American International v. Dandridge

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American International Marine Agency of New York Inc and another v
English Commercial Court: Richard Siberry QC: [2005] EWHC 829 Comm: 5 May 2005
Michael Collett, instructed by Waltons & Morse, for the claimant insurers
Charles Kimmins, instructed by Clyde & Co., for the defendant reinsurers
This case held that, on a point of construction, the wording of the reinsurance contract was not capable of incorporating into the reinsurance a ‘follow the leader’ clause that appeared in the binder evidencing the reinsureds’ participation in the original risk. Even if it had been, the clause would not have been
incorporated as it did not meet the criteria for incorporation established by the case of HIH Casualty and General Insurance Ltd. v. New Hampshire Insurance Co. [2001] 1 Lloyd’s Rep. 596. It was neither germane nor apposite to the reinsurance

DMC Category Rating: Confirmed

This case note is based on an Article in the June 2005 Edition of the ‘(Re)insurance Bulletin’, published by the Insurance and Reinsurance team at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website

The claimant insurers had a 15% line on the hull and machinery insurance of the vessel "Avon". The cover was for 12 months from 30 March 2000 and incorporated Institute Time Clauses (Hulls) CL. 280 1/10/83.

These clauses provided that the insurance would terminate automatically if there was any change, suspension, discontinuance or withdrawal of her class. They also included a Classification Clause warranting that the vessel was classed with Det Norske Veritas ("DNV"). Any change to the warranties was subject to the prior agreement of insurers. A further term provided that the vessel had an insured value of US$2.5 million.

The claimant insurers' participation in the insurance was evidenced by a binder*, dated 18 April 2000, but not signed by the claimants until 20 April. This included a "follow the leader" provision, which stated: "Following French Market Leaders in all respect, including rates and claims but excluding ex gratia".

The vessel's class with DNV expired on 31 August 2000 and it was reclassed with INSB as from 6 September 2000. The lead insurers, Axa, agreed to continue cover on the terms that the class had been changed and the vessel's value reduced from US$2.5 million to US$1.5 million. This was confirmed in writing by an endorsement dated 13 September 2000.

The claimant insurers issued an endorsement to the binder, noting the changes to the cover agreed by Axa, but did not seek their reinsurers' approval.

On 9 September 2000, the vessel ran aground and was declared a total loss. Axa and the claimant insurers paid up under the insurance. The claimant insurers now sought to recover from their reinsurers.

The reinsurance
The claimant insurers' reinsurance covered total loss only. The wording was a MAR 91 slip policy and provided:

"being a reinsurance and subject to the same clauses and conditions and against the same perils as in the original policy or policies … to follow the settlements of original Underwriters but only as far as applicable to this Reinsurance."

The value of the vessel was stated to be US$2.5 million "or as valued in original policy or policies and/or Interest as original". Other terms included: "Class Warranties if and/or as in original" and "Continuations and/or Deviations and/or Extensions as original policy or policies whether notice be given or not". The slip was signed by reinsurers between 10-12 April and a cover note issued on 14 April 2000, 4 days before the binder was issued and 6 days before it was signed.

The issues
The reinsurers argued that the amendments were material alterations to the terms of the insurance and so breached the common law warranty that there should be no variation of the underlying cover without reinsurers' consent (Norwich Union Fire Insurance Society Ltd v Colonial Mutual Fire Insurance Co Ltd [1922] 2 KB 461). In any event, under the express terms of the Institute clauses (as incorporated into the reinsurance) and in the absence of reinsurers' prior written agreement, cover automatically terminated on the expiry of the vessel's class with DNV.

The insurers, however, argued that the follow the leader provision in the binder meant that they had been bound by Axa's agreement to continue the vessel's cover and accept the reduction in its insured value. That agreement amounted to a waiver of any breach of the classification clause or of the clause providing for automatic termination on expiry of class. Since the follow the leader clause had been incorporated into the reinsurance contract ("subject to the same clauses and conditions and against the same perils…"), reinsurers could not deny cover for a settlement which insurers had themselves been bound to pay.

There is a presumption in facultative reinsurance that the parties intended the scope and nature of the reinsurance cover to be back-to-back with that of the underlying insurance (HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co [2001] 1 Lloyd's Rep 596). In this case, the reinsurance was not strictly back-to-back with the insurance because it only provided cover for total loss of the vessel, whereas the insurance covered both total and partial loss.

The judge, however, could see no reason why the presumption should not be capable of applying to the extent the reinsurance matched the underlying cover - in other words, in relation to the total loss cover.

The crucial question was whether the general words of incorporation, on their true construction, were sufficiently wide to incorporate the follow the leader clause in the binder. This boiled down to what was meant by the words "the original policy or policies" in the incorporation clause. The insurers argued that they referred to the binder. The reinsurers said they referred to the slip policy evidencing the cover with the French market, dated 3 April 2000, which did not include a follow the leader clause.

The judge agreed with reinsurers. The natural interpretation of the words "the original policy or policies" was that they referred to the insurance of the vessel as a whole and not to any particular terms unique to one party's participation, even if it was only on behalf of that party that reinsurance was obtained. In addition, the binder post-dated the reinsurers' subscriptions to the reinsurance slip by several days, which made it doubly difficult to read "the original policy" as referring to the binder.

General words
Even if the incorporation clause had referred to the binder, the judge would have found that the words were incapable of incorporating the follow the leader clause.

General words of incorporation in a reinsurance contract will only incorporate a term that satisfies certain criteria (HIH and General Insurance Limited v New Hampshire). The term must be germane (relevant) to the reinsurance; it must make sense in the context of the reinsurance, with or without permissible manipulation; it must be consistent with the express terms of the reinsurance; and it must be apposite for inclusion in the reinsurance.

The follow the leader clause did not meet any of these conditions. It was neither germane nor apposite. The clause regulated the relationship between the lead insurer and the following market and had nothing to do with reinsurers. Axa did not lead the reinsurance, so the clause did not make sense and would have been inconsistent with the other provisions of the reinsurance. The reinsurance slip specifically identified those variations which could be made "with or without notice", so the clear implication was that any other variations could not be made without reinsurers' consent. It was also inherently unlikely that reinsurers would have agreed effectively to give away their underwriting pen to Axa, with whom they had no contractual or other relationship.

*Binder is an insurance market term that can refer to a number of different agreements relating to who has authority to bind an insurer to cover a risk. In this case, "binder" is being used to refer to a binding authority, which is a contractual agreement by which an insurer gives an agent the authority to bind risks on the insurer’s behalf, following rating guidelines laid down by the insurer. This agent is known as the coverholder and will typically be able to accept risks, settle claims and issue insurance documentation within an agreed framework on the insurer’s behalf. Under a binder, Certificates of Insurance, not policies, are issued. [For this information, the Editor is indebted to Millers (Insurance)]

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