QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Fetter Lane, London, EC4A 1NL |
||
B e f o r e :
____________________
Tokio Marine Europe Insurance Ltd |
Claimant |
|
- and - |
||
Novae Corporate Underwriting Ltd |
Defendant |
____________________
Simon Picken QC and Sushma Ananda (instructed by Locke Lord) for the Defendant
Hearing dates: 23 and 24 October 2013
____________________
Crown Copyright ©
Mr Justice Hamblen :
Introduction
Factual background
"This Contract is subject in all respects (excluding the rate and/or premium hereon and subject always to the Limits Reinsured hereon and except as otherwise provided herein) to the same terms, clauses and conditions as original and without prejudice to the generality of the foregoing, Reinsurers agree to follow all settlements (excluding without prejudice and ex-gratia payments) made by original Insurers arising out of and in connection with the original insurance and to bear their proportion of any expenses incurred whether legal or otherwise in the investigation and defence of any claim hereunder in addition to limits hereunder."
i) 1 in Nakhon Sawan (Northern Region) – approximately 200 km north of Central Bangkok
ii) 24 in Ayutthaya (Central Plain Region) – approximately 60 km northeast of Central Bangkok
iii) 57 in Pathum Thani (Central Plain Region) – approximately 30 km north of Central Bangkok
iv) 20 in Nonthaburi (Central Plain Region) – approximately 15 km north of Central Bangkok
v) 9 in Nakhon Pathom (Central Plain Region) – approximately 50 km west of Central Bangkok
vi) 53 in Bangkok (Central Plain Region)
vii) 1 in Samsut Sakhon – approximately 30 km southwest of Central Bangkok
"Given the urgency involved in providing you with a position from TMEI, I confirm that TMEI is prepared to support the proposed settlement with Tesco for its share of GBP80m net of one GBP2.5m deductible subject to the following points:
1. We assume this is the intent of the proposed settlement with Tesco but, for the avoidance of doubt, our agreement to the settlement is on the basis that this is a 'full and final' settlement in respect of the Thailand flood event and that TMEI is fully released from all further liability to ACE in respect of damage to Tesco properties caused by the recent floods.
2. Our agreement is on the strict understanding that it shall not, in any respect, be treated by ACE as a precedent to support any future claims it may make under its reinsurance contract with TMEI.
3. TMEI's support is also on the basis that the premium due will first be paid – a point we understand has already been agreed with QBE."
The preliminary issues
i) It is common ground that the Retrocession reinsures TMEI in respect of TMEI's liability to ACE Europe under the Master Policy. On a true and proper construction of the Retrocession, does it also reinsure TMEI in respect of TMEI's liability to ACE INA and other ACE companies as insurers of local policies issued under or pursuant to the Master Policy?ii) On the true and proper construction of "Loss Occurrence" in the Retrocession, should it be given the same meaning as the Defendant says the words "event" and "occurrence" have when used in aggregation clauses in insurance and reinsurance contracts and taken to refer to something which happens at a particular time, at a particular place, and in a particular way, or, should it be construed in the same manner as the word "Occurrence" in the Master Policy?
iii) On a true and proper construction of the Retrocession, and the follow the settlements clause in particular, (a) did Novae agree to follow the settlements (excluding without prejudice and ex gratia payments) of ACE under the Master Policy and/or the local policy respectively, or (b) did Novae agree to follow the settlements (excluding without prejudice and ex gratia payments) of TMEI under the Reinsurance?
iv) On a true and proper construction of the follow the settlements clause in the Retrocession, is the burden on TMEI to show that the claim so recognised by ACE, or, alternatively, TMEI, depending on the answer to question iii) above, is one which actually falls within the terms of the Retrocession as a matter of law on a balance of probabilities, or is it sufficient for TMEI to show that the claim so recognised arguably does so?
v) On the assumption that ACE, or, alternatively, TMEI, depending on the answer to question iii) above, acted in an honest, proper and businesslike manner in concluding the Original Settlement and/or Reinsurance Settlement, is Novae bound (and, if so, in what circumstances) by a determination by ACE or TMEI (if any) as to (a) the construction and application of the aggregation provisions in the Master Policy to the Tesco losses and/or (b) (if different) whether the Tesco losses were consequent upon or attributable to one source or original cause?
