 March 2003; and (2) if so, what were the terms of that exclusion.
3. Axa's case is that in the aftermath of the terrorist attacks of 11 September 2001, Axa introduced a terrorism exclusion into the PPL sections of the primary cover when it was renewed in 2002. Axa relies on its fax renewal indication dated 20 March 2002 which proposed terms including renewal of the primary liability cover at the same limits as the expiring policy (£25 million for EL and £5 million for PPL), but with the additions of (a) a terrorism exclusion excess of £10 million for EL; and (b) in relation to the £5 million cover for PPL, a "Terrorism exclusion (wording to be agreed)". It is Axa's case that this proposed exclusion for PPL was accepted by or on behalf of RBS/Nat West.
4. RBS/Nat West and their brokers, Marsh Limited ("Marsh") say that the 2002-2003 primary layer liability insurance was not subject to any terrorism exclusion and that the initial proposal for such an exclusion contained in Axa's renewal indication was not insisted upon by Axa, was not agreed to by RBS or Marsh, and thus did not form part of the parties' eventual agreement.
5. The reason why it matters whether or not the 2002-2003 PPL insurance was subject to a terrorism exclusion and, if it was, the terms of the exclusion, is that in 2005 Nat West was sued in the Eastern District of New York for damages under the United States Antiterrorism Act by victims and relatives of victims of Hamas suicide bombings in Israel who allege that a British charity, the Palestinian Relief & Development Fund ("Interpal"), collected donations through Nat West bank accounts, and that Interpal is a fund-raiser for Hamas. Nat West notified Axa of potential claims under its PPL insurance for 2001-2002, 2002-2003 and 2003-2004 (the policy years during which suicide bombings the subject of the Weiss Proceedings occurred). On 12 October 2006 Axa raised various coverage points including asserting that the PPL cover for 2002-2003 was subject to a terrorism exclusion. On 20 March 2009 Axa commenced these proceedings seeking a declaration that it was an express term of the 2002-2003 PPL insurance that liability directly or indirectly caused by, resulting from or in connection with any act of terrorism was excluded.

The key personnel and oral evidence

6. At the trial I heard evidence from the following witnesses called by Axa: Mr Jeremy Smart, the casualty underwriter who wrote the risk at the March 2002 renewal for 2002-2003; Mr John Gibbins, the Line of Business Manager for EL and the person responsible for the RBS account; Mr Ian Wilson, the Head of Casualty Underwriting; Ms Michaela Coelho, the casualty underwriter allocated to the RBS account from about September 2002, and Mr Clive Rogers, the AIG underwriter who led the £45m xs £5m excess PPL layer, participated in the £75m xs £25m excess EL layer and wrote the £15m xs £10m EL layer. I also had written statements from Axa's Mr Peter Hill, the Line of Business Manager for public liability, and Ms Jackie Watts, a casualty underwriter. Neither could attend the trial due to medical reasons and their statements were admitted under the Civil Evidence Act.
7. For Nat West I heard evidence from the following RBS witnesses: Mr Alex Graham, the Head of the Insurance Risk Department; Mr Stewart Hill, an Account Executive in the Insurance Risk Department, Mr William Brannan, a Senior Account Executive in the Insurance Risk Department and second in charge after Mr Graham, and Marcus Bryan, a broker with Willis.
8. Marsh called Mr Andy Ducat, the Marsh broker who placed the renewal of the primary and excess layers, and Mr Lawrence Bird, an account executive of Marsh Management Services (Guernsey) Limited ("MMS"), who acted on behalf of Glensure.
9. All the witnesses were truthful and did their best to assist the court. However, given that they were dealing with events which occurred long ago on many matters they had little specific recollection. For a large part their evidence consisted of reconstruction based on the available documents.

The background facts

The 2001-2002 year

10. Axa underwrote a combined EL and PPL primary layer cover for RBS and its subsidiaries for the period 31 March 2001 to 30 March 2002. Axa wrote 100% of those primary layers. Excess layer policies were also placed by RBS' brokers for each of the EL and the PPL.
11. At the primary layer written by Axa, the structure of the combined programme was:

(1) The primary EL cover had a limit of £25m.

(2) The primary PPL cover had a limit of £5m.

(3) There was a SIR of £250,000 each and every loss for EL; and of £100,000 each and every loss for PPL. There was an aggregate limit to the SIR which was to be borne of £1.75m.

(4) The SIR was not borne by RBS directly, but via a reinsurance arrangement between Axa and the RBS captive, Glensure, whereby Glensure reinsured Axa for the amount of the SIR.

(5) The annual premium for the combined cover to Axa was £307,500 plus IPT. This comprised £265,000 in respect of EL and £42,500 in respect of PPL. The total gross premium to Axa including taxes was just over £1.4m, of which just under £1.05m was premium due to Glensure in respect of the reinsurance arrangement.

12. Glensure was a Guernsey-based captive, which was managed and administered by MMS. The reason for Glensure bearing the SIR via a reinsurance of Axa was that statute required that the primary EL cover be written from the ground up by a UK registered insurer, which Glensure was not.
13. As for the excess layers, the position was as follows:

(1) For EL, a single excess layer of £75m xs £25m was placed by Marsh with Ace, Gerling and AIG.

(2) For PPL, a single excess layer of £45m xs £5m was placed by Marsh with AIG, Gerling and Ace.

The role of Marsh

14. Between 1998 and 2002 Marsh acted as insurance broker in drawing up slips and placing excess EL and excess PPL insurances for RBS in the London market. Marsh's role in relation to the excess layers was thus that of a conventional placing broker in the London market, with Marsh undertaking all interactions with insurers and being responsible for drawing up contractual documentation.
15. The position was more complex in relation to the primary layer which was insured 100% by Axa. Marsh did take part in negotiations with Axa but there were also direct dealings between Axa and RBS in which Marsh had no involvement, and there were some discussions in which representatives from all three parties participated. The usual chain of communication between Marsh and RBS was through Glensure. Marsh did not draw up slips or policy wordings for the primary layer. The evidence was that the absence of a formal slip for the primary layer was not particularly unusual at the time in the context of a 100% insurance underwritten by a company, and the task of drawing up the wording of policies and endorsements for the primary layer was undertaken by Axa rather than by Marsh. However, it was not in dispute that Marsh were RBS's brokers in relation to the placing of the primary layer, as was borne out by the witness evidence.

The background to the renewal

16. The events of 9/11 sparked a reaction in the underwriting world, as insurers set about addressing the underwriting implications of what had occurred.
17. On 8 October 2001, the Non-Marine Association at Lloyd's promulgated a series of terrorism exclusion endorsements which were designed for general application and were not intended to be specific to any territory or class of business. For direct business, the terrorism exclusion was NMA 2920. The International Underwriting Association similarly promulgated revised war and terrorism exclusion clauses in November 2001.
18. Axa's response was reflected in a Memorandum issued by Axa's Paris head office headed "Conditions relative to the acceptance of Direct business (new business and renewals) with effect from 27 September 2001". It set out an update of underwriting policy for direct business and stated that henceforth the basic principle for general liability and products business was to exclude terrorism acts from coverage. In relation to such business it stated:

"The basic principle would be to exclude from coverage terrorism acts.

You must respect local legislation/regulation (especially compulsory minimum limits for bodily injury and property damage) in this respect but if one country does not forbid to restrict coverage for claims arising out from terrorism acts, coverage must be delivered via sub-limit of up to USD100,000 $US per loss.

