IRB Brasil Resseguros SA v CX Reinsurance Company Ltd Commercial Court, 7 May 2010

The Commercial Court has reasserted that where possible it will uphold arbitration awards whose findings appear to be reasonable and commercial and will not subject them to unduly meticulous legal examination. In the course of the same judgment, the Court appears to have given valuable guidance on the proper application of the so-called Hill v M&G 'follow the settlements' clause that appears in many reinsurance contracts. This judgment follows the decision in Equitas v R&Q1 which equally demonstrated the Commercial Court adopting a pragmatic and commercial approach in circumstances where a reinsured has no realistic prospect of demonstrating its liability for each and every original loss which makes up a claim to its reinsurers. The losses in the IRB case arose out of well known US liability claims and class actions (eg breast implants, asbestos) which had been settled by the London market on commercial terms.

Implications

  1. An arbitration award cannot be challenged simply on the basis that it expressed the law erroneously in places if it is otherwise clear that the arbitrators have relied on the proper authorities and made no legal error in applying them to the facts. Both reinsurers and reinsureds may take comfort that the clumsy wording of an award should not succeed as grounds for it to be appealed.
  2. The judgment supports the arbitrators' decision not to reexamine the factual basis of the underlying settlements made by CX Re. This is notwithstanding that the Hill v M&G 'follow the settlements' clause in the reinsurances requires the reinsured to demonstrate that losses fall within the terms of both the policy reinsured and the reinsurance. It appears to have been accepted by the parties that the first part of this so-called double proviso applies to questions of law but not of fact. This pragmatic approach will be welcomed by reinsureds as acknowledging the context of achieving a reasonable commercial settlement where the issues of liability may not be clear, especially where the reinsured itself is indemnifying its insured in respect of a settlement with a third party in which the reinsured was not involved. However, such an approach arguably contradicts the test in Hill v M&G as it has been applied in other cases and interpreted by legal commentators, and would restrict reinsurers' ability to challenge the basis of underlying settlements.
  3. Applying Equitas v R&Q, the standard of proof to which the reinsured is required to prove its case that losses fall within the terms of the original policy and the reinsurance as a matter of law is 'the balance of probability'. It appears from this decision that a market settlement or other compromise agreement may of itself be sufficient evidence to meet this burden of proof.
  4. The fact that a settlement involves a reinsured making payments which cannot be allocated to specific claims or liabilities may not prevent a reinsured relying on the settlement to prove its loss to reinsurers. It may be sufficient to demonstrate that the overall loss paid by the reinsured is at least the value of the likely total quantum of claims for which the reinsured is liable. This is the approach of the arbitrators and the Commercial Court accepts that, in reaching this conclusion, the arbitrators applied the proper law to the facts.
  5. The Court's reluctance to challenge the arbitrators' decision to allow recovery of settlements including amounts relating to future and as yet unreported liabilities may be argued to provide support for other reinsureds and retrocedents seeking to recover commutation settlements which include amounts for IBNR (incurred but not reported) claims.
  6. Reinsureds should be wary of relying too heavily on this judgment as the approach taken by the arbitration panel in this case may not have been applied if the case had been heard before the Commercial Court. Nevertheless, it indicates an approach by the Commercial Court that is increasingly pragmatic and commercial. More significantly, given how many reinsurance disputes are resolved by arbitration, the judgment may give arbitration panels more confidence to adopt such a commercial approach without fear of being overturned on appeal.

Background

The judgment arose out of an appeal by reinsurers, IRB Brazil Resseguros SA, against an arbitration award in favour of its reinsured, CX Reinsurance Company Ltd. The arbitration dealt with claims under CX Re's reinsurance programme protecting its book of casualty business for the years 1976 to 1983. The reinsurance contracts in question each incorporated a Hill v M&G-type 'follow the settlements' clause providing that all settlements by the reinsured, including compromise settlements, were unconditionally binding on reinsurers if such settlements were within the terms and conditions of both the original policies and the reinsurance.

The claims arose out of well known US liability market losses including: the AHS and 3M silicone breast implant claims; the Baxter and Revlon HIV-contaminated blood product claims; and the Corning asbestos claims. CX Re had entered into various settlement agreements which were almost universally paid and supported by the London market. As is common in such cases, the settlements involved liabilities being broadly allocated between insurers and years of account without an exact correlation to the underlying third party claims.

The Arbitration award

In the arbitration, IRB relied on the fact that the settlements involved market-sharing agreements and payments into settlement funds which required CX Re to pay sums in relation to claimants and years of account for which it could not be established that it was actually liable. It followed that CX Re could not prove that paid losses fell within the terms of the original insurance and the reinsurance.

The arbitration panel concluded not only that the settlements were reasonable and business-like but that it was sufficient for CX Re to show that the total payments it had made under the settlements was equivalent, on the balance of probabilities, to its market share of the losses. CX Re could not be required to demonstrate that each individual payment related to a loss for which it was liable. The panel even allowed CX Re to recover the portion of the settlements which related to future claims on the basis that they had reached a reasonable and business-like settlement involving a final determination of all potential liabilities including some not yet advised.

IRB's lawyers argued that the arbitrators had erred in law in concluding that these settlements were within the terms of the original policies and the reinsurance. Such an error in law would give IRB grounds to appeal the arbitrators' decision before the Commercial Court. IRB's case rested, in part, on the language used in the arbitration award which referred to losses "arguably" falling within the terms of the original policies and the reinsurance when the test that should have been applied was whether the losses fell within the terms of the original policies and reinsurance on "the balance of probability".

The Commercial Court decision

The Court expressed its reluctance to challenge any decision of an arbitration panel unless there was a very good reason. The use of incorrect terminology would not open an arbitration award up to being challenged if it was clear that, as a matter of fact, the arbitration panel had applied the proper law to the facts. Importantly, in the case of a 'follow the settlements' case like this, the Court appears to have accepted that the relevant facts were those as they were recognised by the reinsured in entering the compromise agreements - not the facts as they may have happened. The use of "confused terminology" (even as between "event" and "cause" in the case of a question as to whether losses arose out of "one event") is of no assistance to the party challenging the award if the panel's reasoning is clear. In this case, the Court was able to conclude that the arbitrators had been satisfied, on the balance of probabilities, that the claims as settled by the relevant compromise agreements fell within the terms of the original insurance contracts and the reinsurance. They had applied the proper law to the facts. There was therefore no basis on which to challenge the arbitration award.

David Webster comments:

At a time when it is being questioned whether use of the arbitration process to resolve reinsurance disputes is as cost effective and adaptable as litigation this decision is a useful reminder that arbitration does allow arbitrators to apply their commercial experience to decide difficult legal issues which the courts will be reluctant to interfere with unless there has been a blatant disregard of the law