Beazley Underwriting Ltd & others v Al Ahleia Insurance Company & others [27.03.13]

High Court rules on scope and effect of claims control clause in reinsurance contract.

Defendant insurers/reinsureds provided all risks cover for the construction of crude oil storage tanks for the Kuwait Oil Company (KOC). When one of the tanks proved defective, a claim was made against the Defendants, who consequently notified their reinsurers, the Claimants. The claims control clause (CCC) in the reinsurance contract provided:

"... it is a condition precedent to any liability under this Reinsurance that ... (b) The Reinsured [i.e. the Defendants] shall furnish the Reinsurers [the Claimants] with all information available respecting such loss or losses and the Reinsurers shall have the right to appoint adjusters, assessors, surveyors or other experts and to control all negotiations, adjustments, and settlements in connection with such loss or losses. (c) No settlement and/or compromise shall be made and no liability admitted without the prior approval of Reinsurers."

The Claimants argued they were not liable for the loss, as the Defendants had breached paragraphs (b) and (c) of the CCC in failing to allow the Claimants to control negotiations with KOC - instead, the negotiations between the Defendants and KOC were conducted without the Claimants' knowledge. The Claimants also alleged that the Defendants admitted liability and settled or compromised the claim without their prior approval. The Defendants denied that their communications amounted to a settlement/compromise or an admission of liability, arguing in the alternative that if the court found against them on this point, any settlement/compromise or admission of liability in relation to the Defendants' retention did not constitute a breach of paragraph (c) of the CCC.

Decision

The High Court held that, on the evidence, there was no "settlement", "compromise" or "admission of liability" and the Defendants had not breached the CCC. On interpretation, the court ruled that:

  • The CCC operates as an exemption clause and has to be construed narrowly.
  • As to paragraph (b), reinsurers must be given a proper opportunity to exercise their rights to control all negotiations etc. Without this, the terms of the condition precedent will not be satisfied and reinsurers would not be liable.
  • In relation to the issue of whether paragraph (c) prohibited any settlement by the Defendants without the Claimants' approval, the court held it was important to construe the paragraph in the context of the CCC as a whole. The Judge concluded it does not apply to any settlement, admission or compromise within the Defendants' own retention.
  • A "settlement" in paragraph (c) would include a legally binding settlement expressed to be "without prejudice to liability".
  • An admission of liability had to be clear and unequivocal to trigger the CCC but did not have to be legally binding.
  • An offer to pay money is not an "admission of liability".

Comment

If this judgment had gone against the Defendants, that would have been the end of their case (subject to any appeal). This decision means it is open to them to pursue their claim against reinsurers.

Claims control clauses, expressed as a condition precedent to liability, are designed to give reinsurers complete control over the underlying claim. Whereas the insurer/reinsured needs to ensure it fully understands and complies with the wording of the clause, this case confirms that the courts will be slow to find that such a clause has been breached in the absence of clear-cut evidence to that effect.