Any request for limit exceeding the minimum compulsory or the above sub limit must be prior referred to the Class Manager …"

19. On 14 December 2001, Axa in Paris sent out additional underwriting instructions applicable as from that date. These instructions were applicable to Axa in London and were sent to the two 'Line of Business' managers ("LOB managers"), Mr Gibbins (responsible for EL) and Mr Peter Hill (responsible for public liability – "PL"). Mr Wilson, as head of casualty underwriting in London, also received a copy. These additional underwriting instructions served to reiterate "the fundamental principle to respect", namely that subject to local laws, "you must do your best to exclude terrorism acts."
20. The instruction received from Paris on 14 December 2001 was not circulated directly to the London underwriting team by Mr Wilson or the LOB managers. Rather, on 20 December 2001, Mr Wilson sent a brief internal instruction to the London casualty underwriting team, signalling a lengthier document was to follow. The brief instruction stated that, for all PL risks, terrorism needed to be excluded; and that for EL, "we can remain silent for the time being". On the PL side, any removal of the mandatory terrorism exclusion had to be referred either to Mr Wilson or the relevant LOB manager.
21. The lengthier memo from Mr Wilson was circulated among the London casualty underwriting team later on 20 December 2001 (subsequently referred to as "TCUP 1"). The memo stated that the aim was to exclude terrorism "where it is legally possible to do so." Thus, "With immediate effect – terrorism must be excluded from all policies at the time of renewal, and on all new quotations." This did not apply to EL and Motor. There would be a buy-back facility whereby the exclusion would not be applied but this should be subject to a sub-limit of US$100,000 per loss and an additional 5% premium, but any buy-back or change of approach "must" be referred to one of Messrs Wilson, Gibbins or Hill. A wording was supplied, based on NMA 2920, although underwriters were given the flexibility to consider other appropriate wordings subject to referring to the LOB manager.
22. On 28 December 2001 Mr Altmeyer in Paris sent a further memo to (amongst others) Mr Gibbins and Mr Ballardie (the Axa London CEO) setting out Axa's reinsurance protections for 2002. In relation to General Conditions, the memo included the following:

"– Terrorism: protection via the treaty being limited, my memo called «liability & terrorism» dated 14/12/2001 remains enterely [sic] valid and your alone reference to date."

23. This memo was not circulated to the London underwriting team. Mr Wilson prepared his own memo on the subject, which was circulated on 4 January 2002. In fact Axa's reinsurance treaties contained no exclusion of or limit in respect of terrorism cover for PPL, but Mr Wilson did not have copies of the treaties and relied on what he was told by Paris.
24. In relation to EL, where terrorism was not to be excluded, Mr Gibbins emailed his London underwriting team on 3 January 2002 and told them that in all cases renewing up to 1 April 2002 where Axa gave a £25m EL limit, the underwriter concerned was to refer the risk to Mr Gibbins before renewal negotiations began, because "we have to consider our position on terrorism on these high limit cases." RBS was such a risk: the EL limit in 2001/2 was £25m on the primary layer written by Axa and the renewal date was 31 March.
25. On 4 January 2002, Mr Wilson sent an email to his London team informing them of the main points to note in relation to Axa's 2002 reinsurance treaty protections which had been renewed with Swiss Re. The email was Mr Wilson's summary of Mr Altmeyer's 28 December 2001 memo. In relation to terrorism, Mr Wilson's team was informed that:

"Terrorism cover on the treaty is very limited so TCUP 1 on Terrorism should be followed i.e. all PL policies need to carry a terrorism exclusion."

26. On 11 January 2002, Mr Gibbins sent a further email about EL and terrorism which superseded his earlier email of 3 January 2002. Mr Gibbins told the team that henceforth £25m of EL cover was not to be given so far as terrorism cover was concerned. The underwriters' choice was to be either a restriction in the limit of EL cover to £10m or a limit of £25m but with a £10m sub-limit in respect of terrorism. Mr Gibbins stated, "This applies with immediate effect for new quotations and for renewals."

The lead up to the renewal

27. A pre-renewal meeting took place at Axa London's offices on 29 January 2002. The meeting was attended by Mr Smart of Axa, Mr Graham of RBS, and by Mr Ducat and Mr Edwards of Marsh. Three documentary records have survived of this meeting. None of them makes any reference to a proposal by Axa to impose a terrorism exclusion on the £5 million PPL section of the RBS's primary liability cover on the renewal and there was an issue as to whether or not this was mentioned at the meeting. The documents showed the following:

(1) Mr Smart's manuscript note of his renewal proposals records premiums for £25 million of EL cover and £5 million of PPL cover as £265,000 and £42,500 respectively and (in red) a potential premium increase of 20-25%. In relation to EL, the note states: "EL limit £10m then ? excl terrorism" but there is no reference to any terrorism exclusion in relation to the £5 million PPL cover.

(2) Mr Graham's minute records that "They will be applying an exclusion of terrorism cover probably above a limit of £10m though this may reduce to £5m". This would appear to be a reference to the EL cover which was the only cover being offered in excess of a limit of £10 million. The minute goes on to record that:

"[Mr Graham] expressed dismay at the proposed terrorism exclusion and said that if AXA were to insist upon a Letter of Credit this could very well mean that The Royal Bank would need to seek another fronting company as it was extremely unlikely that the Glensure Board would agree to a Letter of Credit being issued.

[Mr Smart] agreed to take these points on board and refer, in particular, the Letter of Credit point to management in Paris who would take the final decision."

(3) Mr Bird of Glensure received a report on the pre-renewal meeting later that day (probably from Mr Ducat) and made a note of the call. This makes no reference to a proposed terrorism exclusion but focuses on Axa's requirement for a letter of credit and advice of a probable 20% increase in premium.

28. Mr Smart stated that his instructions were to exclude terrorism for PPL cover in accordance with TCUP1 and that he believed that he would have relayed that exclusion to Mr Ducat and Mr Graham in the discussions. He accepted in cross examination that it was possible that he had not done so. I find that he did not do so. The terrorism discussion was in the context of the EL cover which was by far the most significant element of the cover in terms of premium, the split being about 85% El to 15% PPL. Had mention, or at least clear mention, been made of a terrorism exclusion applying to PPL that would have been reflected in at least one of the notes and would have provoked a response from Mr Graham.
29. In order for Axa to produce its renewal terms, RBS and Marsh had to provide the necessary information for underwriting. This involved providing updated payroll figures, claims experience for RBS and Natwest and updated triangulations. On 31 January 2002, Mr Bird of Glensure asked RBS to put together this information so that renewal negotiations could begin.
30. The claims experience and updated claims triangulations reached Mr Ducat from Mr Bird on 15 February 2002. The payroll figures were to follow. The 15 February fax was sent again by Mr Bird to Mr Ducat on 27 February 2002, this time confirming the total estimated payroll figure as well. This was followed on 1 March 2002 by an email from Mr Bird to Mr Ducat giving the single largest accumulation of employees in one location with the payroll for that location.
31. Meanwhile within Axa, on 18 February 2002 Mr Smart sent an email to Mr Wilson, copied to Mr Hill, informing Mr Wilson that many insurers were now no longer seeing the need to apply terrorism exclusions across the board on general liability business and that Axa had recently been losing ground in the market due to its insistence on a terrorism exclusion. Mr Smart's view was that there had been quite a dramatic shift away from the previous market stance which could see Axa manoeuvring itself out of new opportunities as well as renewals. He stated that:

"It has recently come to my attention that many insurers are now no longer seeing the need to apply Terrorism exclusions across the board on General Liability business.

We recently lost our position on a satisfactorily priced renewal due to our insisting on a terrorism exclusion. Of our competitors the following wrote this risk without the exclusion: ACE, AIG, Chubb, Liberty.

We are also looking at a new piece of business (£1.1 bn turnover) which will only have a Terrorism exclusion applying to a facilities management subsidiary (which is a minor constituent part of the risk). The insurers that are supporting this approach are: AIG, The Underwriter, Gerling, RJ Wallace, Liberty (New Line are still conferring with Reinsurers).

There would appear to have been quite a dramatic shift away from the previous Terrorism 'Market' stance which could well lead to us manoeuvring ourselves out of new opportunities as well as renewals."

32. Mr Peter Hill of Axa's statement evidence was that Mr Smart was asked to record his concerns in writing at his suggestion so that senior management in London could take them up with Paris, because Axa London wanted to take a more pragmatic approach than the rigid instructions set down by Paris. He said that he spoke to Mr Altmeyer about it the following day, agreeing to forward London's proposals for an amended position.
33. Mr Peter Hill did write to Mr Altmeyer on 14 March 2002, informing him that it was no longer possible for Axa to apply terrorism exclusions to liability policies in the UK market and that when Axa tried to do so, its lines were easily replaced in the market by more flexible underwriters. Mr Hill sought Mr Altmeyer's confirmation of acceptance of Axa's position. His memo stated as follows:

"I refer to your memo of 14^th December and to our subsequent conversations regarding the approach to terrorism exposures in the U.K. liability market.

