Royal & Sun Alliance Insurance Plc v Dornoch Ltd & Ors [2004] EWHC 803 (Comm)

Case No 2002 Folio 416

[2004] EWHC 803 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEENS BENCH DIVISION

COMMERCIAL COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 22 nd April 2004

Before

THE HONOURABLE MR JUSTICE AIKENS

Between

Royal and Sun Alliance Insurance PlcClaimant

Dornoch Limited and othersDefendants

Jonathan Sumption QC and Guy Morpuss (instructed by Herbert Smith) for Claimant

Michael Harvey QC and David Lord (instructed by Mills & Reeve) for Defendants

Hearing Hearing dates : 5 February 2004

Judgment

Synopsis of the case

[1]In this trial the Claimant reinsured (“RSA”) claims a declaration that the Defendant Reinsurers, who are syndicates at Lloyd’s (“the Reinsurers”), are obliged to indemnify RSA under two contracts of reinsurance in respect of any losses that RSA may suffer as a result of having insured Coca Cola Company and its directors and officers for liabilities to third parties. There is only one defence to the claim. This is that RSA did not give notice of “the loss” within the time required in a standard form of Claims Control Clause (“CCC”) in the re-insurance contracts between RSA and the Reinsurers. The key words in the clause are:

“Notwithstanding anything herein contained to the contrary, it is a condition precedent to any liability under this policy that: a) the Reassured shall upon knowledge of any loss or losses which may give rise to claim under this policy, advise the Underwriters thereof by cable within 72 hours.”

Two interesting questions of construction of this clause arise. They are: whose “loss” is being referred to in the CCC; and what constitutes “knowledge of a loss which may give rise to a claim under the policy”?

[2]The original insurance, to which RSA subscribed to the extent of 21.5%, is a “Master Subscription Policy” (“MSP”), in favour of the Coca Cola group of companies for the period April 1997 to April 2002. The policy has ten coverage sections which insure a wide range of risks. These include, under Section V, Director and Officers’ Liability. That Section insures losses to Coca Cola that arise from claims against the company itself or arise from claims against directors and officers whom the company has indemnified. It also insures against losses when Coca Cola has not indemnified the directors and officers in respect of claims made against them. This original insurance is on a “claims made” basis. It has provisions stipulating that Coca Cola and its directors and officers must give the insurers written notice of any circumstances which might subsequently give rise to a Claim. The policy also provides that it is a condition precedent to the right of indemnity that the insurers have been notified of a claim “as soon as practicable”.

[3]RSA reinsured 100% of its participation on Section V of the MSP. The reinsurance was by way of two Lloyd’s slip policies which represented two layers of reinsurance. Originally the period of this reinsurance cover was from 1997 to 2000. However the two slips were submitted for re-signing to extend the cover from 2000 to 2002. All the reinsurance slip policies are in the same terms and all incorporate the CCC quoted above.

[4]The Coca Cola Company and three of its directors and officers were defendants in two “Class actions” brought in the US District Court in Georgia. The two actions have been brought on behalf of persons who had bought shares in Coca Cola between 21 October 1999 and 6 March 2000. The Complaints filed in each action allege that the officers and directors of Coca Cola had dressed up the financial statements of Coca Cola to overstate the company’s earnings. The Complaints assert that this exercise artificially enhanced the level of the company’s stock, so that the plaintiff investors bought the stock at inflated prices. Subsequently the stock prices fell dramatically. The complainants allege that investors have suffered large losses as a result of the acts and defaults of the officers and directors of Coca Cola.

[5]The first action (known in this trial as “the Carpenters action”) was begun on 27 October 2000. The brokers gave notice of the action to the leader of the original insurance, (Allianz Insurance Company – “Allianz”) on 1 November 2000. The second action (known as the “Lavalla action”) was begun on 13 November 2000. That was notified to the lead original insurer on 20 November 2000. Allianz informed the other original insurers, including RSA, on 12 December 2000. Marsh (UK), the brokers for RSA, sent copies of the Complaints in each of the two Class Actions to RSA on 30 December 2000. RSA informed the Reinsurers of these claims on 19 January 2001, which, it is accepted, is more than 72 hours after RSA had been informed of the claims in the two class actions.

