Eagle Star Insurance Company Ltd. v J.N. Cresswell & Ors [2003] EWHC 2224 (Comm)

Case No 2001 Folio 1224[2003] EWHC 2224 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Friday 10 th October 2003
Before
THE HONOURABLE MR JUSTICE MORISON
Between
Eagle Star Insurance Company LimitedClaimantJ.N.Cresswell & OthersDefendant
Mr J.Flaux QC & Mr J.Drake (instructed by Laura Butler, in house solicitor at Claims Management Group Limited) for ClaimantsMr C.Edelman QC (instructed by Mayer, Brown, Rowe and Maw LLP) for DefendantsHearing Hearing dates : 23-24 July 2003
Approved

General Background

[1]This is the trial of preliminary issues. The Claimants, an insurance company, are seeking an indemnity from the Defendants, their Reinsurers. The first fifteen defendants are various Lloyd’s syndicates who subscribed to a policy led by the first defendants. The Lloyd’s underwriters subscribed to 42.64% of 60%. The remaining three defendants are insurance companies and their underwriters, led by the sixteenth defendant, subscribed to the remaining 17.36% of the 60%.[2]The Claimants issued a comprehensive general liability policy to Varian Associates Inc [Varian] for a period of one year from November 1969 to November 1970. They say that they reinsured their liability under the Varian policy on the terms set out in the Lloyd’s and Company reinsurance policies. During the currency of the Varian policy a number of environmental damage claims were made against Varian. Varian made a claim against the Claimants under the policy; the Claimants denied coverage. In July 1992, Varian started proceedings in the San Francisco courts against, amongst others, the Claimants. In October 1995, the Claimants entered into a Settlement Agreement with Varian under which the Claimants agreed to pay Varian an initial sum of US$1 million and to make further payments in the future in the event that Varian’s recoverable costs exceeded Varian’s insurance recoveries or US$30 million. The Claimants say that the defendants are liable (in their proportionate shares) to indemnify them in relation to their liabilities to Varian under the Settlement Agreement and in relation to their costs of defending and investigating the Varian claim [US$615,177.36].[3]The defendants say that they are not liable under the reinsurance policies because a condition precedent to their liability has not been fulfilled, namely clause (b) of the Claims Co-operation Clause, which they say gave them the control over the negotiation and settlement of claims, and they were not given the opportunity to take such control. They also say that the legal costs referred to are excluded by the terms of the policies.[4]With the consent of the parties, on 16 January 2003 I made an order directing the trial of preliminary issues on the basis of an agreed Statement of Facts. There is annexed to this judgment both the agreed issues and the facts upon which the court will proceed. The relevant terms of the various policies A. The Varian policy – Commercial Umbrella Liability Policy Declarations[5]The Claimants issued a comprehensive general liability excess of loss policy of insurance to Varian for the period 1 November 1969 to 1 November 1970. Item 4 of the declarations contained a schedule of Underlying Insurances. There was a General Endorsement which amended the Insuring Agreement by the addition of the following words:
“With respect to Insurance afforded by the underlying policy, the provisions of such policy are incorporated as a part of this policy except for any obligation to investigate and defend and pay for costs and expenses incident to any of the same, the amounts of the limits of liability, any “other insurance” provisions and any other provisions therein which are inconsistent with this Policy.”
B. The Lloyd’s Policy[6]The Lloyd’s policy was dated in London 7 April 1970 for the period 1 November 1969 to 1 November 1970. It provided reinsurance coverage for 42.64% part of 100% of 60% of original limits. The Varian policy limits (of US$1 million any one occurrence excess of primary limits or $25,000 for uninsured perils) are recited. The main Insuring obligation contains these words:
“Now we the Underwriters hereby agree to reinsure against loss to the extent and in the manner hereinafter provided. Being a Reinsurance of an warranted same gross rate, terms and conditions as and to follow the settlements of the Company [the Claimants] and that the Company retains during the currency of this Policy at least the amount stated in the Schedule as the retention on the identical subject matter and risk and in identically the same proportion on each separate part thereof but, in the event of the retention being less than that stated in the Schedule, the Underwriters’ lines to be proportionately reduced.”