It is common ground that evaluation of these exposures is impossible. Regrettably the U.K. has been subject to terrorist attacks for the last 30 years but this has not produced any liability claims. In U.K. law the duty of reasonable care means that the exposure to civil suit in circumstances where injury or damage has been caused by a deliberate, criminal terrorist act is negligible. This duty is limited to reasonable care and is not an absolute duty. Any suit would be readily defendable on the basis that the defendant has discharged the duty by taking reasonable precautions. Also this 30 year history in the U.K. of dealing with the terrorist threat means that target exposures (airports, railway operations, public or Royal premises) have developed sophisticated counter measures to negate or minimise this threat.

In the light of this the U.K. market is not applying any exclusionary language to policies but is instead negotiating with the government to extend the terrorist pool. We have the additional problem that our courts will take a very dim view of the terrorism exclusion on liability policies and will be sympathetic to every move to get around the exclusion.

It is no longer possible for us to apply terrorism exclusions to liability policies in the U.K. market and our colleagues in Axa Insurance are also moving to remaining silent on terrorism. When we try to impose the exclusion both ourselves and Axa Insurance found that our lines were easily replaced in the market by underwriters who do not require an exclusion or other restriction in cover. Examples of cases we have lost are House of Fraser (retail department store), Reed Elsivier (publishers) and British Land (property owners).

Should the market position change we will review our stance but in the meantime please confirm acceptance of our position."

34. Nat West and Marsh contended that these communications showed that the reality was that by mid March 2002, because the UK market was not applying terrorist exclusions, Axa London was not requiring them in all cases either. The possibility was open to them of negotiating, if necessary, in order to compete with others in the market. Whilst this possibility was acknowledged by the Axa witnesses, they were clear that this could only be done with LOB Manager and probably Paris approval, and none of them could recall a PL risk where this was in fact done before the relaxation in underwriting policy which occurred at the end of April 2002. They explained that Mr Peter Hill had somewhat overstated the position in his memo in order to assist in achieving the desired outcome.
35. As to the RBS renewal, on 5 March 2002, Mr Bird sent to Mr Ducat a copy of the most up-to-date audited accounts for Glensure, with information as to Glensure's capitalisation and total combined aggregate liability. Further claims information followed from RBS to Mr Bird on 13 March 2002.
36. On 18 March 2002, Mr Smart set about his rating of the renewal and his preparation of the terms on which he was prepared to quote for the renewal. He set out his proposed renewal terms in a three page manuscript note for discussion with his superior, Mr Gibbins. He concluded that it would be sufficient to propose a 15% increase in premium, rather than the minimum 20% increase he had mentioned at the January pre-renewal meeting, and noted: "Conditions: - Excl. Terrorism (or tba) …. Wording t.b.a.". There was also a reference to "excl. Cyber liabs (wdng t.b.a.)". Nat West and Marsh stressed that the use of the phrase "or tba" indicated that Mr Smart thought that the inclusion of a condition excluding terrorism might or might not be agreed in the course of the renewal process and was a clear indication of the potential for flexibility as the renewal progressed. This was not accepted by Mr Smart in evidence, although he acknowledged that the juxtaposition with the cyber exclusion meant that it was unlikely that "or" was a mistake for "wdng". He suggested that "t.b.a" may have been used because of uncertainty as to precisely how the terrorism exclusion would apply to EL. He insisted that there was never any question that it would apply to PPL.
37. On 20 March 2002, Mr Smart produced a fax containing Axa's renewal terms ("the 20 March fax"). Although dated 20 March 2002, it was not sent to Mr Ducat until the following afternoon. A copy of the fax was also sent by Mr Smart to Mr Bird at Glensure on 22 March 2002. In his fax Mr Smart described as "the main issue that needs to be resolved" a requirement imposed by Axa Paris that RBS should provide security for the Glensure element of the cover fronted by Axa in the form of a letter of credit for £1.3 million. He then set out the other proposed renewal terms:

"Limits: As per expiring (£5m PL/Prods and £25m EL). N.B. Terrorism excluded excess of £10m in respect of EL.

Self insured retention: As expiring (£250,000 each and every in respect of EL and £100,000 each and every in respect of PL/Prods with an annual aggregate of £1,750,000).

L/C required for £1,300,000.

Renewal Premium: £355,000 (annual and net).

PL/Prods conditions as per expiring, but with the addition of:

Terrorism exclusion (wording to be agreed).

Cyber Liability exclusion (wording to be agreed).

EL conditions as per expiring (except re Terrorism element).

Policy wording to be agreed.

….

Look forward to discussing these terms with you soonest"

38. Also on 20 March 2002 Mr Bird noted that Mr Ducat had phoned to say that the renewal terms were expected that afternoon and that Axa were insisting on the letter of credit. Mr Ducat was to advise how much the letter of credit was to be for. On the following day he noted a further conversation in which Mr Ducat said that the renewal terms were on the way to him.
39. On the morning of 22 March 2002 Mr Bird had a discussion of the renewal terms with Mr Smart and Mr Ducat. His note records that Axa wanted a premium increase to £355,000, that the limits were as expiring and that a letter of credit was needed for £1.3m. The note does not refer to the proposed exclusion of cover for terrorism. It also does not refer to the offer being subject to the agreement of Axa's reinsurers, to the requirement of premium payment within 60 days of inception, or to the new Cyber liability exclusion,
40. This information was apparently passed on by Mr Bird to Mr Stewart Hill of RBS, who then sent it on to Mr Graham in an email timed at 10.57 am. There is no evidence of Axa's 20 March fax having been forwarded to RBS by either Marsh or Glensure.
41. On 25 March 2002, as part of his broking of the renewal, Mr Ducat of Marsh visited Mr Rogers of AIG. Mr Rogers had been the AIG underwriter responsible for AIG's participation (via New Hampshire Insurance Company) in the excess EL and PPL layers for the 2001-2002 year. During their meeting Mr Rogers gave Mr Ducat a lead renewal line on the £45m xs £5m excess PPL layer. The slip which Mr Rogers scratched stated that the excess layer cover was to be on the same terms and conditions excluding premium as the underlying policy or policies or renewal thereof. Mr Rogers' file contains the copy of the 20 March fax which Mr Ducat gave him and Mr Rogers' evidence was that he gave his line on the basis that this fax reflected the relevant renewal terms, which he understood to include a terrorism exclusion.
42. At the same time Mr Ducat asked Mr Rogers to quote for a new EL layer of £15m xs £10m. Mr Rogers was willing to do so and gave Mr Ducat a quote for that new layer which was not subject to a terrorism exclusion.
43. Also on 25 March 2002, Mr Ducat went to see the Ace underwriter, who wrote a renewal line on the excess PPL layer of £45m xs £5m, following the lead given by Mr Rogers of AIG. On the excess EL layer of £75m xs £25m the Ace underwriter also wrote the lead renewal line which was expressly on terms excluding terrorism.
44. On 26 March 2002, Mr Ducat went back to Mr Rogers and secured AIG's renewal line on the excess EL layer of £75m xs £25m.
45. By the end of the day on Tuesday 26 March 2002 Mr Ducat had obtained subscriptions up to 80% for renewal of the expiring EL cover at £75 million excess of £25 million, but subject to the addition to the slip conditions of an express term excluding terrorism. He had completed 100% renewal of the expiring PPL cover at £45 million excess of £5 million with the same three underwriters who had subscribed 80% of the EL excess renewal on the same terms as the underlying policy. He had also obtained AIG's quotation for infill EL cover of £15 million excess of £10 million without a terrorism exclusion.
46. On 27 March 2002 there was a further meeting and conversation between Mr Smart and Mr Ducat. At the meeting Mr Ducat asked Mr Smart to quote for a reduction in the EL limit from £25m to £10m. Mr Ducat had noted on his copy of the 20 March 2002 fax the words "to reduce" next to EL. No notation was made next to PPL. At the meeting Mr Smart quoted a reduction in premium of £15,000 for a reduced EL limit of £10m.
47. Mr Smart noted his indication on Mr Ducat's copy of the 20 March fax as follows: "Agree to limit of £10m only iro EL – RP on indic £15,000 ... TOT = £340,000." Mr Smart kept a copy for his own file of the first page of the 20 March fax on which the indication given to Mr Ducat had been noted.
48. On the same day Mr Smart set out a fuller explanation for his revised quotation in a file note regarding potential accumulation of RBS's PPL and EL covers under Axa's reinsurance treaty:

"We asked by Marsh to quote for R.P. for a reduced EL limit to £10m, so that they can place a £15m xs £10m elsewhere with terrorism cover included. As an incentive (so that we can avoid the logistics and added expense of possible application of Treaty Declaratif) I quoted a reduction to quoted premium of 15,000. Thus renewal premium = £340,000."

