A recent decision of the High Court (San Evans Maritime Inc v Aigaion Insurance Co Sa) held that a follower was bound to a settlement entered into by the lead, even though the settlement was expressed not to bind the follower.
The Decision
The court held that the lead could not release the following market from a 'follow' obligation because the obligation arose out of a separate contractual arrangement between each follower and the insured. The only party that could relieve the followers of their obligation was the insured. On the evidence, the court held that the insured had not agreed to relieve the followers of their obligation to follow and, even if the settlement agreement could have been construed in such a way, the followers had no right to rely upon it because they were not a party to the settlement agreement and were not a beneficiary of it within the meaning of the Contract Rights (Third Parties) Act 1999.
Unresolved Issue
The court left unresolved the issue of whether the lead acts as agent for the following market and the scope of any duty of care which might be owed in different circumstances. That doesn't do much to defuse the spectre of followers pursuing claims against leads, where the followers feel they have been adversely affected by the lead's settlement even when the lead didn't intend for that settlement to bind the followers. One solution is to bring the followers into the settlement agreement as a party so as to be in a position to enforce its terms. However, such an arrangement would come at the price of disclosing the terms of the settlement to the following market and that might not suit either the insured or the lead.
Lloyd's Claims Scheme
This decision doesn't (or rather shouldn't) impact on the follow obligations imposed under the Lloyd's Claims Scheme(s) (which sets out the duties of lead and follower) because the insured is not a counterparty to the Lloyd's Claims Scheme and so (arguably) has no right (express or implied) to enforce its terms for its benefit. Fortunately, partial settlements by only some of the subscribing insurers are relatively rare.
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