LAWFUEL – The Law News Network – On 10 March 2004 the Court of Appea…

LAWFUEL – The Law News Network – On 10 March 2004 the Court of Appeal unanimously rejected the King Syndicate’s appeal (made through Equitas) against Colman, J.’s decision of 10 May 2004 in favour of HFW’s client Brandywine.

This particular litigation started in 2004 but it brings to an end nine years of uncertainty in the reinsurance market, regarding the 1996 loss settlements which arose out of the 1989 oil spill.
This case demonstrates four things:
(1) As Lord Justice Waller put it “the case demonstrates the perils of settling under primary insurance when the reinsurance is not subject to a full follow the settlements clause.”
(2) The importance of clear insurance contract wordings.
(3) The importance of a clear and express choice of governing law in insurance contracts.
(4) The highly specialised nature of insurance policy drafting and interpretation and the importance of construing a complicated insurance policy as a whole, against its commercial background, rather than as a collection of isolated phrases.

Following the grounding of the oil tanker Exxon Valdez in 1989, Exxon Corporation (Exxon) presented its primary insurers (led by the Janson Green syndicate) with $1.2 billion of oil pollution clean-up claims under different sections (including section 1: property damage and section 3A: third party liabilities) of Exxon’s General Corporate Excess (GCE) insurance policy. Primary insurers compromised Exxon’s claims for $780 million without having sought their reinsurers’ agreement to do so.

Reinsurers disputed their liability to reimburse primary insurers in respect of the settlements. The reinsurance policies contained conditions that all primary loss settlements must be within the terms and conditions of the primary insurance. The Court of Appeal upheld the first instance decision that the claims made by Exxon for its oil pollution clean-up costs under sections 1 and 3B of the GCE (which had been compromised by primary insurers’ settlements) were not as a matter of construction covered by the GCE policy, and so insurers’ settlements were not recoverable from their reinsurers (including Brandywine.) (A further compromise payment, under section 3A: marine liabilities of the GCE policy, was not disputed.)

The case has huge implications for the London Market Excess of Loss (LMX) spiral, since many reinsurers have already paid Exxon Valdez reinsurance and retrocession claims as if they were liable for them. The unscrambling and reimbursement of the invalid elements of these claims could prove very complicated for many participants in the LMX spiral.
Thus, although the uncertainty over the recoverability of the sections 1 and 3B payments is now at an end, the practical difficulties caused by this ruling will take some time and ingenuity to overcome.

It is stressed that this case was a dispute solely between the reinsured and its reinsurer and it does not impugn the original settlements to Exxon Corporation, which remain unaffected.

More detailed information about the judgment is given overleaf.

Andrew Bandurka, Simon Sloane and Tolla Duke of Holman Fenwick & Willan, and Christopher Butcher QC (7 King’s Bench Walk) and Richard Slade (Brick Court Chambers) acted for Brandywine.

For further information please contact:
Andrew Bandurka or Simon Sloane, Holman Fenwick & Willan, in London, on +44 (0)20 7264 8404
Alternatively, please contact Lesley Goodlet, Head of Marketing in London, on 020 7488 2300

Editors Note:
Holman Fenwick & Willan is an international law firm specialising in Shipping & Transport, Trade & Energy, Commercial and Insurance & Reinsurance. It also has one of the largest arbitration and dispute resolution practices of its kind world-wide. The firm has a reputation worldwide for excellence and innovation.

Holman Fenwick & Willan, Marlow House, Lloyd’s Ave, London EC3N 3AL
Tel: 020 7488 2300 Email: [email protected]
Fax: 020 7481 0316


Between 1989 and 1992 Exxon incurred clean-up expenses/costs in excess of $1.2 billion, which they sought to recover from their GCE Insurers. In 1996 Insurers settled Exxon’s Section 1 claim for $300 million (which had limits of $600 million excess $400 million). Exxon obtained a Texan court judgement for $410 million against Insurers in respect of Exxon’s Section 3A claim. Insurers subsequently settled both the Section 3A and 3B claims for $480 million. Insurers sought to recover these payments from their excess of loss reinsurers. Reinsurers/ retrocessionaires queried the recoverability of such claims under London Market Excess of Loss contracts written on the JELC form, which states at Clause 1.3 that:

“It is a condition precedent to liability under the contract that settlement by the reassured shall be in accordance with the terms and conditions of the original policies or contracts.”