[6]Mr Harvey QC, on behalf of the Reinsurers, accepts that the word “loss” in the CCC must mean an “actual loss” as opposed to an “alleged loss”. He says that the claimants in the two actions have suffered actual losses by buying shares at an inflated price and then seeing the shares fall in value. He submits that the word “loss” in the CCC of the reinsurance policies refers to the loss of the claimants against Coca Cola ie. the investors bringing the two Class Actions. He says that when RSA was told of the two Class Actions on 30 December 2000, then, objectively speaking, RSA had knowledge of the actual “losses” suffered by the claimants in those actions. Moreover, objectively speaking, RSA had knowledge of losses that “may give rise to claim (sic) under this [reinsurance] policy”, in the words of the CCC. Therefore RSA was obliged to inform the Reinsurers of those “losses” within 72 hours of having that knowledge. Because (as is accepted) they did not do so, he submits that the Reinsurers are not obliged to indemnify RSA under the reinsurances.

[7]Mr Sumption QC, on behalf of RSA, submits that “loss” in the CCC refers to the loss of the Coca Cola group and its directors and officers. He says that only such losses can give rise to a claim on the original insurance and so only those claims “may give rise to a claim” on the reinsurance. Section V of the original insurance is a liability insurance. Therefore, Mr Sumption submits, in terms of that liability insurance, RSA’s insured, ie. Coca Cola and its directors and officers, only suffer a “loss” when their liability is ascertained either by settlement of the Class actions or adjudication of them by the District Court in Georgia. Until that happens, there is no “loss” that “may” give rise to a claim under the reinsurance. Therefore there is no obligation on RSA to inform the Reinsurers until the Class actions have either been settled or the Georgia Court has adjudicated on them.

[8]Mr Sumption has a second argument. Even if “loss” in the CCC means the loss of the claimants against the original insured, RSA did not have knowledge of an actual loss in December 2000/January 2001. RSA only had knowledge of claimed or alleged losses. Therefore there was no obligation under the CCC to advise the Reinsurers of what were only claims, not losses.

[9]So the two issues in this case concern the proper construction of the wording of one paragraph in the CCC. The principal issue is whether the word “loss” refers to the loss of the claimants against Coca Cola and its directors and officers, or the loss of Coca Cola itself and its directors and officers. The second issue is: what constitutes knowledge of the relevant “actual loss”.

[10]Because the issues concern construction only, there was no need for either side to call oral evidence. The trial, which lasted one day on 5 February 2004, was confined to counsels’ submissions, which were admirably concise and for which I am very grateful.

The Facts in more detail: the Master Subscription Policy

[11]The MSP was arranged in three layers; a Primary Layer, a first excess layer and a second excess layer. The limit of indemnity on the primary layer was US$ 15 million any one loss and in aggregate, with one exception, which is immaterial. On the first excess layer it was US$ 25 million in excess of the primary limit. The second excess layer was for US$ 75 million excess of the first excess layer. In early 1998 RSA and other insurers reinsured with Coca Cola’s captive reinsurer, Coca Cola Reinsurance Services Ltd, (“CCRS”) which meant, effectively, that CCRS retained up to US$15 million per occurrence in respect of claims on the MSP and other policies. The parties agreed that this arrangement was not relevant to the present issues. A consortium of insurers The insurers of the MSP are referred to collectively in the MSP as “The Consortium”: see Common Policy Definition D: B1/page 58 participated on all layers of the MSP, although the percentage participation of each insurer was not the same on each layer. Allianz took the lead on each layer. RSA wrote a line of 21.5% on each of the layers of cover. RSA was prepared to do this only on condition that it could re-insure 100% of its risk in respect of Section V of the MSP. That was arranged with the Reinsurers.

