Transcript Slide 1

IS THE REINSURER BOUND BY A
JUDGMENT OR AWARD AGAINST
THE REINSURED?
AIDA Reinsurance Working Party
Athens, Thursday 8 MAY 2014
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English law: basic rule
“There are only two rules, both obvious. First, that the reinsurer
cannot be held liable unless the loss falls within the cover of the policy
reinsured and within the cover created by the reinsurance. Second,
that the parties are free to agree on ways of proving whether these
requirements are satisfied. Beyond this, all the problems come from
the efforts of those in the market to strike a workable balance between
conflicting practical demands and then to express the balance in
words.”
Hill v Mercantile & General [1996] LRLR 341, 350 per Lord Mustill
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English law: theory
 Reinsurer not party to (even English) proceedings on
underlying policy between insured and (reinsured)
insurer is not bound by result as res judicata: Hayter v
Nelson [1990] 2 Lloyd’s Rep 265, 271, Saville J
 No implied term that reinsurer liable for payment by
reinsured insurer to insured under settlement following
court judgment against insurer: Insce Co of Africa v
SCOR [1985] 1 Lloyd’s Rep 312, 331 (CA)
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English law: practice
 Equivalent treatment of liability insurance (direct) and reinsurance
 “I consider that the better view is that, absent some agreement to be
bound, it will be open to a liability insurer or a reinsurer to challenge
findings of liability in an underlying judgment in proceedings to which it
was not a party in order to question whether in fact the insured is under a
liability. In other words, whilst the judgment may ascertain or establish the
loss, it will not necessarily establish the legal liability of the insured or
reinsured, although it may be compelling evidence of such liability,
depending on the circumstances in which it was obtained.” Astrazeneca v
XL [2013] Lloyd’s Rep IR 290 per Flaux J at [65] (dicta) (liability ins)
 Court or tribunal deciding liability insurance dispute may decide that court
hearing underlying dispute as to liability of insured was in error on the
facts or the law or both: Astrazeneca [2013] EWCA Civ 1660 per
Christopher Clarke LJ at [17]
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English law: foreign judgments
 Dicta of Potter LJ in CU v NRG Victory [1998] 2 Lloyd’s
Rep 600 at 610 (CA) that foreign court’s judgment on
reinsured’s liability should be binding, subject to (1)
competent jurisdiction, (2) no breach of exclusive
jurisdiction clause, (3) reinsured taking all proper
defences, and (4) judgment not manifestly perverse, not
followed in subsequent cases.
 Different substantive law may be applied by different
courts to same clause in underlying policy and
reinsurance, with different result: Wasa v Lexington
[2010] AC 40 (HL)
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Danish, Norwegian & Swedish law:
The basic rules
Reinsurance not governed by the Insurance Acts in DK, N
and S
Some principles may apply by analogy (not the provisions
which are devised to protect the insured)
The permissible extent of construction by analogy is not
well defined
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Danish, Norwegian & Swedish law:
Construction of reinsurance contracts
Customs and usages on the relevant international markets
are important when constructing the reinsurance contract:
No case law in DK and S but in N:
Gjensidige v Continental Insurance and others
(unpublished): ”This indicates that a literal construction be
applied also under Norwegian law …”
ND-1995-447: ”The insurance policy is developed by
brokers at the insurance market in London … Norwegian
practice must be considered to comply with English
practice in this regard” (Direct insurance)
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Danish, (Swedish and Norwegian) law:
Contracting
 Cedant and Reinsurer are free to agree that the
Reinsurer shall be bound by a settlement, an award or
a judgment in a case between the Insured and the
Cedant
 ”Follow the Fortunes” clauses
– (North River v Cigna 52 F.3d 1194, 3rd Circ, 1995)
– (North River v ACE 361 F.3d 134, 2nd Circ, 2004)
 ”Follow the Settlements” clauses
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Danish, (Swedish and Norwegian) law:
Contracting cont.