49. Having secured Mr Smart's indication, Mr Ducat went back to Mr Rogers at AIG on 27 March 2002 and secured his agreement to hold covered subject to slip on the new excess EL layer of £15m xs £10m at a premium of £10,000.
50. Also on 27 March 2002, Mr Smart emailed Mr Bird of Glensure regarding the reasoning behind Axa's requirement for a letter of credit to secure Glensure's obligations under the reinsurance agreement. This was not a requirement on which Axa was prepared to compromise. Mr Bird forwarded Mr Smart's email to Mr Graham of RBS late in the evening on 27 March 2002.
51. 28 March 2002 was Maundy Thursday. It was the last working day before Easter and therefore the last day on which the renewal of RBS' combined EL and PPL cover could be put in place before the existing cover expired on 30 March 2002.
52. On the morning 28 March 2002 Mr Ducat reported the outcome of his renewal negotiations to Mr Bird of Glensure in terms which were noted down by Mr Bird:



53. Mr Bird's 28 March 2002 note ends "AG agrees. Advised AD to place cover, LGB 28/3/02" which indicates that Mr Bird reported the renewal terms obtained by Mr Ducat to Mr Alex Graham of RBS and obtained his instructions to place cover, which he passed on to Mr Ducat. This is confirmed by an email which Mr Bird sent to Stewart Hill and Alex Graham of RBS at 10.34 a.m., setting out the renewal options, in which he referred to a telephone conversation with RBS earlier in the morning, and said that he had given instructions to Mr Ducat to place the renewal on the basis of £10 million employers' liability cover with Axa and infill cover of £15 million excess of £10 million employers' liability cover with AIG. The email stated:

"I have given instructions for Andy to place the renewal as follows:

i) Axa

EL limit £10m

PL limit £5m

Premium £340,000 plus Glensure's premium plus IPT

ii) AIG

EL limit £15m excess of £10m

Premium £10,000 plus IPT

Items (i) and (ii) are necessary as Axa wanted to limit their EL terrorism cover to £10m. The AIG layer deals with this and saves £5,000 premium."

54. Meanwhile, earlier that morning RBIS had been in touch with Axa directly about the renewal. At 9.45 a.m. Mr Stewart Hill of RBIS sent an email to Mr Smart of Axa in which he made a request about the provision of an employers' liability certificates "As discussed this morning". Mr Hill's email also said that he noted that Axa had invited renewal of the primary liability policy at rates which represented a 15% increase on 2001 and: "I confirm that this is acceptable to us. I therefore have pleasure in instructing you to renew the policy with effect from 31 March 2002".
55. Mr Smart did not respond to Mr Hill's email until 4.56 p.m. that afternoon when he replied as follows:

"Many thanks for firm order.

Would qualify renewal terms as set out for the PL and EL as:

PL – Limit £5m

EL – Limit £25m

Annual net premium of £355,000.

I have also quoted a reduced limit for EL of £10m to Marsh.

Please could you confirm on which basis we have the firm order."

Mr Stewart Hill replied a minute later: "Order based on reduced EL of £10m". This was acknowledged by Mr Smart immediately after the Easter weekend on Tuesday 2 April 2002.

56. The email exchanges between Mr Hill and Mr Smart were not copied to either Marsh or Glensure and it seems that they may have been unaware that RBS had placed a firm order for renewal of the primary liability policy directly with Axa. None of the witnesses could recollect, and there is no documentary evidence as to whether and, if so, when Mr Ducat reverted to Mr Smart to place an order for renewal of the primary insurance as Mr Bird had asked him to do, but both Mr Ducat and Mr Smart thought that it is likely that he either did so or left a message with one of Mr Smart's colleagues. I find that the terms of Mr Smart's email to Mr Stewart Hill of 4.56pm clearly indicates that he had received no firm order by that time and that it was not in fact until 2 April 2002 that Mr Ducat passed on the instructions to place the cover. By then the cover had already been placed as a result of Mr Stewart Hill's direct instruction on 28 March 2002.

Post renewal events

57. Axa, on the one hand, and Nat West and Marsh, on the other, each point to certain post-inception events and documents as evidencing that the policy was renewed either with or without a terrorism exclusion applying to the PPL section.
58. On 8 April 2002, Mr Edwards of Marsh reported to Mr Bird that he had now received from the broking team (i.e. Mr Ducat) the excess layer slips. Mr Edwards asked Mr Bird to note that "… as confirmed to Alex Graham the employers liability terms in excess of £10M will now exclude terrorism coverage, and as follow form this will continue on through the excess layers." This was incorrect in that the EL cover for the new layer £15m xs £10m did not exclude terrorism coverage – that was the rationale for creating the new layer and placing it with Mr Rogers of AIG. Further, whilst the excess layer of £75m xs £25m was a follow form layer on the same terms and conditions as the underlying layer, that was not the reason why terrorism was excluded – Ace (as lead underwriter) had imposed an express terrorism exclusion in the slip.
59. Although Mr Bird would have read Mr Edwards' email on his return from holiday on 9 April 2002, the reference to the terrorism exclusion did not appear to cause him any concern and he did not seek clarification from Mr Edwards.
60. On 30 April 2002 Mr Wilson of Axa issued revised underwriting guidelines for terrorism which had been agreed with Axa Paris. These provided that the principle of excluding cover for terrorism was still to be applied as much as possible but where an underwriter had to grant this coverage his exposure per risk should not exceed £15 million, a separate premium (being a minimum of 5% of the catastrophe premium) should be charged and shown in the premium calculation, and the "PL case spreadsheet (controlled by Roz Emery) must indicate that the policy is silent on terrorism."
61. Axa's witnesses accepted that this involved a relaxation of the guidelines, but said that they did not come into effect until after the renewal had taken place. Nat West and Marsh pointed out that people often seek formal permission for something after they have been doing it for a while and contended that that is what had occurred in this case.
62. On 21 May 2002, Marsh sent "confirmation of cover" letters (effectively, cover notes) to Glensure in respect of the excess layers of insurance. The first letter, dated 16 May, confirmed cover for the excess PPL layer of £45m xs £5m on the same terms and conditions as the underlying policy. There was nothing to indicate what the primary layer terms and conditions were. The second letter, dated 16 May, confirmed cover for the excess EL layer of £75m xs £25m. It failed to make any reference to the express terrorism exclusion which the Ace underwriter had imposed. The third letter, dated 16 May, confirmed cover for the excess EL layer of £15m xs £10m. No letter was produced in respect of the primary layer insurance placed with Axa. On 10 June 2002, Glensure (by Ms Lois Rawlins-Duquemin) forwarded Marsh's "confirmation of cover" letters to Mr Stewart Hill at RBS.
63. Meanwhile, Axa had provided no policy documentation in relation to the primary layer to either Marsh or RBS. Despite chasing from NatWest, these documents remained outstanding when Mr Smart left employment with Axa (for a position at Lloyd's) on about 5 July 2002. Wording for the 2000/2001 layer was provided to NatWest on 29 July 2002. This was a draft wording which Axa had prepared and sent to Mr Bird on 25 October 2001. No "terrorism exclusion" wording was ever provided.
64. The unchallenged evidence of the RBS witnesses that they did not believe that there was any terrorism exclusion is borne out by the documents. For example, in an email from Mr Stewart Hill to a colleague at Lloyds TSB on 24 June 2002, he stated as follows:

"Further to our telephone conversation this morning, I write to confirm that RBSG experienced no restriction on Terrorism cover when our Liability policy renewed with effect from 31 March 2002. You may be interested to note that the lead insurer – AXA did reduce their EL Terrorism limit from £25m to £10m and the short-fall was made up by one of the excess layer insurers."

65. On 11 September 2002, Mr Gibbins informed Mr Graham that following Mr Smart's departure, the RBS account had been allocated to Ms Michaela Coelho. A meeting was fixed for Mr Graham to meet her and for a general discussion.
66. The meeting took place on 8 October 2002. It was attended by Mr Gibbins, Ms Coelho and Mr Graham. The meeting was not attended by any representative from Marsh. Mr Graham prepared a contemporaneous minute of the meeting which included the following:

"Purpose of Meeting:

To meet the new Liability Underwriter at AXA and to discuss outstanding issues

….(2) JG advised that for clean risks they are looking for increases in the range of 25% to 33% and that because of pressure from Reinsurers, asbestos may be a total exclusion and terrorism may be restricted to £5M for EL and totally excluded for PL. AG asked for early warning should these proposals become concrete. …."