[12]It is accepted by both sides that, prior to the placement of the reinsurances of all RSA’s risk in respect of Section V of the MCP, the leading underwriter of the Reinsurers, (Mr James Gerry), was provided with a copy of the proposed wording of Section V of the MSP. So the structure and wording of Section V of the MSP are part of the background facts against which the wording of the CCC in the reinsurance policy terms has to be interpreted. In particular, the definitions in the MSP are relevant to the issues to be decided, although not directly so.

[13]Section V of the MSP is headed “Directors and officers Liability (This section is Claims Made)”. Clause I of the Section identifies the “Named Insured” as “The Coca Cola Company or any Subsidiary Company”. The Section is divided into two parts. The first part deals with losses to the Coca Cola companies arising from claims against them or against directors and officers who have been indemnified by the companies (Clauses II to VII). The second part of the Section, headed “Non – Indemnifiable Coverage” deals with losses arising from claims against directors and officers who have not been indemnified by the companies (Clauses VIII to X111).

[14]The Insuring Clauses of the two parts of the Section are, respectively Clauses II and VIII. Clause II states that the Consortium of insurers will indemnify the Named Insured for “Loss” As defined: see below. arising from(a) (A) any “Securities Claim” As defined in Clause V “Definitions” paragraph F. Essentially a “Securities Claim” is one brought against the Named Insured which alleges a violation of the US Securities laws and such laws of other countries. that is first made against the Named Insured during the Policy Term (or various extensions to that period which do not matter); and

(b) (B) any “Claim” As defined in Clause V. “Definitions” paragraph A. Essentially a “Claim”, which includes a “Securities Claim”, is a written demand for the payment of money or the service or receipt of a Complaint or other similar pleading made against a Director or Officer of the Named Insured, but only when the Director or Officer “shall have been indemnified by the Named Insured”.

[15]In the second part of Section V, Clause VIII provides that the Consortium of insurers will pay the “Loss” For the definition see below. of any Director or Officer of the Named Insured arising from any “Claim” The definition of “Claim” for the purposes of the second part of Section V is set out at Clause XI A. It is the same as set out in Clause V. made against any Director or Officer by reason of any “Wrongful Act” as a Director or Officer, “except for and to the extent the Directors or Officers are indemnified by or are entitled to indemnification by the Named Insured”.

[16]“Loss” is defined in both parts of Section V. The definitions are different. This is because in the first part of Section V the cover provided is against losses of Coca Cola companies, who are “the Named Insured” As set out in Clause I of Section V. and also the losses of directors and officers of Coca Cola who have been indemnified by the company; whereas in the second part the cover is for losses of the directors and officers when they have not been indemnified by the company.

[17]Clause VE (in the first part of Section V) provides: “Loss Words in bold are defined in the policy terms. means any amount the Named Insured shall have paid with respect to any Securities Claim and any amount the Named Insured shall have paid to a Director or Officer as indemnity for a Claim arising out of those matters set forth in Item II. Insuring Agreement above (whether actual or asserted) and subject to the provisions of this Coverage Section. Loss shall include damages, judgments, settlements, costs, charges and expenses (excluding salaries of Officers or employees of the Named Insured) in the investigation and defense of actions, suits or proceedings and appeals therefrom involving any Securities Claim against the Named Insured or any Claim for which payment by the Named Insured may be required or permitted according to applicable law (common or statutory) or contract, or under provisions of the Named Insured’s Charter of By-Laws effective pursuant to such law or contracts; provided always that such Loss shall not include fines or penalties imposed by law, punitive or exemplary damages, or damages which may be deemed uninsurable under the law pursuant to which this policy shall be construed”.

[18]Clause X1E provides: “Loss(es) means any amount which the Insureds are legally obligated to pay for Claim for Wrongful Acts, and shall include damages, judgments, settlements, costs, charges, and expenses (excluding salaries of officers or employees of the Named Insured) incurred in the investigation and defense of actions, suits or proceedings and appeals therefrom; provided always that such Loss shall not include fines or penalties imposed by law, punitive or exemplary damages, or matters which may be deemed uninsurable under the law pursuant to which this Coverage Section shall be construed”.

