In Gard Marine v Lloyd Tunnicliffe and Others  EWCA 1658, the Court was required to determine the meaning of "100%" in a facultative reinsurance that provided for an excess of "USD250 million (100%)". Mr Justice David Steel held that Offshore Energy Insurance market practice (in both direct insurance and facultative reinsurance) was that the wording meant the excess reduced in accordance with the underlying policyholder's interest in the underlying loss. David Steel J's comments in respect of both policy excess and limits provisions mean that the judgment is of interest to all parties involved in the insurance and facultative reinsurance of offshore risks.
The Claimant insurer, Gard Marine & Energy Limited ("Gard"), subscribed to a 12.5% share under an Energy Package Insurance policy (the "Original Policy") purchased by Devon Energy Corporation ("Devon"). Gard reinsured 7.5% of the 12.5% through facultative reinsurance (the "Reinsurance Policy") with various Lloyd's syndicates, including Advent; and the remaining 5% through Glacier Re.
Devon suffered a loss as a result of damage caused by Hurricane Rita. The relevant gross loss from the ground up was approximately US$912.5m. Devon's interest in that loss was US$416m (approximately 45.6%). Devon had a retention of US$16m under the Original Policy and a further US$35m discount was agreed, meaning that the claim under the Original Policy was settled for US$365m.
Gard made a claim against its reinsurers, and the issue between the parties was the point at which the loss attached. The Sum Insured clause in the Reinsurance Policy provided as follows:
"To pay up to Original Package Policy limits/amounts/sums insured excess of USD250 million (100%) any one occurrence of losses to the original placement".
It was the use and meaning of "100%" that was the principal issue in dispute.
Gard submitted that "100%" meant that the excess of US$250m related to the total gross loss (in this case, US$912.5m). Therefore, it was argued, the excess relevant to the Reinsurance Policy was to be reduced or "scaled" in proportion to Devon's interest in the total gross loss. Devon's interest of the total loss was, approximately, 45.6%, and so the relevant deductible was 45.6% of the US$250m (i.e. US$114m). The claim against reinsurers was, therefore, the appropriate percentage of US$251m, being the US$365m paid out to Devon less the proportionately reduced or scaled deductible of US$114m.
Advent submitted that Gard's construction was incorrect and that "100%" referred to the losses paid by the full market of insurers on the Original Policy. On that basis the relevant excess was the full US$250m, and Advent was only obliged to contribute its share of Gard's proportion of US$115m paid to Devon above the US$250m excess.
Advent had a 26.6667% share of Gard's 7.5% that was reinsured under the Reinsurance Policy. On Gard's construction, it was entitled to recover from Advent 26.6667% of 7.5% of US$251m, being slightly more than US$5m. Advent's case was that Gard was entitled to recover 26.6667% of 7.5% of US$115m, being US$2.3m.
Following a brief dispute as to the correct interpretation of "100%" when Gard's claim was made, all other insurers subscribing to the Reinsurance Policy paid their contributions in accordance with Gard's construction of the Sum Insured clause. Glacier Re did not accept Gard's interpretation at that time and so was named as the Second Defendant in the claim. However, the claim against Glacier Re settled before trial.
The Court heard evidence from a wide range of fact witness (all experienced brokers/underwriters in the energy field) and from expert witnesses in underwriting and insurance broking. David Steel J found that the "evidence overwhelmingly supports the conclusion that the notations “(100%)” or “(100% for interest)” have a specialised and recognised meaning in the energy market". That specialised meaning was as Gard had argued and, David Steel J considered, applied equally to the policy excess and policy limit (in each case if used) in both direct insurance of offshore energy risks and facultative reinsurance.
Advent pursued an alternative claim on the basis that Gard's broker had made misrepresentations as to the correct construction and operation of the reinsurance (i.e. that the broker had represented that the reinsurance was to be construed as Advent now argued). If (as was found) the reinsurance operated as Gard had submitted, the reinsurance could be avoided by reason of those misrepresentations. Gard also advanced an alternative claim against the broker in the event that its (Gard's) construction was not found to be correct on the basis that the broker should have used the proper wording to achieve Gard's intended outcome. David Steel J found without difficulty that there had been no misrepresentation and so there was no requirement to consider the related issues of materiality and inducement. Gard's alternative case was obviously unnecessary given the construction of the clause.
The determination of the meaning of "100%" in the present case was strictly required only in the context of an excess in a claim under a facultative reinsurance. However, David Steel J's obiter comments that the interpretation applies also in Offshore Energy Insurance to policy limits and to direct insurance may mean that the case has more wide reaching consequences.
Policyholders, insurers and reinsurers will each need to consider whether the coverage that relevant direct or facultative reinsurance policies provide accord with their expectations as to limits and excess in light of interests in projects covered thereunder. The consequence for Advent in the present case was that whilst the excess reduced or scaled relative to the insured's interest in the loss, the limit of the Reinsurance Policy was not subject to a similar proportionate reduction, and so its potential liability under the reinsurance was uncertain in that if the insured's interest in the project (and thus the loss) changed, so would Advent's exposure by reason of the scaling of the excess (but not the limit).
The judgment also indicates the practical difficulties in attempting to establish or rely on market custom to ascribe words a particular meaning. David Steel J noted that there had been some assertion of a market custom in relation to the meaning of "100%" that had not been pursued in argument. To constitute a custom the relevant practice must be notorious, universally followed and reasonable (for example, the signing down of over subscribed slips has been found to reach the requisite level of notoriety and universal practice). It seems the evidence here did not reach the requisite very high standard. Nevertheless, market practice can still be relevant to the construction of a policy term as part of the factual matrix if the practice is widespread (but not universal and so unable to constitute a custom, as was apparently the case here). However, there is all too often a risk of uncertainty arising from the use of terms intended to bear a specialised meaning which can usually be avoided by just a handful of explanatory words. By way of example in this case there was no dispute about the meaning of "(100%)" or "(100% interest)" in the Original Policy which included a Partial Interest Clause making the position plain.