High Court: Mr Justice Teare

Michael Ashcroft QC and Rupert Hamilton (instructed by Watling & Co) for the Third Claimant

Luke Parsons QC and Benjamin Coffer (instructed by Ince & Co LLP) for the Defendant

Background

This case involves a claim under a policy of insurance for the vessel, ST EFREM (the "Vessel"). The claims of the First and Second Claimants were stayed by the result of their failure to provide security for the Defendants' costs, and so this judgment was only conducted on the basis of submissions made by the Third Claimant. However, the Court's determination of the issues was to be binding on all Claimants. The Third Claimant was in fact the Mortgagee of the vessel, and the First and Second Claimants were the Owner and Manager respectively.

The Vessel was insured for a value of US$3,800,000 by three Lloyd's Syndicates: Catlin, Arc and Brit (the "Lead Policy"). The Lloyd's market made up 50% of the slip with 30% insured by Aigaion on slightly different terms from the Lead Policy (the "Aigaion Policy"). The balance of the risk was uninsured. The terms of the Aigaion Policy were such that they agreed to follow Catlin and Brit's lead on claims, excluding ex gratia payments:

“Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex-gratia payments.”

On or about 27 July 2010, the Vessel ran aground in Paranagua, Brazil, and suffered a generator breakdown. The Vessel was towed from South America to Abidjan, and a claim was made under both the Lloyd's policy and the Aigaion Policy.

On 24 April 2012, the Syndicates on the Lead Policy settled the claim against them for an aggregate sum of US$779,500. The Settlement Agreement included a wording which read:

"The settlement release pursuant to the terms of this agreement is made by each underwriter for their respective participation in the policy only, and none of the underwriters that are a party to this agreement participate in the capacity of leading underwriter under the policy and do not bind any other insurer providing hull and machinery cover in respect of the St Efrem."

The Assureds maintain that Aigaion are obliged to follow the settlement and say that Aigaion's 30% proportion is US$450,000. Aigaion deny that they are obliged to follow the settlement because the follow clause in the Aigaion Policy does not oblige them to do so.

The Judgment

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 follow clauses come in a variety of different forms. It is therefore necessary in each case to examine the terms of the follow clause in question.

The Follow Clause in this case was an agreement between the assured and Aigaion that Aigaion would follow the settlement of claims by Catlin and Brit. The judge noted that the law remained uncertain as to whether the effect of follow clauses is to make the leading underwriter the agent for the following underwriters. He 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, particularly where there was no agreement between Aigaion on the one hand and Brit and Catlin on the other.

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 be binding of Aigaion.

The judge held that the phrase "any other insurer" in Clause 7 described insurers of the Vessel other than the Lloyd's syndicates who subscribed to the Lead Policy, 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 effect of 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 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. Clear words would be needed to justify a conclusion that, by Clause 7, the assured intended to give up the benefit of the Follow Clause in the Aigaion Policy. There were no such clear words in this case.

The Court went on to find that the Follow Clause was triggered by the settlement agreement.

Conclusions

The Court's decision is a stark reminder that following underwriters who agree to be bound by a "Follow Clause" will be obliged to follow the 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 which contain different policy terms.

This judgment took the law no further on the question of whether a leading underwriter owes the following underwriters a duty of care and thus whether, if a following underwriter is unhappy with the leader's decision, he has any right of recourse against the leader.

We understand that an appeal of this judgment is due to be heard by the Court of Appeal later this year.