Reinsurance Focus

The Commercial Court (a subdivision of the Queen’s Bench Division of the U.K.’s High Court of Justice), recently held that an underwriter could not avoid the reinsurance contracts it had underwritten because it failed to convince the court that it would not have underwritten those contracts. In a case involving nondisclosure of loss statistics, the court determined that plaintiff reinsurer, Axa, could not avoid two reinsurance agreements that it had entered into with defendant insured, Arab Insurance Group (ARIG). The court made this finding even though ARIG failed to disclose – and perhaps even misrepresented – the loss statistics associated with its existing book of internal risk that was subject to the reinsurance. The court agreed with Axa that the misrepresentation of ARIG’s loss statistics was a material fact that should have been disclosed. However, even if ARIG had disclosed this information prior to the completion of the underwriting process, Axa would still have entered into the reinsurance agreements. Axa failed to prove they were induced by ARIG’s misrepresentation into the reinsurance contracts; they were therefore bound to those contracts. Axa Versicherung AG v. Arab Insurance Group [2015] EWHC 1939 (Comm).

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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An upper tribunal in the United Kingdom has dismissed an appeal brought by Westinsure, an alliance of brokers formed to provide introductions and improve the business terms of its members, where Westinsure argued its services were tax exempt under a VAT Directive. That Directive exempts insurance and reinsurance transactions including “related services performed by insurance brokers and insurance agents.” The issue was whether Westinsure, which provides its member brokers commercial buying power, regulatory compliance assistance, and other business support, acts as a broker or agent when supplying these services. The tribunal found Westinsure’s services are not of a broker or agent and therefore not exempt under the VAT Directive or the Value Added Tax Act of 1994 (VATA). The tribunal further found that while Westinsure’s services are related to the supply of insurance, they did not have a sufficiently close connection to the insurance transactions themselves to come within the VAT exemption. Westinsure Group Ltd. v. Commissioners for Her Majesty’s Revenue and Customs, [2014] UKUT 00452 (TCC) Appeal No. FTC/96/2013 (Upper Tribunal (Tax and Chancery Chamber) Oct. 13, 2014).

This post written by Renee Schimkat.

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A judgment found that certain Lloyd’s reinsurers were not liable to cover the destruction of cargo on board a vessel that capsized in the Philippines during a Typhoon. The trial court relied on a typhoon warranty clause contained in both the reinsurance policy and the underlying insurance policy, which deemed the policy void if a vessel sailed out of port (1) “when there is a typhoon or storm warning at that port”; or (2) when the destination or intended route “may be within the possible path of the typhoon or storm announced at the port of sailing, port of destination or any intervening point.” The trial court had found that there was a typhoon or storm warning at the port of sailing, and that the vessel’s route was within the possible path of the typhoon or storm announced at the port.

On appeal, the cedent argued that the first condition of the typhoon warranty clause was not breached under a four-step analysis: (1) the reinsurance policy contained a follow the settlements clause, (2) which required the reinsurance coverage to be interpreted like the underlying insurance policy, (3) the insurance policy should be construed in accordance with what an experienced insured would have understood the storm notice to mean, and (4) in this case, the storm notice would not be understood by an experienced insured as a sufficient warning against embarking. The court rejected this argument, holding that the clause must be understood according to only its plain meaning, both with respect to the clause in the insurance policy and the parallel clause in the reinsurance policy, and here it was undisputed that a storm warning had been issued. The court also rejected the cedent’s contention that the intended path of the vessel would not have crossed the possible path of the typhoon, finding that it was proper for the trial court to determine that the intended route was within the typhoon’s path. Amlin Corporate Member Ltd. v. Oriental Assurance Corp., [2014] EWCA Civ 1135 (Royal Courts of Justice, July 8, 2014).

This post written by Michael Wolgin.

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Plaintiffs sued defendant primary insurer, Oriental Assurance Company, under a reinsurance contract covering underlying risk of a Philippines shipping company, including 22 scheduled vessels. Among them was the Princess of the Stars, a ferry built in 1984 which, on June 21, 2008, set out from Manila on a trip to Cebu, with 2978 tons of cargo, including cars and SUVs, 713 passengers and 138 crew. It capsized when a typhoon struck, killing 851 people and leaving only 32 survivors. The reinsurance contract contained a “Typhoon Warranty” clause prohibiting a ship setting sail in waters after issuance of a typhoon warning, violation of which voids the policy. After hearing expert testimony and other evidence regarding the ship captain’s and shipping company’s knowledge of typhoon warnings, and decision to nonetheless sail, the UK court held the warranty breached, and the reinsurance cover void. Amlin Corporate Member, Ltd. v. Oriental Assurance Corp., [2013] EWHC 2380 (Comm) (British High Court of Justice, Queen’s Bench, July 31, 2013).

