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AIG
provided D&O cover to Smartforce. Faraday participated in the reinsurance
of the cover, which included the standard claims cooperation clause,
described as a condition precedent, that "… the Reinsured
shall upon knowledge of any loss which may give rise to a claim, advise
the Reinsurers … as soon as is reasonably practicable and in any
event within 30 days …".
Following a fall in the value of the shares of Smartforce and the initiation
of a class action by Smartforce's disgruntled shareholders, of which
AIG were aware in November 2002, formal notification was only given
to Faraday by AIG in April 2004. Faraday claimed this was too late.
They said that AIG had to give notice of circumstances that may give
rise to a loss as well as actual losses and even if this was not the
case, AIG were actually aware of the losses in November 2002 when they
created an internal loss notification document or at the latest in February
2004, when they posted a reserve.
Mr Justice Morison disagreed. The loss referred to was the "actual"
loss of the shareholders and it was not "actual" until it
was a proved fact ie that it was clear that the shareholders had bought
the shares at a value which was inflated due to the default of the directors
and officers. Posting a reserve had no bearing on the matter. AIG had
not breached the condition by being too late. Farady appealed.
The Court of Appeal held that AIG did know of a loss which might give
rise to a claim much earlier than 30 days before they actually notified
Faraday in April 2004. The loss envisaged in the clause did not necessarily
have to be the loss which subsequently constituted the claim. What the
reinsured had to know was "any loss or losses which may give rise
to a claim". On any view, the sharp fall in the share price in
November 2002 was a loss which "might" give rise to a claim.
It did in fact give rise to several claims which Smartforce notified
to AIG in December 2002. There was no reason why AIG could not have
notified reinsurers within 30 days of that date and should have done
so if the clause was going to work as intended. Faraday's appeal was
allowed.
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