What duties does a lead underwriter owe to following underwriters when settling a claim?

Introduction

The issue of what duties a lead underwriter owes to the following market when settling a claim was considered by the commercial court in the context of a “follow clause” inSan Evans Maritime Inc & Ors –v- Aigaion Insurance Co SA [2014] EWHC 163 (Comm)

At least in the context of this particular follow clause, the court held:

• the lead underwriter was not the agent of the following market when settling the claim; and
• the lead underwriter could owe duties to the following market and therefore may wish to make clear when settling a claim that he does so on his own behalf and is not purporting or intending to bind the following underwriters.

Background

The Insured made an insurance claim following its vessel, the St. Efrem, being grounded in Brazil and being towed to the Ivory Coast.

The vessel was insured under two policies of insurance:

• 50% was insured by three Lloyd’s syndicates, Catlin, Ark and Brit (“the Lloyd’s Syndicates”)
• 30% was insured by a Greek insurer, Aigaion, under a separate policy (“the Aigaion Policy”)  
• 20% was uninsured

The Aigaion Policy contained a “Follow Clause” stating that Aigaion “Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex-gratia payments”.

The Lloyd’s Syndicates settled the claim against them.  The settlement agreement purported to settle and release the Lloyd’s Syndicates only and expressly stated that none of the underwriters were party to the settlement agreement in the capacity of leading underwriter and did not bind any other insurer.

The Insured subsequently sought to maintain that, pursuant to the Follow Clause, Aigaion was obliged to follow the settlement reached with the Lloyd’s Syndicates. 

Amongst other things, the court was asked to determine as preliminary issues:

• whether the Follow Clause required Aigaion to follow the settlement of the Catlin and Brit syndicates
• if so, was the Follow Clause triggered by the settlement agreement

The First Preliminary Issue

Aigaion argued that the Follow Clause merely authorised Catlin and Brit to act on its behalf in negotiating and/or agreeing the settlement of disputed claims rather than follow any settlement they had reached.

The court disagreed. The clause said nothing about how a settlement must be reached in terms of negotiation or agreement with the Insured and was contained in the Aigaion Policy: an agreement between Aigaion and the Insured; not an agreement between Aigaion and Catlin or Brit. In any event, there was no reference in the clause to Catlin or Brit having authority to act on Aigaion’s behalf, but only that Aigaion agreed to follow Catlin and Brit in claims, and therefore in settlements, excluding ex-gratia payments.

The court decided that effect could be given to the simple language of the clause as an agreement between Aigaion and the Insured to follow a settlement by Catlin and Brit. The attempt to argue that the clause provided authority for Catlin and Brit to act on Aigaion’s behalf unnecessarily complicated it because it brought in the concept of the lead insurers acting as agent on behalf of the following insurer as principal.

The court preferred the view that by agreeing the clause Aigaion was expressing a willingness to be bound by the lead underwriters in the settlement of claims. On this basis the agreement of the lead underwriters to settlement of the Insured’s claim acted as a trigger to bind Aigaion as follower.

Commentary

In coming to this conclusion the court recognised that there are many types of follows clauses that seek to bind the following market to the decisions of the lead underwriter in a variety of circumstances. There is some uncertainty over the basis on which follow clauses operate and it has to be said that the balance of the authorities adopt an agency analysis, as opposed to the “trigger” analysis preferred here.

This matters on a very practical level because holding that a lead underwriter is agent of the following market means that the lead has fiduciary obligations to act loyally on behalf of the following market on settlement and, in particular, not to act in a position of conflict. It is of course very common for a lead to have separate and conflicting interests to the following market when settling a claim and, arguably, unrealistic to seek to impose fiduciary obligations in these circumstances.

The court avoided doing so here, despite there being some authorities which would seem to prefer that approach, and this seems eminently sensible.

The Second Preliminary Issue

Aigaion argued that the Follow Clause did not apply to the settlement reached by the Lloyd’s Syndicates because it had been expressly agreed that the settlement was not binding  on it. Amongst other things, Aigaion argued that there was an implied term in the Follow Clause that it would not apply to settlements not purported to be made by Catlin and Brit on behalf of Aigaion.

The court disagreed. The lead underwriter was unable to countermand the effect of the Follow Clause if, as the court had decided here, the effect of such a clause was to oblige the following underwriter to follow any settlement made by the lead underwriter, whether or not the lead underwriter purported to act as agent for the following underwriter.

The court accepted that a lead underwriter might owe a duty of care to following underwriters and as a result might wish to make clear when settling a claim that it he does so on his own behalf only and is not purporting or intending to bind the following underwriter. However, the purpose of doing so would be to protect the lead underwriter from any claim by the following underwriter rather than undoing the Follows Clause.

Comment

The second preliminary issue brings out another practical effect of analysing the Follows Clause as a trigger rather than an agency arrangement: the  lead underwriter could not agree that he was not acting as agent when settling a claim in order to get around the effect of the Follows Clause expressly agreed between Aigaion and the Insured.

As the court observed, the commercial purpose of a follows clause is that from the insurers’ point of view it saves time and costs and makes co-insurance more marketable and attractive to those seeking insurance.

In this context, the court’s approach to both preliminary issues is to be welcomed: it sought to apply the ordinary meaning of the words used in the Follows Clause without importing any complex notions of agency which might lead to a lead underwriter acting in breach of fiduciary duty; and attempted to bring certainty to an Insured’s position by avoiding the effect of the clause being negated by actions taken by the lead insurer at the time of settlement.