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Royal
Sun Alliance ("RSA") were D&O liability insurers of CocaCola's
directors. In October/November 2000, CocoCola investors issued complaints
in the US District Court (Northern District of Georgia, Atlanta Division)
against CocoCola and named directors. RSA knew of the existence of the
complaint by 12 December 2000 and had copies by 30 December 2000.
RSA reinsured its exposure under the D&O policy with Dornoch and
Others ("Reinsurers") under a contract which included a full
reinsurance clause and a claims co-operation clause ("CCC")
the latter of which provided as follows:-
"Notwithstanding anything herein contained to the contrary, it
is a condition precedent to any liability under this policy that:-
(a) The Reinsured shall upon knowledge of any loss or losses which may
give rise to a claim under this policy, advise the underwriters thereof
by cable within 72 hours;
(b) The Reinsured shall furnish the underwriters with all information
available respecting such loss or losses and the underwriters shall
have the right to appoint adjusters, assessors and/or surveyors and
to control all negotiations, adjustments and settlements in connection
with such loss or losses".
RSA did not notify Reinsurers until 19 January 2001 and Reinsurers consequently
denied liability for the claim on the basis of a breach of this condition
precedent.
The issues before the Court of Appeal were:-
1 Whether the loss referred to in the clause was an actual loss that
gave rise to a claim under the reinsurance, rather than merely a claimed
loss; and
2 Whether RSA had to have actual knowledge of that loss before RSA had
to notify Reinsurers.
The Court of Appeal upheld the Lower Court in finding that Reinsurers
could not rely on the CCC in the circumstances of this case because:-
1 The word "loss" in the CCC meant "actual loss"
not merely claimed loss.
2 Whether actual loss had been suffered was still in dispute in the
US proceedings, and so RSA could not yet have knowledge of an actual
loss, and was not in breach of the CCC.
As neither the loss suffered by third party claimants (against which
they sought indemnity from the directors) nor the insured directors'
consequent loss were yet established as actual loss, it did not matter
in this case which RSA was obliged to notify under the CCC in the reinsurance.
Longmore LJ, however, commented obiter that had it been relevant he
would have decided that the loss concerned was that of the third party
claimants. Were that not the case, it would not invariably follow that
the second part of the clause (giving claims control to Reinsurers)
would be "otiose in practically every case in which it must be
intended that it have some value)". Nevertheless, that was the
effect in this particular case, and so could be in many others, where
loss alleged to be suffered by the claimant is in dispute with the insured.
Reinsurers had argued that this could not have been the intention of
the parties. They had propounded a purposive approach to interpretation
as enunciated by Lord Hoffman in Investors Compensation Scheme Limited
v West Bromwich Building Society (1998) 1WLR 896, and which has increasingly
found favour in the Courts. However, Longmore LJ commented:-
"Attractive as that proposition is in general, there are dangers
in Judges deciding what the parties must have meant when they have not
said what they meant for themselves. This is particularly dangerous
when the parties have selected from the shelf or the precedent book
a clause which turns out to be unsuitable for its purpose. The danger
is then intensified if it is only one part of such clause which is to
be construed in accordance with "business commonsense. If the parties
had addressed their mind to the question of which clause out of a number
of standard terms they would have used for the particular requirement
which they had in mind, it is by no means obvious that they would have
selected a form which was as draconian as the one unwisely but, in fact,
chosen."
Longmore LJ concluded:-
"It does not therefore seem to me to be any part of the Court's
function to go out of its way to give a purposive or business commonsense
construction to one part of a clause in favour of one party and thus
enable that party to seek to take advantage of another part of the clause
which has draconian consequences for the other party. If the parties
had decided to choose an appropriate form of clause suitable for the
reinsurance of a reinsured's liability rather than its property, they
might very well have chosen a clause with a longer notice period than
72 hours or at least a clause which did not make 72 hours' notice a
condition precedent to any liability on Reinsurers' part."
This strict interpretation of the first part of the clause should not,
however, signal a return in the construction of contracts generally
to literalism rather than taking account of business commonsense. The
Court's literal interpretation of the wording in this case must be viewed
in the light of the unnecessarily draconian nature of the second part
of the clause, the inclusion of which the Court clearly considered in
itself to be contrary to business commonsense, and in the light of the
fact that the clause is in effect an exemption clause, which Courts
will always interpret narrowly Longmore LJ observed:-
"A reinsurer of a reinsured's liability to a third party is prima
facie liable to the extent of his subscription once it is ascertained
that the reinsured is liable to that third party. A condition precedent
to the liability of the reinsurer operates as an exemption to that prima
facie liability. It is a well established and salutary principle that
a party who relies on a clause exempting him from liability can only
do so if the words of the clause are clear on a fair construction of
the clause . . . In my view, the terms of the Claims Control Clause
on which the Syndicates rely do not sufficiently clearly exempt them
from liability."
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