One of the longest running cases to affect the LMX reinsurance spira…

One of the longest running cases to affect the LMX reinsurance spiral market came to a head this week with the conclusion of the Exxon Valdez oil spill trial in London. Judgment is now eagerly awaited by the run-off industry, which seeks closure of this significant issue.

1. The Commercial Court trial of the Exxon Valdez reinsurance claims finished yesterday after nine days’ submissions. Mr. Justice Colman heard argument in D.G.King (Syndicate 745 and others) and Equitas-v-Brandywine Reinsurance Company (UK) Ltd (formerly CIGNA Reinsurance Company (UK) Ltd. and his judgment is now eagerly awaited by the reinsurance run-off market.

2. This is the latest dispute of many regarding the Exxon Valdez oil spill of 24th March 1989, when 11 million gallons of crude oil belonging to Exxon was spilled off the coast of Alaska, causing widespread pollution. Exxon and its subsidiary Exxon Shipping spent over $2bn in cleaning-up the spill, and over $1bn settling claims brought by the US/State of Alaska. Exxon paid out several hundred million dollars as compensatory damages to fishermen, native Alaskans etc. In addition, Exxon faces (subject to appeal) a $4.5bn punitive damages judgment arising from the fisherman’s claims.

3. Claims for oil spill clean-up expenses were made by Exxon against London insurers under the different sections of the GCE policy. Section 1 of the GCE policy covered first party property loss and damage including “removal of debris”. Exxon’s Section 1 claim was settled in 1996 for $300m. Section 3 covered third party liabilities, including pollution liabilities, and following judgment against insurers in Texas litigation, the Section 3 claim was settled for $480m. It is the recoverability of these settlement sums from excess of loss reinsurers in the notorious LMX spiral, which is at the centre of the current London dispute.

4. In 1998 Commercial Union sought summary judgment under an XL contract against NRG Victory, for recovery of CU’s share of the overall settlement sum. CU’s application failed in the Court of Appeal, since NRG established an arguable defence that the clean-up costs were not covered under section 1. As a matter of reinsurance law (following Hill-v-Mercantile and General), under the XL JELC clauses a settlement has to be covered by the original policy as a matter of law, in order to be recovered under an XL policy.

5. Following the failed application, CU and NRG compromised their differences, but in the meantime the whole reinsurance market suspended payment of Exxon Valdez losses, on the basis that the $300m Section 1 claims were unrecoverable and should be stripped out of composite claim of $800m. The whole claim (which represents many $bns in the XL spiral) has been at a standstill since 1998, despite various attempts at resolving the impasse. This has caused great uncertainty and tied up huge amounts in reserves.

6. Matters have been brought to a head in the latest action, and the run-off industry is looking forward to a decision regarding recoverability. The GCE policy has undergone a very rigorous examination, and the evidence in the original US proceedings has been picked over very finely. A number of new issues and side-issues have arisen and the judgment will be very interesting for a number of important reasons.

7. Some of the interesting issues are (A) whether in the context of the policy, pollution clean-up costs can be described as the costs of “removal of debris” under a first-party property cover (in Section 1), and/or whether they are pollution liabilities (under Section 3) and (B) whether the Seepage and Pollution exclusion in JELC policies, which refers to “on-shore” pollution, applies to the shoreline pollution caused by an offshore incident. There is also an interesting legal spin on the requirement under Hill-v-M&G that settlement must as a matter of law lie within original coverage, in order to be recoverable from reinsurers.

Andrew Bandurka, Simon Sloane and Tolla Duke of Holman Fenwick & Willan, and Christopher Butcher QC and Richard Slade of Counsel acted for Brandywine.

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