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Under the
wording of the reinsurance policy, the reinsured was required to notify
the reinsurers of a substantial claim or to seek their consent to a
settlement in order to recover an indemnity, notwithstanding a "follow
the settlements" clause on the part of the reinsurer.
The claimant
insurance company issued a comprehensive general liability policy to
Varian Associates for a period of one year from November 1969. Thereafter
the claimant reinsured their liability under the policy with the eighteen
defendants. Following a claim made by Varian against the claimant a
settlement agreement was reached in October 1995 resulting in an initial
payment of US$1 million and contingency terms for future payments.
The claimant
then sought an indemnity from the defendants in relation to their liabilities
to Varian under the settlement agreement and also in relation to their
costs in the sum of $615,000 for investigating and defending the Varian
claim. The defendants contended that they were not liable under the
reinsurance policies on the grounds that
(a) a condition precedent to their liability had not been fulfilled,
namely, the exercise of their right of control over the negotiation
and settlement of claims, and
(b) the terms of the reinsurance policies excluded the claim to legal
costs.
It was
agreed by consent that there would be a trial of preliminary issues
based on an agreed statement of facts.
The policy
issued to Varian referred to underlying insurances which were to be
incorporated, "except for any obligation to investigate and defend
and pay for costs and expenses …" [on the part of the reinsurers].
The main
reinsurance policy obliged the reinsurers, "to follow the settlements
of the Company [the Claimants]…". This policy also contained,
by way of an addendum, a claims co-operation clause, whereby the claimants
had to notify the reinsurers within 7 days of any claims or occurrences.
The reinsurers were then able to control the negotiations and settlements
of any claims and accordingly not be liable to pay any claim not so
controlled.
It was
held that in determining the effect of the reinsurance clauses contained
in the reinsurance policies the assumption was that the parties had
a common understanding as to the meaning of the language which they
had chosen to express their bargain and it was the court's task to ascertain
it.
There existed
a binding obligation upon the defendants (in the absence of a liquidation,
which was dealt with under separate wording) to "follow the settlements"
made by the claimants. Such a clause was not unusual at least where
the reinsured and reinsurers were "co-adventurers". It was
held that it was not a condition precedent that the reinsurers exercise
a right of control over the negotiation and settlement of claims. Notwithstanding
the existence of the "follow the settlements" clause, the
correct position was that although the claimant could make settlements
with or without the defendants' consent, if significant costs were to
be incurred it was in the interests of the claimant to obtain consent.
Whilst notifying the defendants of a substantial claim or seeking their
consent to settlement could provoke them to exercise their right to
take control of the settlement or negotiations, the claimants were not
entitled to subvert such a course by settling a claim behind the backs
of the defendants otherwise they would not be entitled to recover under
the reinsurance policies.
As to the
second question, namely whether the claimants were entitled to recover
their costs where a settlement had been reached without the consent
of the defendants, the Court held that this would not be determined
at the preliminary issue stage.
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