The approach to construction
"There has been considerable judicial exposition of these principles by the House of Lords and the Supreme Court in recent years.7 [Footnote 7 refers to Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; Re Sigma Finance Corp [2010] 1 All ER 571 and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900] There is no point in my going over the same ground again at any length. The court's job is to discern the intention of the parties, objectively speaking, from the words used in the commercial document, in the relevant context and against the factual background in which the document was created. The starting point is the wording of the document itself and the principle that the commercial parties who agreed the wording intended the words used to mean what they say in setting out the parties' respective rights and obligations. If there are two possible constructions of the document a court is entitled to prefer the construction which is more consistent with "business common sense," if that can be ascertained. However, I would agree with the statements of Briggs J, in Jackson v Dear, [2012] EWHC 2060 at [40] first, that "commercial common sense" is not to be elevated to an overriding criterion of construction and, secondly, that the parties should not be subjected to "…the individual judge's own notions of what might have been the sensible solution to the parties' conundrum". I would add, still less should the issue of construction be determined by what seems like "commercial common sense" from the point of view of one of the parties to the contract."
"..(3) In principle the relevant terms in a proportional facultative reinsurance – and in particular those relating to the risk – should be construed so as to be consistent with the terms of the insurance contract on the basis that the normal commercial intention is that they should be back to back"..
"The first is an assumption that where a direct insurer takes out reinsurance, and where both policies contain provisions enabling the amount of losses to be added together, the parties are likely to have intended their effect to be much the same. This assumption may very well be correct where the reinsurance is of the proportionate kind, under which the reinsurer is sharing the risk assumed by the direct insurer. In such an event it is indeed likely that the treatment of multiple losses, and hence the outcome of the parallel contracts, was meant to be the same. But where a reinsurer writes an excess of loss treaty for a layer of the whole account (or the whole of a stipulated account) of the reinsured I see no reason to assume that aggregation clauses in one are intended to have the same effect as aggregation clauses in the other. The insurances are not in any real sense back-to-back. Thus, for example, a direct insurer may issue many policies on terms as to deductible and limit of liability which he can fix according to his knowledge of the policyholders and of the likely size and incidence of the kind of casualties which are insured. The financial outcome of these policies will depend on other factors besides the total monetary amount of the valid claims made. Thus, if many of the policyholders make a large number of small claims, comparatively few of them will exceed the deductible, and the underwriter's gross exposure will be small. At the other extreme, if the claims are large but few, most of them will be cut off by the upper limit, and again the exposure may be quite small. But if there are many claims of medium size the underwriter may find himself carrying them all in full. If when writing his policies he foresees that this could happen, he will consider limiting his liability under an individual policy by reference to aggregate claims made during the policy year, as well as by the size of each individual claim. Or, again, if the likelihood is that even when there are numerous losses a group or groups of them will share a more or less distant common origin, it may be prudent to impose not only a limit per claim but also a limit per group. These matters form an element in determining not only the premium charged, but also the amount and the nature of the reinsurance which it is prudent for the direct insurer to carry.
The strategy of the underwriter who takes a line on a layer of an excess of loss treaty is not necessarily the same. He cannot rate the individual policyholders and individual risks directly, and must take a much broader view. For him, the relationship between the inward and outward policies is essential to profitability. Not only the limits for each loss, but the aggregation of losses, both causally and in other ways, and the numbers and circumstances of permitted reinstatements, make all the difference. It is, I believe, plain that the elements of the prudent underwriter's judgment when writing policies of this kind need not be at all the same as if he were writing the underlying business direct. In particular, according to circumstances it may suit him, but not the direct underwriter, to have an aggregation clause which sweeps up many losses into one aggregate; or the opposite may be the case. It is simply impossible to generalise, and I have no predisposition to start the inquiry by assuming that parties intended the provisions for aggregation in the direct policy and in the reinsurance treaty to be the same. The natural way to achieve that result is to make sure that the aggregation clauses are the same."