Danish case law:
U1996.906 SC & U 1999.429 SC (Co-assurance)
Case concerning defective windturbines:
The leading insurance assurer could decide and the other
insurers obliged to follow (1996)
The principle did not apply to payments made to owners
of non-insured windturbuines (1999)
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Danish, (Swedish and Norwegian) law:
Point of Departure:
Absent an agreement:
The Reinsurer is (probably) not bound by a judgment or
an award in a case between the Insured and the Cedant
… but may be (at least in DK)
i.e. only ”res judicata” between the parties and the
principle of ”ne bis in idem” does not apply to a
subsequent case between the cedant and the reinsurer
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However (Danish law)…
U 1922.186 AC (Retrocession)
By implication, the retrocessionaire obliged to follow the
decisions by the reinsurer
U 2006.2421 SC (Reinsurance)
Cedant: The principle of ”Follow the Fortunes” applies
Reinsurer: An implied obligation to ”follow the fortunes”
apply in treaty reinsurance
AC: Since the case deals with facultative reinsurance, the
principle of ”follow the fortunes” does not apply by
implication
SC: Did not opine on the matter
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Case law concerning direct insurance
(Danish law):
U 1993.727 AC (”The Turkey farm”)
Liablity insurance – Turkey Farm
Judgment between the injured and the person causing the loss (insured)
establishing the insured’s liablity …
Insured had kept the insurer informed about the case while it was pending
and the result (judgment) before the time an appeal had lapsed …
The insurer had not insisted or suggested an appeal …
The insurer was barred from challenging the finding of liability in the judgment
…
U 1943.1042 AC (”The Vet”)
Insurance company not barred from asserting that the insured had not been
negligent
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Increased focus on loyalty in ”Relational
Contracts” … ?
Yam Seng v ITC, [2013] Lloyds Rep 1, 526:
"(M)any contracts … involve a longer term relationship between the
parties in which they make a substantial commitment. Such
"relational" contracts, as they are sometimes called, may require a
high degree of communication, cooperation and predictable
performance based on mutual trust and confidence and involve
expectations of loyalty which are not legislated for in the express
terms of the contract but are implicit in the parties' understanding and
necessary to give business efficacy to the arrangements. Examples of
such relational contracts might include some joint venture
agreements, franchise agreements and long-term distributorship
agreements."
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And finally…
Commercial Union v NRG [1998] Lloyd Rep 600
(obiter):
”(I)t would be quite impractible, productive of endless
dispute and against the presumed intention of the contract
of insurance (absent contrary or special provision of a kind
…) for an English Court trying a dispute concerning the
reinsurer’s liability not to treat the the judgment of a
foreign court as the the resinured’s original liability as
decisive and binding, save within the most circumscribed
limits”.
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German law: basic rule
“If there are two lawyers involved discussing an issue this will most certainly
result in at least two differing opinions on the subject matter”
 German (civil) law is governed by a structured set of codified norms
 German Courts do not set rules of law, they interpret the rules set by
legislature or by executive authorities if authorized by legislature
 Laws may be imperative (compulsorily binding) or non-imperative – i.e.
binding but variable by agreement of the parties to a contract
 Customs of a trade have the effect of a non-imperative norm (§ 346 HGB –
German Commercial Code)
 Superior Court’s interpretation of a rule of law does not establish “precedent”
(is not binding in principle) to a lower Court
 Scholars, academics and other learned people also interpret the law, but in
the absence of binding interpretation there’s no right or wrong
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German law:
reinsurers’ duties to follow
 no interpretation by a superior commercial Court available on the
application of § 346 HGB – commercial custom – in relation to any
customs of the reinsurance trade
 prevailing opinion: it is a custom of the reinsurance trade that the
reinsurer shall have to follow the settlements and the fortunes of
ceding company unless
– otherwise agreed in the reinsurance contract
or
– the original settlement or other liability incurred by the ceding
company does not fall into the scope of coverage of the
reinsurance contract
 differing opinion: …not unless specifically agreed in the contract
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German law: (prevailing opinion)
custom of the reinsurance trade
 prevailing opinion:
long running and persistently, the participants trading in the
reinsurance market adhere to the consistent, uniform and voluntary
practices (gleichmäßige, einheitliche und freiwillige Übung)
– to empower and to oblige the reinsured to manage any
reinsured business as if it were not reinsured
– the oblige the reinsurer to follow the reinsured in any decision
taken in the course of managing reinsured business and to
follow the fortunes of the reinsured incurred in course of this
management
 differing opinion:
such practice cannot be consistently nor uniformly asserted for
German reinsurance practice
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German law:
scope of following duties, if in force
 the reinsured is obliged to manage and execute a reinsured
insurance contract as if it were unreinsured
(duty to manage / Geschäftsführungspflicht)
 thus, the reinsured has to be entitled to manage a reinsured
insurance contract as if it were unreinsured
(power to manage / Geschäftsführungsrecht)
 thus, the reinsurer has to follow any settlement by the reinsured
undertaken within the limits of this “power to manage”
 thus, the reinsurer has to follow the reinsured ’s fortunes incurred
while managing within the limits of this “power to manage”
 but only inasmuch as reinsurance cover is provided by the scope
of the reinsurance contract in question
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German law:
limitations to scope of reinsurance
 the parties may waive or limit the powers and duties envisaged by
reinsurance custom
– by express provisions of the contract
– by conduct implying that intent (such as provisions to a contract
which are in conflict with the provisions of a custom)
 the parties may expressly define the scope of coverage given by
a reinsurance - customary powers or duties will not broaden nor
reduce such scope
– It is common practice that underlying terms and tariffs are
incorporated by cross reference into the reinsurance contracts
– the reinsurance agreement “to cover as original” may broaden this
scope as well as limit it to the originally agreed insurance cover
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Israeli law: Applicable Law on
Reinsurance Contracts
 Excluded from Insurance Contract Law – a
consumer protective law
 General Contracts Law
 Two separate contracts
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Israeli law: Interpretation of Reinsurance
Contract
 According to the commercial object of the parties
– assumption of “back to back” coverage
Elbit v. Harel and Ors. : Same interpretation of
terms, same applicable law.
