Eagle Star Insurance v. Cresswell and Others
The Court of Appeal overturned the judge of first instance's interpretation of this "dog's dinner" of a reinsurance contract, holding that reinsurers were not bound to follow settlements that the primary insurer had made without reference to them. The Court of Appeal held that reinsurers were only obliged to pay if they had controlled the negotiation and settlement of the claim on the primary policy. Even though it was not expressed as such, the claims control clause was a condition precedent because the implications of breach were clearly spelled out.
DMC Category Rating: Confirmed
This case note is based on an Article in the June 2004 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website
Eagle Star claimed on its reinsurance with the defendants, who comprised fifteen Lloyd's syndicates and three reinsurance companies. Reinsurers, however, argued that Eagle Star was in breach of a claims control clause that was a condition precedent to their liability.
The main reinsuring clause stated that the reinsurance was on
the "same gross rate, terms and conditions as and to follow the
settlements" of the underlying cover, provided that Eagle Star retained
a 40% retention. A number of typed clauses had been added to the policy,
including a claims control clause, under which Eagle Star agreed:
This replaced a claims co-operation clause, which was marked "void" on the policy. The deleted clause expressly stated that it was a condition precedent to any liability under the policy (1) that Eagle Star would notify any losses within seven days and (2), that Eagle Star would provide reinsurers with information about losses and would co-operate with them in the adjustment and settlement of claims.
Other typed clauses included the following, headed "Apportionment
No settlement of a loss by agreement shall be effected by the Company for a sum in excess of the limits stated in the Schedule hereto, without the consent of the underwriters"
A further typed clause appeared under the heading "Insolvency Clause". Confusingly, it included a full reinsurance clause in similar terms to the printed reinsurance clause ("being a reinsurance of and warranted the same…terms and conditions as set forth in the Policy" ) but omitted any reference to follow the settlements.
The two preliminary issues before the court, therefore, were: (1) was compliance with sub-paragraph (b) of the claims control clause a condition precedent to reinsurers' liability to indemnify Eagle Star and (2) were reinsurers bound by the follow the settlement clause to indemnify the reinsured in any event?
A "follow the settlements" clause normally binds reinsurers provided the claim so recognised by the insurers falls within the risk covered by the reinsurance as a matter of law and that insurers have acted honestly and taken all proper and businesslike steps in making the settlement.
At first instance, the judge held that sub-paragraph (b) was not a condition precedent. In any event, reinsurers were bound by the follow the settlements clause to indemnify Eagle Star. In reaching this conclusion, he found that the effect of the clause providing "no settlement without consent" was limited to the apportionment of costs. If Eagle Star settled a claim without reinsurers' consent, reinsurers would be obliged to follow the settlement, but Eagle Star would lose the right to recover the costs it incurred. The second, typed reinsurance clause (which omitted any reference to follow the settlements) only operated in the context of insolvency. Reinsurers appealed.
On the appeal, Eagle Star argued that sub-paragraph (b) of the claims co-operation clause was not a condition precedent but merely gave reinsurers an option to take control and arose when a claim or occurrence likely to give rise to a claim was notified under sub-paragraph (a). Notification had been given, but reinsurers had not exercised the option. They could not now seek to exercise it at a later date.
The Court of Appeal, however, held that, even though the clause was not expressed to be a condition precedent, it was one. The wording clearly spelled out the consequences of reinsurers not being given control: "In this event [meaning "in the event of there being any negotiations or settlement"] the Underwriters hereon will not be liable to pay any claim not controlled as set out above".
This conclusion meant that, although (as the Appeal judges found) there was no term, implied or otherwise, requiring Eagle Star to tell reinsurers when negotiations began, the consequences of them not doing so were very serious. The Appeal Court, however, said it took account of the fact that Eagle Star was not an inexperienced consumer and was well able to negotiate its own contract.
It also left open the question what would happen if reinsurers refused or failed to exercise control promptly, or simply ignored the role the clause had allocated to them. Eagle Star alleged that reinsurers had waived their rights, were estopped from doing so and had failed to act in a reasonable and timely manner. Lord Justice Rix commented that there might be an implied term to protect the reinsured in such circumstances (as suggested by Mance LJ in Gan v Tai Ping (Nos 2 and 3)  Lloyd's Rep IR 667), or even that it was part of the reinsurers' duty of utmost good faith not to act in bad faith, capriciously or arbitrarily. These, however, were not issues to be decided at this preliminary hearing.
Consequently, unless Eagle Star could persuade the court that reinsurers should not be entitled to rely on breach of the clause, paragraph (b) operated as a condition precedent to exclude reinsurers' liability.
The other typed clauses
Looking at the policy as a whole, all three Appeal Court judges found that both the "no settlement without consent" clause and the second reinsurance clause (which contained no follow the settlements provision) were clearly intended to have a wider application than the judge had allowed.
Consequently, "no settlement without consent" applied to settlements as a whole, not merely to the question of costs. The reference to settlement "in excess of the limits stated in the Schedule hereto" referred to a sum that exceeded the deductible. The second reinsurance clause was also plainly intended to operate generally and not only in cases of insolvency. The fact that it did not contain a follow the settlements was consistent with the "no settlement without consent" provision and the claims control clause.
Consequently, reinsurers were under no obligation to follow
Eagle Star's settlement of the Varian claim as they had not consented to it, nor
controlled its negotiation or agreement.
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