The first preliminary issue: Does the Retrocession reinsure TMEI for its liability to ACE in respect of the local policies?
"Perils | All Risks of Direct Physical Loss Destruction or Damage and as more fully described in the Original Policy Wording as applicable hereto. |
Insured |
Tesco Plc and as more fully defined in the Original Policy Wording. |
Interest |
All real and personal property of every kind and description belonging to the Insured or for which the Insured is responsible or has assumed responsibility to insure prior to the occurrence of any damage including all such property in which the Insured may acquire an insurable interest during the period of insurance including Business Interruption as a result of loss, destruction or damage by an insured peril as more fully defined in the Original Policy Wording. |
Sum Reinsured (For 100%) |
GBP 25,000,000 each and every Loss Occurrence in Excess of GBP 53,000,000 each and every Loss Occurrence Which in turn is in excess of Original Policy Deductibles. Limited by Sublimits as defined in the Original Policy wording. |
Reinsurance Conditions | Following Original Policy Wording Reference Number: UKFRIC38309.10. This Contract is subject in all respects (excluding the rate and/or premium hereon and subject always to the Limits Reinsured hereon and except as otherwise provided herein) to the same terms, clauses and conditions as original and without prejudice to the generality of the foregoing, Reinsurers agree to follow all settlements (excluding without prejudice and ex-gratia payments) made by original Insurers arising out of and in connection with the original insurance and to bear their proportion of any expenses incurred whether legal or otherwise in the investigation and defence of any claim hereunder in addition to limits hereunder." |
The second preliminary issue: Is the term "Loss Occurrence" in the Retrocession to be construed in the same manner as "Occurrence" in the Master Policy?
The third preliminary issue: Did Novae agree under the Retrocession to follow the settlements of ACE or of TMEI?
Reinsurance Conditions | Following Original Policy Wording Reference Number: UKFRIC38309.10. This Contract is subject in all respects (excluding the rate and/or premium hereon and subject always to the Limits Reinsured hereon and except as otherwise provided herein) to the same terms, clauses and conditions as original and without prejudice to the generality of the foregoing, Reinsurers agree to follow all settlements (excluding without prejudice and ex-gratia payments) made by original Insurers arising out of and in connection with the original insurance and to bear their proportion of any expenses incurred whether legal or otherwise in the investigation and defence of any claim hereunder in addition to limits hereunder." (emphasis added) |
The fourth preliminary issue: To what standard of proof does TMEI have to show that the claim so recognised by ACE falls within the Retrocession as a 1matter of law – balance of probabilities or arguability?
"First, that the reinsurer cannot be held liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. Second that the parties are free to agree on ways of proving whether these requirements are satisfied."
"In my judgment, the effect of a clause binding reinsurers to follow settlements of the insurers, is that the reinsurers agree to indemnify insurers in the event that they settle a claim by their assured, i.e., when they dispose, or bind themselves to dispose, of a claim, whether by reason of admission or compromise, provided that the claim so recognized by them falls within the risks covered by the policy of reinsurance as a matter of law, and provided also that in settling the claim the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement."
"The principle stated in Scor's case is unexceptional, but its application gives rise to difficulty where the terms of the reinsurance contract are the same as those of the underlying insurance contract, and the reinsurer has agreed to follow the settlements of the original insurer/reinsured. This difficulty was recognized by the Court of Appeal of Hong Kong in Insurance Co. of the State of Pennsylvania v. Grand Union Insurance Co., [1990] 1 Lloyd's Rep. 208. In the leading judgment, Hunter J.A. said this:
'Two points, I think, have to be noticed about these two provisos. The first, I have no doubt, was very carefully worded and deliberately limited to the policy of reinsurance. Mr. Collins argues that where, as is usual, the policy of reinsurance refers to the terms of the original insurance, the reinsurer can look through to those terms and complain, as was sought to be done here, of breaches of condition in the underlying policy. I reject that. If Lord Justice Goff meant that, he would in Mr. Justice Mortimer's words "be nullifying the conclusion that he had already reached". I am satisfied that he meant no such thing. He was well aware that many settlements include compromises on liability and quantum and that to permit reinsurers to go back to an alleged strict construction of the policy would destroy the value of the clause. If there is any question as to the sufficiency or propriety of the settlement it arises under the second proviso.'
