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In a
dispute between insurers and their reinsurers arising out of the Exxon
Valdez oil spill, this case demonstrates the difficulties that can arise
when claims are compromised before trial in the absence of full "follow
the settlements" reinsurance cover, as well as finally providing
guidance on the recovery of the disputed Exxon losses from reinsurers.
Exxon,
the owners of the oil cargo involved in the spill in March 1989, spent
some $1.2bn on clean up and containment. Its subsidiary, Exxon Shipping,
spent around $800m. Lengthy litigation followed as Exxon attempted to
recover from its insurers under its global corporate excess ("GCE")
policy but that litigation was finally settled by agreement.
Although
a number of the excess of loss reinsurers accepted an obligation to
indemnify their direct insurers, others argued that some of the payments
to Exxon were not covered by the GCE policy and so refused. Most of
the reinsurance contracts were on the Joint Excess Loss Committee terms
that do not include a full follow the settlements clause, and this,
of course, gave reinsurers a better opportunity to challenge the original
settlements.
Insurers
issued recovery proceedings. The reinsurers, including Brandywine, argued
that the GCE policy was covered by English law and that Exxon's costs
were "a liability" covered under Section 3A of the policy.
The insurers, including the King Syndicate, argued that the policy was,
on the contrary, governed by New York law and that the claims were covered
under Section 1 of the policy.
Exxon had
in fact originally sued under all three Sections of the policy and had
received $300m under Section 1 and, at a later date, $480m under Sections
3A and 3B, a payment that was not apportioned between A and B. If Brandywine
were right, none of the Section 1 payment could be included in the calculation
of the ultimate net loss under the reinsurance policy and none of the
payments under Section 3A and 3B could be apportioned and included either.
Mr Justice
Colman found in favour of Brandywine. The GCE contract was governed
by English law. Oil pollution clean-up expenses were not covered under
Section 1 nor under Section 3B.
Insurers
had settled in the absence of a full follow the settlements clause,
without establishing they were legally liable first and without obtaining
their reinsurers' consent to do so and duly suffered the consequences.
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