[19]Mr Harvey accepts that these provisions define the measure of indemnity granted by the MSP. He accepts that the words “shall have paid” in Clause VE do not impose a requirement that a financial payment of the losses must actually have been made before any claim can be made on the MSP. See: Charter Reinsurance Co Ltd v Fagan

[1997] AC 313

Mr Sumption accepts that the definitions of “Loss” do not apply directly to the CCC in the reinsurance contracts. Both parties accept that in each part of Section V, the definition of “Loss” includes litigation costs incurred in the investigation and defence of legal proceedings. Therefore Coca Cola companies and un-indemnified directors and officers of the companies who are insured under the MSP are insured in respect of legal costs incurred concerning claims made against them by third parties.

[20]There are exclusions from the cover provided in both parts of Section V. These are set out respectively in Clauses VI and XII. The only exclusions relevant to the present case are in Clauses VI H and XII H, which are in the same terms: “The Consortium shall not be liable to make any payment for Loss in connection with any Claim made against the Insureds: H. For bodily injury, sickness, disease, death or emotional distress of any person, or for damage to or destruction of any tangible property, including the Loss of use thereof or for oral or written publication of a libel or slander or of other defamatory or disparaging material or of material that violates a person’s right of privacy; however, this exclusion shall not apply to wrongful termination of employment or other unfair employment practices Claim”.

[21]Mr Harvey points out that the effect of this exclusion is that the claims against Coca Cola (and its directors and officers) which will give rise to “Losses” that can be recovered under the MSP will be claims for financial loss. That is, of course, the nature of the losses claimed against Coca Cola in the two Class Actions with which this case is concerned.

[22]Both parts of Section V of the MSP contain clauses that require the Insured companies and their directors and officers to give notice to the insurers. These provisions are set out under the heading “Conditions” and are, respectively, at Clauses VIIB 2 and 3 and XIII B 2 and 3. Notice has to be given in two situations. The first is when there is a “Claim” made against the directors and officers of the companies or any “Securities Claim” is made against the “Insured”. Clauses VIIB 2 and XIII B2 are in identical terms (so far as relevant) and they both provide that it is a condition precedent to the right to indemnity under the MSP that the insurers are given notice of a claim. Clause VIIB 2 provides as follows:

“The Insureds shall, as a condition precedent to the Insureds’ right to be indemnified under this Coverage Section, give to the Consortium notice in writing of any Claim made against the Directors or Officers or any SecuritiesClaim made against the Insured as soon as practicable during the Policy Term (or during the Discover Period) if effective in accordance with Common Policy Condition Q….”

[23]The second situation in which notice must be given is when the insured companies become aware of “any circumstances that may subsequently give rise to a Claim” against the directors and officers or a “Securities Claim” against the insured companies under the MSP. In those circumstances the companies must give written notice of the circumstances and the reasons for anticipating a claim. The terms are set out in Clauses VIIB (3) and XIII B(3), which are also in identical terms. Clause VIIB(3) provides: “If during the Policy Term or during the Discovery Period, if effective in accordance with Common Policy Conditions Q., Discovery Clause, the Named Insured shall become aware of any circumstances which may subsequently give rise to a Claim being made against the Insureds or a SecuritiesClaim being made against the Named Insured and shall give written notice of the circumstances and the reasons for anticipating a Claim, with full particulars as to dates and persons involved, then any Claim which is subsequently made against the Insured arising out of such circumstances shall be treated as a Claim made during the Policy Term”.