The Company’s retention was specified to be 40%. The Policy also contained, by way of an addendum, a Claims Co-operation clause, which I set out in full: “The company [defined to mean the Claimants] agree (a) To notify all claims or occurrences likely to involve the Underwriters [the Lloyd’s Syndicates] within 7 days from the time that such claims or occurrences become known to them. (b) The Underwriters hereon shall control the negotiations and settlements of any claims under this Policy. In this event the Underwriters hereon will not be liable to pay any claim not controlled as set out above. Omission however by the Company to notify any claim or occurrence which at the outset did not appear to be serious but which at a later date threatened to involve the Company shall not prejudice their right of recovery hereunder. The books and other papers of the Company relating to this Reinsurance shall be open to the inspection of the Underwriters or their authorised representatives. The Underwriters hereon shall be liable for an amount representing the “ultimate net loss” over the limits expressed in the Schedule. The term “ultimate net loss” shall mean the sum actually paid in settlement of losses or liability after making deductions for all recoveries, all salvages and all claims upon other insurances or reinsurances whether collected or not and shall include all adjustment expenses arising from the settlement of claims (other than the salaries of employees and office expenses of the Original Assured and/or reassured) but excludes legal costs. All salvages, recoveries or payments recovered or received subsequent to a loss settlement under this Policy shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. Provided always that nothing in this clause shall be construed to mean that losses under this Policy are not recoverable until the Assured’s ultimate net loss has been ascertained.” (a) To notify all claims or occurrences likely to involve the Underwriters [the Lloyd’s Syndicates] within 7 days from the time that such claims or occurrences become known to them. (b) The Underwriters hereon shall control the negotiations and settlements of any claims under this Policy. In this event the Underwriters hereon will not be liable to pay any claim not controlled as set out above.[7]This Claims Co-operation Clause replaced one which was part of the Insolvency Clause, itself a part of the same attachment. The wording of the clause, which is stamped, in two places, “This Clause Void”, reads:
“Notwithstanding anything contained herein to the contrary, it is a condition precedent to any liability under this Policy that “(a) the Company shall upon knowledge of any loss or losses, which may give risk [sic] to a claim under this Policy advise the Underwriters thereof within seven days, (b) the Company shall furnish the Underwriters with all information available respecting such loss or losses and shall co-operate with the Underwriters in the adjustment and settlement thereof.”
[8]The Claimants also rely upon two other clauses in the Attachment: the Apportionment of Costs provision and the Insolvency Clause:
“Apportionment of Costs In the event of a loss arising to which the Underwriters hereon may be liable to contribute, no legal costs shall be incurred on their behalf without their consent being first obtained and if they so consent they shall contribute to the said costs in the proportion that their share of the loss as finally settled bears to the total sum payable. If, however, a settlement of the loss be practicable prior to taking the case into Court whether by compromise or otherwise for a sum not exceeding the limits stated in the Schedule hereto, no legal costs shall be payable by the Underwriters hereon. No settlement of a loss by agreement shall be affected by the Company for a sum in excess of the limits stated in the Schedule hereto, without the consent of the Underwriters.”
