PT Buana Samudra Pratama v Marine Mutual Insurance Association (NZ) Ltd [29.09.11]

The Commercial Court clarifies the meaning of the follow the leader clause. The insured’s tug, the Buana Dua, ran aground off the coast of Indonesia whilst on its way to tow a damaged tanker. It was insured by a market led by Axa and followed by the Defendant and Aegis.

The policy contained a warranty that the tug should not be used to undertake towage or salvage under a previously arranged contract. Axa settled the claim anyway but the Defendant argued that they were not required to follow the settlement as the insured was in breach of this warranty.

The "follow the leader" clause read as follows:

"It is agreed to follow Axa HK in respect of all decisions, surveys and settlements regarding claims within the terms of the policy, unless these settlements are to be made on an ex gratia or without prejudice basis."

The Defendant argued that they were only bound where a claim fell "within the terms of the policy", meaning that the clause binds them as to quantum but not as to whether the policy responds in the first place.

The insured, citing Mance J in Roar Marine Ltd v Bimeh Iran Insurance Co [1998], suggested that this would defeat the purpose of the clause, which was to simplify the administration and settlement of claims.

Decision

The Commercial Court agreed with the insured, holding that the clause as written is reasonably understood to encompass decisions or settlements as to whether claims were within the terms of the policy. It noted that far clearer language would be needed to separate issues of liability and quantum. Consequently, the court did not have to decide whether the warranty was breached.

However, all did not end well for the insured. The Defendant alleged that, after settlement by Axa, the insured made two fraudulent representations to the effect that they had never intended to use the Buana Dua for towage of the tanker and so the claim was forfeit. The insured argued that this was irrelevant; any fraud did not matter, as the Defendant was already locked into the settlement by the follow the leader clause and, accordingly, the duty of utmost good faith had come to an end. As the court was uncomfortable with deciding this "novel and interesting" argument at a summary judgment hearing, it remitted the matter to trial.

Comment

This decision will reassure insureds that settlement with a lead insurer will lock in the following market. For the same reason, following markets ought to be concerned if they have doubts about the integrity of the underlying claim that are not shared by their lead. That said, the court considered it arguable that the following market might still use a fraudulent misrepresentation to avoid payment. We await the court’s judgment on that issue, following the trial.