San Evans Maritime Inc & Ors v Aigaion Insurance Co SA (the ST EFREM)1 

In this case, which involved the determination of a number of preliminary issues, the Court considered the application of a follow clause under which an insurer of a vessel agreed to follow the lead (C) and one other Lloyd’s syndicate (B) “in claims excluding ex gratia payments”. In particular, the Court had to consider whether the effect of the follow clause was displaced by a separate clause in a settlement agreement between B, C and the assured, which expressly stated that B and C were entering into that settlement for their own participations only and were not purporting to bind any other insurer providing hull and machinery cover in respect of the vessel.

The first question for the Court was whether the effect of the follow clause was (i) to require the insurer to follow any settlement made by B and C; or (ii) merely to authorise C and B to act on the insurer’s behalf. There is some uncertainty in the case law as to the basis upon which follow clauses operate, and in particular whether or not they create a relationship of agency. In this case, on a construction of the particular clause in question, the Court preferred the view that no agency was created and that the clause operated by way of a simple agreement that the insurer would follow C and B in claims matters. Therefore, the fact that C and B were not purporting to act for the insurer in settling the claim did not absolve the insurer from liability by reason of any suspension of agency.

The next question was whether the insurer could rely upon the contracts (Rights of Third Parties Act 1999) to enforce the term in the agreement between the assured, C and B. The Court held that the insurer could not do so because in agreeing the term in question, those parties were not purporting to confer a benefit on the insurer, but were instead seeking to protect C and B from any possible liability to the insurer in circumstances where they knew the insurer’s policy contained a follow clause. The Court further held that even if it were wrong on this point, this would not assist the insurer, because whatever C, B and the assured may have agreed between themselves, this did not amount to a promise on the part of the assured not to rely upon the follow clause against the insurer.

Finally, the Court rejected an argument that the follow clause does not apply to a settlement which is expressly agreed not to be binding upon the insurer. The effect of the follow clause was to oblige the insurer to follow any settlement made by C and B, whether or not they purported to act as agent for the insured. This being the case, C and B were unable to countermand the effect of the clause by purporting not to bind the insurer.

As the Court recognised, follow clauses can be a useful tool in simplifying claims settlement and reducing the costs thereof. However, this case illustrates the extent to which an insurer may be bound by such a clause, even in circumstances in which it may not have imagined this to be the case. Insurers should therefore consider carefully whether or not the benefits of such clauses are outweighed by the risks and seek advice as to the appropriate wording of such clauses, if they are to be utilised. The case also highlights the fact that important issues remain unresolved as to the extent to which follow clauses create (i) a relationship of agency; and (ii) a duty of care on the part of the lead underwriter.