Exxon Valdez Oil Spill – The Day That Reinsurers Cleaned Up

Article by Ed Stanley and Susan McGill

The decision of the Commercial Court in King and others v Brandywine Reinsurance Co (UK) Ltd, (formerly known as Cigna Re Co (UK) Ltd) was eagerly awaited by the reinsurance run-off market, as it dealt with the vexed question of whether underlying settlements made in relation to the 1989 Exxon Valdez oil spill could be claimed from reinsurers.

The issue had been unresolved for a long time, resulting in a log-jam in the settlement of a notorious LMX spiral claim. Originally, in the mid 1990’s, one of Exxon’s insurers, Commercial Union, had pursued some of its excess of loss carriers for summary judgement, claiming that they were bound to follow its settlements. The Court of Appeal disagreed however in Commercial Union v NRG Victory Reinsurance Ltd [1998], holding that the wording of the relevant loss settlements clauses did not permit this.

It therefore fell to Commercial Union to prove at trial its legal liability to Exxon. However, it entered into a (confidential) settlement with reinsurers, leaving the point completely open. King v Brandywine was therefore a test claim by Equitas as successors in interest to King Syndicate 745, which had in fact paid Exxon settlement claims to insurers and now sought recovery from their retrocessionaires (it is worth noting that Equitas is also successor in interest to a number of other syndicates whose position is aligned with that of retrocessionaires). It concerned the interpretation of only certain specific terms of coverage which were in dispute.

Exxon owned the oil and its affiliate owned the vessel by which it was being transported.

Exxon was obliged to initiate a hugely expensive exercise to clean up the pollution, both on land and at the shoreline. Exxon was under a strict liability to third parties including the State for any losses caused by the oil; Exxon paid those claims in 1991 and 1992.

The Exxon General Corporate Excess (‘‘GCE’’) Policy was the largest policy insuring Exxon, the relevant parts of which were: Section 1, which covered first party loss or damage to property, Section IIIA (‘‘Marine Liabilities’’ - in respect of which there was no dispute), and Section IIIB (‘‘Public and Third Party liability’’).

Exxon reached a settlement with its insurers in 1996 in respect of all claims under Section 1 and in 1997 in respect of all claims under Sections IIIA and IIIB (the payment was not apportioned between IIIA and IIIB).

These were written on standard Lloyd’s JELC terms which provided as a ‘‘condition precedent to liability that settlement by the reassured shall be in accordance with the terms and conditions of the original policies or contract’’ and that ‘‘all loss settlements shall be binding upon the reinsurers provided that such settlements are within the terms and conditions of the original policies and within the terms and conditions of this policy…’’

Many of the retrocessions excluded ‘‘any loss arising from seepage, pollution or contamination on land unless such risks are insured solely on a sudden and an accidental basis’’.

The main issues were:

(i) A threshold issue as to the applicable law;

(ii) the scope of coverage under Sections I and IIIB, and

(iii) the effect of the Seepage, Pollution and Contamination exclusion in the outward retrocessions between the claimants and the defendants.

After a lengthy review of the law of conflict of laws, the judge held that English law governed the GCE policy, rather than that of New York. The coverage issues therefore all fell to be determined under English law.

The key insuring clause in Section I referred to the ‘‘removal of or attempted removal of debris or wreck of property and/or residual structure covered hereunder’’ together with a sue and labour clause extending coverage to ‘‘expenses incurred in removal or attempted removal of debris or wreck or property’’. King tried to argue that the oil pollution clean-up exercise was ‘‘removal of debris’’ under the sue and labour provision. The Court rejected this, noting that the ordinary meaning of the word ‘‘debris’’ did not encompass liquids (even when they turned into solid sludge).

Even had there been coverage under Section I, under a ‘‘notwithstanding clause’’, it would have been disallowed because it overlapped with a sue and labour clause contained in Section IIIA (‘‘Marine Liabilities’’).

Section IIIB provided coverage for claims caused by or arising out of various activities including ‘‘offshore and/or inshore and/or onshore Drilling, Production, Exploration operations and all transportation activities….’’ and legal liability for pollution damage arising out of those operations and the costs of removal or clean-up.

The judge rejected King’s argument that the tanker transportation of crude oil was a ‘‘transportation activity’’ for the purposes of coverage under Section IIIB. The clause was intended to be confined to Exxon’s drilling, production and exploration activities.

Therefore, only Section IIIA of the GCE Policy could respond.

Retrocessionaires argued that the pollution and contamination was ‘‘…on land’’ as per the specific exclusion. King argued that the exclusion was confined to pollution which emanated from a land-based cause and did not bite in respect of pollution emanating from a vessel. There appeared to be some legal basis for this argument from the first instance judgement in Commercial Union v NRG Victory (see above). The judge however rejected King’s argument and upheld the exclusion.

Unfortunately for those seeking finality on the issue, but hardly surprising given the complexity of the issues and their general importance to the market, leave to appeal to the Court of Appeal was given. The Court of Appeal will have to consider a very long and carefully reasoned judgment. Reinsurers and retrocessionaires meanwhile can continue to consider themselves substantially off the hook in respect of the Exxon settlement.