King v. Brandywine CofA
The Court of Appeal disagreed with the High Court and found that New York law applied to the primary policy, but upheld the judge's decision that reinsurers were not liable for oil pollution clean-up costs under the Excess of Loss reinsurance contracts. Whether English or New York law applied, the phrase "removal of debris" did not cover pollution clean-up costs. Further, given the segmented structure of the primary policy, "transportation activities" in a section of the policy covering non-marine liabilities did not include the carriage of oil by sea in a tanker. The court was divided on the question whether an exclusion of "seepage and pollution on land" in certain of the reinsurance policies referred to seepage and pollution emanating from the land, or emanating from the sea but affecting the land
DMC Category Rating: Confirmed
This case note is based on an Article in the April 2005 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website.
At the time of the casualty, the Exxon Valdez was entered with the International Tanker Indemnity Association Limited ("ITIA"), a mutual P&I insurer set up in the aftermath of the Torrey Canyon disaster of 1967. ITIA provided cover for liabilities assumed under the Tanker Owners' Voluntary Agreement Concerning Liability for Oil Pollution ("TOVALOP") and those for which the owner was legally liable under statute or otherwise by reason of a discharge or threatened discharge of oil. ESC, as owner of the Exxon Valdez, recovered the full US$400 million available under this cover.
The primary cover
Under section I (and "subject to the Basis of Recovery Article"), insurers agreed to pay "all losses incurred by the Insured as a result of physical loss or damage to Property of any kind owned by the Insured or property of others held in trust or for which the Insured may have assumed responsibility or for which the insured has an obligation to insure, repair or replace". In addition, insurers agreed to indemnify the insured for all sums which the insured paid or incurred as costs or expenses on account of (amongst other things) "Removal of or attempted Removal of Debris or Wreck of Property and/or Residential Structure covered hereunder". The Basis of Recovery Article confirmed that recoverable loss under the policy included "expenses incurred in removal or attempted removal of debris or wreck [of] property…"
Section I went on: "Notwithstanding anything contained as above there shall be no recoveries hereon for liabilities as described under the [Insured's] Liabilities Polices…" This clause was commonly referred to as the Notwithstanding clause.
All three sections of the GCE policy included service of suit and arbitration clauses. Sections I and IIIA provided that, in the event of a failure to pay under the policy, insurers would, at the request of the insured, "submit to the jurisdiction of any Court of competent jurisdiction within the State of New York". If the option were exercised "all matters arising hereunder shall be determined in accordance with the law and practice of the court selected". The equivalent clause in section IIIB was slightly different, in that it referred to "any court of competent jurisdiction within the United States".
The arbitration clauses in sections I and IIIA provided that, in the event of a dispute, the matter "may, upon the agreement of the parties" be referred to arbitration, that any such arbitration would take place in New York and, to the extent arbitrators followed the rules of law, "such law shall be that of the state of New York to the exclusion of all other laws". The arbitration clause in section IIIB provided that any dispute "shall at the request of either party" be referred to arbitration in New York and that the arbitrators could abstain from following strictly the rules of law.
The reinsurance cover
"It is a condition precedent to liability under this contract that settlement by the Reassured shall be in accordance with the terms and conditions of the original policies or contract".
In addition, the Claims Clause provided:
"All loss settlements by the Reinsured 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 and the Reinsurers shall pay the amounts due from them upon reasonable evidence of the amounts paid being given by the Reinsured".
Some of the reinsurance contracts also included a seepage and pollution exclusion, which excluded loss arising from seepage and pollution "on land", but confirmed cover for "seepage, pollution or contamination covered by Protection and Indemnity policies".
Exxon claimed against insurers under all three sections of the GCE policy. In March 1996, the primary insurers (bearing in mind the likely reaction of a jury if the matter ever got to court) settled all Exxon's claims under the property cover (section I) for US$300 million. Exxon's claim under section IIIA proceeded to trial in Texas, where the jury found against insurers. Judgment was entered on 3 July 1996 for about US$410 million. Insurers filed a notice of appeal but, on 23 January 1997, entered into a global US$480 million settlement of all Exxon's section IIIA and IIIB claims.
Excess of loss reinsurers, however, refused to pay up because, they argued, the settlement was not within the terms of the underlying policy and so fell outside the reinsurance cover. Insurers issued proceedings.
High Court decision
There could also be no recovery for ESC's putative claim under section I because there had been no settlement of ESC's claim.
As for the section IIIB claim, the judge held that there was no cover for clean-up costs under section IIIB under English law, although there would have been had New York law applied.
The judge also held that the seepage and pollution exclusion (which appeared in most of the outward reinsurances) excluded liability on the part of those reinsurers to indemnify insurers in respect of clean-up costs, even if they were covered by the GCE policy.