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Israeli law: Extra Contractual Damages
Imposed on Reinsured
The Sky Club Judgment: The insured is entitled to
compensation for losses caused by wrongful
declination of coverage.
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Israeli law: Extra Contractual Damages
(cont’d)
 Is it outside the ceded risk?
Declination according to Reinsurer's instructions award will bind Reinsurer
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Mexican law: basic rule
 Insurance companies are fully liable for any insured risk
before the insured, irrespective of their reinsurance
coverage.
 Insurance companies are fully liable for any insured risk
before the insured, irrespective of their reinsurance
coverage.
 The will of the parties as set forth in the respective
contract is the prevailing law.
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Mexican law: theory
 The reinsurer has the obligation to pay the reinsured an
amount of money in case the conditions set forth under
the reinsurance contract are met.
 It is deemed that the reinsurer is bound when the
reinsured covers a risk – whether by a judgement or
award - if the respective risk under which the judgement
or award was granted is covered and not excluded
under the reinsurance contract.
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Mexican law: practice
 Considering the cedent obligation to cover the insured
risk is independent from the reinsurance, there is a
tendency to play a double standard in the market, on
one side enforcing claims controls and on the other
reserving rights for liabilities of the cedent putting stress
on the local market.
 There is a lack of precedent and judicial decisions that
is reverting with more judicial activity.
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Spanish law: basic rule
 No connection between insured and reinsurer.
 Reinsurer not party to proceedings on underlying policy
between insured and insurer (reinsured).
 There is case law confirming these principles (the
Musini case).
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Spanish law: theory
 Basic principles of reinsurance: community of risk and
good faith between reinsured and reinsurer, hence
reinsurer must follow (in principle).
 But no current explicit rule on follow the fortunes or
settlements.
 The loss must be covered by underlying insurance
contract and by reinsurance contract.
 Claims must be settled in a business-like manner. Exgratia payments are not recoverable.
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Spanish law: practice
 No case law providing guidance on these principles.
 Not uncommon for reinsurance contracts to provide that
reinsurer must follow where the reinsured is obliged by
a court to indemnify under the terms of the original
policy.
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Spanish law: foreign judgments
 A foreign judgment against the reinsured will
not bind the Spanish court in proceedings
instigated by the reinsured against the
reinsurer.
 The reinsured may present the foreign
judgment as evidence in proceedings against
the reinsurer.
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Julian Burling
Niels Schiersing
Dr. Andreas Schwepcke Dr. Reinhard Dallmayr
Serle Court
Horten
Advokatpartnerselskab
6 New Square
Philip Heymans Allé 7
Lincoln’s Inn
DK-2900 Hellerup,
London WC2A 3QS
Copenhagen
[email protected]
www.serlecourt.co.uk
[email protected]
www.horten.dk
ars/re Partners
Schwepcke &
Wieland PartG
Max-Emanuel-Str. 5
82319 Starnberg
[email protected]
www.arsre.com
BLD
Bach Langheid
Dallmayr PartG mbB
Karlstraße 10
80333 München
[email protected]
www.bld.de
Yves Hayaux Du Tilly
Peggy Sharon, Adv.
Levitan, Sharon & Co.
Advocates and Notaries
Yigal Alon 57
Tel Aviv 67891
[email protected]
www.levitansharon.co.il
Nader Hayaux & Goebel
Paseo de los Tamarindos
400 B 7o. Piso
Bosques de las Lomas
05120 México DF
60 Lombard Street
London EC3V 9EA
(44) 2031787802
Jorge Angell
L.C. Rodrigo Abogados
Lagasca, 88
28001 Madrid
[email protected]
www.rodrigoabogados.com
[email protected]
www.nhg.mx/
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