[24]Under the terms of both parts of Section V of the MSP the insurers could exercise some control over the defence or settlement of claims against the Insured companies or directors and officers. The terms are set out in Clauses VIIA and XIIIA. In each case the clause first deals with the basis on which the insurers will advance defence costs to directors and officers or Insured companies. Broadly, the insurers will advance defence costs prior to the final disposition of claims, but only on condition that advance payments will be repaid if “Insureds” That is both the companies, as “Named Insureds”, and the directors and officers of “Named Insureds”. are not entitled to payment of the loss that is claimed.

[25]Each of Clauses VIIA and XIIIA then deals with the insurers’ rights to defend claims and the insured’s duty to obtain the consent of the insurers to any settlement or submission to judgment. The first paragraph of this part of Clauses VIIA and XIIIA are in identical terms. They provide: “The Consortium does not, however, under this Coverage Section, assume any duty to defend. The Insureds shall not admit or assume any liability, enter into any settlement agreement or stipulate to any judgment without the prior written consent of the Consortium. Only those settlements, stipulated judgments and Defense Costs which have been consented to by the Consortium shall be recoverable as Loss under the terms of this Coverage Section. The Consortium’s consent shall not be unreasonably withheld, provided that the Consortium shall be entitled to effectively associate in the defense and the negotiation of any settlement of any Claim in order to reach a decision as to reasonableness”.

[26]There is an additional paragraph in Clause XIIIA, ie. in the second part of Section V. That stipulates:

“The Consortium shall have the right but not the duty to effectively associate with the Insureds in the defense and settlement of any Claim that appears reasonably likely to involve the Consortium, including but not limited to effectively associating in the negotiation of a settlement. The Insureds shall defend and contest any such Claim as appropriate. The Insureds shall give the Consortium full co-operation and such information as it may reasonably require”

The Reinsurance policies

[27]The two reinsurance contracts were concluded in April 1997 with the defendant syndicates. By a reinsurance slip contract signed between 17 and 22 April 1997, the first six defendants agreed to reinsure RSA for a three year period from 1 April 1997 for RSA’s 21.5% coverage of the first US$25 million in the annual aggregate in respect of Coca Cola’s liability for Directors and officers’ liabilities that was covered by Section V of the MSP. The second slip contract was signed between 21 and 25 April 1997. That covered RSA’s 21.5% coverage of US$ 75 million in excess of $25 million for Coca Cola’s liability for Directors and officers’ liabilities that were covered by Section V of the MSP. Again the period was for three years. Both slips provided that they could be resubmitted for re-signing for the balance of the five year term of the MSP. Both were re-signed in March and April 2000.

[28]For the purposes of this action, therefore, the relevant slip policies are the re-signed slip policies that were in force between 1 April 2000 and 31 March 2002. The original two slips and the resigned two slips are on the same terms so far as is relevant.

[29]The leading two syndicates on the primary layer of reinsurance are Syndicates 861 and 1209. They followed on the excess layer. The underwriter who wrote the business on behalf of those two syndicates in 1997 was James Gerry, who was the Deputy Underwriter of Syndicate 861. He was also a Director of Underwriting at XL London Market Limited (“XLLM”), who were the managing agents of Syndicates 861 and 1209. He has provided a statement on behalf of the defendant Reinsurers. He was not called to give evidence at the trial because it was agreed between the parties that I could treat his statement as evidence.

[30]He explains in his statement how he was approached by David Taylor, a placing broker at Marsh FINPRO Limited (“Marsh”) in February and March 1997. Mr Taylor was trying to place a reinsurance of the involvement in the MSP by RSA and Winterthur Insurance Company. Mr Gerry agreed to the participation of Syndicates 861 and 1209 to both layers of reinsurance. He did not take part in the renewal/extension in 2000.

[31]Mr Gerry points out that when Mr Taylor presented the proposed reinsurance, the terms included both a “Full Reinsurance Clause” and a “Claims Control Clause”. Gerry: para 32; Bundle 3/page 711. Mr Gerry explains that he was familiar with those terms and he would ordinarily have expected to see them in a reinsurance of this nature. He did not amend the wording as presented. Gerry: para 33: Bundle 3/page713. Although Mr Gerry describes the Claims Control Clause as being of “fundamental importance” for Syndicate 861, Gerry: para 35; Bundle 3/page

714. he makes it clear that in respect of the reinsurance there was no discussion of the meaning of the Full Claims Control Clause between the brokers and Mr Gerry or members of his team during the negotiations.