The insurers appealed against the decision.
The Court of Appeal Judgment
Nevertheless, the Court of Appeal concluded that New York law applied. Looking at the arbitration and service of suit clauses, it seemed to be beyond doubt that they pointed to an inferred choice of New York law as the proper law of the contract. But was this enough to displace the circumstances surrounding the placement that pointed to English law? The policy referred to standard English clauses, the placing brokers were in London and most of the placement had been made in London.
In the Court of Appeal's view, the key provision was the arbitration clause in section IIIB, which provided for compulsory arbitration in New York should either party request it. It was difficult, if not impossible, to infer a choice of English law when a substantial part of the contract provided for any difference between the parties (if either requested it) to be determined by an arbitration to which the law, if applied, would necessarily be that of New York. Taken with the (non-compulsory) arbitration clauses in sections I and IIIA and the service of suit clauses, this all pointed to New York law being the applicable law of the contract.
Removal of debris
The insurers relied heavily on a US case, Lexington Insurance Co v Ryder System Inc 142 Ga. Apt.36, 234 SE 2d 839, which concerned an all-risks policy which included cover for stores of oil and for the cost of "removal of debris formerly part of the insured property and no longer suitable for the purpose for which it was intended". A leak from underground storage tanks contaminated the surrounding earth. The Court of Appeals of Georgia held that clean-up costs were covered. Oil was part of the insured property and, following the leak, it was no longer suitable for its purpose. The word "debris" could mean waste material resulting from the destruction of some article.
In addition, the insurers argued, the phrase had to be construed in context. This was a high-level catastrophe cover for the Exxon group. Section I included cover for loss of or recovery of cargo and the cost of removal of debris of cargo. The only types of cargo identified were crude oil and refined or in-process products. Cover was provided even if the expenditure was incurred solely as a result of a governmental or other authoritative order, such as an order for clean-up.
Reinsurers, however, argued that pollution clean-up was such a serious and well-known risk that one would expect to see an express reference to it. On its natural meaning "debris" did not describe oil or the process of clearing up an oil incident. The overall structure of the policies supported the view that oil pollution risks were covered only by section III, not section I.
At first instance, the judge found that, under English law, "debris" did not cover pollution clean-up, but that under New York law, it did. The Court of Appeal agreed that clean-up costs were not covered, but also held that this conclusion would be the same whether English law or New York law applied.
Although insurers' submissions based on the Lexington case were powerful, they were not enough to persuade the court that it had been intended that "removal of debris" would cover pollution clean-up costs. "Debris" was not a natural way to describe spilled oil or pollution from spilled oil and there would have to be some significant feature or provision in the policy if it was to have that meaning. Nor was the term used in the international conventions that deal with oil pollution and which formed the background to this policy.
Having reached this conclusion, the meaning of the Notwithstanding clause became irrelevant, since none of the detailed arguments put forward could change the simple fact that "removal of debris" did not cover clean-up costs following an oil spill. It was also unnecessary to look at the ESC claim. Whether under English or New York law, ESC never had a claim under section I for the costs of removal of debris.
The section IIIB claim
The insurers argued that "all transportation activities" was wide enough to cover the ocean movement of oil in a tanker and such transportation was an operation of the insured.
At first instance, the judge disagreed. Applying English law, he found that the overall coverage structure of the GCE policy was clearly intended to prevent any overlap between the three sections. The watercraft exclusion in section IIIB indicated an intention to confine all marine transportation claims to section IIIA. As for "operations", this covered a range of industrial activities but not carriage by sea. Had the contract been governed by New York law, however, he thought the conclusion would have been different because the court would have given the overall structure of the policy relatively less weight.
The Court of Appeal upheld the judge's decision on English law but, once again, held he had been wrong to think the position would be any different under New York law.
Seepage and pollution exclusion
The reinsurers argued that "on land" described where the effect of the seepage, pollution or contamination was located. Almost all the clean-up costs were directed to contamination of the land, not the sea, and so fell within the exclusion. The insurers said "on land" referred to where the pollution originated. Since the pollution in this case originated from a ship at sea and not from the land, the exclusion did not apply. The High Court judge agreed with reinsurers that it referred to where the pollution was located.
Having concluded that there was no relevant liability at all, the Court of Appeal did not need to decide the issue. It was, however, divided on the meaning of the exclusion. There was nothing in the phrase to determine whether what was being looked at was the source (as distinct from the physical presence) of the seepage, pollution or contamination. Two of the three Appeal Court judges thought that the phrase referred to the source and that, since the pollution in this case occurred at sea, the exclusion did not apply. But Lord Justice Rix thought that if the parties had wanted to differentiate between sources, so as to exclude on-shore sources while leaving offshore sources covered, they would have used clearer language. However, it was not necessary to reach any conclusion on the point.
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