In a recent case the Commercial Court has reaffirmed the importance that should be placed on claims co-operation clauses in insurance/reinsurance policies. Christopher Clarke J adopted a literal interpretation of the claims settlement provision by finding in favour of reinsurers where the reinsured had let commercial considerations override its coverage interests by failing to comply with the terms of the clause.
There are a number of important lessons to be derived from the decision (although these must be viewed in the context of the specific claims settlement clause in issue):
- A reinsured should not act on a unilateral basis in investigating the nature and/or extent of a claim.
- A reinsured should seek the prior written approval for any action and/or decision it wants to take.
- A reinsured should not act against/to the detriment of reinsurers.
- Investigations into a claim can take many years to reach a firm conclusion and the time in which an insured can bring the claim will continue to run throughout the course of the investigations.
- The parties should make it a priority to understand potential time bar issues from the outset of the notification of a claim to avoid a claim being wholly rejected on this basis.
- A reinsurer is entitled to assert a claim for breach of a condition precedent and to continue to assist in the commercial resolution of the settlement and adjustment of a claim.
- A reinsured cannot rely on the co-operation of reinsurers in the investigation of a claim as constituting the waiver of any defence to liability that reinsurers may have.
Last, but certainly not least, it is important not to let commercial pressures override fundamental contractual obligations. The decision in Lexington v Multinacional illustrates that losing sight of what is important when dealing with a claim could leave a reinsured without any cover.
Further reading: Lexington Insurance Co v Multinacional De
Seguros SA [2008] EWHC 1170 (Comm)
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Full Article
The recent decision in Lexington v Multinacional, on a
preliminary issues hearing, reaffirms the importance that
should be placed on claims co-operation clauses in
insurance/reinsurance policies. The Commercial Court adopted a
literal interpretation of the claims settlement provision by
finding in favour of reinsurers where the reinsured had let
commercial considerations override its coverage interests by
failing to comply with the terms of the clause.
Multinacional, one of Venezuala's largest insurers,
fronted a property and business interruption insurance for
reinsurers. The underlying insureds were companies in the
Corporacion Venezolana De Guyana Group. CVG had a long standing
relationship with Multinacional.
The reinsurance contracts incorporated the following claims
settlement clause:
"Notwithstanding anything contained in the
reinsurance agreement and/or the policy wording to the
contrary, it is a condition precedent to any liability under
this policy that:
(a) Upon the reinsured being advised of any circumstances
which may give rise to a claim against this policy, the
reinsured will advise reinsurers of such notification as soon
as is reasonably practicable;
(b) The reinsured shall furnish the reinsurers with all
information in respect of such circumstances and shall
co-operate with the reinsurers in the adjustment and settlement
of the claim."
A claim was made by CVG in April 1998 following a malfunction
at one of its facilities. Adjusters and technical experts were
appointed to assess the claim. The reports of the adjusters
were fairly inconsistent, apparently as a result of a lack of
information provided by CVG. A sixth adjuster's report
concluded that CVG had failed to mitigate the claim and that a
nil loss reserve should be posted. Multinacional disagreed (but
without providing reasons) and sought to appoint a further
adjuster, indicating to reinsurers that it had instructed
another expert.
Reinsurers objected to the independent stance Multinacional
was adopting without prior consultation. In January 2000,
almost two years following notification of the loss, reinsurers
advised Multinacional that, as a result of its failure to
co-operate in accordance with the claims settlement clause,
reinsurers were entitled to be discharged from all liability as
a result of the breach of the condition precedent that it would
co-operate. At the same time, reinsurers opened without
prejudice negotiations with Multinacional to try to bring about
the satisfactory settlement of the claim.
Reinsurers issued proceedings in London for a declaration of
non-liability in April 2000, although without prejudice
discussions continued between the parties.
In Venezuala Multinacional unilaterally applied to the
Superintendencia de Seguros for an order that the final
adjuster's report be issued.
As a result of the protracted adjustment discussions,
CVG's claim against Multinaconal became time-barred in
April 2001. Reinsurers thereafter halted discussions with
Multinacional in order to investigate the time bar point.
Without consultation with reinsurers, Multinacional once again
went to the Superintendencia to seek a decision as to whether
the claim was time barred. It was clear that Multinacional did
not want to accept the time bar point and directed the
Superintendencia accordingly. In addition, Multinacional
proceeded to meet with CVG following which it issued a further
application to the Superintendencia to 'confirm that
time had not elapsed'. It was increasingly apparent
that Multinacional's interests were in settling the
claim to the benefit of its long-standing business partner,
CVG, and not acting in accordance with the co-operation
provisions in the reinsurance policy.
A meeting then took place between Multinacional and reinsurers
in which a strategy was agreed for Multinacional to invoke the
time bar against CVG, as well as rejecting the claim on
coverage grounds (at this stage, reinsurers were not aware that
Multinacional had approached the Superintendencia or met with
CVG). Multinacional's lawyers made it clear following
this meeting that it did not agree with the time bar point but
reinsurers requested a formal action plan to implement the
strategy agreed at the meeting. Against this background,
reinsurers agreed to stay the London proceedings on the proviso
that the time bar issue between CVG and reinsurers would be
resolved to reinsurers' satisfaction.
