UK: Actions of Insurers in Respect of the Retention and One Reinsurer's Share did not Breach Claims Control Clause
The High Court recently handed down a judgment in which a claims control clause in a reinsurance contract was held not to be breached by the conduct of the reinsured in agreeing to pay the insured their retention and the share of one reinsurer who had been involved in settling that part of the claim.
In Beazley Underwriting Limited and others v Al Ahleia Insurance Company and other companies  EWHC 677 (Comm), a claim for repair or rebuilding of a faulty crude oil storage facility in Kuwait was referred to insurers (the Defendants, led by Al Ahleia Insurance Company (AIC), who handled the claim and represented the other Defendant insurers). Apart from a 10.5% retention, the risk was reinsured by the Claimants and AIG (not party to this litigation). The Reinsurance Contract, a Lloyd's slip policy, contained a claims control clause (CCC). This made it a condition precedent to liability that the reinsurers be notified of any loss as soon as reasonably practicable, that they should have access to all available information, be able to appoint relevant experts and to control negotiations, adjustments and settlements, and that settlements should not be concluded or liability admitted without their prior approval.
In this case, all reinsurers initially denied liability on the basis of an exclusion regarding a defect in the design of the tank. Later, however, AIG (who as joint lead reinsurers with Beazley, had reinsured 20% of the risk) and AON (the broker), both of whom wished to retain a positive commercial relationship with the insured (the Kuwait Oil Company/Kuwait Petroleum Company), agreed that AIG would pay their share of the loss as independently assessed by AIG's independently-appointed loss adjuster.
The court held that discussions (particularly the insured's statement to the insurer of how they wanted the claim to be handled) were not negotiations (they were, at most, the first step in a negotiation) and the resulting settlement between AIG, AIC and the insured did not constitute a settlement or an admission of liability in respect of the part of the claim which remained to be paid by the other reinsurers. The claim was therefore dismissed, so the case will now progress to the hearing of the secondary issue (the scope and effect of the exclusion for defects in design), scheduled for November 2013.