Insolvency Clause [part] ….. Being a Reinsurance of and warranted same (except as regards the premium amounts, and limit of liability and renewal agreement and except otherwise provided herein), terms and conditions as set forth in the Policy issued to the Original Assured by the Company and that the Company retains during the currency of this Policy at least the amount stated in the Schedule. This Policy to pay excess of that retention up to a maximum ultimate net loss any one occurrence and in the aggregate in any one policy year with respects to Products Liability and occupational disease. …” Insolvency Clause [part] C. The Companies’ Reinsurance Policy

Insolvency Clause [part]

[9]This is called Insurance Companies Collective Policy, is dated 8 June 1970 and covers the same policy period. By the policy, the named companies agreed to indemnify the Claimants in respect of the loss limited to the proportion set against each company’s name. The policy simply stated that “It is warranted that this Policy is subject to the same terms, limitations and conditions of [the relevant] Lloyd’s Policy .. issued on the identical subject matter and risk”. The agreed facts[10]A number of environmental pollution claims were asserted against Varian. Varian made a claim against the Claimants under the Varian Policy. In July 1992, Varian commenced proceedings against Varian and others in the Superior Court of the State of California, City and County of San Francisco. Varian sought indemnity under the Varian policy and declaratory relief. The Claimants denied coverage. In October 1995 Varian and the Claimants agreed to compromise the claims made in the litigation and entered into a Settlement Agreement and Release. That Agreement was executed by Varian and the Claimants on 30 October 1995.[11]For the purposes of this hearing it is agreed that during the period from June to August 1990, a letter dated 6 June was sent by the Claimants’ brokers to the First Defendant, the lead underwriter, and to the 18th Defendant. The first Defendant scratched the document in the following terms:
“R/I Eagle Star 12 Mos at 1/11/69 $1M xs $25,000. Seen, without prejudice to Reinsurers’ Rights. Status report by 30/09/91 please to include evaluation of potential exposure to this protection. A.L.S. 19/6/91.”
Thereafter, in June 1991 a manuscript memorandum entitled “Varian Associates – Pollution” was shown by the Claimants’ brokers to various Underwriters including the 18th Defendant. And in about August 1992 a letter dated 13 August 1992, addressed to the Claimants’ brokers, entitled “Initial Reinsurance Claims Advice” was shown by the brokers to various underwriters including the 18th Defendant.[12]The Defendants did not control the negotiation or settlement of the claim or claims in respect of which the Claimants seek an indemnity. It is accepted that the Claimants paid $1million to Varian pursuant to the Settlement Agreement and Release and that the Claimants incurred costs and expenses totalling £615,177.36 in defending and investigating the claim against them by Varian.

The relevant pleadings

[13]The basis of the Defendants’ defence to the claim is encapsulated in paragraph 8 of the Defence. It is pleaded that “..the Defendants can have no liability to Eagle Star under either the Lloyd’s Policy or the Companies Policy because a condition precedent to such liability has not been satisfied. In particular:(1) By the effect of clause (b) under the heading “Claims Co-operation Clause” it was a condition precedent to any liability of the Defendants to indemnify the Claimant in respect of any claim that the Defendants should control negotiation and settlement of any such claim. …(2) The Defendants did not control the negotiation or settlement of the present claim or claims, and neither were they given the opportunity to do so….”

