HFW Client Briefing, 13 February 2009
Was there a reinsurance contract in place and, if there was, can the reinsurer deny the claim for non-payment of premium? English Court of Appeal Decision, 19th December 2008 - Costas Frangeskides and Alexandra Cottrell report on the above case which they handled for Allianz (Egypt) which raises important issues for reassureds and their brokers when buying reinsurance or retrocessional cover.
Holman Fenwick Willan represented Allianz of Egypt before the English Courts against Greek reinsurer, Aigaion Insurance Company, in claims for unpaid reinsurance balances. The case considered issues of importance to the parties in a reinsurance contract but particularly overseas reassureds, their brokers, and reinsurers/retrocessionaires, where normal London placing/underwriting procedures were unavailable. HFW was successful in recovering all the unpaid reinsurance balances for Allianz plus interest and indemnity costs.
The issues included: (i) contract formation, i.e. at what point in negotiations is there a binding reinsurance contract? (ii) contract formation by silence, i.e. can a reassured/cedant be deemed to accept more onerous reinsurance terms, such as a premium payment warranty ("PPW"), by silence, e.g. where a reinsurer without notice issues a fresh policy wording to its reassured post contract containing more onerous terms? (iii) section 53(1) of the Marine Insurance Act 1901 – under this section is a broker deemed to have paid a marine facultative reinsurer the owed premium so as to defeat any breach of a PPW in a marine insurance contract?
Background
Aigaion agreed to reinsure 30% of the insurance cover provided by
Allianz in respect of a fleet of tugs, including the Ocean Dirk.
The reinsurance was effected through a reinsurance broker in
Cyprus. Allianz argued that the agreement was reached via a series
of emails between Aigaion and the broker including a slip forwarded
by the broker to Aigaion on 31 March 2005. However, contrary to the
previous emails, the slip did not contain a condition which
"warranted vessels IACS class and class maintained". In
all other respects it reflected the exchange that had taken place,
including the inclusion of a deferred premium payments clause. On 2
April 2005, Aigaion sent the broker an email that read:
On or about 15 April 2005, Aigaion issued its own policy document to the broker - which included a PPW - a clause the breach of which would allow the reinsurer to deny liability for claims arising as from the date of breach. The broker did not acknowledge receipt nor respond to this document and on 23 July 2005 the Ocean Dirk became a constructive total loss. Allianz consequently sought payment from Aigaion of its share of the loss. However, Aigaion denied that it was liable, claiming that since Allianz had breached the PPW allegedly incorporated in the policy it could deny the claim. However, Aigaion later went on to argue that there was no binding contract of reinsurance in place at all. Allianz had in fact paid the relevant instalments to the broker by the required dates but the broker had failed to pass them on to Aigaion.
Was there a binding contract?
For a contract to be binding under English law, there must be: (i) an offer; (ii) acceptance of that offer; (iii) certainty of terms; (iv) consideration; and (iv) the parties must have had intentions to create legal relations. In this case, Aigaion's first and foremost argument was that there was never a concluded contract between Aigaion and Allianz, primarily because an IACS condition previously agreed was not included in the slip subsequently sent from the broker to Aigaion, i.e. there was no exact match between the "offer" and the "acceptance".
Both the High Court and the Court of Appeal rejected Aigaion's argument – with the Court of Appeal finding that the email stating that "Cover is bound with effect from 31.3.05 as we had quoted, i.e. 1.33% H & M and 0.4% IV for our 30% line. Our documents to follow." was agreeing with the terms set out in the slip sent a couple of days earlier – and there was therefore a binding contract and certainty of terms, which did not include the previously agreed IACS condition but, if it were necessary, the IACS condition could have been incorporated by rectifying the contract to reflect the intentions of the parties.
Was a premium payment warranty incorporated?
Aigaion also argued that if there was a contract, it was not entered into until its Policy Document (including the PPW) was later sent to the broker, with the broker's failure to respond to that document creating a contract by silence.
Under English law, there can be acceptance of contract terms by silence in certain circumstances. For example, in the case of Rust v Abbey Life Assurance Co Ltd [1979] 2 Lloyd's Rep 334, in which insurance terms were held to be accepted by the insured's silence, the judge said: "It is clear that in ordinary insurance cases a policy may become a binding contract between insured and insurers even though the insured has not seen or expressly assented to all the detailed terms of the policy, provided always that such terms are the usual terms of the insurers".
In this case, because there was already a contract in place pursuant to the emails and slip, the Judge said that it was "hopeless" to suggest that by its silence in the face of the Policy Document sent much later to their broker, that Allianz had accepted payment obligations that did not exist under the agreement already concluded by email on 2 April 2005.
Section 53(1) of the Marine Insurance Act 1906
Whilst the Courts found that Aigaion was on risk and that no PPW had been incorporated into the contract, the first instance judge dealt briefly with Allianz's alternative argument that, if the premium payment warranty had indeed been included in the agreement, section 53(1) of the Marine Insurance Act 1906 operated so as to treat Aigaion as having received the premium instalments.
Section 53(1) MIA 1906 provides:
Allianz submitted that this subsection embodied the earlier common law "fiction" that the broker is deemed to have paid the premium to the underwriter and to have borrowed from him the money with which he pays. In other words - that the assured is discharged of its duty to pay the premium to the insurer by reason of the fact that it had been paid by the broker. The court found against Allianz on this issue. The judge concluded that the wording of section 53(1) was clear and that it did not embody the common law fiction. The section only provides that the insurer may look to the broker for payment of the premium. It does not mean that the broker is always deemed to have paid the premium – thereby effectively complying with any PPW.
Despite the court holding that Aigaion was not deemed in law to have received the premium, nevertheless the reinsurance claim was still valid because the normal remedy for failure to pay a premium is to offset the premium against the claim and not to cancel the contract (unless there is a PPW or similar provision).
In short, this case demonstrates a number of important issues to buyers of reinsurance and their brokers including the importance of: precise emails when agreeing and negotiating insurance terms, considering carefully any post-contract Policy wordings or documents which were not agreed but which may contain more onerous terms and be relied upon by reinsurers in the event of a loss and finally the importance of drawing to the insured's attention the existence of any PPWs.
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.