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UK: Robust approach to reinsurer's follow obligation
In a refreshingly short judgment, Field J adopted a robust, common sense approach in granting summary judgment to a cedant and refusing to allow a reinsurer to try to develop arguments that the underlying commercial settlement was reached without all proper and business like steps having been taken.
Tokio Marine was claiming sums due under a retrocession with Novae. Tokio Marine was a reinsurer of ACE. ACE had insured Tesco's operations in Thailand under a local policy and a master policy, which operated on a DIC/DIL basis. The policies were subject to Thai and English law respectively. The local policy had deductibles of either £10,000 or £100,000 (depending on the size of the store) per occurrence. The master policy provided for deductibles and SIRs of up to £16.65m in the annual aggregate in respect of claims arising out of any one occurrence. Occurrence was defined in the Master Policy, but not the local policy, as "…any one Occurrence or any series of Occurrences consequent or attributable to one source or original cause". There was also a 72 hours clause.
Tesco claimed £125m in respect of damage to 212 premises. ACE initially took the view that there were 11 deductibles under the 72 hours clause. In response, Tesco submitted a legal opinion that all occurrences were to be aggregated as single occurrence because the exceptional monsoon rain was the source or original cause of the flooding.
Discussions took place about settling the loss. Tesco offered to accept £82.5m subject to one deductible of £2.5m, provided the settlement was received in time for inclusion in its 2011/2012 accounts. Otherwise, it would carry out a full stock audit and its claim would be far higher than the original claim. ACE's internal assessment was that the claim was worth at least £113m and on a worst case basis could be worth even more. Therefore, a £82.5m settlement was "a once in a lifetime opportunity".
ACE consulted the reinsurers who agreed the proposed settlement, except for Novae as the relevant person was away. The claim was settled by ACE but Novae is disputing its liability to Tokio Marine under a retrocession. One of its argument was that it is not obliged to follow the settlement because ACE had not taken all proper and business like steps in settling the claim.
The judge had no difficulty in rejecting all of Novae's arguments and his reasons for doing so are only set out briefly in the judgment.
The judge held that even though ACE did not delve into the coverage under the local policy or whether Tesco's legal opinion about one occurrence was correct, the opportunity to settle for significantly less than ACE assessed the claim to be worth meant that there was nothing additional to be gained by investigating these points. "The settlement at £80m net was undoubtedly a good settlement" and there was no good reason why the ordinary presumption that Novae should follow the settlement should not apply.
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