The recent case of English & American Insurance Company Limited (in a scheme of arrangement) v Axa Re SA  EWHC 3323 (Comm) contains further discussion of the steps required by a reinsured to establish that a settlement of claims on the original insurance fell within the terms of the reinsurance. In addition, the case demonstrates the danger of assuming that all correspondence written in the context of settlement negotiations will necessarily be without prejudice.
The claimant, English & American Insurance Company Limited (in a scheme of arrangement) ("EAIC") had subscribed to shares in 10 contracts of insurance (the "Insurance Contracts") whereby the insured, Dow Chemical Company, Dow Corning Corporation and certain associated companies ("Dow"), were insured against the risk of certain losses and liabilities on an excess of loss basis for various periods and for various limits. The defendant, Axa Re SA ("Axa"), reinsured EAIC for 100% of its subscription to the Insurance Contracts (the "Reinsurance Contracts"); in effect, EAIC was fronting for the defendant.
Dow incurred substantial liability to numerous claimants for damages for personal injuries arising out of Dow's manufacture and sale of breast implant devices and materials. Dow agreed a settlement with a group of its solvent London market insurers, the London Market Settlement Agreement ("LMSA") in which the insolvent EAIC did not participate. This agreement was a commutation of Dow's anticipated claims (including incurred but not reported claims (IBNR)) rather than of then-existing liabilities.
Following the LMSA, Dow pursued claims against certain other solvent insurers in the Michigan courts. The Michigan courts gave favourable judgments to Dow and confirmed the validity of the model used by Dow to allocate its liabilities to the various policy years and layers of insurance cover.
Dow then pursued EAIC in respect of its liability under the Insurance Contracts. EAIC claimed against Axa on the back-to-back Reinsurance Contracts. In correspondence, Axa expressed concern that because EAIC had not participated in the LMSA, Axa was now being exposed to liabilities in excess of those to which it would have been exposed if EAIC had participated in the LMSA.
EAIC and Axa had a meeting which both parties agreed was without prejudice. Following the meeting, Axa confirmed its position in a letter that was not marked "without prejudice". Axa stated:
"However, without prejudice to our right to deny liability for losses arising out of EAIC settlement with Dow Corning, we will support a settlement up to the present value of what our share of the 1995 Market Settlement would have been. We understand that were EAIC to settle on the basis of the Market Settlement, its total liability on the relevant policies would be $3,772,761, of which Abeille Re's [a company taken over by Axa] share would be $772,538."
Following this letter, EAIC acknowledged that its liability to Dow was at least US$ 3,772,761 under the Insurance Contracts and admitted that amount as an established scheme liability, entitling Dow to an interim dividend (the "Interim Settlement"). The Interim Settlement reflected the amount that EAIC would have paid had it been a party to the LMSA. Axa's proportionate share of the Interim Settlement was US$ 772,538 (representing paid claims and IBNR) whereas Axa's share of the actual amount being claimed by Dow was US$ 1,048,949.
Axa refused to pay monies to EAIC who commenced proceedings and applied for summary judgment for payment of the US$ 772,538. Axa brought an application to strike out certain paragraphs of the evidence supporting EAIC's application for summary judgment on the basis that they referred to without prejudice correspondence and were therefore inadmissible.
Axa's application to strike out EAICs evidence
The court held that the correspondence referred to by EAIC was not without prejudice. The letters were written to confirm Axa's position following settlement discussions and, as such, were open offers and not without prejudice correspondence. Not all correspondence written with a view to a settlement is without prejudice; it depends on the intentions of the parties which must be objectively determined. The correspondence was admissible in support of EAIC's application for summary judgment.
EAICs application for summary judgment
Follow the settlements clauses
It was not in dispute that the effect of the follow the settlements clauses required Axa to indemnify EAIC for its liabilities ascertained by judgment, award or settlement, provided that:
- the claim as so recognised fell within the risks covered by the policy of reinsurance as a matter of law; and
- in settling the claim the reinsured had acted honestly and had taken all proper and businesslike steps in reaching the settlement (Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd  1 Lloyd’s Rep)
IIssues raised by Axa
Axa argued that it could not be required to follow the Interim Settlement which was an interim good faith payment to Dow without admission of liability on a without prejudice basis, under a full reservation of rights, and was not sufficient to constitute a settlement. Further, there was no identification of which claims EAIC had settled, and whether those claims fell within the terms of the Reinsurance Contracts or were IBNR or ex gratia payments. EAIC, it was argued, had not taken proper and businesslike steps to settle the claims.
Decision of the court
On the facts, the court held that EAIC was entitled to summary judgment in the sum of US$ 673,808 plus interest. This represented the amount of Axa's share of the Interim Settlement for paid claims less the amounts paid in respect of IBNR, for which the court reluctantly accepted that Axa might just have a defence such that it could not be said there was no realistic prospect of success (and therefore the high threshold for summary judgment could not be met). The reasons were:
By making the Interim Settlement EAIC was recognising that it had a liability to Dow for US$ 3,772,760.93 under the Insurance Contracts.
The claims that had been settled could be identified and fell within the risks covered by the Reinsurance Contracts. From the evidence it was clear that at the date when EAIC made payment of the Interim Settlement to Dow, there were paid claims in respect of four out of the 10 Insurance Contracts.
EAIC had acted honestly and taken proper steps in reaching the settlement. The fact that the London Market settled for such amounts and Axa itself had expressed written willingness to settle for this amount, indicated to the judge that payment of such an amount was proper.
The court held that, even if it was wrong in relation to above points, there was no realistic prospect of Axa establishing that it did not have a liability to EAIC for at least the paid claims. Axa's main complaint was that EAIC had failed to settle the claim on the more favourable terms of the LMSA. However, the evidence from the Michigan court proceedings and Axa's own letter were such that it would be impossible for Axa to assert that it had no liability for the paid claims.
The court was clearly influenced by the commercial reality of Axa's letters which, whilst not setting out formal offers to pay EAIC, reflected a recognition that Axa was in fact liable to pay at least the amount of EAIC's Interim Settlement.
The case also highlights the importance of making it absolutely clear whether or not correspondence is intended to be without prejudice. It is well-established that marking correspondence "without prejudice" is not determinative, but this must be helpful in establishing, objectively, the intention that the correspondence should be without prejudice.
Leave to appeal was refused by the High Court but Axa has lodged an application with the Court of Appeal for permission to appeal so it may not be the end of this matter.