The Parties’ arguments

[14]For the Claimants, Mr Flaux QC made the following submissions:(1) Sub-paragraph (b) does not give rise to a condition precedent because it does not impose any positive obligation on the Claimants. On a proper interpretation of the clause, the Claimants are bound to notify the Reinsurers of any claim or occurrence in 7 days from the date when such became known to them, and that once so notified the Reinsurers were obliged to control the settlements and negotiations. And only if Eagle Star obstructed the Reinsurers’ endeavours to take control would the Reinsurers be entitled to reject liability. It was significant that the Reinsurers were not seeking to argue that sub-paragraph (a) imposed a condition precedent to recovery under the reinsurances or that it had been breached.(2) Alternatively, if subparagraph (b) does impose some positive obligation on the Claimants the obligation could not properly be described in law as a condition precedent to liability.(3) Alternatively, if the clause does constitute a condition precedent, the condition can only be regarded as unfulfilled where the Reinsurers had sought to control the negotiations and settlement and the Claimants had obstructed them in some way. This is not an alleged breach.(4) I was referred to a number of authorities to support the following propositions: (a) Hill v Mercantile and General Reinsurance [1996] Lloyd’s Reinsurance Law Reports page 341 at page 350, a case concerning a ‘follow the settlements clause’. The proper construction of such clauses does not involve “questions of deep principle”. It is simply a matter of construing the clause against the relevant background. There is a tension between, on the one hand, the desires of the Reinsurer not to be bound by what might be regarded as imprudent settlements made by the Insurer, and, on the other, the desire of the Reinsurer not to have to re-investigate a matter about which the Insurer may well know more. As Lord Mustill put it:
“This conflict is quite easily managed where the insurance and reinsurance are on the same terms and where the parties are essentially co-adventurers: for example, in participatory reinsurance or facultative reinsurance with a large retention. Here, the interests of the direct insurers and the reinsurers are broadly the same, and it is not imprudent for the reinsurers to put themselves unconditionally in the hands of their reinsured for the settlement of claims which will be passed on to them”. (b) Investors Compensation Scheme Ltd v West Bromwich BS [1998] 1 WLR 896 at 912H –913C, the speech of Lord Hoffmann: “Almost all the old intellectual baggage of "legal" interpretation has been discarded. The principles may be summarised as follows: (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] 2 W.L.R. 945 (5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. 19851 A.C. 191, 201: ". . . if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense." (c) The clause is to be construed in the context of the contract as a whole: per Phillips J in Cox v Bankside [1995] 2 Lloyd’s Law Reports page 437 at page 453, cited with approval in the Court of Appeal in George Hunt Cranes Ltd v Scottish Boiler & Gem Line Co Ltd [2002] Lloyd’s Law Reports page 178 at paragraph 10. per Potter LJ. (5) Here there is a follow the settlements clause, together with an apportionment of costs clause which contains the words “no settlement of a loss by agreement shall be effected by [the Claimants] for a sum in excess of the limits stated in the Schedule hereto without the consent of the Underwriters”
. Had the follow the settlements clause stood alone then, assuming that the Claimants had settled a claim which, as a matter of law, fell within the risks covered by the reinsurance and the Claimants had acted in good faith and in a proper and business-like manner, the Reinsurers would have been obliged to indemnify them: Insurance Company of Africa v Scor [1985] 1 Lloyd’s Law Reports page 312 at page 330 [per Lord Justice Robert Goff]. The addition of the words in the apportionment of costs clause makes it clear that condition (b) was not a condition precedent to the Reinsurers’ liability as the Insurers were entitled to settle a claim (subject to the assumptions above) and in that event the Reinsurers would be obliged to follow the settlement and concede the indemnity. (6) Applying those principles, the structure of the contract of reinsurance requires the Insurers to notify the reinsurers of claims within 7 days of their becoming aware of them. Upon notification, either the Reinsurers are obliged to take over the investigation or they have an option to do so. Unless they do so, the Insurers are entitled to settle claims and the Reinsurers are obliged to follow the settlements. If they do comply with their obligation or, as the case may be, exercise their right, to take over the investigations and negotiation then the Reinsurers would not be obliged to follow the settlement made by the Insurers. “In this event” in the second sentence of clause (b) of the Claims Co-operation Clause means in the event that the Reinsurers have taken control. On the agreed facts, the Reinsurers did not control the negotiation or settlement of the claims. (7) The Court should refrain from construing a policy condition as a condition precedent to liability “unless absolutely constrained to do so” : Merkin, Reinsurance Law at C4.3-09. If Reinsurers wish to have such a term then clear words are needed. No part of the Claims Co-operation Clause is expressed to be a condition precedent. Instead of clear words the clause is badly worded and rather obscure. The word “this Policy” must mean this