A new Commercial Court ruling by Mr Justice Walker has sounded a clear warning to those benefiting from non-proportional variable excess stop loss reinsurance contracts.
The case is believed to be the first in which the point when such claims become statute-barred has been considered by the courts. The judge has held at the trial of preliminary issues, that most of a claim for £1.69m, interest and costs had been statute-barred at the date when the proceedings were commenced.
According to Monckton Chambers insurance specialist Mark Pelling, the case is important in that it establishes when the clock begins to run in such cases.
The point was raised in a dispute between North Atlantic Insurance and Bishopsgate
Insurance over a non-proportional variable aggregate excess stop loss policy.
Bishopsgate reinsured North Atlantic's liabilities under contingency policies which Bishopsgate had underwritten. The policy aggregate excess was £2.5m and the net premium income which North Atlantic was to receive in respect of the underlying policies was £3.5m.
However, the policy contained a clause providing that the aggregate excess was to increase in proportion to the amount of net premium income received by North Atlantic over £3.5m.
At the recent preliminary hearing, North Atlantic contended that time could not start to run until the amount of the net premium income received by North Atlantic could be ascertained. Bishopsgate claimed that time had started to run as soon as North Atlantic had settled claims with an aggregate of £2.5m. Bishopsgate's argument succeeded.
Pelling, instructed by Andrew Hobson of Reynolds Porter Chamberlain, says: "It has been well-established that a cause of action in relation to a proportional reinsurance policy starts to run when the underlying liability has become ascertained by agreement or arbitral award or judgment.
"What has been unclear is how the courts would approach this issue in relation to a non-proportional excess of loss or stop loss treaty which was subject to a variable excess."
He adds: "One view was that no claim could be made until the amount of the excess was fully ascertainable and it had been reached. The alternative view was to treat the excess provision, not as a condition precedent to liability, but merely as a contractual mechanism by which the ultimate liability of the reinsurer could be finally ascertained.
"Mr Justice Walker concluded, as a matter of construction of the particular contract, that the latter approach was to be preferred essentially because the contrary view was inconsistent with the terms of an ultimate net loss clause in the contract."
As to how relevant this is in insurance law circles, Pelling says: "Variable excess stop loss treaties are relatively rare but it is unlikely that there are any which do not incorporate ultimate net loss clauses in similar terms to that incorporated in the policy considered in this case.
"As such, the judge's reasoning in this case is likely to be valid in similar cases."
Pelling concludes: "The lesson for reinsurers benefiting from such policies is clear. Claims must be made within six years of the date at which the fixed element of a variable excess is exceeded if the limitation risk is to be eliminated."