The King Syndicate (through Equitas) brought a ‘test action’ against Brandywine Re (UK) Ltd (Brandywine), a retrocessionaire, seeking recovery of Exxon expenses under an excess of loss contract which incorporated the JELC clauses. It was Brandywine’s position that the expenses incurred by Exxon in cleaning up the oil spill were not recoverable under the GCE policy and therefore Insurers’ settlement was not “in accordance with the terms of the original policy”. At first instance Mr Justice Colman made the following findings:

1.1 The governing law of the GCE policy was English law;

1.2 As a matter of English law there was no cover under Section 1 (“Removal of Debris”) because, on its true construction, it did not cover pollution clean up costs;

1.3 Had the proper law been New York law there would have been cover for clean up costs under Section 1; but,

1.4 That under English law and New York law even if there had been cover for clean up expenses under Section 1, there was no cover by reason of the “Notwithstanding” clauses;

1.5 There was no recovery for Exxon Shipping’s (ESC’s) putative case under Section 1 as there was no settlement of ESC’s notional claim;

1.6 As a matter of English law there was no cover for clean up costs under Section 3B of the GCE policy;

1.7 As a matter of New York law there would have been cover for clean up costs under Section 3B of the GCE policy;

1.8 The seepage & pollution exclusion in the reinsurance policy excluded liability to indemnify the Claimants even if clean up costs were covered under the GCE policy.

2. The Court of Appeal questioned whether the court’s approach to construction would be so different under New York and English laws. They would expect the authorities in one court to be persuasive in the other and would expect the same findings to be made as to the parties’ intentions as expressed in the policy .

3. As to the proper law of the GCE contract the CA held, on English conflict of law principles, that the contract was governed by New York law, although this finding made no difference to the overall outcome of the appeal. Waller, Rix and Nourse LJJ based their decision firstly on the fact that the various arbitration clauses in the different sections of the GCE policy allowed for the application of New York law. Further the U.S. Service of Suit clauses did not detract from this, and so read together there was an inferred choice of New York law. They felt there was enough in those clauses to displace the ordinary inference (which had swayed Colman J.) that English law applied, drawn from the major placement in the London market, the location of lead insurers in London and the use of London clauses. They therefore overturned Colman J.’s finding on proper law.

4. Dealing under New York law with the construction of Section 1 and “Removal of Debris” cover in Section 1 the CA held that Colman J. erred in not giving sufficient weight to what he had accepted were compelling arguments under English law. Colman J. had dealt very briefly with the New York treatment of Section 1 and had been swayed by US case law (notably the Lexington case) which was not decided in New York and was not on point. “The points made to the effect that removal of debris was not intended to provide cover for clean up costs for an oil spill are too formidable to be displaced by the reasoning in Lexington”[para 117]. The CA went on to state that “debris is not the natural way in which to describe ‘spilled oil’.”

5. The Notwithstanding clause in section 1 provided that : “notwithstanding anything contained herein to the contrary there shall be no recovery hereon for liabilities as described under [section 3].” Because there was no cover for the spilled oil within section 1 the CA declined to interpret the effect of the Notwithstanding clauses because these were now moot, and to do so would mean the court would be interpreting an entirely different policy (i.e one which did include clean-up cover in section 1). [Note: The CA did recognise the force of Equitas’ argument that the Notwithstanding clauses were exclusionary and would be construed narrowly had cover been expressly provided under section 1.] However, they also recognised that the meaning given to those clauses by Brandywine did accord with (1) the “removal of debris” clause not covering clean up costs under section 1; (2) that section 1 was not designed to cover third party property; and (3) that oil pollution clean up costs and liability were covered under Section 3.

6. As for the Section 3B payment the CA held that Colman J.’s construction of this section was correct under English law, namely that “all transportation activities” under Section 3B should be confined “to carriage specifically associated with drilling, production or exploration” as it accorded more closely with the structure of the (GCE) cover as a whole” and not to ocean carriage of oil. However, the CA stated Colman J. was again wrong to find that New York law would lead to a different conclusion. Colman J. also did not give sufficient weight to extrinsic evidence given the accepted ambiguity under New York law.
7. The Seepage & Pollution Exclusion in the reinsurance contracts was governed by English law and stated that “This contract excludes any loss arising from seepage, pollution or contamination on land unless such risks are insured solely on a sudden and accidental basis…These exclusions shall not apply to coverage provided in respect of….liability under Offshore Pollution Agreement”. This exclusion could only apply to settlements of GCE section 1 and 3B payments, and since the CA had determined there was no such liability the reinsurance exclusion issue was moot. However, they did indicate that the correct question was to determine “where does the seepage pollution or contamination occur, on land or sea?” Whilst two of the Lords Justices would have ignored the exclusion as applying only to “on land” pollution, Rix LJ thought that if the reinsurance exclusion was to be limited by reference to the source of the pollution then the draughtsman would have said so more clearly. As to the issue of whether the GCE policy gave cover only on a “sudden & accidental” basis, which would take the claim outside the seepage and pollution exclusion, the CA indicated they would be reluctant to determine this issue without investigation into the US jurisprudence concerning this much-litigated expression.

8. Finally, under both English and New York law the CA found that ESC could never have had a clean-up claim under Section 1 for “removal of debris” (for the reasons set out above.) The Court did note that ESC never advanced a claim against insurers, and no payment made to ESC by insurers.

9. Equitas/Syndicate 745 did not seek leave to appeal to the House of Lords.

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