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A claims
co-operation clause in a reinsurance contract amounted to an exclusion
of the defendant reinsurers' liability to indemnify the claimant reinsured,
and the reinsurers were prima facie not bound to follow the settlement
of that claim because they had not consented to do so.
Eagle Star
Insurance Co Ltd issued a general liability policy to their original
insured, Varian. Eagle Star were reinsured with various Lloyd's and
company reinsurers. Subsequently, Eagle Star settled a claim by Varian
under the primary policy, without involving reinsurers in the negotiations
or settlement or obtaining their consent. Reinsurers refused to indemnify
Eagle Star in relation to the settlement. Eagle Star issued proceedings
against their reinsurers. Morison J, sitting in the Commercial Court,
resolved the matter in Eagle Star's favour. The first instance decision
was, however, unanimously overturned on appeal.
The central
issue in the appeal was the true construction of a so-called "claims
co-operation clause" in the reinsurance policies. This provided:
"The
company agrees
(a) To
notify all claims or occurrences likely to involve the Underwriters
within 7 days from the time that such claims or occurrences become
known to them.
(b) The Underwriters hereon shall control the negotiations and
settlements of any claims under this Policy. In this event the Underwriters
hereon will not be liable to pay any claim not controlled as set out
above" (emphasis added).
At first
instance, the court had held that this clause did not amount to a condition
precedent, and that pursuant to a follow the settlement provision in
the reinsurance policies, reinsurers were bound to indemnify the Varian
settlement.
The Court
of Appeal disagreed. It concluded that the clause, although it was described
as a claims co-operation clause, in fact amounted to a claims control
clause: it gave reinsurers a controlling role in negotiations. Whilst
the clause did not expressly state that it was a condition precedent
to reinsurers' liability that the reinsurers shall control the negotiations
and any settlement, this was in Longmore J's opinion clearly its effect.
Rix LJ arrived at the same outcome but applying a slightly different
analysis: he considered that if the wording was not a condition precedent,
at any rate it amounted to an exclusion of reinsurers' liability.
It was
an agreed fact between the parties that reinsurers had not controlled
the negotiations or settlement of the claim: indeed, they appeared not
to have been given the opportunity to do so. The court concluded that,
unless some reason was shown for excusing the breach of this provision,
reinsurers were not liable under this clause.
Further,
whilst reinsurers were subject to a provision requiring them to follow
the settlement, reinsurers were not bound to do so in relation to the
Varian settlement, for two reasons. First because reinsurers had not
consented to the Varian settlement, and secondly because they did not
control its negotiation or agreement.
Rix LJ
concluded that whilst the claims co-operation clause could operate harshly
on a reinsured, the solutions were in the reinsured's own hands. Eagle
Star was well able to negotiate its own contract. It could take care
to ensure that its reinsurers were kept in the picture of any negotiations
or settlement activities. If reinsurers simply refused to exercise control,
there remained the argument of waiver. And if, while exercising or refusing
to exercise control, reinsurers acted capriciously, Eagle Star could
invoke an implied duty of good faith.
This decision
reflects the court's willingness to give effect to the clear language
used in a policy of reinsurance. As such, it is to be welcomed.
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