DMC Category Rating: Confirmed

Background
In 1969, Eagle Star issued a comprehensive general liability excess of loss policy to a US company, Varian Associates Inc. Varian claimed against Eagle Star in respect of a number of environmental claims. Eagle Star denied coverage and Varian began proceedings in the San Francisco court. Settlement was eventually reached in October 1995. Under this agreement, Eagle Star paid Varian an initial sum of US$1 million and promised to make further payments in the future if Varian's recoverable costs exceeded its insurance recoveries or US$30 million.

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 reinsurance
Two policies were involved: a Lloyd's policy and a companies' collective policy. The companies' policy simply provided that it was subject to the same terms and conditions as the Lloyd's policy.

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:
"To notify all claims or occurrences likely to involve the underwriters within 7 days from the time that such claims or occurrences become known to them.
(a)The Underwriters hereon shall control the negotiations and settlements of any claims under this Policy. In this event the Underwriters hereon will not be liable to pay any claim not controlled as set out above. 
(b)The underwriters hereon shall control the negotiations and settlements of any claims under this Policy. In this event the Underwriters hereon will not be liable to pay any claim not controlled as set out above.
Omission however by Eagle Star to notify any claim or occurrence which at the outset did not appear to be serious but which at a later date threatened to involve Eagle Star shall not prejudice their right of recovery hereunder…"

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 of Costs":
"In the event of a loss arising to which the Underwriters hereon may be liable to contribute, no legal costs shall be incurred on their behalf without their consent being first obtained and if they so consent they shall contribute to the said costs in the proportion that their share of the loss as finally settled bears to the total sum payable. If, however, a settlement of the loss be practicable prior to taking the case to court whether by compromise or otherwise for a sum not exceeding the limits stated in the Schedule hereto, no legal costs shall be payable by the Underwriters hereon.

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 issues
For the purpose of the hearing, it was accepted that the claim had been notified to reinsurers. At no stage, however, did reinsurers take control of the negotiations or settlement.

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.

Judgment
Option to control
The Court of Appeal disagreed with Eagle Star’s arguments. There was no basis for suggesting that reinsurers had to make a once-and-for-all decision whether or not to exercise the right to control a claim when it was first notified. The clear intent of the clause was that reinsurers were to be entitled to control any negotiation or settlement taking place between Eagle Star and the underlying insured. All that was required was for Eagle Star to inform reinsurers when negotiations began so that reinsurers could say what form they should take and whether an offer should be made, if they chose to do so. There was no implied term that Eagle Star was obliged to give such notice, but it was obviously in its interest to do so.

Condition precedent
But was it a condition precedent? At first instance, the judge found it was not because it did not say it was one, and because (on his construction) the "no settlement without consent" clause contemplated the possibility of a settlement without consent which reinsurers were bound to follow but which did not bind them as to costs. In addition, the parties had chosen to delete a claims co-operation clause that expressly stated it was a condition precedent in favour of a claims control clause that did not.

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) [2001] 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
How did the various clauses and typed clauses in the policy fit together to make a coherent whole? The policy, described at the first instance hearing as a "dog's dinner" was full of apparently contradictory provisions, some of which were unhelpfully - even misleadingly - headed, and some of which had no headings at all. But the starting point was that typed words and clauses will normally prevail over printed clauses, unless they are for some reason inapplicable.

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.