reinsurance policy; yet the Defendants wish to construe it as though it meant the underlying policy. The words “In this event” refer to an undefined event. If they mean ‘in the event that the Reinsurers take control’ that makes the first sentence non obligatory. The language used in the second sentence is consistent with a breach of contract rather than a condition precedent. If the event is apt to cover a situation where the Reinsurers sit on their hands and do not take control of negotiations and settlement, but leaves the Insurer to negotiate and pay at his own peril, that would render the clause uncommercial. (8) At best, the clause is ambiguous and the Court should choose a construction which tends towards performance rather than avoidance: see Youell v Bland Welch [1992] 2 Lloyd’s Law Reports, page 127 at page 134. (9) If the parties had intended the clause to be a condition precedent they could and would have said so. The deleted clause contained just such a clause. When the new clause was inserted and the old one ‘voided’ the parties presumably applied their minds to the issue.[15]At the outset of the hearing before me, Mr Flaux QC for the Claimants indicated that the Claimants were prepared to concede that(a) the Companies Policy did incorporate the aforesaid addendum (see issue 1) and that(b) the “Claims Co-operation Clause” was not rendered ineffective by reason of the multiple reinsurers (see issue 2). I did not therefore hear argument on these issues.[16]For the Reinsurers, Mr Edelman QC argued as follows:(1) Sub-paragraph (a) of the Claims Cooperation clause is not a condition precedent; whereas subparagraph (b) is. Thus, if the Claimants were sued to judgment then the reinsurers would be liable: see Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd No 2 [2001] Lloyd’s reports IR 667, paragraph 41. Subparagraph (b) is not a full claims control clause; rather, it gives the reinsurers control over settlement negotiations.(2) The words in subparagraph (b) [“will not be liable to pay any claim not controlled as set out above”] are clear. If a claim is settled behind the Reinsurers’ backs then there will be no liability.(3) Provided that the effect of a condition precedent is clear, there is no need for any precise form of words. Thus, “no claim under this policy shall be payable unless the terms of this condition have been complied with” are sufficiently precise to create a condition precedent [See George Hunt Cranes Ltd v Scottish Boiler and General Insurance Co Ltd [2002] Lloyd’s Reports 178; or “Payment of Claims … is dependent on you … (d) reporting in writing to us as soon as possible … (e) forwarding to us immediately upon receipt every receipt writ …” which were also held sufficient to create a condition precedent [See Bankers Insurance Company Limited v South and Gardener [2003] EWHC 380, per Buckley J. at paragraph 32].(4) It is unsafe to place any reliance on words which have been deleted. There is ample authority to support this submission. Apart from anything else, the fact that a more sweeping clause was deleted says nothing about the proper interpretation of the words in issue.(5) The words in subparagraph (b) [“in this event”] must either mean ‘in the event of negotiations or settlement taking place (whoever controls them)’ or, less literally, ‘in these circumstances’. This clause is concerned with “any claims under this Policy” and those words must mean ‘any claims which will ‘hit’ the reinsurers under the policy’. The last sentence of the Apportionment of Costs provision [“No settlement of a loss by agreement shall be effected by the Company for a sum in excess of the limits stated in the Schedule hereto without the consent of the Underwriters”] re-affirms the effect of the ‘condition precedent’ in subclause (b). Thus, the Claimants were entitled to settle claims below the excess limits in the reinsurance contract, but were not entitled to do so in relation to settlements where the Reinsurance policy would be ‘hit’. A claim which is “under this Policy” will be a claim which is under the original underlying policy but which is of a size such as to make it a claim under the reinsurance Policy.(6) The ‘follow the settlements’ clause is “emasculated” by subparagraph (b). The plain intention of the subparagraph was to circumscribe the power of the Reinsured to make settlements which were binding on the Reinsurers. The clause only applies to ‘negotiations and settlement’ of claims it does not apply to investigations nor to the contesting of court proceedings. Further, the clause only applies to the “control” of negotiations and settlement. Therefore, the Reinsured is entitled to conduct negotiations under the control of the Reinsurers and if they make a settlement under such control then the Reinsurers would be obliged to follow that settlement. Therefore, the ‘follow the settlement’ clause is not inconsistent with what Mr Edelman QC submits is the true construction of subparagraph (b).(7) The subparagraph does not impose a duty on the Reinsurer to take control because it makes no sense that the subparagraph should impose a duty on party A with a consequence for breach of duty adverse to party B.(8) Although it is accepted that the standard Reinsurance form of Policy contains a full reinsurance clause which includes a "follow the settlements" obligation, the addendum contains a similar full reinsurance clause which does not include those words. Since the presumption is that printed words will give way to written words the parties’ intention must have been that the full reinsurance clause in the addendum was intended to override the full reinsurance clause in the form of Policy.

