Reinsurance is No Exception: A Case of Staying and Not Following

    ‘Follow the settlements’ clauses have been the subject of debate in the English courts several times in recent years. The decision by the Court of Appeal in Amlin Corporate Member Ltd v Oriental Assurance Corporation [2012] EWCA Civ 1341 serves as a reminder to reinsureds of the potential limitations of these clauses. In Amlin v Oriental, the Court of Appeal upheld a decision of Mr Justice Andrew Smith in refusing to grant a stay of English proceedings brought by reinsurers to seek to establish that they were not liable under a contract of reinsurance (in circumstances where parallel proceedings were ongoing in the Philippines), despite it containing a ‘follow the settlements’ provision.

    The Facts
    The proceedings related to the loss of the vessel ‘Princess of the Stars’ off the coast of the Philippine Islands in 2008. The casualty occurred as the vessel sailed into the path of typhoon ‘Frank’ and resulted in the loss of over 500 lives. More than 40 separate proceedings were subsequently brought directly against Oriental Assurance Corporation (Oriental), the insurer of the vessel, in the Philippine courts by the owners of the cargoes carried onboard the vessel.

    The Claimant/Respondent (Amlin) had agreed to reinsure Oriental under a reinsurance contract. Both the original policy and the reinsurance contract contained a typhoon warranty, which stipulated that the vessel would not sail out of port when there was a typhoon warning or when her destination or intended route might cross the typhoon’s path. The reinsurance contract also included a clause to “…follow all terms, conditions and settlements of the original policy issued by the Reinsured to the Insured” (the Follow Provision), and an express English law and jurisdiction clause.

    In November 2010, Amlin issued a claim in the English courts seeking declarations that it was not liable to indemnify Oriental under the reinsurance contract as a result of a breach of the typhoon warranty. Amlin similarly argued that Oriental was not liable under the original policy for the same reason. Oriental sought an order for a stay of action, as a matter of case management, pending the outcome of the Philippine claims against it. Andrew Smith J, hearing the matter initially, dismissed the application on the grounds that a stay of the kind applied for should be granted only in rare and compelling circumstances, which were not present in this case. In dismissing the application, Andrew Smith J rejected Oriental’s argument that Amlin would be bound by any factual findings made by the Philippine courts pursuant to the Follow Provision in the reinsurance contract.

    Oriental appealed the decision on three main grounds. First, it submitted that in a normal reinsurance case, where a reinsurer is bound to follow the settlements of the reinsured, the starting point had to be that the reinsurer should wait for the reinsured to settle a claim and only then address the question of its own liability. Secondly, it maintained that the risk of inconsistent verdicts of the Philippine and English courts militated strongly in favour of a stay and that it would be inherently unfair to place Oriental in a position where it would be forced to assert the opposite of its case in the Philippine court. Finally, it submitted that the judge had given too much weight to the exclusive English jurisdiction clause in the reinsurance contract and to the inherent delays of the Philippine court system.

    Counsel for Amlin conversely submitted that, irrespective of the Follow Provision, Amlin had a right to bring proceedings in the agreed forum and it was only in a rare and compelling case that a stay should be granted of a case so brought. It was further argued that the presence of the express English law and jurisdiction clause meant that the grounds for justifying a stay ought to be even more persuasive than a case in which jurisdiction was founded for other reasons.

    Decision and Reasoning
    The Court of Appeal acknowledged that in seeking negative declaratory relief against Oriental, Amlin would oblige Oriental publicly to put forward a case to the English court that there was no breach of the typhoon warranty in the reinsurance contract or the original policy, which is the very opposite of the position taken by Oriental in the Philippines. Similarly, the Court of Appeal noted that should the stay of English proceedings not be granted, Oriental could run the risk of undermining the credibility of its own defence in the Philippines, or else would have to concede that the typhoon warranty was indeed breached and that it had no reinsurance cover. While Longmore LJ agreed that Andrew Smith J was likely to some extent to have been influenced by the “glacial” progress forecast of the Philippine court proceedings (it was estimated that it might take up to 10 years to reach judgment in the Philippines), he saw no reason why the judge should not have taken this into account when exercising his discretion. As such, in spite of the apparently unfair position that Oriental found itself in as a result of Andrew Smith J’s decision, the Court of Appeal was unpersuaded that the judge’s discretion had been exercised on an incorrect basis or that he had taken irrelevant considerations into account.

    Turning to the issue of the Follow Provision, the Court commented that if Oriental was to succeed in its argument that a reinsurer must first wait for the reinsured to settle a claim before assessing its own liability, reinsurance would have to be considered an exception to the normal rule that a stay of proceedings properly brought can only be granted in rare and compelling circumstances. The Court of Appeal, mindful of the well- established fact that a ‘follow the settlements’ provision will have no application if the loss does not fall within the terms of the reinsurance cover, held that reinsurance constituted no such exception. In this context, the Court also considered the possible impact of the arguably back-to-back nature of the reinsurance cover. However, Longmore LJ concluded that this consideration did not “negate or relevantly impinge on the more general principle that any stay of action properly brought in England should only be granted in rare and compelling circumstances”. As such, the appeal was unanimously dismissed and a stay of the English proceedings refused.

    It seems, however, that the judgment was not handed down with enthusiasm by the Court of Appeal. In fact, Rimer LJ stated that despite there being no scope for the Court to interfere with the order of Andrew Smith J, he was left with “an instinct that the apparent unfairness of the position in which the judge’s order places Oriental must mean that there was something wrong with his decision”. Moreover, Tomlinson LJ commented that “by pressing ahead with their claim for negative declaratory relief, these giants of the London insurance market have placed their reinsured Philippine minnow in a hopeless and invidious position”. Despite this, Andrew Smith J’s decision was maintained on the basis that “a conclusion does not have to be reached with enthusiasm in order to be right”.

    Commentary and Significance of the Case
    The judgment in Amlin v Oriental makes clear that a situation where the reinsurer is bound to follow the settlements of the reinsured is not a general exception to the normal rule regarding a stay of proceedings. Reinsurers will therefore continue to be free to seek declaratory relief in relation to the scope of cover provided by a reinsurance contract before judgment or settlement in relation to the underlying claim.

    The decision also serves to remind both reinsurers and reinsureds alike that despite a reinsurer’s obligation to indemnify a reinsured for a judgment or settlement paid by the reinsured in good faith by virtue of a ‘follow the settlements’ provision, the loss must be shown to fall within the scope of the original policy and the reinsurance contract before the reinsurer’s indemnity obligation arises.

    Reinsurers will no doubt say that, in allowing the English litigation proceedings to continue, common sense has prevailed as the stay, had it been granted, would have to have remained in place for up to 10 years, pending the outcome of the cases in the Philippines. The same is unlikely to be said for reinsureds who, following this decision, could find themselves in the unfortunate position of having to argue both sides of the same story.

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