London Market - August 2010

XOL Reinsurance, Follow Settlements, Burden of Proof

IRB Brasil Resseguros SA v CX Reinsurance Company Ltd [2010] EWHC 974 (Comm)

The Commercial Court was asked to consider the appeal from the award (“Award”) of an arbitration tribunal (the “Tribunal”) in relation to six different individual cases concerning various reinsurance claims arising from the participation of IRB Brasil Resseguros SA (“IRB”) in an excess of loss reinsurance programme.  All of the underlying claims concerned class actions against US companies and related to US liability insurance.

The first two claims related to bodily injuries suffered due to silicon breast implants manufactured by AHS and 3M. 

The third and fourth claims, against Baxter and Revlon, concerned the production of products derived from blood contaminated by HIV and Aids. 

The fifth claim was against Corning, a company engaged in the use of asbestos.

The last claim, against Stauffer, a manufacturer of chemical and agricultural products involved an environmental pollution claim. 

Each of these claims was settled by the insurer, CX Reinsurance Company Ltd (CX Re), by way of a compromise agreement.

The Tribunal considered whether the sums paid under the compromise agreement were recoverable by CX Re against IRB as reinsurer.  The Tribunal found against IRB who appealed on the ground that the Tribunal had erred in law in their Award.

The four questions for the court to consider were:

1. What is the standard of proof necessary for a reinsured to prove their case under a “double proviso” follow settlements clause?  Is it on the balance of probabilities or arguability?  This question arose in respect of the claims against AHS, 3M, Baxter and Revlon.
   
2. When considering whether, under a follow settlements clause the proof of loss of a compromised settlement, is it appropriate to look at the underlying facts of the original claim or simply to look at the basis of the claim as compromised?  This question arose in respect of the claims against AHS, 3M, Baxter and Revlon.
   
3. In relation to a reinsurance contract containing a follow settlements clause, what is it necessary to prove in relation to a “losses occurring during” clause?  This question arose in relation to the claims against AHS, 3M, Corning and Stauffer.
   
4. What is the test for determining whether a loss ‘arises out of’ an event?  This question only arose in relation to the claim against Corning.

The first two questions involved the policies’ “NOTICE OF LOSS CLAUSE”, effectively a “double proviso” follow settlements clause.  The two provisos of the clause being:

(i) that the insurer must settle losses within the terms and conditions of the underlying policies, and

(ii) the settlement must be within the terms and conditions of the reinsurance.

The third question related to the policies’ “Period” clause, which stated:

“This reinsurance covers all losses as herein defined occurring during the period commencing with ……… and ending with ………, both days inclusive… ”

The clause relevant to the fourth question was the “EACH AND EVERY LOSS” clause, which stated:

“… The term “each and every loss” shall be understood to mean each and every loss and/or occurrence and/or catastrophe and/or disaster and/or calamity and/or series of losses… arising out of one event.” 

Mr Justice Burton held that:

1. Compliance with both provisos in the “double proviso” follow settlement clause had to be proven on a balance of probabilities.  Although the Tribunal may have expressed itself erroneously in the award, it had in fact applied the correct burden of proof.
   
2. The evidence required to discharge the burden of proof varies from case to case.  Where there is a compromise settlement, the relevant facts are those on which the compromise was reached, not the facts of the loss as it happened.
   
3. It was not necessary for the Tribunal to spell out the Period clause in their award.  Under US law the “triple trigger theory”, by which once a defect has been identified liability can be found on one of three different occasions, brings into play different periods of cover.  Under this theory, it was possible that the insurers could have been found liable for 100% of the loss.  The insurers had reached a settlement compromise by calculating what percentage of losses could be attributed to their period of cover.  This was a mere mathematical calculation but there was nothing to stop a court or arbitrator from relying on such to reach a conclusion.  The Tribunal had reached a reasonable and business decision and had made no error of law.
   
4. To determine whether a loss ‘arises out of’ an event it is necessary to consider the contractual context, including the type of peril insured against and the loss in question.  The Tribunal was right to conclude that the single event was the decision of the company, Corning, to engage in business involving the use of asbestos.

The Tribunal had not erred in law in reaching their conclusions.

Appeal dismissed.