In my judgment, the reinsurer is always entitled to raise issues as to the scope of the reinsurance contract, 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. But this is subject to one proviso which I have already assumed in the Syndicate's favour, and which is supported by the judgment of Hunter J.A. in the Grand Union case, quoted above. The reinsurer may well be bound to follow the insurer's settlement of a claim which arguably, as a matter of law, is within the scope of the original insurance, regardless of whether the Court might hold, if the issue was fully argued before it, that as a matter of law the claim would have failed." (emphasis added)
"38 The distinction between having to prove that an original loss falls within the cover provided by a contract of insurance and also by a contract of reinsurance, and having to prove that a claim that has been recognised by the insurers as falling within the cover provided by a contract of insurance also falls within the cover provided by a contract of reinsurance, is significant. In the former, one is examining what in fact happened and whether, on the basis of what actually happened, the insurers are liable to indemnify the assured under the contract of insurance and the reinsurers are liable to indemnify the insurers under the contract of reinsurance, according to their respective terms. In the latter, 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.
39...When one is examining the claim so recognised by the insurers when they settle it by admission or compromise, one is examining the real basis on which the claim has been settled...
40 In examining the real basis on which a claim has been settled, one is looking to identify the factual and legal ingredients of the claim embodied and thus recognised in the settlement..."
"49 It is apparent that Evans J was of the view that, in a case where the risks reinsured are co-extensive with those originally insured, the effect of the reinsurers' agreement to follow the settlements of the insurers may be to bind the reinsurers by a compromise of a dispute between the insurers and their assureds as to liability, including as to whether the claim is covered by the risks insured under the contract of insurance as a matter of law, provided that the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement: with the consequence that the reinsurers cannot reopen the precise same question for the purposes of disputing liability under the terms of the contract of reinsurance or contesting that the claim does not fall within the risks covered by the contract of reinsurance as a matter of law.
50 ….He concluded …. that the reinsurers 'may well be bound' to follow the insurers' settlements and, implicitly therefore, may well be precluded from raising under the contract of reinsurance the same issues in relation to liability and scope of cover as had already been disputed and compromised, or admitted, by settlement under the contract of insurance.."
"….First, if the reinsurers were to have the ability to reopen the same issues of coverage as a matter of law under the contract of reinsurance as those which the insurers had admitted or compromised under the contract of insurance in circumstances where the parties had deliberately ensured that the reinsurance should be back to back with the insurance, the result would in practical and legal terms be similar to that which would obtain if the parties had agreed that the promise by the reinsurers to follow the settlements of the insurers should be subject to the settlements coming within the terms and conditions of both the contract of insurance and the contract of reinsurance. That, however, was not agreed either expressly or impliedly. Secondly, reinsurers having entrusted the insurers with their confidence in determining and compromising any disputes in relation to whether any claims made under the contract of insurance fell within the risks covered by the contract of insurance as a matter of law in circumstances where the risks covered by the contract of reinsurance were identical, it would be inconsistent for the reinsurers to be able thereafter to dispute the self same questions of law arising in connection with the identical terms and the equivalent scope of cover under the contract of reinsurance. It is implicit in the combination of the fact that the contracts were deliberately back to back with the promise by the reinsurers to follow the settlements of the insurers that, if the insurers upon the taking of all proper and businesslike steps honestly compromise a dispute concerning the scope and application of the contract of insurance, the reinsurers should be bound to follow the insurers in respect of that settlement. Thirdly, and following from the above, the follow the settlements promise binds the reinsurers to a proper and businesslike compromise by the insurers of the question of liability or a proper and businesslike admission of liability under the contract of insurance whether the insurers were legally liable to the assured or not. For the insurers then to have to prove to the reinsurers that, on the settled facts, they were legally liable to the assured, which would be the inevitable consequence (if indirect) if the reinsurers were entitled to require the insurers to establish that on the settled facts the claim fell within the risks reinsured, would replace the unqualified follow the settlements promise with something significantly different."
