Reinsurance: strict interpretation of claims co-operation clause

The recent decision in Lexington v Multinacional, on a preliminary issues hearing, reaffirms the importance that should be placed on claims co-operation clauses in insurance/reinsurance policies. The Commercial Court adopted a literal interpretation of the claims settlement provision by finding in favour of reinsurers where the reinsured had let commercial considerations override its coverage interests by failing to comply with the terms of the clause.

Background

Multinacional, one of Venezuala’s largest insurers, fronted a property and business interruption insurance for reinsurers. The underlying insureds were companies in the Corporacion Venezolana De Guyana Group. CVG had a long standing relationship with Multinacional.

The reinsurance contracts incorporated the following claims settlement clause:

“Notwithstanding anything contained in the reinsurance agreement and/or the policy wording to the contrary, it is a condition precedent to any liability under this policy that:

(a) Upon the reinsured being advised of any circumstances which may give rise to a claim against this policy, the reinsured will advise reinsurers of such notification as soon as is reasonably practicable;

(b) The reinsured shall furnish the reinsurers with all information in respect of such circumstances and shall co-operate with the reinsurers in the adjustment and settlement of the claim.”

A claim was made by CVG in April 1998 following a malfunction at one of its facilities. Adjusters and technical experts were appointed to assess the claim. The reports of the adjusters were fairly inconsistent, apparently as a result of a lack of information provided by CVG. A sixth adjuster’s report concluded that CVG had failed to mitigate the claim and that a nil loss reserve should be posted. Multinacional disagreed (but without providing reasons) and sought to appoint a further adjuster, indicating to reinsurers that it had instructed another expert.

Reinsurers objected to the independent stance Multinacional was adopting without prior consultation. In January 2000, almost two years following notification of the loss, reinsurers advised Multinacional that, as a result of its failure to co-operate in accordance with the claims settlement clause, reinsurers were entitled to be discharged from all liability as a result of the breach of the condition precedent that it would co-operate. At the same time, reinsurers opened without prejudice negotiations with Multinacional to try to bring about the satisfactory settlement of the claim.

Reinsurers issued proceedings in London for a declaration of non-liability in April 2000, although without prejudice discussions continued between the parties.

In Venezuala Multinacional unilaterally applied to the Superintendencia de Seguros for an order that the final adjuster’s report be issued.
As a result of the protracted adjustment discussions, CVG’s claim against Multinaconal became time-barred in April 2001. Reinsurers thereafter halted discussions with Multinacional in order to investigate the time bar point.

Without consultation with reinsurers, Multinacional once again went to the Superintendencia to seek a decision as to whether the claim was time barred. It was clear that Multinacional did not want to accept the time bar point and directed the Superintendencia accordingly. In addition, Multinacional proceeded to meet with CVG following which it issued a further application to the Superintendencia to ‘confirm that time had not elapsed’. It was increasingly apparent that Multinacional’s interests were in settling the claim to the benefit of its long-standing business partner, CVG, and not acting in accordance with the co-operation provisions in the reinsurance policy.

A meeting then took place between Multinacional and reinsurers in which a strategy was agreed for Multinacional to invoke the time bar against CVG, as well as rejecting the claim on coverage grounds (at this stage, reinsurers were not aware that Multinacional had approached the Superintendencia or met with CVG). Multinacional’s lawyers made it clear following this meeting that it did not agree with the time bar point but reinsurers requested a formal action plan to implement the strategy agreed at the meeting. Against this background, reinsurers agreed to stay the London proceedings on the proviso that the time bar issue between CVG and reinsurers would be resolved to reinsurers’ satisfaction.

Contrary to the action plan, Multinacional held discussions with CVG (on a unilateral basis) to discuss the progression of the claim. Indeed a letter was drafted from Multinacional to CVG by which CVG was given the clear impression that Multinacional had: (a) achieved the non-prescription of the claim initiated by reinsurers regarding breach of the condition precedent and possibly, (b) a positive ruling by the Superintendencia. It was unclear from the words used, but CVG believed that not only had it acted in the interests of CVG in achieving the above, but that Multinacional had also “rejected” reinsurers request to claim time bar against CVG on the grounds that it was “legally incorrect” and applied “all the legal resources, sparing no expense, both in Venezuela…and in London in order to reverse this state of affairs and ensure the continuation of the adjustment and the suspension of the proceedings, which to date has been achieved.” This was untrue.