[32]In his statement Mr Gerry explains why, in his view, it is important for the Reinsurers to have claims control over any claims made by claimants against Coca Cola or its directors and officers. Gerry: para 41 and ff; Bundle 3/page 717 et seq. But he also states that the interpretation of the Claims Control Clause was not discussed at any time between the brokers (for RSA) and the Reinsurers. He frankly admits that he does not know why the Claims Control Clause contained a time limit of 72 hours for the notification of any “knowledge of any loss or losses which may give rise to a claim under this policy….” However, he insists that a short period was needed if the word “loss” refers to the losses of claimants against Coca Cola, rather than losses suffered by Coca Cola itself. Gerry: para 46; Bundle 3/page 719.

[33]On 16 June 1997 Mr Marcel Fischer of Winterthur, which had participated in both layers of the reinsurance, wrote to Marsh stating that he had seen the Cover Notes for the two layers and had noticed the terms of the Claims Control Clause. He complained that the clause was included without Winterthur’s agreement and he asked Mr Taylor to obtain two changes. These were, first, that the 72 hour period for reporting be enlarged to 60 days and, secondly, that paragraph (b) of the Claims Control Clause be deleted entirely. These points were put to Mr Gerry, but he rejected both of them. However he did agree to extend the 72 hour period to 5 days. Mr Gerry explained to Mr Taylor that “the intention in the appointment of an adjuster etc is simply to monitor and protect their interests solely in the reinsurance of the Winterthur participation”. See the fax letter from Mr Taylor of Marsh & McLennan to Mr Fischer of Winterthur dated 28 October 1997: Bundle 3/page 800. Mr Gerry says in his statement that the letter did confirm his position: para 50 at Bundle 3/page 720. There was no similar request for any amendment of the terms of the CCC by RSA.

[34]Mr Matthew Doherty was the underwriter for Syndicates 861 and 1209 who was responsible for re-signing of the two slip contracts in April 2000. In his statement Mr Doherty says that when the broker from Marsh & McLennan presented the slips and information to him in March/April 2000, he noted that the reinsurance contained a Claims Control Clause. Doherty: para 10; Bundle 3 page921. There was no question of any change to the clause. Doherty para 13; Bundle 3 page

922. He states that the clause gave him confidence that “if RSA had knowledge of anything which might give rise to a claim under the reinsurance for the preceding period then it would have been notified”. Doherty para 10 He says that the clause also gave him “the comfort of knowing that if RSA did become aware of anything which might give rise to a claim under the reinsurance (and if it wanted to be indemnified) then [the syndicates] subscribing to the contract had the ability to get directly involved in how RSA handled the claim against Coca Cola and/or its directors or officers at virtually the earliest possible stage, ie. within 72 hours of RSA receiving that knowledge”. Doherty para 11: Bundle 3 page 921/2. However this issue was not discussed with either Marsh &McLennan or RSA at the time.

[35]The terms of each slip state that the “Original Insured” is The Coca Cola Company and the Reinsured is RSA. The “Interest” is stated to be “As original”. The “Conditions” are described as “Full Reinsurance Clause, as attached. Claims Control Clause, as attached…”. A standard Lloyd’s Non - Marine Association “War and Civil War Exclusion Clause” is also incorporated but it is not relevant. There is also an Information provision, but nothing turns on that.

[36]The two crucial clauses in the reinsurances are as follows: “FULL REINSURANCE CLAUSE Being a Reinsurance of and warranted same gross rate, terms and conditions as the Original Policy, so far as they may be applicable hereto and shall pay as may be paid thereon, but subject nevertheless to the terms, clauses and conditions of the Reinsurance. CLAIMS CONTROL CLAUSE Notwithstanding anything herein contained to the contrary, it is a condition precedent to any liability under this policy that: a) the Reassured shall upon knowledge of any loss or losses which may give rise to claim In the printed wording there is no definite or indefinite article between “to” and “claim”. under this policy, advise the Underwriters thereof by cable within 72 hours, b) the Reassured 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.