"61….The defendants are bound by all settlements made by Generali (except ex gratia and without prejudice settlements) (a) provided that the claims so recognised by Generali fall within the risks covered by the contract of reinsurance as a matter of law: by which is meant in this context as explained above, provided that the claims were settled on a basis which, if and assuming it to be valid, falls within the risks covered by Generali's outward contract of reinsurance as a matter of law; and (b) provided that Generali acted honestly and took all proper and businesslike steps in making such settlements."
"17 The proviso to which Evans J refers is that reinsurers are bound by reasonable compromises on liability and quantum between the insurers and their assured under the terms of the original policy. That, as I have already said, is well established: the insurer does not have to prove that if the original claim was fully argued it would in fact have succeeded. No investigation as to whether it was arguably within the terms of the original policy is required. But what Evans J says about the reinsurance is clear. Like the judge, I agree with what he says.
18 What I have said so far disposes of Mr Hofmeyr's submissions on this part of the case which I do not accept. But none of the earlier cases have considered how the first proviso works in practice in a case such as this. Here the judge has done so. By reference to the words 'the claim so recognised' he has concluded that the insurers do not have to show that the claim they have settled in fact fell within the risks covered by the reinsurance, but that the claim which they recognised did or arguably did. I think this gives effect to what Robert Goff LJ said and gives some sensible added meaning to the clause. It gives substance to the fact that the reinsurer cannot require the insurer to prove that the assured's claim was in fact covered by the original policy, but requires him to show that the basis on which he settled it was one which fell within the terms of the reinsurance as a matter of law or arguably did so. This and the need for the insurer to have acted honestly and taken all reasonable and proper steps in settling the claim provide adequate protection for the reinsurer." (emphasis added)
The fifth preliminary issue: Is Novae bound by a determination by ACE (if any) as to the construction and application of the aggregation provisions in the Master Policy to the Tesco losses?
i) the Retrocession is a non-proportional excess of loss contract of reinsurance.
ii) the Retrocession was not back-to-back with the Reinsurance.
iii) the Retrocession is concerned with the reinsurance of another reinsurer.
"Another preliminary observation which needs to be made, which is true of very many professionally drafted commercial and financial contracts, and is particularly true in the present case, is that there are often well established alternatives open to the parties in the drafting of their agreement. The choice made from among these alternatives represents part of the bargain struck by the parties and must be respected by anyone (judge or arbitrator) adjudicating upon a dispute arising under the document. As noted by Lord Mustill in AXA Re v Field [1996] CLC 1169 at pp. 1173–7; [1996] 1 WLR 1026 at pp. 1031–5, and, as I will explain below, aggregation clauses come in different well established forms. The clause in the present case is no exception."
The same observation can be made in respect of follow settlements clauses and the choice made in this case.
Conclusion
i) On a true and proper construction of the Retrocession it reinsures TMEI in respect of TMEI's liability to ACE INA and other ACE companies as insurers of local policies issued under or pursuant to the Master Policy.
ii) On the true and proper construction of "Loss Occurrence" in the Retrocession it is to be construed in the same manner as the word "Occurrence" in the Master Policy.
iii) On a true and proper construction of the Retrocession, and the follow the settlements clause in particular, Novae agreed to follow the settlements (excluding without prejudice and ex gratia payments) of ACE under the Master Policy and/or the local policy respectively.
iv) On a true and proper construction of the follow the settlements clause in the Retrocession the burden on TMEI is to show that the claim so recognised by ACE is one which arguably falls within the terms of the Retrocession as a matter of law.
v) On the assumption that ACE acted in an honest, proper and businesslike manner in concluding the Original Settlement, Novae is bound by a determination by ACE (if any) as to (a) the construction and application of the aggregation provisions in the Master Policy to the Tesco losses and/or (b) (if different) whether the Tesco losses were consequent upon or attributable to one source or original cause.