UK: Commercial Court Considers Construction of ‘Follow’ Clause
In San Evans Maritime Inc & ors v Aigaion Insurance Co SA  EWHC 163 (Comm), the Commercial Court was asked to determine three preliminary issues arising from a ‘follow’ clause in a contract of insurance.
The vessel St Efrem was insured under two contracts of insurance, which respectively insured 50% and 30% of the vessel (with the remaining 20% being uninsured). The first policy was led by Catlin (the Lloyd’s policy) and the second policy, from which this claim arose, was written by Aigaion (the Aigaion policy). In July 2010, the vessel was grounded leading to a claim under both policies. The terms of the Aigaion policy were not identical to that of the Lloyd’s policy, however the Aigaion policy did contain the following term: “Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex-gratia payments.” The claim against the Lloyd’s syndicates was settled and the settlement agreement stated that the settlement did not bind “any other insurer providing hull and machinery cover”. The assured submitted that Aigaion was obliged to follow the Lloyd’s settlement, a fact which Aigaion denied.
The first preliminary issue was whether, on a proper construction, the follow clause required Aigaion to follow settlements made by Catlin or Brit or whether it merely authorised Catlin and Brit to act on Aigaion’s behalf in negotiating and/or agreeing the settlement of disputed claims. There was no dispute that the word “claims” in the follow clause included the settlement of claims. It was also the case that there was no agreement between the Lloyd’s leads and Aigaion.
Mr Justice Teare held that that the follow clause required Aigaion to follow any settlement made by Catlin and Brit and that the simple construction of the clause was consistent with its purpose of “simplifying the process of claims settlement.” Teare J found that Aigaion’s submissions ignored and added to the “simple words” of the follow clause. Teare J also noted that there is uncertainty in the authorities as to the basis upon which a follow clause operates between the lead and following underwriters (whether it is by way of agency or trigger analysis). Teare J held that the follow clause was not dependent upon the lead underwriters acting as agent for Aigaion so as to bind Aigaion to the settlement.
The second preliminary issue required the judge to determine whether the follow clause in the Aigaion policy was triggered by the settlement agreement. Rejecting Aigaion’s submissions that the follow clause did not apply to a settlement which is expressly agreed not to be binding on Aigaion, Teare J held that a lead underwriter is not able to countermand the effect of a follow clause if the effect of it is to oblige the following underwriter to follow any settlement made by the lead underwriter.
Answering the third preliminary issue, Teare J had to resolve whether a clause of the settlement agreement had any application to Aigaion. The clause related to the capacity in which the Lloyd’s syndicates had settled the claim and stated that “the settlement and release pursuant to … this Agreement … do not bind any other insurer providing hull and machinery cover”. Aigaion submitted that the intention of the clause was that the settlement agreement would not be binding on any other party i.e. Aigaion, who fell within the clause. The assured submitted that the intention of the clause was to make clear that each syndicate concluded the settlement in its own name and not as a lead underwriter on behalf of any other underwriter. Teare J held that the clause would be understood by the “reasonable person with the background knowledge available to the parties” as meaning that the Lloyd’s syndicates were not purporting or intending to bind any other insurer. Teare J then had to consider whether, for the purposes of section 1(b) of the Contracts (Rights Against Third Parties) Act 1999 (the Act), the clause purported to confer a benefit on Aigaion. The judge cited Mr Justice Christopher Clarke in Dolphin Maritime v Sveriges  2 Lloyd’s Reports 123, in which Christopher Clarke J held that a “contract does not purport to confer a benefit on a third party simply because the position of that third party will be improved if the contract is performed.” Teare J held that the clause’s purpose was not to confer a benefit on Aigaion rather it was to protect the syndicates from any possible liability to Aigaion in the circumstances where the Lloyd’s syndicates knew that the Aigaion policy contained a follow clause and, therefore, Aigaion was not entitled to rely upon the Act.
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