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UK: The perils of follow clauses: a following underwriter may have to follow a settlement even if the settlement agreement purports not to bind them

07 April 2014

In this case the Commercial Court held that the Aigaion, one of the insurers of a ship – the St. Efrem, was required to follow a settlement entered into by a group of Lloyd's syndicates who were the lead insurers of the vessel under a separate policy, based on a proper construction of the follow clause in Aigaion's policy.

50% of the interest in the St. Efrem was insured by three Lloyd's syndicates (Catlin, Ark and Brit), 30% was insured by Aigaion (on different terms from those of the Lloyd's syndicates) and the remaining 20% interest was uninsured.  The Aigaion policy contained a follow clause which stated that it: "agreed to follow London's Catlin and Brit Syndicate in claims excluding ex-gratia payments"

In 2010, the ship grounded in Brazil and had to be towed to Abidjan, Côte d'Ivoire. A claim was subsequently made under both the Lloyd's and Aigaion policies.  The Lloyd's syndicates settled the claim for US$779,500 in total.  Clause 7 of that settlement agreement provided that the syndicates entered into the agreement each for their respective participation only and did not: "bind any other insurer providing hull and machinery cover in respect of the St. Efrem." The Lloyd's syndicates subsequently maintained that Aigaion was obliged to follow this settlement, which Aigaion denied.

The three preliminary issues to be determined by the Court were:

  1. Did the follow clause in the Aigaion policy require Aigaion to follow the settlement made under the lead policy?
  2. If so, was the follow clause actually triggered by the settlement agreement?
  3. Did the three Lloyd's syndicates agree (by clause 7 of the settlement agreement) that the settlement was not binding on the Defendant?

On the first point, Mr Justice Teare held that the clause should be reasonably understood as obliging Aigaion to follow any settlement entered into by the Catlin and Brit syndicates.  There was no dispute that "claims" included settlement of claims and the judge rejected Aigaion's argument that the follow clause was authorising Catlin and Brit to act on Aigaion's behalf when settling claims.  The judge found that introducing the concept of agency absent an agreement between Aigaion and the Lloyd's syndicates "unnecessarily complicate[d] the operation of the clause".  The simpler construction of the clause was also consistent with its purpose of simplifying the process of claims settlement.

Regarding the second issue, the judge held that the follow clause was triggered by the settlement agreement, even though it was expressly agreed not to be binding on Aigaion.  The judge found that to construe the clause otherwise would be "unreasonable and uncommercial".  The obvious purpose of the follow clause was to simplify claims settlement.  This purpose would be frustrated if the clause was held not to apply to an underwriter who settled a claim expressly on his own behalf only.

On the third issue, the judge agreed that the wording in clause 7 of the settlement agreement, that the Lloyd's syndicates were not binding "any other insurer providing hull and machinery cover in respect of the St Efrem", described Aigaion. The reasonable construction of this clause was that the Lloyd's syndicates were not purporting or intending to bind any other insurer, including Aigaion. However, the judge found that the purpose of the clause was not to confer a benefit on Aigaion but to protect the syndicates from any possible liability to Aigaion (under a fiduciary duty or duty of care).  Therefore, Aigaion was not entitled to rely upon the Contracts (Rights of Third Parties) Act 1999 ("the 1999 Act") to enforce clause 7 of the settlement agreement. In any event, reliance on Clause 7 would not assist Aigaion if the Lloyd's syndicates wanted to enforce the follow clause because they had not waived their right to rely on this clause as against Aigaion.

There are many different forms and scopes of follow clauses.  Each case will have to be considered on the particular wording of the follow clause in issue.  However, on the facts  of this case, it shows that where a policy contains a follow clause, a following underwriter could be bound by settlements made by the lead underwriter, even if the settlement agreement expressly states that the following underwriter is not bound.  Such clauses are likely to be included by lead underwriters to avoid assuming a fiduciary duty or duty of care to the following underwriter.

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