The decision

[17]It seems to me that the words ‘dog’s breakfast’ used by counsel in the submissions is an apt description of the way this policy has been drawn; for example, the existence of two potential reinsuring clauses which are different, and the ‘difficult’ wording of subparagraph (b). However, the assumption must be that the parties had a common understanding as to the meaning of the language they had chosen to express their bargain and it is the Court’s task to ascertain it.[18]In my view, the first point to deal with is the last one made by Mr Edelman QC in his able submissions: the two reinsuring clauses. It is significant that this was not a point which had been pleaded in the defence and was not part of his lengthy skeleton argument [22 pages]. It was first made in a “supplemental” submission very shortly before the hearing. It seems to me that it is a point which might perhaps have best been left in the cupboard. The written clause is contained in an Addendum under the heading “INSOLVENCY CLAUSE”. Under that clause, if the Claimants became insolvent then the reinsurers undertook to meet claims allowed by the liquidator, without reduction. However, the liquidator is required to give written notice of any pending claim on the liquidator which might possibly impact on the reinsurers. The reinsurers were given the right to investigate such claim “and interpose, at their own expense in the proceeding where such claim is to be adjudicated any defence or defences which they may deem available to the Company [the reinsured] or its liquidator …” There then follows a provision as to costs, which is irrelevant and finally there is a reinsurance clause which does not include a ‘follow the settlements’ provision.[19]It seems to me that this reinsuring clause applies and applies only in the event that the reinsured goes into liquidation. It is not difficult to see why, on a liquidation, the Reinsurers would be anxious to assume the rights to investigate and deal with claims themselves. It was probably the parties’ intention and expectation that the liquidator would not himself settle any claim, but would, after notification, leave the Reinsurers to take up the running and decide whether to defend, pay up or compromise. There is nothing inconsistent between this reinsuring clause and the printed version: the former is dealing with what happens during a liquidation, the latter is dealing with the position which otherwise applies.[20]One is left, therefore, with a binding obligation on the Reinsurers to ‘follow the settlements’ made by the reinsured. As Lord Mustill explains, such a clause is not unusual at least where the Reinsured and Reinsurers are co-venturers, in the sense that each has a significant financial stake in resisting claims and settling them to their mutual advantage. Here, it was a condition of the policy that the reinsured retained 40% of the risk throughout the policy. Mr Edelman submitted that that did not preclude the Reinsured from seeking to cover their exposure through excess of loss protection [in the absence of words such as “net for its own account”]. Whether or not that is right, the fact is that the Reinsured were committed to a 40% share of the risk, whether with or without insurance. The printed ‘follow the settlement’ clause forms part of the basic reinsurance obligation and is a reflection of the fact, which makes commercial good sense, that both parties were ‘in it’ together and the Reinsured could be trusted to act in their mutual interest. It seems to me that clear words are required to alter this fundamental position. On Mr Edelman’s argument, this obligation on the reinsured was extinguished. His hypothesis that a settlement might be made which was managed by the Reinsured under the Reinsurers’ control seems unrealistic. But in any event, managing a settlement under the control of the Reinsurers is an example of the Reinsurers exercising control of the negotiations and would fall within the first sentence of subparagraph (b). The question is whether subparagraph (b) of a Claims Cooperation Clause has this effect.[21]It is significant that Mr Edelman does not contend that subparagraph (a) is a condition precedent. In other words, if there were an omission by the Reinsured to notify the Reinsurers timeously of an occurrence which at the outset did appear to them to be serious and which was likely to ‘hit’ the policy then the Reinsurers would not be entitled to deny liability despite the words “shall not prejudice their rights of recovery hereunder”. The obligation to notify claims is commercially important, since the Reinsurers have to think about setting appropriate reserves. The question is why should subparagraph (a) lead to one result and subparagraph (b) to another?