GAN v. Tai Ping
GAN’s policy wording contained the following Claims Cooperation Clause: ‘It is a condition precedent to any liability under the policy that ... (c) no settlement and/or compromise shall be made and liability admitted without the prior approval of reinsurers.’
The Winbond development suffered extensive fire damage while it was being built. Tai Ping settled Winbond’s claim under its EAR policy but, although other reinsurers followed Tai Ping’s settlement, GAN refused to do so on the basis that it had been reached without their approval. Proceedings were therefore launched in the Commercial Court in London.
The Commercial Court judgment
• The Claims Cooperation Clause was a condition precedent to GAN’s liability to indemnify Tai Ping in its true sense. Strict compliance with the clause was necessary in order to trigger GAN’s liability to indemnify;
• The Commercial Court found, however, that Tai Ping had not breached the clause and therefore GAN could not deny liability to indemnify on that basis. The Commercial Court decided that Tai Ping could only be in breach of the clause if they both settled the Insured’s claim AND admitted liability without GAN’s approval. Tai Ping may have settled Winbond’s claim without GAN’s approval, but they were not, as such, found to have admitted liability.
The Court of Appeal Judgment
Applying the principles approved in Investors Compensation Scheme vs West Bromwich Building Society (House of Lords 1998), they decided that it would have made no commercial sense to read the clause conjunctively and substituted the word ‘or’ for ‘and’ before the words ‘liability admitted’.
In the alternative, Tai Ping had tried to rely upon a ‘Follow the Settlements’ clause in the reinsurance wording. They argued that GAN would be bound to indemnify them if they were themselves liable to indemnify Winbond under Taiwanese law. However, the Court of Appeal found that this clause would take effect subject to compliance with the Claims Cooperation Clause and, since Tai Ping had breached the condition precedent in that clause, GAN were not bound to indemnify them under their ‘Follow the Settlements’ clause.
The Commercial Court had further found that reinsurers could not withhold approval for any settlement without reasonable grounds and the Court of Appeal agreed, by a majority. They also provided useful (albeit not necessary for their decision) guidance on what would amount to reasonable grounds for a reinsurer withholding approval. In particular, any withholding of approval should take place in good faith after consideration of and on the basis of the facts of the particular claim, and not with reference to considerations wholly extraneous to the subject-matter of the particular reinsurance.
They must not settle, compromise or admit liability for a claim without the prior approval of their reinsurers. Such compliance is a condition precedent to liability and this considerably strengthens the hands of reinsurers in the claims cooperation process. It effectively enables the reinsurer to decide whether or not to settle a claim, provided that they act reasonably in deciding whether or not to withhold their approval.
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