London – 10 May 2004 – LAWFUEL – The High Court ruled today that various settlement payments made by Exxon’s General Corporate Excess insurers in 1996 and 1997 are not recoverable from London market excess of loss reinsurers.
In a 95 page judgment Mr. Justice Colman accepted defendant reinsurer Brandywine’s (formerly CIGNA Re (UK)) grounds to resist the claims of D.G. King syndicate 745 and other syndicates through Equitas.
The massive Exxon Valdez oil spill took place in Alaska in March 1989. It has spawned endless litigation in the USA, Alaska and England, and many of the insured losses have found their way into the reinsurance market. Since 1998, when the English Court of Appeal in Commercial Union-v-NRG Victory ruled that excess of loss reinsurers had arguable defences to many of the reinsurance claims, many US$millions of claims have been trapped in the London Market Excess of Loss “spiral.” The spiral achieved some notoriety in the 1990s when it spawned massive litigation in Lloyd’s and contributed to the need for Reconstruction and Renewal and the formation of Equitas.
The decision is therefore of some importance to the run-off industry, since the continuing uncertainty and differences of opinion regarding recoverability of the reinsurance losses have dictated that most LMX spiral market participants have been unable to free reserves and close their books for the affected 1988/9/90 years. There are some similarities between these problems, and the problems affecting the LMX market in respect of the Kuwait and British Airways losses arising out of the 1990 invasion of Kuwait (and the “two events” judgment in M.A. Scott –v- Copenhagen Re.)
The decision is also of some importance in the context of pollution insurance coverage, in particular on the topical issues of whether clean-up expenses are to be covered as first party property losses or as third party liabilities, and whether costs expended to minimise or avert imminent losses are properly recoverable from liability insurers.
The Judge’s rulings under both London and New York law ensure that the case will have resonance on both sides of the Atlantic.
Mr. Justice Colman validated reinsurer’s defences, and removed the uncertainty from the reinsurance market, in a judgment which makes clear that the contested claims are unrecoverable. These potentially recoverable claims may be too small to make any further impact on the excess of loss spiral in any event. Furthermore, there is a probability that many Exxon reinsurance claims which were settled before the 1998 freeze, can now be recovered from those reassureds to whom they were paid.
The massive oil clean-up operation conducted after the March 1989 spill involved Exxon (the owner of the oil cargo) spending $1.2 billion, and it’s subsidiary Exxon Shipping (the owner of the Valdez) spending $800 million. The Exxon General Corporate Excess insurance policy was in three parts: Section 1 in respect of Loss of or Damage to Property; Section 3A in respect of Marine Liabilities; and Section 3B in respect of Public and Third Party Liability. Exxon Shipping had cover but made no claim under the policy (but it had separate cover with the International Tanker Owners P&I Club). Exxon, however, sued its insurers in the USA under all three sections of the policy. Exxon’s insurers compromised the Section 1 claim in 1996, and the Section 3A and 3B claims in 1997.
Many reinsurers (and their retrocessionaires), including defendant Brandywine, argued that they had no liability to indemnify their reassureds in respect of the insurance settlement payments made under Sections 1 and 3B of the GCE policy, since their assumed reinsurance contracts were written on Joint Excess Loss Committee terms rather than a full “follow settlements” basis. The JELC terms require reassureds to demonstrate that direct insurers had a legal policy liability to their assured (rather than merely having made a reasonable and businesslike settlement of their assured’s claim) before there is any obligation on reinsurers (and their chain of retrocessionaires) to indemnify reassureds against the settlement sums. Reinsurers Brandywine argued that Exxon’s insurers had no legal liability to make the settlements to Exxon, as a matter of GCE policy construction, and so reinsurers up the chain had no corresponding liability to their reassureds, such as the claimant syndicates, who may have settled claims. Some of the claimant syndicates had been Exxon’s direct insurers (and contributed to the 1996/7 settlements), and all the claimant syndicates had paid Exxon claims on their assumed reinsurance contracts. The syndicates (through Equitas) therefore sued their retrocessionaire Brandywine for an indemnity against their alleged liabilities.
Mr. Justice Colman ruled today, in favour of defendant reinsurers Brandywine. So far as Exxon’s direct coverage under the GCE policy was concerned:
1. The GCE policy was ruled by English and not New York law;
2. Oil pollution clean-up expenses were not recoverable from Exxon under Section 1, which covered property loss and “removal of debris”, because oil sludge was not “debris.”
3. Even if Section 1 did prima facie cover Exxon’s oil clean-up expenses, there was definitely cover for such expenses under Section 3, the Liability section of the policy, and so certain GCE clauses which prevented overlap of cover between Sections (the so-called “notwithstanding clauses”) defeated the Section 1 cover.
4. There was no cover in respect of Exxon’s clean-up expenses under Section 3B, the Public and Third Party Liability section, because of restrictions in that section.
5. If New York law had been applicable (which it was not), then there would have been clean-up cover under Section 3B, and whilst in New York Section 1 cover for “removal of debris” would have extended to oil spill clean-up expense, nevertheless there would still have been no cover under Section 1 because of the “notwithstanding” clauses.
So far as the reinsurance polices between the syndicates and Brandywine were concerned:
6. There could be no claim against reinsurers in respect of Exxon Shipping’s clean-up expenditure because (i) Exxon Shipping had made no claim against insurers under Section 1 of the GCE policy, (ii) the 1996 settlement agreement did not effect any settlement of any claims made by Exxon Shipping, and (iii) any claim which Exxon Shipping might have made at the time of the 1996 settlement was time-barred (under English law) by then.
7. Regardless of whether New York or English law governed the GCE policy, and even if, contrary to the judgment, GCE insurers had been liable to Exxon under sections 1 and 3B, nevertheless the Seepage and Pollution exclusion in most of the reinsurance contracts (which was taken from the JELC 1988 wording) barred recovery from reinsurers in respect of all pollution affecting land which originated from an offshore source. (Since 98% of Exxon’s expenditure related to onshore clean-up of the shoreline, rather than offshore pollution clean-up, this ruling eliminates the majority of these losses from reinsurance coverage.)
(We should add that there is no possibility of re-opening the insurer’s 1996 and 1997 settlements made to Exxon and, despite the Judge’s findings of non-liability under the GCE policy, this judgment binds only the reinsurance parties and does not affect the direct market’s Exxon settlements.)
The syndicates were granted leave to appeal against the Judgment.
This brief note cannot do justice to the careful reasoning set out in the 95 page judgment. For further details please contact the undersigned.
Andrew Bandurka, Simon Sloane and Tolla Duke of HFW instructed Christopher Butcher Q.C. and Richard Slade on behalf of defendant reinsurers Brandywine.