Decision

In light of the above, the court accepted that the correspondence between Multinacional and CVG had: (a) waived the time bar defence available against CVG; (b) encouraged CVG to continue to pursue its claim; and (c) completely undermined the strategy agreed between Multinacional and reinsurers. Christopher Clarke J concluded that such events released reinsurers from any liability to indemnify Multinacional in respect of the underlying claim.

The judge rejected Multinacional’s argument that reinsurers had waived any breach of the claims settlement clause by continuing to co-operate in the settlement and adjustment of the claim. The judge made some interesting remarks about election of a defence to a claim on the grounds of a breach of a condition precedent.

The judge held that reinsurers were entitled to continue to co-operate on a without prejudice basis following the initiation of a claim on the basis that it was reasonable commercial practice to do so. As he aptly stated “if the reinsured is, as a matter of construction, to be released from any further obligation to co-operate on account of reinsurers’ initial denial of liability certain odd and undesirable consequences would follow”. The judge adopted reasonable commercial logic in the construction of his response. Principally, he stated that both parties must be encouraged to resolve claims, notwithstanding any investigations and/or issues in respect of liability. Indeed in the present case both parties did continue to co-operate together. Secondly, Christopher Clarke J stated that by repeating the ‘without prejudice’ nature of discussions, reinsurers did not make their co-operation extra contractual. The process of settlement and adjustment of a claim involves considering and determining whether and, if so, to what extent it is well founded. In the present case, the parties were considering whether or not there was an effective time bar applicable to the claim of the original insured. If there was, reinsurers would be under no further obligation to indemnify the reinsured, as the expiry of time would extinguish the underlying right.

The judge also considered the doctrine of waiver by election The judge reviewed the recent Court of Appeal decision in Kosmar v Trustees of Syndicate 1243 (to read our law now on the Court of Appeal decision click here). The judge concluded that the decision in Kosmar did not assist Multinacional as reinsurers were not presented with a choice between two mutually inconsistent rights at the time of initiating the claim. The judge opined that if reinsurers were right to contend that Multinacional was in breach of a condition precedent then they were automatically discharged from liability. If they were wrong then they were not.

The judge also considered the relevance of the fact that Kosmar was an application on the grounds of waiver of a past breach of a condition precedent, whereas in the present case, reinsurers were said to have waived future performance. The judge concluded it had no relevance. In brief, he stated that the assertion by reinsurers that it had a defence to liability arising from the breach of the condition precedent was an unproved assertion and not a choice between inconsistent remedies. Most importantly, it was not an irrevocable decision. Reinsurers were entitled to change the nature of their defence, abandon it or indeed rely on another one (or none at all). The reinsurer had made a ‘choice’ but it was not an irrevocable contractual election.

Comment

There are a number of important lessons that can be derived from the Lexington v Multinacional decision :

1. A reinsured should not act on a unilateral basis in investigating the nature and/or extent of a claim.

2. A reinsured should seek prior written approval for any action and/or decision it wants to take.

3. A reinsured should not act against/to the detriment of reinsurers.

4. Investigations into a claim can take many years to reach a firm conclusion and the time in which an insured can bring the claim will continue to run throughout the course of the investigations.

5. The parties should make it a priority to understand potential time bar issues from the outset of the notification of a claim to avoid a claim being wholly rejected on this basis.

6. A reinsurer is entitled to assert a claim for breach of a condition precedent and to continue to assist in the commercial resolution of the settlement and adjustment of a claim.

7. A reinsured cannot rely on the co-operation of reinsurers in the investigation of a claim as constituting the waiver of any defence to liability that reinsurers may have.

Last, but certainly not least, it is important not to let commercial pressures override fundamental contractual obligations. The decision in Lexington v Multinacional illustrates that losing sight of what is important when dealing with a claim could leave a reinsured without any cover.

Further reading: Lexington Insurance Co v Multinacional De Seguros SA [2008] EWHC 1170 (Comm)