67. Nat West and Marsh contended that this note shows the total exclusion being presented as a possible new exclusion of which early warning would be given, which is inconsistent with any understanding that there was already an exclusion in place. Mr Gibbins and Ms Coelho were adamant that this was their understanding and stated that Mr Gibbins would not have said anything to suggest otherwise.
68. At around the same time, possibly at the meeting or as a result of a telephone call from Mr. Gibbins prompted by the discussion of terrorism at the meeting, Mr Graham learnt of a suggestion within Axa that there was a terrorism exclusion on the £75 million xs £25 million EL cover for 2002/2003, on which Axa has a 5% line. A manuscript note by Mr Hill dated 9 October 2002 records:

"John Gibbins @ Axa advised Alex that they (Axa) have a 5% line on the £75m over £25m EL layer which carries a total Terrorism exclusion.

This has not previously been notified to us and Laurence [Bird] is unaware – he, like us, understood that insurers were silent on terrorism."

The note records that Mr. Bird was to check the position.

69. Mr. Bird raised the issue with Mr Ducat of Marsh on 23 October 2002, who suggested that the £75m xs £25m EL layer was intended to exclude terrorism, and that the confirmation of coverage letters issued on 16 May 2002, which had been sent to RBS, were inaccurate in failing to identify the terrorism exclusion.
70. On the same day, Marsh issued revised coverage letters in relation to both the EL excess layers and the PL excess layers, which were in identical terms to those dated 16 May 2002, save that the letter dealing with the EL xs £25m included, as a Condition, "Excluding Terrorism". They gave Mr Edwards as the relevant contact at Marsh.
71. Mr Bird spoke to Mr. Edwards of Marsh, who initially suggested that the terrorism exclusion for the EL excess layer had been specifically discussed at a meeting which he had attended with Mr Ducat, Mr. Graham and Axa. Mr Bird spoke to Mr Graham, who could not recall such a discussion. Mr. Edwards' recollection in this respect was in error.
72. Mr Ducat then set about obtaining alternative quotations for excess EL cover without a terrorism exclusion. Mr Graham chased Mr Bird about this on 12 November 2002 and Mr Bird chased Mr Ducat the same day. He told Mr Ducat he was under "extreme pressure" and "must have an answer urgently".
73. On 25 November 2002 Mr Ducat told Mr Bird that there were three underwriters (including AIG and Chubb) who, between them, were prepared to write a total of £35m xs £25m without a terrorism exclusion. On this basis, RBS (and possibly Marsh) would be left exposed for £40m xs £60m where terrorism would not be covered. In the same conversation, the question arose what the position was on the PPL cover. Mr Bird recorded in his note that "PL: no terrorism exclusion – AD to double check. AD to revert".
74. Mr Ducat spoke to Mr Bird again on 28 November 2002. He told him that there were still three underwriters willing to write £35m xs £25m without a terrorism exclusion but that there was still £40m xs £60m where terrorism was excluded and there was no market for such cover without the exclusion. Mr Ducat was sent away to check if underwriters would cancel and replace with effect from the renewal date of 31 March 2002. He was also sent away to double check the position on the PPL cover. The Note stated "AD to double check there's no exclusion under PL". It further recorded that Mr. Bird "chased" Mr. Ducat on 29 November 2002, and then on 4 December 2002 noted "Terry Edwards to check".
75. It appears that by early December 2002 RBS was working on the basis that Marsh was actually in the process of replacing the £75m xs £25m layer with a new £35m xs £25m layer and with Marsh being held responsible for the shortfall of £60m xs £40m until March 2003. On 3 December 2002, Mr Ducat reported to Mr Bird (according to Mr Bird's note) that Ace, the leader on the excess EL layer, had agreed to cancel and replace; the position of the others was awaited. On 4 December 2002, Mr Ducat reported (again, according to Mr Bird's note) that AIG had also agreed.
76. 20 December 2002 was Mr Bird's last day at MMS in Guernsey before he moved to Marsh Management Services (Bermuda) Ltd in Bermuda. On that day Mr Bird noted that Mr Ducat had told him that the placement backdated to renewal was almost complete and that Mr Ducat would advise final details as soon as possible.
77. Later on 20 December 2002 Mr Bird sent an email to Mr Graham confirming that Marsh had now managed to secure agreement to cancel and replace the excess EL layer with effect from renewal so that terrorism was no longer excluded up to £60m. Mr Bird ended by saying "As soon as the placement is complete in accordance with your instructions, we will advise you of the final details."
78. Mr Graham had Mr Bird's email circulated to the entirety of the Insurance Steering Group within RBS.
79. There is no documentary evidence of Marsh having sought or secured the agreement of any underwriter to any restructuring of the excess EL cover. There is no scratch, no slip, no fax and no cover note. In short, despite what Mr Ducat appears to have told Mr Bird and despite what Mr Bird told RBS, there is no documentary evidence that the cancel and replace or any part of it had taken place. At most Mr Ducat can have only obtained a verbal quote.
80. In the same email of 20 December 2002 Mr Bird reported that "further to our recent discussions, I write to confirm the position. As discussed the PL policy has no exclusion in respect of terrorism". Mr Bird said that this must have been as a result of what he had been told by either Mr Ducat or Mr Edwards, although there was no written record of this or of what, if any, double checking had been carried out.
81. In January 2003, Willis Guernsey replaced MMS as managers of the RBS captive; and in early February 2003, Willis London replaced Marsh London as RBS' brokers.
82. On 29 January 2003, Willis contacted Marsh in an attempt to follow up on Mr Bird's email to Mr Graham of 20 December 2002.
83. On 12 February 2003, Mr Edwards of Marsh sent to Mr Chris Weston-Simons of Willis the "current signed slips for RBS". These were the slips scratched in March 2002 for £45m xs £5m on the excess PPL and £75m xs £25m (excluding terrorism) and £15m xs £10m on the excess EL. In response, Willis referred to their understanding that the excess EL had been replaced to include, to some extent, terrorism cover during 2002.
84. Having obtained the files from Marsh, on 19 February 2003 Willis informed RBS that there was no evidence in the files of any cancel and re-write of the excess EL layer having ever taken place. Further investigation by Willis Guernsey revealed Mr Bird's file note of conversations with Mr Ducat between 28 November 2002 and 20 December 2002. The absence of any written confirmation from the broker (i.e. Mr Ducat) was noted.
85. On 21 February 2003, in advance of a meeting with Marsh on 24 February 2003, Mr Graham asked for Mr Ducat to provide the cover notes for the cancelled and replaced layer. Nothing was forthcoming.
86. By early March 2003, discussions were commencing between Willis and Axa in relation to the renewal for the 2003/2004 year. On 4 March 2003 Ms Coelho informed Mr Bryan of Willis that Axa seemed to be missing great chunks of their files for RBS, that she could trace no presentations from Marsh, and that the best she had was a draft policy wording for the 2001 policy period. On 6 March 2003 she sent Mr Bryan proposed renewal terms for 2003-2004 which contained no reference to a terrorism exclusion for the public and products liability cover but 10 minutes later she sent a further email apologising: "I failed to mentioned the exclusion of Terrorism. My understanding is that this was excluded last year, can you check". Ms Coelho's evidence was that this understanding was not based upon any conversation with Mr Smart since she did not have a handover meeting with him, and that she believed it was derived from her review of Axa's file and in particular the 20 March 2002 fax, although it was possible that Mr Gibbins may have raised the point with her. Axa's internal computer records did not refer to a terrorism exclusion on the 2002-2003 PL policy. While the Axa computer screen print for 2003-2004 states in the comments box "excluding asbestos, terrorism and cyber", it was accepted that the comment box was blank for 2002-2003.
87. Willis responded on 7 March 2003, noting both the typo in relation to the expiring PPL limit (which was £5m not £10m) and that "As far as terrorism is concerned on the PL/Prods, the client do not have any evidence of coverage from Marsh for last year, so I am not in a position to advise whether it was excluded or not." Willis indicated that they were looking to place the renewal without the exclusion for 2003-2004.
88. Ms Coelho departed on holiday and in her absence on 10 March 2003 Mr Gibbins sent Mr Bryan an email setting out Axa's proposed renewal terms for £5 million cover in respect of each of employers' liability and public and products liability, which concluded:

"On the terrorism issue prepared to stay silent for both EL/PL up to limits indicated above".

