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This recent judgment concerned the determination of three preliminary issues regarding whether or not a following market underwriter was bound by a loss settlement agreed by the leading Lloyd’s underwriter. The issues arose out of a claim brought by the claimants against Aigaion Insurance Company (“Aigaion”) under a hull and machinery insurance policy in respect of the vessel St. Efrem.
The three claimants were the owner, the manager and the mortgagee of the St. Efrem, together (the “Assured”). The insured value of the vessel was US$3.8 million. 30 percent of the vessel was insured by Aigaion and 50 percent was insured by three Lloyd’s Syndicates (Catlin, Ark and Brit) (the “Syndicates”). The remaining 20 percent was uninsured. Catlin was the Lloyd’s slip leader and the Claims Agreement Parties were stated to be the slip leader and Xchanging Claims Services.
The Aigaion policy with the Assured differed from the Lloyd’s policy and contained a “Follow Clause”, which stated: “Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex-gratia payments”.
In July 2010, the St. Efrem ran aground in Brazil and suffered a generator breakdown. A claim was made by the Assured under both the Lloyd’s and the Aigaion policies in the amount of US$1.5 million. After the loss had occurred, a copy of the Aigaion policy was sent to the Syndicates.
In April 2011, the Syndicates settled the claim for US$779,500. The Settlement Agreement stated that each Syndicate was liable for its own respective share of that sum and that, in entering into the settlement, none of the Syndicates were acting as lead underwriter. The Settlement Agreement also expressly stated that it did not “bind any other insurer providing hull and machinery cover in respect of the St. Efrem”.
The Assured contended that Aigaion was obliged to follow the settlement by the Syndicates in accordance with the Follow Clause. Aigaion maintained that it was not obliged to follow the Syndicates’ settlement because of the express words in the Settlement Agreement.
The preliminary issues that fell to be decided by Mr. Justice Teare were as follows:
- Was Aigaion required to follow any settlement made by Catlin and Brit (as contended by the Assured) or did the Follow Clause merely authorise Catlin and Brit to act on behalf of Aigaion in negotiating and/or agreeing a settlement of the claim (as contended by Aigaion)?
- If the Follow Clause did require Aigaion to follow any settlement made by Catlin and Brit, was the Follow Clause triggered by the settlement in question?
- Did the Assured agree in the Settlement Agreement that the settlement would not be binding upon Aigaion and, if so, could Aigaion rely upon the Contract (Rights of Third Parties) Act 1999 (the “Act”) to enforce this?
In relation to issue one, Mr. Justice Teare held that the Follow Clause was not simply an agreement authorising Catlin and Brit to act on Aigaion’s behalf when settling claims. He held that, by the Follow Clause, Aigaion had agreed with the Assured to follow any settlement made by Catlin and Brit in respect of an insurance claim arising from a casualty affecting the St. Efrem. In reaching this conclusion, Mr. Justice Teare stated that the Follow Clause was a simple agreement between the Assured and Aigaion (and not between Aigaion and the Syndicates) the purpose of which was to simplify the claims process and the interpretation favoured by Aigaion would unnecessarily complicate matters because it would introduce the concept of agency.
Mr. Justice Teare dealt with issue three next in his judgment because it made logical sense to do so. Issue three is really a simple issue of construction. Aigaion argued that the obvious commercial intention of the Settlement Agreement was that it would not be binding upon them because the Syndicates were defined in the agreement as “the Underwriters” which would suggest that “any other insurer” must be Aigaion. Mr. Justice Teare agreed that “any other insurer” must mean Aigaion and that in entering into the Settlement Agreement, the Syndicates were not intending to bind Aigaion. In reaching his decision, Mr. Justice Teare relied upon a number of specific facts which were present in this case. These included the fact that the Syndicates were aware of the terms of the Aigaion policy, and in particular the Follow Clause, the fact that Aigaion insured 30 percent of the interest in the St. Efrem and that Clause 7 of the Settlement Agreement expressly stated that each Syndicate entered into the Settlement Agreement in respect of their own participation only.
As to whether Aigaion was entitled to rely upon the Act to enforce the terms of the Settlement Agreement, Mr. Justice Teare held that the purpose of Clause 7 of the Settlement Agreement was not to confer a benefit upon Aigaion. As such, Aigaion was not entitled to rely upon the Act to enforce the Settlement Agreement. Furthermore, the Assured had not agreed to give up its right to rely on the Follow Clause in the Aigaion policy as very clear words would be required for this.
In relation to issue two, it was held that that the Settlement Agreement did trigger the Follow Clause and that the only reason why the Syndicates had expressly stated in the Settlement Agreement that it was not binding upon Aigaion was to protect themselves against any claim by Aigaion and not to frustrate the Follow Clause. Mr. Justice Teare made it clear that the Syndicates could not countermand the effect of the Follow Clause (to which they were not a party) in this way.
This judgment highlights the importance of Follow Clauses in simplifying the claims process and makes it very clear that the effect of such a clause will not be reversed simply because a lead underwriter, wishing to protect himself against a claim by a following insurer enters into a Settlement Agreement which is expressly stated not to be binding upon any following insurer.
1 2014] EWHC 163 (Comm)
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