UK: Offshore Energy Insurance Meaning Of "100%" And Scaling For Interest

Gard Marine & Energy v. (1) Lloyd Tunnicliffe; (2) Glacier Re & Anor [2011]¹

Commercial Court, 30 June 2011

We have previously reported on this case in the context of a dispute about law and jurisdiction². Specifically, the second reinsurer, Glacier Re, being a company based in Switzerland, sought to challenge the jurisdiction of the English court, preferring to have the matter determined in Switzerland under Swiss law. They were unsuccessful in that attempt, and the dispute between the Claimant and Glacier Re was subsequently settled.

That left the English court to address the merits of the dispute as between the Claimant (Gard) and the remaining reinsurer defendant, Lloyd's Syndicate 780 (Advent).

The background is that Gard took a 12.5% line on an operating package policy issued to Devon Energy Corporation (Devon), an independent oil exploration company with an interest of varying percentages in a number of wells in the Gulf of Mexico. The policy included cover for all risks of loss or damage to offshore and onshore property and associated business interruption, subject to a combined single limit of "US$400,000,000 (for interest) any one accident or occurrence arising from a named windstorm in the Gulf of Mexico".

Gard then purchased facultative reinsurance from the reinsurers, including Advent, subject to the following provision as to Sum Insured:

At the heart of the dispute was the meaning of the expression "100%", in so far as related to the claim for Devon's Hurricane Rita losses.

The gross Hurricane Rita loss suffered from the ground up in connection with the assets insured by Gard was put at US$912.5 million. Of that, Devon's interest was around 45.6% or US$416 million, narrowly exceeding the original policy limit of US$400 million. Accordingly, the claim was treated as a limits loss to the original policy, although in fact only US$365 million was paid, reflecting a US$35 million agreed discount for early settlement. Of the said amount of US$365 million, Gard's 12.5% share was US$45,625,000.

The question for the court concerned the operation of the US$250 million attachment point in the reinsurance, in the context of the expression "100%". Advent contended that the stated Sum Insured referred to the loss suffered by the full market of insurers subscribing to the original policy. They argued that the expression "losses to the original placement" meant just that. In other words, only if Devon's interest generated a claim on the original policy in excess of $250 million would this translate into a liability to indemnify Gard for the excess of this amount, as to Gard's 12.5% share.

By contrast, Gard argued that the reference to "100%" meant that the excess point was to be measured against the insured value of the original lost asset, and not merely Devon's interest in that asset. Thus, where Devon had only a percentage interest, as here, the US$250 million figure was required to be scaled down. In the present case, Devon's interest was 45.6%, and so Gard argued that the attachment point in the reinsurance must be reduced from US$250 million to US$114 million, thereby enlarging the percentage of Gard's own losses amenable to a reinsurance recovery.

The difficulty was that none of this was spelled out expressly under the Sum Insured clause in the reinsurance. That contrasted with the original policy, which defined the term "100%" as assuming a 100% interest in the relevant well, and calling for a scaling of retentions where the assured held less than a 100% interest³. It was common ground that the expression "for interest" or "for Assured's interest", as it applied to the US$400 million original policy limit, had the opposite effect.

Gard argued that the meaning of 100% in the reinsurance should be taken to have the same meaning as that defined under the original policy. Moreover, they contended that this was also consistent with market practice in the offshore energy market, where the 100% reference carried a specialised meaning, requiring scaling for interest.

After considering detailed expert evidence adduced by the parties, the Commercial Court found for Gard. In the judge's view, the weight of evidence did indeed establish a recognised and established meaning, as they had contended.

The court was then required to consider an alternative case of avoidance for misrepresentation. It was Advent's case that the reinsurance risk had been presented on the premise that the maximum exposure was US$135 million, an assertion said to have been made by Gard's brokers at Advent's underwriting box. On the policy construction now determined by the court, that was not true, since the exposure could exceed this amount by reason of scaling for interest. Accordingly, Advent contended, the risk had been misrepresented, for which it claimed to be entitled to avoid.

Again, the court found for Gard. The alleged misrepresentation was said to have been made in an oral exchange almost six years ago, and not corroborated in any subsequent written communication. On the contrary, the underwriting notes that accompanied the broke made no mention of maximum exposure, and it was also significant that Advent raised the avoidance point only in September 2007, even though the scaling point had become an issue as early as December 2005. The implication, clearly, was that the avoidance case was in truth something of an afterthought. Perhaps more compelling still was the fact that Advent's underwriter was himself an experienced offshore energy reinsurer. He could form his own view as to the legal effect of the policy terms, and if he disagreed with the broker's interpretation he was free to challenge it and indeed to request an appropriate variation to the wording to make the position clear.

Result: Judgment for the reinsured.

Footnotes

^{1 [2011] EWHC 1658 (Comm)}

^{2 See Taylor Wessing Insurance and Reinsurance Update, 20 October 2009 (Commercial Court) and Taylor Wessing Insurance and Reinsurance Review of 2010, page 13 (Court of Appeal).}

^{3 Similar provisions appear in the Bermuda Form XL 004 and the Oil Casualty umbrella policy, both of which make express provision for the abatement of attachment points in the case of "joint ventures".}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.