89. The cover was duly placed without any terrorism exclusion. Axa and Willis then negotiated and agreed the terms of a policy wording for 2003-2004, based on the draft 2000-2001 wording.

Discussion

90. Axa's case is straightforward. The renewal terms are as set out in the 20 March fax. Save to the extent that those terms were amended by agreement they represented the basis upon which Axa was offering to renew and were accepted by the order given to place the cover on 28 March 2002.
91. The fact that RBS may not have been made aware of the terms of the 20 March fax makes no difference in law. Marsh, as broker, was RBS/Natwest's agent for the purpose of receiving communication of the renewal terms on behalf of RBS/Natwest from Axa. Marsh was under a duty to communicate those renewal terms to its client.
92. If the contract of insurance was concluded by or on behalf of RBS in ignorance of the fact that Axa had told Marsh that Axa would only renew on terms which included a terrorism exclusion, RBS's ignorance would make no difference: the acceptance would be of the renewal terms offered by Axa and communicated by Axa to RBS/Natwest's duly authorised agents, namely Marsh.
93. I accept this analysis of the position. Subject to Nat West and Marsh's argument (which is considered below) that the PPL renewal term "Terrorism exclusion (wording to be agreed)" was not an effective contractual term, the 20 March fax clearly set out the terms upon which Axa was prepared to renew and was communicated to RBS/Nat West's broker and authorised agent. Unless it was agreed to amend or negotiate out that term it would have carried forward into the renewed contract when the firm order was given and the cover placed. As was accepted (but subject to the same argument on effectiveness), the same would apply to the term "Cyber Liability exclusion (wording to be agreed)", as to which there was no suggestion of further discussion or agreement.
94. In the above circumstances the essential question is whether or not it was agreed that there should be no PPL terrorism exclusion, as Axa had proposed. In considering that question I accept and follow the guidance given by Lord Goff in Grace Shipping Inc v C F Sharp (Malaya) Pte Ltd [1987] 1 Lloyd's Rep 207 at 215:

"..it is not to be forgotten that, in the present case, the Judge was faced with the task of assessing the evidence of witnesses about telephone conversations which had taken place over five years before. In such a case, memories may very well be unreliable; and it is of crucial importance for the Judge to have regard to the contemporary documents and to the overall probabilities."

95. I also accept, however, Axa's submission that the oral evidence is not irrelevant. In particular, documents can serve to jog memories, documents can be best explained by those who produced them contemporaneously, and the oral evidence helps to give the Court an impression of the individuals involved and of their abilities and temperaments, which can assist in assessing the overall probabilities.
96. Nat West and Marsh submitted that the documents and the overall probabilities show that the proposed PPL terrorism exclusion must have been and was negotiated out. They relied on various facts and matters, as set out below.

(1) Axa's underwriting guidelines

97. It was submitted that by March 2002 any restrictions on the cover Axa London could grant had been relaxed, as a result of commercial pressures which arose especially on the general liability side; that Axa London took a rather more flexible approach to compliance with Axa Paris guidelines than the Axa witnesses suggested, and that Mr Peter Hill's memo of 14 March 2002 provides the best evidence as to what the attitude and policy of Axa London was in March 2002, in the days before the renewal of RBS's policy. It was said that this showed that Axa London had already moved to remaining silent on terrorism on general liability. It was also said that the Axa's witnesses mistaken reliance on the guidelines undermined the evidence of reconstruction which they gave.
98. Although the Axa witnesses, in common with the other witnesses, had little recollection of matters of detail, they did have a firm recollection that the clear Axa head office guideline on PL was that terrorism should be excluded, that this caused the London office difficulties, and that, although this guideline could be relaxed, this could only be done with the agreement of senior management. I accept that evidence. I also accept that this meant that the inclusion of a terrorism exclusion was not ubiquitous. However, where a PL policy was silent on terrorism the agreement of senior management was required. There was no general acceptance of silence on terrorism for PL; the terrorism exclusion had to be applied, absent contrary senior management agreement.

(2) The 29 January 2002 meeting

99. It was submitted that the fact that Mr Smart did not specifically mention the PPL terrorism exclusion showed that it was not at the forefront of his mind. Reliance was also placed upon the fact that Mr Graham expressed dismay at the proposed EL terrorism exclusion as making it clear to Mr Smart that RBS would be likely to be equally resistant to any PPL terrorism exclusion. However, whatever the impression given by Mr Graham may have been, the fact of the matter is that notwithstanding his apparent dismay Axa came back with a proposed terrorism exclusion for both EL and PPL. This, if anything, re-inforces the priority given to underwriting guidelines over clients' wishes. It is also not correct to equate EL and PPL, even if there was a perceived similarity in the underlying terrorism risk. As Mr Rogers explained in evidence, there was a difference in the coverage available in the market between them. In relation to EL there was a statutory requirement that there be £5 million of cover free of any terrorism exclusion. This resulted in the market offering cover to differing degrees without terrorism exclusions. By contrast, on PPL, where there was no such statutory requirement, many underwriters were not prepared to give any latitude.

(3) Mr Smart's 18^th March 2002 "Excl. Terrorism (or tba)" renewal notes

100. It was submitted that this note reflected a request to Mr Gibbins to authorise him to treat the RBS account if necessary as one on which no terrorism exclusion would be imposed, and that Mr Gibbins agreed to this. Although this was an internal note, I agree, as Mr Smart essentially accepted, that it is unlikely to have been a slip of the pen. However, I consider that it is reading far too much into it to suggest that this brief note was the basis of an agreement between Mr Smart and Mr Gibbins that the terrorism exclusion could be conceded, if necessary. Both Mr Smart and Mr Gibbins firmly rejected this suggestion. It is also not consistent with what subsequently happened in that a terrorism exclusion was proposed for both EL and PPL and, on any view, was maintained in respect of EL. I consider it more likely that, as Mr Smart suggested, it reflected the fact that the note reflected that he had in mind the fact that both EL and PPL were involved and that part of the EL limit would not exclude terrorism. Indeed, if the client chose to take only £10m of cover, there would be no terrorism exclusion at all on the EL side.

(4) The fact that the 20 March fax was a renewal "indication"

101. It was submitted that this, together with the reference at the end of the fax to looking forward to discussing the terms with Mr Ducat, showed that the purpose of the fax was to set out proposed terms for negotiation, rather than to confirm terms which had already been negotiated. They also contrasted the unequivocal position taken by Axa in relation to the letter of credit requirement with that in relation to other terms, including the terrorism exclusion. Axa accepted that when Mr Smart wrote and sent the fax, he clearly anticipated that there might be discussion about the terms. However, that does not detract from the fact that the terms being indicated were the terms upon which Axa was offering to renew the combined policy – consistent with the subject line of the fax.

(5) Placement of the excess layers on 25-26 March 2002

102. Nat West and Marsh relied on the fact that upon receipt of the 20 March 2002 renewal indication fax Mr Ducat made unprompted efforts to secure EL cover for £15 million excess of £10 million without a terrorism exclusion. Yet he made no such efforts in relation to the £5 million primary PPL cover, notwithstanding that he was aware of RBS's attitude to terrorism exclusions, and notwithstanding the fact that it was Mr Ducat's evidence that it should have been possible to place that cover elsewhere without a terrorism exclusion. They submitted that the absence of any attempt by Mr Ducat to obtain even a quotation for alternative primary PPL cover, for example from Mr Rogers, suggests that by the time he approached Mr Rogers on 25 March 2002, Mr Ducat did not think that there was a problem that required to be solved in relation to the PPL cover. However, as discussed further below, if it had already been agreed that there was to be no PPL terrorism exclusion it is remarkable that no note or mention of this was made when the excess layer was broked to Mr Rogers. His evidence, which I accept, was that he was provided with the 20 March fax and the PPL risk was presented to him on that basis. In any event, the ease with which it would have been possible to obtain alternative PPL cover at this late stage was not explored in any depth in the evidence, and, moreover, this was a combined liability cover and there was no evidence that alternative combined liability cover would have been available, or that split cover would have been acceptable to RBS.

(6) The report to Mr Bird on 28 March 2002 that Mr Ducat had negotiated renewal terms including renewal of the PL cover "as is".