CLAIMS CONTROL CLAUSE

[37]The general effect of a reinsurance policy which contains a Full Reinsurance Clause in these terms was not in issue between the parties. It is as follows:(1) such a contract of reinsurance is an independent contract between the reinsured and the reinsurer in which the subject matter of the reinsurance is the same as that of the original insurance. So here this means that the subject matter of this reinsurance is the subject matter of Section V of the MSP, ie. the Coca Cola Companies and their directors and officers, who may be held liable to third parties in respect of defined types of claim as a result of defined perils. The insurable interest of the insurer/reinsured is its risk in the original policy and the insurer may reinsure in respect of it. See generally: Toomey v Eagle Star

[1994] 1 Lloyd’s Rep 516

at 522 per Hobhouse LJ; Charter Re v Fagan

[1997] AC 313

at 392 per Lord Hoffman.

(2) The effect of the phrase “warranted same…. terms and conditions as the Original Policy, as far as they may be applicable hereto” is that the terms and conditions of the MSP are incorporated into the reinsurance to the extent that those terms are appropriate to the reinsurance and are not supplanted by the express terms of the reinsurance itself. Vesta v Butcher [1989]1AC 852 Both sides agree that in this case the scope of the cover and the extent of the exclusions are the same in both the original insurance and the reinsurance contracts and that the definitions in Section V of the MSP are incorporated to define the extent of the reinsurance. However both sides also agree that the definitions in Section V were not incorporated in the reinsurance for the purpose of defining words used in the express terms of the reinsurance contracts, in particular the CCC.

(3) The phrase “pay as may be paid thereon” has given rise to a long line of cases, Reviewed by Stephenson LJ and Robert Goff LJ in The Insurance Company of Africa v Scor (UK) Reinsurance Co Ltd

[1985] 1 Lloyd’s Rep 312

, particularly at319 – 321 and 327 – 330 respectively. See also: Charter Re v Fagan

[1997] AC 313

, in the judgment of Mance J at 333. but the meaning of the phrase is now well established. In order to recover on the reinsurance, the reinsured must prove first, that the kind of loss on which he has paid is within the terms of the original policy and secondly, that the reinsured had taken all proper and business – like steps to have the amount of the claim fairly and carefully ascertained. The latter requirement may be fulfilled by the original insured and the insurer/reinsured reaching an honest and careful settlement as to quantum.

(4) The words “subject to the terms, clauses and conditions of this reinsurance” mean that a reinsured can only recover under the reinsurance if all the requirements of the reinsurance, as set out in its terms, are also fulfilled. Those terms obviously include the requirements set out in the Claims Control Clause, whatever they might mean.

[38]The effect of the wording of the Full Reinsurance clause, therefore, is that the reinsured must fulfill the requirements concerning liability under the original insurance and the terms of the re- insurance before the re-insurers will be liable.

[39]I also note one further general point about the reinsurance contracts. This is that ascertainment of the liability By a court or arbitration decision or settlement by the parties. of the insurer (and re-insured) is a pre-condition to the accrual of the insurer/re-Insured’s rights against the Reinsurers. The leading case on this topic is Versicherungs und Transport AG Daugava v Henderson.

(1934) 49 Lloyd’s Rep252

at 253 – 4 per Scrutton and Maugham LJJ. That case was recently followed by Mance LJ in Gan Insurance Company Ltd v Tai Ping Insurance Company Ltd (Nos 2 and 3). [2001]Lloyd’s IR 667 at 690 para 41. Latham LJ agreed with Mance LJ on this point. Sir Christopher Staughton dissented in the result but not from this proposition.

