Reinsurance Focus

The UK Commercial Court, Queen’s Bench Division, has assessed costs in favor of Equitas against broker Horace Holman in an action in which Equitas sought an accounting and other remedies from Horace Holman. The Court found that the action was “largely fruitless,” in part due to the status of Horace Holman’s records, but that Equitas was nevertheless entitled to have its costs paid by Horace Holman. This opinion demonstrates the different approach that UK and US courts take with respect to the assessing of the costs of litigation. Equitas Ltd. v. Horace Holman & Co., [2007] EWHC 903 (Comm) (April 27, 2007).

The English Court of Appeal dismissed an appeal by the Australian liquidators of HIH Casualty and General Insurance Limited (“HIH”). The question before the court was whether it had jurisdiction to entertain a request under the Insolvency Act for directions to the liquidators in England to transfer assets collected by them to the liquidators in an Australian liquidation. The court considered whether such a transfer would interfere with the statutory scheme imposed on those assets by the Insolvency Act and whether or not the court should exercise its discretion in favor of such a transfer. The Court found that if the companies were in liquidation in England, the court would have jurisdiction to entertain a request under section 426 of the Insolvency Act for directions to the liquidators in England to transfer the assets collected by them to the liquidators in the principal liquidation, even though the result would interfere with the statutory scheme imposed on those assets by the Insolvency Act.

The Court held that if section 426 could authorize a transfer then the only question would be whether the court should exercise its discretion to do so. In exercising its discretion, the court had to consider the prejudice to the interests of some creditors of such a transfer. In this case, the Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors. Accordingly, the appeal was dismissed. HIH Casualty & General Insurance Ltd & Ors v. McMahon, [2006] EWCA Civ 732 (June 9, 2006).

This case involves claims by Lloyds names against Lloyds, alleging that they had been misled by misrepresentations by Lloyds of its syndicate auditing and operational controls into becoming members of Lloyds syndicates. The names later suffered serious financial losses with respect to asbestos claims. The names lost the case, but then discovered additional evidence which they contended demonstrated that the judge had been misled by Lloyds. The issue before the court was whether the England and Wales Court of Appeals had jurisdiction to reopen a case upon an allegation that the Court had been misled by a party’s evidence and by fraud. The applicants, who were names at the Society of Lloyds, asserted that under the jurisprudence of Taylor v. Lawrence, 2003 QB 528, the Court had authority to reopen the case.

The Court disagreed, noting that, unlike the present case, Taylor v. Lawrence concerned misconduct by a court in that the judge was said to have been biased. Taylor v. Lawrence did not contain authority for extending the recognition of jurisdiction to reopen an appeal on the grounds of bias to a case where the allegation was not that the court had misbehaved, but that the court had been misled by one of the parties. The court cited authority directly denying the existence of jurisdiction in the latter case, providing that the proper remedy was to bring a collateral action to set aside the judgment allegedly obtained by fraud. Jaffray v. The Society of Lloyds, [2007] EWCA Civ 586 (June 20, 2007).

This dispute arose out of an alleged breach of a gas transit agreement, in which Russian gas giant Gazprom alleged that Naftogaz’s predecessor took more gas than it was entitled to under the terms of a transit agreement. Gazprom’s captive insurer, Sogaz, paid Gazprom over $88 million dollars to cover its loss. Sogaz’s reinsurer, Monde Re, in turn paid Sogaz the like sum. Gazprom’s claims against Naftogaz passed to Monde Re by way of subrogation. Monde Re succeeded on its claim against Naftogaz at the International Commercial Arbitration Court in Moscow. The award was later assigned from Monde Re, which was in liquidation, to Gater Assets Limited (“Gater”).

Subsequently, an English court ordered enforcement of the arbitration award. Naftogaz applied to the English High Court to have the award set aside based on the fact that there was no arbitration agreement between the claimant and the defendant, among several other reasons. Naftogaz also applied for an order that Gater provide security for costs pursuant to CPR 25.12 and 13.

Over Gater’s objections, the Court ruled that it had jurisdiction to order security for costs in favor of a party seeking to set aside enforcement of a domestic or New York Convention arbitration award because such a party can qualify as a defendant under CPR 2.3(1). The court ordered Gater to provide security in the amount of £250,000. Gater Assets Ltd. v. Nak Naftogaz, [2007] EWHC 697 (Comm. Ct. Mar. 22, 2007).

This case involves a situation in which a U.S. court found that an insurance policy covered a portion of damages incurred prior to and after a policy period based upon a manifestation coverage trigger. The insured then entered into a settlement agreement, and sought coverage from its reinsurers for the amount of the settlement. The resulting reinsurance dispute was litigated in a UK court. The UK court found that even though it was apparent that the insured had acted in good faith and prudently in negotiating the settlement to minimize its loss, the reinsurance did not cover damage that occurred outside the time period of the coverage of the reinsurance agreement. This decision illustrates an important area of risk for companies which may have their insurance and reinsurance governed by different applicable law, whether the laws of different U.S. states, which may have different coverage trigger or damage allocation theories, or the laws of a U.S. state and the UK. Care should be taken in establishing reinsurance programs to attempt to avoid such a scenario. Wasa International Ins. Co. v. Lexington Ins. Co., [2007] EWHC 896 (Queen’s Bench Commercial Court April 25, 2007).