103. It was submitted that the reference to renewing the PPL cover with Axa "as is" is a powerful piece of documentary evidence that by 28 March 2002 Mr Ducat had secured Mr Smart's agreement to renewal of the PPL cover on the expiring terms, without the proposed new terrorism exclusion, as that is the natural meaning of "as is". However, both, Mr Ducat and Mr Bird accepted in cross examination that this could have meant "as quoted". Even if it meant "as expiring" it does not necessarily indicate that the terrorism exclusion had been negotiated out. It would be equally consistent, for example, with Mr Ducat being under the mistaken impression that the PPL terms were "as expiring". Further, if it was referring to the expiring cover then the statement was on any view incorrect since the Cyber liability exclusion meant that the terms were not "as expiring" regardless of the position on the terrorism exclusion.

(7) Mr Smart's email exchange with Mr Hill on 28 March 2002

104. It was submitted that it was or should have been apparent from the terms of Mr Stewart Hill's email to Mr Smart on the morning of 28 March 2002 in which he gave renewal instructions to Axa, that the renewal terms to which Mr Stewart Hill was referring were not those set out in Axa's 20 March 2002 renewal indication. It was for this reason that Mr Smart responded later that day thanking Mr Stewart Hill for the firm order, but qualifying the renewal terms referred to, and asking for confirmation of the basis on which Axa had a firm order. It was submitted that the most likely explanation for why Mr Smart's summary of the renewal terms made no mention of any terrorism is that Mr Smart was no longer insisting that there should be a terrorism exclusion on the PPL cover. Again, I consider that this is reading too much into the documents. Mr Smart did not know why Mr Stewart Hill had sent the email in the terms which he had. He would reasonably have expected Mr Stewart Hill to have and to be aware of the terms of the 20 March fax, and I accept Mr Smart's evidence that that was his understanding at the time. If so, there was no need to make express mention of the terrorism exclusion.

(8) The 8 October 2002 meeting between RBS and Axa

105. It was submitted that Mr Graham's note of the meeting was accurate, and that it was inconceivable that he and Mr Gibbins could have had a discussion on 8 October 2002 about the possible imposition of terrorism exclusions at renewal in 2003, and that Mr Graham could have recorded it as "…because of pressure from Reinsurers … terrorism may be restricted to £5M for EL and totally excluded for PL. AG asked for early warning should these proposals become concrete", if Mr Gibbins had been under the impression that there was already a complete terrorism exclusion on the PPL cover. However, Mr Graham's note would have been written from his perspective, which was that there was no existing terrorism exclusion. If Mr Gibbins had simply stated that these would be the terms for the following year, Mr Graham may well have responded at the time and in his note in the way which he recorded. The EL terms were being changed, which would explain the reference to pressure from reinsurers. When stating what the EL terms were to be it would be understandable to state the PPL terms as well, regardless of whether they were being changed. Mr Gibbins was clear that he was under no misapprehension on the subject of the existing terrorism exclusions, and Ms Coelho's evidence was that he did not give any impression to the contrary.
106. Reliance was also placed on the fact that at or shortly after the meeting Mr Gibbins mentioned the terrorism exclusion on the £75 million excess of £25 million layer, as borne out by Mr Stewart's Hill's note of the following day, but nothing about the PPL terrorism exclusion. However, this may well have been because it was the exclusion on EL that Mr Gibbins was seeking to justify. He did not need to justify the PPL exclusion if it was already in place. I do not therefore accept that it follows that this was the only existing terrorism exclusion on RBS's liability cover of which Mr Gibbins was aware. That was emphatically not his evidence.

(9) The excess EL cancel and re-write exercise

107. As Marsh had to accept, they did not cover themselves in glory when it came to the exercise of cancelling and re-writing the excess EL cover so as to ensure that there was no terrorism exclusion below £60 million. However, the principal relevance of this exercise was the light which it shed on the position relating to the PPL cover. In that regard, it was submitted that it is notable that when asked whether there was any terrorism exclusion on the PPL cover, Mr Ducat's instant reaction (which at that stage would have been based on recollection of recent events) was that there was no such exclusion, and that this was the confirmed position after it had been double checked, as borne out by Mr Bird's email of 20 December 2002. It was submitted that the confirmation given on 20 December 2002 and the manuscript notes of Mr Ducat's earlier statement that the PPL cover was not subject to a terrorism exclusion are powerful contemporaneous documentary evidence to that effect, from a time when recollections would still have been fresh. If there had been any doubt about the position on the PPL cover in the Autumn of 2002 when RBS raised the question, there would have been no reason for either Mr Ducat or Mr Bird to do anything other than say so, given their candid admission to RBS of Marsh's mistake in relation to the top layer excess EL cover.
108. As to Mr Ducat's reaction at the time, this would be equally consistent, for example, with him being under the mistaken impression that there was no PPL terrorism exclusion. Further, if the terrorism exclusion had been specifically negotiated out one would expect him to have a clear recollection of that without the stated need for checking. As to the double checking exercise, there is no evidence that this was in fact done and I find that it was not. Had it been done one would have expected there to be some written record of it, not least because an examination of the documents on the file would have indicated that there was a terrorism exclusion. Mr Bird was an assiduous note taker and there was no note of this information being received, despite his chasers. I consider that what is most likely to have occurred is that Mr Bird was anxious to tie matters up on his last day in the office and he stated what he did on the basis of Mr Ducat's initial reaction rather than any subsequent confirmation received.

(10) The absence of any terrorism exclusion wording

109. It was submitted that Axa's failure to submit any exclusion wording supported the inference that no exclusion had been agreed. However, given Axa's poor record in dealing with wordings, any such inference would be a weak one. Axa failed to produce any policy wording for a considerable period of time, and did not procure agreement to any wording at the time. They never produced a Cyber exclusion wording either.

(11) The 2003-2004 renewal

110. It was submitted that the only sensible reading of Ms Coelho's 6 March 2003 email requesting Mr Bryan of Willis to check whether there was a terrorism exclusion on the 2002-2003 cover is that she was unsure of the position. If Ms Coelho and Mr Gibbins had genuinely been sure in early 2003 that the 2002-2003 PL cover was subject to a terrorism exclusion, then they would have said so during negotiations with Mr Bryan for the 2003 renewal but there was no such conversation and no particular difficulty in persuading Mr Gibbins to withdraw the proposed exclusion for 2003.
111. I accept that there was a degree of uncertainty on Ms Coelho's part. This is because in the absence of a signed slip or agreed policy the position was not unequivocal. All there would have been on the Axa file would have been the 20 March fax, and Mr Smart's notation and file note dealing with EL, and it made sense to seek confirmation from the brokers. However, her stance, as stated at the time and confirmed in evidence, was that there was an exclusion, and I accept that this was her belief and understanding. I also accept that there was no particular reason for Mr Gibbins to stress the concession involved in withdrawing the terrorism exclusion or seeking an increase in premium. As he explained in evidence, he was already charging a hefty increase in premium as compared with the previous year and that with the commercial considerations arising from Willis engaging in an active marketing of the risk, there was no reason to load the premium further on agreeing to move from a terrorism exclusion to being silent on terrorism or to make a particular issue of this.

(12) The fact that RBS was unaware of the terrorism exclusion

112. It was not disputed that RBS did not receive a copy of the 20 March fax and that they did not know that the PPL cover included a terrorism exclusion. However, there could be any number of reasons why this might be so and Axa would reasonably have expected them to be aware of the terms of the 20 March fax.
113. The case put by Nat West and Marsh in closing was that the overwhelming probability was that Mr Ducat had already agreed with Mr Smart that there would be no PPL terrorism exclusion prior to the telephone conversation with Mr Bird on the morning of 22 March 2002. This was different to Mr Ducat's witness statement evidence, to the case put by Marsh in opening and to that put to the Axa witnesses, which was that this agreement took place when Mr Ducat and Mr Smart met on 27 March 2002.
114. The stated reason for this major shift in case was said to be that, as Mr Ducat recognised in evidence, it was unlikely that Mr Ducat would have approached Mr Rogers on the PPL excess layer prior to seeking the removal of the exclusion, and that if this had been discussed at the 27 March 2002 meeting this would be likely to have been noted by Mr Ducat on the 20 March fax.
115. Whilst I do not accept that this change in case is not open to Nat West and Marsh, it is unsatisfactory that there should be such a significant shift in timing on the major factual issue in the case and it does not inspire confidence in the case or the evidence being advanced. There are in any event a number of difficulties about this new case. In particular:

(1) The only evidence of telephone discussions between Mr Ducat and Mr Smart prior to the conversation with Mr Bird on 22 March 2002 is that reflected in Mr Bird's notes relating to 20 and 21 March 2002. Neither of these make any reference to the terrorism exclusion. Both of them precede the sending of the 20 March fax to Mr Ducat and if there had been an agreement not to include the terrorism exclusion prior to the 20 March fax being sent then it is highly improbable that it would have been sent out saying precisely the opposite.

