The English Commercial Court recently considered1 whether a follow clause obliged an overseas underwriter to follow the London market in the settlement of a claim and, if so, whether a clause in the settlement agreement between the London market and the assured purporting not to bind “any other insurer” meant that the overseas underwriter was not obliged to follow the settlement.
The ST EFREM suffered generator damage. 50% of the hull and machinery interest was insured in London by Catlin, Ark and Brit (the Lead Policy) and 30% by Aigaion in Greece under a separate insurance policy (the Aigaion Policy).
The Aigaion Policy contained a ‘follow clause’ which read:
“Agreed to follow London’s Catlin and Brit Syndicate in claims excluding exgratia payments”.
The assured made claims under both policies. A settlement was reached under the Lead Policy in which the London underwriters agreed to settle for US$779,500. The settlement agreement included a provision at clause 7 as follows:
“The settlement and release pursuant to the terms of this Agreement is made by each Underwriter for their respective participations in the Policy only and none of the Underwriters that are party to this Agreement participate in the capacity of a Leading Underwriter under the Policy and do not bind any other insurer providing hull and machinery cover in respect of the St Efrem”.
The assured argued that Aigaion was obliged to follow that settlement.
The Court first considered whether the follow clause in the Aigaion Policy required Aigaion to follow any settlement by Catlin and Brit under the Lead Policy.
The Court noted that it is necessary in each case to examine the terms of the follow clause in question. This follow clause was an agreement between the assured and Aigaion that Aigaion would follow the settlement of claims by Catlin and Brit. The Judge considered that effect could be given to the simple language of the follow clause in this case without the need to introduce the concept of agency (on which the law remained unclear).
The Court then had to consider whether clause 7 of the settlement agreement amounted to an agreement by the assured that the settlement agreement would not bind Aigaion.
The judge held that the phrase “any other insurer” in clause 7 described insurers of the vessel other than the Lead Policy Lloyd’s syndicates, and that it therefore included Aigaion. The intention of that clause was that in settling the insurance claim the Lloyd’s syndicates were not purporting to bind Aigaion. However, the follow clause was a contractual agreement between the assured and Aigaion that Aigaion would follow a settlement by Catlin and Brit, whether or not Catlin and Brit purported to bind Aigaion.
The judge found that, in any event, Aigaion would not have been able to rely on clause 7 to avoid their follow obligation because the purpose of clause 7 was not to confer a benefit on non-party Aigaion. There were no clear words sufficient to justify a conclusion that, by clause 7, the assured intended to give up the benefit of the follow clause in the Aigaion Policy.
The follow clause was accordingly triggered by the settlement agreement.
This decision is a stark reminder that following underwriters who agree to be bound by a ‘follow clause’ will be obliged to follow leading underwriters’ decisions, within the remit of the follow obligations in the clause in question. This is the case even where the leading underwriter and the following underwriter are parties to two separate insurance policies containing different policy terms.
We understand that an appeal is due to be heard by the Court of Appeal later this year.