Reinsurance Focus

The UK Court of Appeals has allowed an appeal and reversed an Order for security for costs in favor of a party seeking to set aside the enforcement of an arbitration award rendered at the International Commercial Arbitration Court in Moscow, Russia. The analysis may be of interest to those involved in international arbitrations involving the New York Convention. The lower court’s decision was reported on in this blog on June 14, 2007. Gater Assets Ltd. v. Nak Naftogaz Ukrainiy [2007] EWHC 725 (CA Oct. 17, 2007).

This post written by Rollie Goss.

In a September 6, 2007 post to this blog, we reported on the decision of the UK Commercial Court striking a defense of settlement to reinsurance claims arising out of claims by North Korean insurers. The UK Court of appeals has affirmed that ruling. Korea National Ins. Corp. v. Allianz Global Corporate & Specialty AG [2007] EWCA Civ. 1066 (Court of Appeals Oct. 30, 2007).

The UK Commercial Court, Queen’s Bench Division, has granted a request to avoid several reinsurance agreements based upon misrepresentations in the placement of the treaties. The treaties were first loss facultative reinsurance agreements, and the court found that there had been material misrepresentations of the cedent’s underwriting policies. Specifically, the court found that although the placement materials had represented that the cedent insured risks subject to deductibles of from £500,000 to 1 million, the reinsured risks in actuality had deductibles of from £100,000 – 200,000. The court found that the misrepresentations were of a present fact, rather than of future intention, and were highly material to the acceptance of the risk given the conditions of the particular market. The court found that if the actual underwriting practices of the cedent had been disclosed, the reinsurer would not have agreed to the reinsurance agreements. The fact that the reinsurance was a first loss cover made the amount of the deductibles particularly important. Limit No. 2 Limited v. Axa Versicherung AG [2007] EWHC 2321 (Comm. Queen’s Bench October 17, 2007).

In 2003, insurer Europ Assistance, and underwriter, Temple Legal Protection, entered into a binding authority agreement that authorized Temple to write ‘after the expenses’ coverage and handle claims on behalf of Europ. In exchange, Temple received 35% commission on the net premium. In 2005, Europ terminated the business with respect to new business, and in April 2007, Europ informed Temple that it planned to revoke all of Temple’s authority. Temple asserted that Europ repudiated the binding authority agreement.

While waiting for resolution of the underlying dispute, Europ sought an injunction barring Temple from continuing to carry on the run-off business, alleging that Temple was causing loss by unlawful means and was guilty of unlawful interference and breach of trust in failing to hand over premiums.

Balancing the interest of both parties, the English court refused to enjoin Temple from continuing with the run-off business. The court seemed influenced by the fact that Europ, a subsidiary of the well known and substantial Italian insurance company Assurazioni Generali SpA, had no continuing interest in the expenses business. In contrast, Temple, a small company, would be adversely affected if it were barred from running off the business. Europ Assistance Ins. Ltd. v. Temple Legal Protection Ltd., [2007] EWHC 1785 (Queen’s Bench July 25, 2007).

In 1997, DDT Trucking of North America (“DDT NA”) entered into a distributorship agreement with DDT Holding’s predecessor. That agreement contained an arbitration agreement and stated that if DDT Holdings was sold, it should simultaneously terminate the distributorship agreement and compensate DDT NA. In 1999, the parties terminated the agreement. A dispute arose as to whether this nullified the agreement, such that DDT Holdings did not have to provide any compensation to DDT NA and as to whether this nullified the agreement to arbitrate. Relying on Section 7 of the Arbitration Act of 1996 as well as English precedent, Justice Cooke concluded that the right to compensation and arbitration does not end when the underlying contract is terminated. DDT Trucks of North America Ltd. and DDT Holdings Ltd., [2007] EWHC 1542 [Comm], Eng. Comm., QBD (June 29, 2007).

A dispute arose between “C” and its insurer “D,” both U.S. corporations. The insurance policy was governed by New York state law, but provided for disputed to be settled in England under the provisions of the English Arbitration Act. The parties agreed to arbitrate in England, and the panel issued a partial award in favor of “C.” “D” threatened to apply to a U.S. court to set aside the award on the basis that it was based on a “manifest disregard of the law.” “C” obtained an interim anti-suit injunction restraining “D” from commencing proceedings in a U.S. court. At the final hearing, Justice Cooke held that because the parties chose England as the seat of arbitration, they must submit any challenge to the eventual award to an English court under English law, regardless of the governing law of the contract. C and D, [2007] EWHC 1541, [Comm], Eng. Comm., QBD (June 28, 2007).