Contrary to the action plan, Multinacional held discussions
with CVG (on a unilateral basis) to discuss the progression of
the claim. Indeed a letter was drafted from Multinacional to
CVG by which CVG was given the clear impression that
Multinacional had: (a) achieved the non-prescription of the
claim initiated by reinsurers regarding breach of the condition
precedent and possibly, (b) a positive ruling by the
Superintendencia. It was unclear from the words used, but CVG
believed that not only had it acted in the interests of CVG in
achieving the above, but that Multinacional had also
"rejected" reinsurers request to claim time bar
against CVG on the grounds that it was "legally
incorrect" and applied "all the legal resources,
sparing no expense, both in Venezuela...and in London in order
to reverse this state of affairs and ensure the continuation of
the adjustment and the suspension of the proceedings, which to
date has been achieved." This was untrue.
Decision
In light of the above, the court accepted that the
correspondence between Multinacional and CVG had: (a) waived
the time bar defence available against CVG; (b) encouraged CVG
to continue to pursue its claim; and (c) completely undermined
the strategy agreed between Multinacional and reinsurers.
Christopher Clarke J concluded that such events released
reinsurers from any liability to indemnify Multinacional in
respect of the underlying claim.
The judge rejected Multinacional's argument that
reinsurers had waived any breach of the claims settlement
clause by continuing to co-operate in the settlement and
adjustment of the claim. The judge made some interesting
remarks about election of a defence to a claim on the grounds
of a breach of a condition precedent.
The judge held that reinsurers were entitled to continue to
co-operate on a without prejudice basis following the
initiation of a claim on the basis that it was reasonable
commercial practice to do so. As he aptly stated "if the
reinsured is, as a matter of construction, to be released from
any further obligation to co-operate on account of
reinsurers' initial denial of liability certain odd and
undesirable consequences would follow". The judge adopted
reasonable commercial logic in the construction of his
response. Principally, he stated that both parties must be
encouraged to resolve claims, notwithstanding any
investigations and/or issues in respect of liability. Indeed in
the present case both parties did continue to co-operate
together. Secondly, Christopher Clarke J stated that by
repeating the 'without prejudice' nature of
discussions, reinsurers did not make their co-operation extra
contractual. The process of settlement and adjustment of a
claim involves considering and determining whether and, if so,
to what extent it is well founded. In the present case, the
parties were considering whether or not there was an effective
time bar applicable to the claim of the original insured. If
there was, reinsurers would be under no further obligation to
indemnify the reinsured, as the expiry of time would extinguish
the underlying right.
The judge also considered the doctrine of waiver by election
The judge reviewed the recent Court of Appeal decision in
Kosmar v Trustees of Syndicate 1243 (to read our law now on the
Court of Appeal decision
click here). The judge concluded that the decision in
Kosmar did not assist Multinacional as reinsurers were not
presented with a choice between two mutually inconsistent
rights at the time of initiating the claim. The judge opined
that if reinsurers were right to contend that Multinacional was
in breach of a condition precedent then they were automatically
discharged from liability. If they were wrong then they were
not.
The judge also considered the relevance of the fact that
Kosmar was an application on the grounds of waiver of a past
breach of a condition precedent, whereas in the present case,
reinsurers were said to have waived future performance. The
judge concluded it had no relevance. In brief, he stated that
the assertion by reinsurers that it had a defence to liability
arising from the breach of the condition precedent was an
unproved assertion and not a choice between inconsistent
remedies. Most importantly, it was not an irrevocable decision.
Reinsurers were entitled to change the nature of their defence,
abandon it or indeed rely on another one (or none at all). The
reinsurer had made a 'choice' but it was not an
irrevocable contractual election.
Comment
There are a number of important lessons that can be derived
from the Lexington v Multinacional decision :
- A reinsured should not act on a unilateral basis in
investigating the nature and/or extent of a claim.
- A reinsured should seek prior written approval for any
action and/or decision it wants to take.
- A reinsured should not act against/to the detriment of
reinsurers.
- Investigations into a claim can take many years to reach
a firm conclusion and the time in which an insured can bring
the claim will continue to run throughout the course of the
investigations.
- The parties should make it a priority to understand
potential time bar issues from the outset of the notification
of a claim to avoid a claim being wholly rejected on this
basis.
- A reinsurer is entitled to assert a claim for breach of a
condition precedent and to continue to assist in the
commercial resolution of the settlement and adjustment of a
claim.
- A reinsured cannot rely on the co-operation of reinsurers
in the investigation of a claim as constituting the waiver of
any defence to liability that reinsurers may have.
Last, but certainly not least, it is important not to let
commercial pressures override fundamental contractual
obligations. The decision in Lexington v Multinacional
illustrates that losing sight of what is important when dealing
with a claim could leave a reinsured without any cover.
Further reading: Lexington Insurance Co v Multinacional De
Seguros SA [2008] EWHC 1170 (Comm)
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 19/06/2008.