This post written by John Pitblado.

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Since reinsurance disputes are sometimes multi-jurisdictional we occasionally post on appellate UK and US court opinions dealing with the relationship between proceedings in different countries. The latest example of this involves two parties which entered into a contract concerning a hydroelectric plant in Kazakhstan. The contract is governed by Kazakh law but contains a London arbitration clause. When a dispute arose one party filed suit in Kazakhstan and secured a judgment from the Kazakh Supreme Court invalidating the arbitration provision. The other party filed suit in a UK court seeking a declaration that the arbitration provision was valid and enjoining the action in Kazakhstan. The UK trial court and Court of Appeals ruled that the Kazakh judgment was not binding, upheld the validity of the arbitration provision and enjoined the parties from proceeding with the Kazakh action. The UK Supreme Court agreed, and dismissed the appeal (the UK equivalent of affirming). The UK Supreme Court held that the refusal of the Kazakh court to enforce the arbitration provision compelled it to act to preserve the right to arbitrate. It is perhaps notable that no one had sought to commence an arbitration proceeding. The UK courts were acting to preserve the right of the parties to arbitrate, should they desire to do so. Ust-Kamenogorsk Hydropower Pland JSC v. AES Ust-Kamenogorsk Hydropower Pland LLP, [2013] UKSC 35 (June 12, 2013).

This post written by Rollie Goss.

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A newly-installed petroleum holding tank in Kuwait was discovered as defective in 2007, and initial repair/replacement estimate was approximately $28 million (US). At that time, the insurers notified the reinsurers, including Beazley, through their broker, Aon. AIG, the lead insurer, took the position that loss was excluded from coverage under a defective design exclusion. Ultimately, that coverage dispute appeared headed toward settlement, with AIG prepared to contribute some $4 million of a reduced $19 million total repair estimate. Beazley, AIG’s reinsurer, and other participating reinsurers, were not informed of these developments at the time. Upon learning about the negotiations later, the reinsurers notified the primary insurers of their objection that the settlement did not take into account the defective design exclusion, and that they did not consent to the settlement. They also pointed to the Claims Control Provision in the reinsurance contracts, which they alleged gave them full control over investigation and settlement. After hearing testimony, the Court held in favor of the primary insurers, finding that the reinsurers were sufficiently apprised of the settlement discussions, and the coverage dispute, as to have had meaningful control over the claim, and that the insurers did not breach that condition. Beazley Underwriting, Ltd. v. Al Ahleia Insurance Co., [2013] EWHC 677 (English High Court of Justice, Queen’s Bench, Comm. Div., Mar. 27, 2013).

This post written by John Pitblado.

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A consortium of London reinsurers are seeking a declaration from an English court regarding their duty to indemnify Philippine insurer Oriental Insurance Company for losses resulting from the sinking of a cargo passenger ship during Typhoon Frank in 2008. The sinking, which caused widespread outrage in the Philippines due to the vessel’s failure to heed storm warnings resulted in over 500 deaths and significant property loss. The reinsurance contract contained a “Typhoon Warranty,” which voided the policy if an otherwise covered vessel left port during a typhoon or storm warning. Oriental’s underlying policy with the ship owner contained a virtually identical clause. Oriental, facing massive claims and litigation in the Philippines, sought a stay of the proceedings initiated by the British reinsurers, arguing that their action was premature given the reinsurance contract’s “follow the fortunes” clause and significant unresolved claims pending in the Philippine courts. The lower court dismissed Oriental’s application for a stay, holding that such relief should only be granted in “rare and compelling circumstances,” which were not present. The appellate court dismissed the appeal with “little enthusiasm,” finding the lower court’s decision correct but noting its apparent “unfairness.” In particular, as one justice noted, the reinsurers’ action might force Oriental to assert in the London courts that the “Typhoon Warranty” did not apply, a position diametrically opposed to the one it would wish to take in defending ongoing and imminent coverage suits in the Philippines. Amlin Corp. Member Ltd. v. Oriental Assurance Corp., [2012] EWCA Civ. 1341 (Royal Courts of Justice, Queen Bench Division, Commercial Court Oct. 17, 2012).