Claimant, Square Mile Partnership (“Square Mile”), entered into an agreement with Robert Bruce Fitzmaurice Group (“RBF Group”) for the purchase of the shares of Robert Bruce Fitzmaurice (“RBF”), RBF Group’s direct subsidiary, a Lloyd’s broker. The agreement provided for the transfer of RBF’s “accumulated net worth” to Square Mile. The day before completion of the agreement, the transfer took place in favor of Fitzmaurice McCall (“Fitzmaurice”), RBF’s ultimate holding company. The amount of the payment was calculated on the basis of RBF’s distributable dividends.

After completion of the agreement, a dispute arose between Square Mile and Fitzmaurice concerning the exact meaning of the expression “accumulated net worth.” According to Square Mile, it referred only to RBF’s distributable profits, while according to Fitzmaurice it meant the whole of RBF’s net assets.

The court concluded that the expression “accumulated net worth” was intended to cover all the nets assets of RBF. As to Square Mile’s argument that the amount actually transferred from RBF Group to Fitzmaurice a day before completion of the agreement, the court explained that to the extent to which this argument relied on evidence of precontractual negotiations it could not be admitted. While English law does offer some exceptions to the general rule that precontractual negotiations are inadmissible as evidence for the interpretation of a written agreement, the Court concluded that the exceptions were not warranted in this case. The Square Mile Partnership Ltd v. Fitzmaurice McCall Ltd, [2006] EWCA Civ. 1689 (Dec. 18, 2006).

In a November 7, 2006 post to this blog, we reported on a decision of the UK Commercial Court rejecting claims against a reinsurance broker. The UK Court of Appeals has affirmed the Commercial Court’s decision, based in part upon there being inadequate evidence that the losses complained of were caused by the alleged misconduct of the broker. To reach the loss causation issue, however, the Court affirmed the holding below that the broker had a continuing duty of disclosure to the cedent after the reinsurance had been issued, which is an important point. This opinion contains an interesting discussion of the role of brokers in the insurance and reinsurance markets, especially where the same broker places “back-to-back” insurance and reinsurance coverage. The Court's approach to this kind of situation is illustrated by its statement that “[t]he role of an insurance broker is notoriously anomalous for its inherent scope for engendering conflict of interest in the otherwise relatively tidy legal world of agency.” Opinion, paragraph 60. HIH Casualty & General Insurance Limited v. JLT Risk Solutions Limited, [2007] EWCA Civ. 710 (July 12, 2007).

Reinsurers, Dornoch and others, sought a declaration that they were not liable under an Excess Physical Loss or Damage cover for losses sustained by the defendants, Mauritius Union Assurance (“MUA”), a Mauritian company which conducts both life and general insurance business. The Excess Reinsurance policy was written on a slip policy; the cover was excess 50 million Mauritian Rupees any one loss. It provided for “Premises” and “Transit” cover, but did not carry any general infidelity cover. It also provided for a 72 hour discovery period and contained a clause to follow all terms and conditions of the primary reinsurance policy.

The reinsurers argued they were not liable on the ground that the underlying losses were not of their nature within the physical loss or damage cover provided by the policy and that they were not discovered within the 72 hour discovery period. Additionally, they argued that the losses did not exceed the deductible (of MRS 50m x/s MRS 500,000) applicable to each loss under the policy.

The English High Court agreed with the reinsurers on all grounds. Specifically, it found that the reinsurers did not have any liability to MUA pursuant to the Excess Reinsurance because the described losses fell outside the scope of cover due to the fact that the losses sustained by the underlying insured were a direct result of employee infidelity. The court also concluded that none of the many losses alleged were discovered within 72 hours of their occurrence. Lastly, the court agreed that the underlying losses were not capable of meeting their applicable deductible of Maur Rup 50,000,000 any one loss. Dornoch Limited v. The Mauritius Union Assurance Company and Mauritius Commercial Bank, [2007] EWHC 155 (Comm. Feb. 6, 2007).

On July 20, 2007, this blog reported on a dispute relating to the mass defection of fourteen facultative reinsurance brokers from the U.K. based Marsh Services Limited to Integro, a competitor. A suite was filed in US District Court in New York, which the Court declined to dismiss on jurisdiction grounds. In a parallel suit in the UK, a judge declined to enjoin the prosecution of the US action, but the UK Court of Appeals has allowed an emergency appeal, entering an injunction to restrain the US proceedings. This opinion contains an interesting discussion of the relationships between the UK and US courts, as influenced by an EU regulation relating to employment contracts. Samengo-Turner v. J & H Marsh & McLennan (Services) Limited, [2007] EWCA Civ 723 (July 12, 2007).