Payout bouts

Jurisdictional choice has become a key battleground in reinsurance conflicts. Ian McKenna and John Vishneski provide the lowdown on both sides of the Atlantic

When one considers some of the cases in the reinsurance sector in early 2005 on both sides of the Atlantic, two key issues emerge: first, the need for contractual certainty; and second, uncertainty as to the proper forum and jurisdiction for disputes.

England

Exxon Valdez settlements

Last year, the Commercial Court addressed whether primary insurers were liable to indemnify Exxon for oil pollution clean-up costs following the Exxon Valdez spill in March 1989 (King v Brandywine Reinsurance Company (2005)). Primary insurers settled Exxon’s claim for $780m (£416.2m) without seeking reinsurers’ consent. Reinsurers then disputed their liability for such settlements. In a test action by the King syndicate against Brandywine, the court ruled in favour of Brandywine that the original policy did not respond to the settlement.

The first-party loss or damage to property section of the policy did not respond, as the key insuring clause “removal of debris” did not encompass liquids, and therefore oil. Although marine liabilities and public and third-party liability was covered, the policy precluded recovery under those sections where, on the facts, the property damage section did not respond. This meant that insurers’ settlements were not recoverable from reinsurers.

The Court of Appeal has upheld this decision. The effect is that an ‘unravelling’ process will be required in relation to settlements already paid by reinsurers. Given the quantum involved and the number of affected insurers and reinsurers, this process will be complex and lengthy.

Notification obligations

In Dornoch Ltd & ors v Royal and SunAlliance Insurance plc (2005), the Commercial Court considered whether Dornoch was obliged to indemnify Royal & SunAlliance (RSA) under reinsurance contracts containing a claims control clause (CCC) requiring that “…the reassured shall upon knowledge of any loss or losses which may give rise to a claim under this policy, advise the underwriters thereof by cable within 72 hours…”.

On the basis that this was a reinsurance of a legal liability, and that both the original insured’s cause of action against insurers and insurers’ cause of action against reinsurers arose out of the same event – namely, the actual loss of the third-party claimant – Judge Aikens found that the “loss” in question was the “actual”, as opposed to the “alleged” or “claimed”, loss of the third-party claimants against the original insured. Actual, as opposed to constructive, knowledge of the third-party claimants’ losses was also required. On the facts, RSA did not have actual knowledge of an actual loss and had not, therefore, breached the notification obligation in the CCC.

The Court of Appeal has upheld this decision, holding that a party which relies on a clause exempting them from liability can do so only if the words of the clause are clear on a fair construction of the clause. The CCC in question was not sufficiently clear. The Court of Appeal appears to have been swayed by the parties’ failure to choose an appropriate form of notification clause, suggesting that an appropriate clause in the context of liability insurance might have a longer notice period than 72 hours, or at least one which would not make 72-hours notice a condition precedent to liability.

The United States

In Combined Insurance Company of American v Certain Underwriters at Lloyd’s London (2005)), an Illinois reinsurance suit may proceed notwithstanding an earlier-filed English action.

An intermediate state appellate court held that a reinsurance dispute could proceed in the Illinois state court, notwithstanding that there was an earlier-filed and ongoing dispute between the same parties in England. Combined (Aon’s captive) and Lloyd’s had entered into a contract reinsuring ‘accidental death and dismemberment’ coverages for Aon employees. Following 11 September, Combined paid out to the families of the Aon employees who died in the World Trade Centre. Lloyd’s consented to this payment but contested its right to coverage by filing a declaratory judgment action in England in late 2001. Combined then filed a competing action in a New York federal court pursuant to legislation that was passed post-11 September. The New York action was dismissed for a lack of jurisdiction in 2003. On 11 September 2003, Combined filed a suit in Illinois’ state court seeking a declaration of coverage and damages for any purported breach by Lloyd’s. Lloyd’s moved to dismiss the Illinois action on the basis of the earlier-filed English action. The Illinois appellate court rejected this. A majority of the court found that, although both the English action and the Illinois action involved the same declaratory issues, to obtain the damages that it sought in Illinois, Combined would need to file a non-compulsory counterclaim in the English action. This fact justified allowing the action to proceed in Illinois.

This case shows that state courts can feel strongly about allowing state residents to litigate a claim at home, and that reinsurers may face parallel proceedings as a result.

In Markel Corporation Group Insurance Company v PMA Capital Insurance Company (2005), the arbitration clause applied to related ancillary contracts.

A US federal trial court broadly construed the arbitration clause in a reinsurance agreement to apply to an ancillary trust agreement that did not have its own, separate, arbitration clause. Each of the reinsurance agreements between Markel and PMA contained a typical arbitration clause that provided for arbitration of “any dispute that arises out of or in connection” with the reinsurance agreements. The reinsurance agreements also provided mechanisms for securing PMA’s obligations if certain economic triggers regarding PMA’s financial status were reached. The parties entered into a ‘trust agreement’, which did not contain an arbitration clause. Markel attempted to avoid arbitration of a dispute regarding the amount of funds that the trust agreement required. The court, however, found that the dispute was subject to arbitration following the general rule that “when two related agreements are entered into, and one agreement contains an arbitration clause and the other does not, the arbitration clause will apply to both agreements”. The court concluded that this rule was especially applicable in this case because there was an “integral relationship” between the reinsurance and trust agreements.

This decision extends the broad reach of arbitration clauses and is a reminder to reinsurers to focus on arbitration clauses during the contracting process, because those clauses will most likely determine how disputes are resolved.

Ian McKenna (London) and John Vishneski (Chicago) are partners in Mayer Brown Rose & Maw’s global insurance and reinsurance.