[22]It seems to me that the sensible construction of subparagraph (b) is that the Reinsured who, by virtue of the ‘follow the settlement’ provision, had the right to settle claims which would bind the Reinsurers, was conceding to the Reinsurers the right to take control of negotiations and settlement, where the Reinsurers so wished or so required. If they did take control of the negotiations then a settlement of a claim made by the Reinsured would not be a settlement to which the ‘follow the settlement’ clause applied, and the Reinsurers would not be liable. I do not think that the clause could sensibly be regarded as imposing any obligation on the Reinsurers to take control, for the reason given by Mr Edelman: there would be disharmony between the obligation and the consequence. Although the words of the first sentence of this subparagraph appear to contemplate that the Reinsurers will take control of all settlements and negotiations, the words, “in this event” are apt to show that the Reinsurers might well not wish to take control. The Apportionment of Costs clause contemplates that settlements may be made by the Reinsured, with the Reinsurers’ consent. Thus, not all settlements were to be made by or under the control of the Reinsurers. In other words, the words “in this event” mean ‘in the event that the Reinsurers (exercise their right to) take control of negotiations and settlement’ and the words “pay any claim not controlled as set out above” mean ‘pay any claim which was settled outside the control of the Reinsurers’. Therefore, on what I regard as the proper construction of this subparagraph no question of a condition precedent can arise.[23]But, I am reinforced in my view that subparagraph (b) does not amount to a condition precedent by reason of the fact that it does not say so. The deleted clause shows that the words “a condition precedent” were in the vocabulary of the parties and must be assumed to have been in their minds. It would have been only too easy to have inserted those words either before subparagraphs (a) and (b) [both would seem more logical than just one] or just (b) if the parties had really intended (b) to be a condition precedent. Further, although questions of construction are best dealt with without restrictive rules which may distort the attempt to find the parties’ true meaning, a condition precedent needs, I think, to be clearly spelt out. Subparagraph (b) singularly fails to do this.[24]As to the Apportionment of Costs provisions, it seems to me that whilst the policy required the Reinsurers to follow a settlement made by the Reinsured without their consent, in such a case the Reinsured would lose the right to recover the costs they incurred. The definition of “ultimate net loss” for which the Reinsurers were liable to the reinsured excluded “legal costs”. Thus, in order to recover their legal costs, the Reinsured has to rely on the Apportionment of Costs provision which required consent. Issues of estoppel and such like may arise as to whether the Reinsurers can rely on an absence of consent in this case and that is a matter for another day.[25]The overall structure of this policy makes commercial sense, in my view. First, there is “a follow the settlements” provision which is quite usual where there are, as here, co-adventurers. The Reinsured could be trusted not to make foolish settlements when he retained a 40% share of the risk. They could make settlements with or without the Reinsurers’ consent. But if significant costs were incurred then it would be in the Reinsured’s interest to obtain consent. Notifying the Reinsurers of a substantial claim [under (a)] or seeking their consent to a settlement might provoke the Reinsurers into taking control of the settlement and any further negotiations. They had the right to do so by (b). If they did so, then it would not be open to the Reinsured to subvert what they were doing and settle the case behind their backs. If the Reinsured did so then they were not entitled to recover under the policy.[26]The parties will wish to draw up an order reflecting the terms of this judgment.