In March, the United Kingdom’s High Court ruled that courts have the authority to order further explanations from the umpire in an expert determination. The parties in this case entered into an agreement whereby the claimant, Halifax Life Limited (“Halifax”) agreed to reinsure the defendant’s business. A dispute arouse as to the precise balance of premium payable for the reinsurance. Pursuant to the agreement, an umpire was appointed, who would act as an expert, not an arbitrator, whose decision would be binding on the parties. In September, 2006, the umpire issued a ruling. The claimants, unsatisfied with the ruling, challenged the umpire’s determination on several grounds.

Mr. Justice Cresswell found that the reasons given by the umpire for arriving at his decision were inadequate under the circumstances. Although Justice Cresswell declined to make a declaration that the expert determination was not binding, he referred to section 70(4) of the Arbitration Act of 1996, which allows a court to order the tribunal to state the reasons in detail where it appears that the award does not contain sufficient detail to enable the matter to be properly considered. Justice Cresswell stated that “[i]t would be highly anomalous if an expert’s failure to give reasons caused the determination not to be binding, when this is not the position in the case of arbitration awards.” Instead, he adjourned the hearing and directed the umpire to state further reasons for his ruling. Halifax v. Equitable Life Assurance Society, [2007] EWHC 503 (Mar. 13, 2007).

In the autumn of 2006, facultative reinsurance specialists left Benfield to join Aon. Although the principal individuals involved worked in the UK, there were allegations of conspiracy and other misconduct in both the UK and the US. Benfield filed suit in US District Court in New York in October 2006, and in the UK the following month. The UK proceeding proceeded towards a trial in March 2007, while the US proceeding proceeded into discovery without a trial date being set. When it became apparent that Benfield would seek to depose critical witnesses in the US suit prior to the UK trial, while trial preparations were underway, the UK Court enjoined Benfield from taking the depositions until after the UK trial. Although reluctant to take action that would interfere with the US suit, the UK Court noted the slow pace of progress of the US suit, and articulated nine factors that it took into account in reaching its decision. This is a very interesting opinion dealing with the “coordination” and relationships between a UK and a US proceeding. Benfield Holdings Limited v. Aon Limited, [2007] EWHC 171 (Queen's Bench Feb. 21, 2007).

In mid-March, 2007, Aon announced it reached “a global and comprehensive settlement with Benfield… relating to former Benfield facultative reinsurance employees…who will be joining Aon on April 1.” Under the terms of the settlement, Benfield will receive payments over time totaling more than $18 million dollars.

The English High Court considered an application by Noble and Shell for an anti-suit injunction to restrain Gerling from continuing proceedings in the Vermont courts against both Noble and Shell where there had been a final arbitration award rendered in a London arbitration.

In November 2006 the Vermont court held that it had no jurisdiction to vacate the arbitration award since the seat of the award was London, but accepted subject matter jurisdiction over the claims to rescind the contracts for misrepresentation. In granting the ex parte injunction, the Court held that the misrepresentation claim fell within the scope of the arbitration agreement. The Court also held that the claims raised in the Vermont proceedings could have been raised in the London arbitration and that Gerling was estopped from raising those claims in the Vermont proceedings.

On the inter partes hearing for a final injunction, the Court held that Gerling’s conduct in attempting to nullify the effect of the arbitration award by court proceedings in Vermont against both Noble and its parent Shell, based on assertions contrary to the findings in the award, was vexatious, oppressive, an abuse of process and unconscionable. This decision confirms the jurisdiction of the English court to grant an anti-suit injunction to protect an arbitration award after the arbitration proceedings have concluded, and not only exiting arbitration proceeding prior to the delivery of an award. Noble Assurance Company and Shell Petroleum Inc. v. Gerling-Konzern General Insurance Company, 2006 EWHC 253 (February 22, 2007).

The UK Court of Appeals has issued an opinion that discusses the appeal process in the UK, in the context of the appeal of an arbitration award in a reinsurance dispute. The reinsurance is irrelevant to this decision, which is interesting if one wishes to see how the UK appeal process works. CGU International Ins. PLC v. AstraZeneca Ins. Co., [2006] EWCA Civ 1340 (Oct. 16, 2006).

A Justice of the Queen's Bench Division of the UK Commercial Court has interpreted a loss notification provision of a reinsurance agreement to permit the reinsured to recover under the agreement. The analysis used by the Court is similar in some respects to how courts in the United States interpret insurance policies. AIG Europe (Ireland) Limited v. Faraday Capital Limited, [2006] EWHC 2707 (Comm) (Oct. 31, 2006).