This post written by Ben Seessel.
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Howden North America, Inc., a subsidiary of the Howden Group, Ltd. (“HNA”), manufactures equipment for the petrochemical, steel, mining, and cement production industries. HNA faces liability for asbestos exposure which allegedly caused personal injuries, from the 1960s through the 1990s. HNA looked to its insurers, which resulted in dispute with certain of its excess liability carriers. In 2009, HNA brought suit in Pennsylvania federal district court, seeking declaration as to the construction of the insurance policies at issue. In 2011, HNA joined a separate coverage action also pending in Pennsylvania and implicating some of the same policies and coverage layers, brought by a different primary policy holder. Meanwhile, in 2010, one of the excess carriers brought suit in the London High Court of Justice, seeking declarations involving some of the same policies at issue in the two Pennsylvania actions. In June 2012, the Pennsylvania court held, among other things, that English law does not apply, and denied motions to dismiss by the foreign defendants under the premise of forum non conveniens.

The British court has now held that English law governs with respect to one subset of the policies at issue, and that it is the appropriate court to hear those claims. It noted that because the British case is further along in terms of discovery, that it could be tried sooner and more efficiently. The British court also considered the problem of inconsistent judgments in the parallel proceedings, but held that “this is a position which the court in each country must accept.” As to the other subset of policies, the British Court declined to exercise jurisdiction, based on a lack of justiciability. Ace European, Ltd. v. Howden Group. Ltd., [2012] EWHC 2427 (High Court of Justice, Queen’s Bench Division, Commercial Court Sept. 17, 2012).

This post written by John Pitblado.

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Insurance policies insuring various risks regarding the construction of a hydroelectric plant in Brazil provided that, if the parties could not resolve disputes through mediation, arbitration was to take place in London. Brazilian law, however, governed the policies and, furthermore, the policies gave Brazilian courts exclusive jurisdiction over policy disputes. The policies, and arbitration clauses within them, however, were silent regarding what law governed interpretation of the policies’ arbitration agreements.

The insurers (Sulamérica and others) gave notice of arbitration regarding a dispute, to which the insureds responded by obtaining an order from a Brazilian court enjoining arbitration. The insurers applied to the U.K. Commercial Court for an injunction to restrain the Brazilian court proceedings. In opposition, the insureds argued that, under Brazilian law, arbitration could not be commenced without their consent. The Commercial Court sided with the insurers, determining that the arbitration agreement was governed by English law. The appeals court dismissed the appeal and agreed with the Commercial Court that, given the choice of London as arbitral forum, the arbitration agreement had its “closest and most real connection” with English law. Sulamérica CIA Nacional de Seguros S.A. v. Enesa Engenharia S.A., Case No. A3/2012/0249, [2012] EWCA Civ. 638 (Q.B. May 16, 2012).

This post written by Ben Seessel.

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An English court recently refused to enjoin an expert witness from giving testimony against a Lloyd’s syndicate, despite that expert’s previous employment by the syndicate in an arbitration over similar issues with a different party. The subject of the expert’s testimony in this case related to the extent of coverage for losses arising from the 9/11 terrorist attacks under a reinsurance “Interlocking Clause” provision. Although the expert’s previous testimony on behalf of the syndicate did not involve the Interlocking Clause, the interpretation of that clause did arise in private meetings wherein the expert expressed disagreement with the syndicate’s interpretation. Subsequently, the syndicate’s opponent in the instant case employed the expert to give testimony on the Interlocking Clause. After the arbitration tribunal denied the syndicate’s request to exclude the expert, the syndicate sought injunctive relief from the court. The court rejected the syndicate’s argument that the expert unfairly possessed confidential information, including the syndicate’s potential cross-examination strategy. The court explained that there was no evidence that the expert had misused confidential information thus far, and that the expert’s alleged inability to recall details of the syndicate’s meetings rendered it unlikely that the expert would do so in the future. To the extent the syndicate lost the element of surprise with respect to its cross-examination strategy, the court was “not persuaded that the loss of such a forensic advantage amounts to damage which justifies the grant of an injunction which would interfere with the tribunal’s management of the arbitration.” A Lloyd’s Syndicate v. X, [2011] EWHC 2487 (Q.B. Comm. Ct. Oct. 3, 2011).

This post written by Michael Wolgin.

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