(2) If, although there is no documentary or statement evidence to this effect, the conversation took place after Mr Ducat received the 20 March fax then one would expect the fax to be amended before it was sent to Mr Bird the following day.

(3) If, as is asserted, the agreement not to include the terrorism exclusion was explained to Mr Bird in a telephone conversation one would expect this to have been noted by him. One would also expect it to have been mentioned in his conversation about the renewal terms with Mr Stewart Hill on 22 March 2002.

(4) If the terrorism exclusion had been negotiated out before the PPL excess layer was broked to Mr Rogers one would expect it to be reflected in the written terms he was being presented with (the 20 March fax) or at the very least explained to him. There was no record of this being done and Mr Rogers was clear in his evidence that it was not.

116. For all these reasons I am not satisfied that either individually or collectively the facts and matters relied upon by Nat West and Marsh show that it was agreed that the proposed PPL terrorism exclusion should not be included. Indeed, I am satisfied that the overwhelming probability is that the PPL terrorism exclusion was not even discussed, still less negotiated out. In particular (further to points already made):

(1) If the terrorism exclusion had been negotiated out it is highly likely that there would be some written record of that being done, or at least of the issue being raised. There is nothing – no internal note on either side, still less some document crossing the line.

(2) In relation to the change in the offer made in respect of EL from that set out in the 20 March fax Mr Smart made a note on the 20 March fax itself, kept a copy of that for his file, and made two file notes. The strong probability is that he would have done likewise if the PPL terrorism exclusion had been negotiated out.

(3) If Mr Ducat had sought to negotiate out the terrorism exclusion I find that Mr Smart would have been required to and would have raised that issue with his superiors. There is no record of his doing so. Further, Mr Smart and one or more of Mr Gibbins, Mr Wilson and Mr Peter Hill would be likely to have some recollection this – they had no such recollection. I further find that Mr Smart's superior would have considered that, given the importance of the account, this was an issue upon which clearance from Paris would have been needed. There is no record of this being done and again this is a matter which is likely to have been recollected.

(4) I accept Mr Rogers' evidence that the PPL excess layer was broked to him by Mr Ducat on the back of the 20 March fax. Had there been any question of the PPL terrorism exclusion having been negotiated out Mr Ducat would have so informed Mr Rogers. I accept Mr Rogers' evidence that he did not do so.

117. I therefore find that there was no agreement between Mr Ducat and Mr Smart that the PPL terrorism exclusion would not be included.
118. It was put to Mr Ducat that the reason that he did not seek to negotiate out the PPL terrorism exclusion was because he realised that in the light of Axa's known policy it would be fruitless to do so. It was said that this was consistent with the fact that, for the same reason, he did not seek to negotiate in respect the EL terrorism exclusion in excess of £10m. This is a possibility. However, it is at least as likely that Mr Ducat simply did not pick up on this element of the renewal terms.
119. At the 29 January 2002 meeting the terrorism exclusion had only been raised in the context of EL. EL was also by far the most significant element of the combined cover, and the basis of about 85% of the premium. In such circumstances it is understandable that this was the element of the cover that Mr Ducat should focus on. It was submitted that it is unlikely that Mr Ducat would miss such an obvious point, especially as he clearly noted the premium being asked for, but on any view Mr Ducat's attention to detail on this risk was unimpressive. If, as was claimed, he said that the PPL cover was "as expiring" then this was on any view incorrect in light of the Cyber exclusion. Despite his own evidence that he would have realised the importance of a terrorism exclusion to RBS he did not inform them of the exclusion applied to the £75m xs £25m EL layer. He informed Mr Bird that he had succeeded in obtaining a cancel and re-write of the excess EL cover when he had not done so.
120. It might equally have been expected that Mr Bird would have picked up on this element of the proposed renewal. However, he had no recollection of the 20 March fax. Although the evidence establishes that it was eventually forwarded to Glensure at 11.55 a.m. on 22 March, if Mr Bird then saw it, it would have been after he had already discussed the renewal terms with Mr Ducat. He would have assumed that all the material terms had already been communicated to him by Mr Ducat and therefore had no reason to examine the fax closely. As he said in evidence, he already had the main information he was looking for. Moreover, when the apparent terrorism exclusion on EL xs £10m was pointed out to Mr Bird by Mr Edwards in his letter of 8 April 2002 he did not respond or enquire further.
121. It is therefore quite possible that this aspect of the renewal offer was missed by both Mr Ducat and Mr Bird. Mr Ducat's focus was the excess layers and the intermediate EL layer. Mr Bird's focus was the letter of credit requirement and the premium.
122. In any event, whatever the reason, in the result the renewal went through without anyone questioning the proposed PPL terrorism exclusion. That exclusion was thereby agreed in the following terms "Terrorism exclusion (wording to be agreed)".
123. Nat West and Marsh had a further argument to the effect that even if this was agreed it did not involve an effective agreement to a terrorism exclusion in the absence of any wording being agreed. It was pointed out that the wording is "Terrorism exclusion" rather than "Terrorism excluded". That wording identifies what the subject matter of the exclusion will be but not what the exclusion is. To establish what the exclusion is wording would be required to be put forward and agreed, but it never was. Identifying the subject matter of the clause is not sufficient for there to be agreement as to the term, which, on any view, was an inessential term of the contract.
124. I reject this argument. In my judgment, the words "Terrorism exclusion" are words of substance and content on their own – they do not require the inclusion of some clause which has not been identified; rather, they state and identify that which is excluded from cover. The fact that the parties then contemplated a fuller expression of the same exclusion in a wording subsequently to be agreed could not and does not undermine the fact that the exclusion was cast in terms which are capable of both interpretation and application. It is a common feature of the London market that parties contemplate a fuller wording to follow the slip or short-form statement of their agreed terms.
125. Nat West and Marsh further submitted that if I concluded that the term agreed was "Terrorism exclusion (wording to be agreed)" I should then go on to consider and determine what that exclusion means, the circumstances in which it would apply and the causal connection required.
126. Nat West and Marsh stressed that this had effectively been put in issue by the terms in which Axa had advanced its claim. In paragraph 7 of the Particulars of Claim Axa claim that:

"It was an express term of the 2002/2003 contract of insurance that liability directly or indirectly caused by, resulting from or in connection with any act of terrorism was excluded under the Public and Products Liability sections".

They then seek a declaration in those terms.

127. I accept that it is not appropriate for there to be a declaration in these terms. It involves a gloss on the words actually agreed. However, at the trial Axa made it clear that they were only seeking a declaration that the term was "Terrorism exclusion (wording to be agreed)". I consider that they were entitled to limit their claim in this way and that this claim falls within the agreed "primary issue" of "the terms of any such exclusion".
128. Nat West and Marsh submitted that the term "Terrorism exclusion (wording to be agreed)" is ambiguous, that it is capable of a range of possible meanings, that it should be construed contra proferentum, and that the narrowest possible meaning should be given to the term, which they submitted would be:

"The Insurer will not indemnify the Insured against liability arising from any act of terrorism affecting premises owned, used or occupied by the insured"

129. They further submitted that such a term would be consistent with the terrorism risk that was or reasonably would have been contemplated by the parties and what would, on a balance of probabilities, have been agreed by the parties following a reasonable process of negotiation.
130. In my judgment it is not appropriate for me to seek to construe the term agreed in the abstract and to try to lay down what it means and requires. If the Defendants wish to seek guidance from the court as to the proper construction of the clause they can make an application to the court for the determination of how the clause applies to agreed or assumed facts. There is force in their point that if such guidance is to be sought it should be in the context of the existing proceedings and it may be possible to include a provision in the court order which enables that to be done.

Conclusion

131. I accordingly determine the issues as follows:

(1) the public and property liability sections of RBS's primary contract of insurance with Axa for the period 31 March 2002 to 30 March 2003 did contain an express term excluding liability for terrorism; and

(2) the terms of that exclusion were "Terrorism exclusion (wording to be agreed)".