The Class Actions and their notification

[40]The “Carpenter” Class Action was brought by Carpenters Health & Welfare Fund of Philadelphia, for itself and others. It was filed in the US District Court, Northern District of Georgia, Atlanta Division on 27 October 2000. The Plaintiffs are “purchasers of common stock of The Coca Cola Company (“Coke” or “the Company”)” between 21 October 1999 and 6 March 2000. The Complaint sets out a history of Coca Cola’s business in the late 1990s. The principal allegation is that from early1998 the business of Coca Cola was declining and this was reflected in a fall in the share price from a peak in July 1998. The share price recovered in early 1999. However, the fundamental trend of Coca Cola’s business was downwards. The share price of the company’s stock had fallen to its lowest point in several years by October 1999.

[41]The Complaint alleges that the underlying sales of Coke were poor in mid - 1999. In order to boost the revenues of the company, it is said, the chief officers of Coca Cola forced the company’s bottlers in many countries (in which Coca Cola had a 49% shareholding) to take huge unwanted shipments of Coke beverage concentrate. This enabled the company to report, in its third quarter 1999 results, that it had met forecasted revenue levels. In fact this was only done “….by making millions of dollars of unjustified and excessive concentrate shipments”. Complaint para 10: Bundle 2/G (1) page 519. The company continued to forecast strong revenue growth and this led to a huge increase in the value of its stock from a low of $47 5/16 in early October 1999 to $69 on 12 March 2000. But underlying sales of Coke continued to be poor in the remainder of 1999. So, it is said, the same process of forcing bottlers to accept unwanted concentrate was repeated in order to keep up revenue forecasts. Further, assets in the Russian and Japanese operations were massively overvalued and should have been written down by the third quarter of 1999 rather than in the first quarter of 2000.

[42]The Complaint alleges that the CEO of Coca Cola, Mr Douglas Ivester, realised that there were problems by December 1999, but he was removed and replaced by Mr Douglas Daft. It is asserted that the company made misleading announcements over Mr Ivester’s retirement and misled the public about the state of Coca Cola’s business. This meant that the stock of the company rallied in early January 2000. However the poor position of the company was revealed on 26 January 2000 when it reported its fourth quarter 1999 results, which included a loss of $45 million. The company also said that its results for 2000 would be much lower than earlier forecast. This led to a fall in the share price from $66 7/8 on 21 January 2000 to $55 1/16 on 3 February 2000. Analysts became increasingly gloomy about the company’s performance and the stock price fell to $44 13/16 on 7 March 2000. On 4 April 2000 the company informed analysts that the results for the first quarter of 2000 and the forecast for the 2000 results would be much lower than had been previously forecast.

[43]The Complaint alleges that the company, Mr Ivester and other officers intentionally and knowingly made false statements; failed to disclose adverse facts and participated in a fraudulent scheme to inflate the value of the company’s stock. Complaint para 29: Bundle 2/I (1) page 532. The financial statements for the company were also misleading and false, at least for the third quarter of 1999. Complaint para 90: Bundle 2/I (1) page 569. The Complaint asserts that the defendants violated the US Securities and Exchange Act 1934 by (i) employing devices, schemes and artifices to defraud; (ii) making untrue statements of material facts and omitting to state material facts, so that the statements made were misleading; (iii) engaging in acts, practices and a course of business that operated as a fraud upon the Class in connection with their purchases of Coca Cola’ stock. Complaint para 111: Bundle 2/I (1) page576. Paragraphs 112 and 114 of the Complaint Bundle 2/I (1) pages 576 and

577. then state:

“112. Class members were damaged. In reliance on the integrity of the market, they paid artificially inflated prices for Coke stock. ….. 114. Plaintiff and the Class have suffered damage in that, in reliance on the integrity of the market, they paid artificially inflated prices for Coke stock. Plaintiff and the Class would not have purchased Coke stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants’ misleading statements.”

[44]The Complaint seeks damages and interest for all the members of the Class at a jury trial. At the end of the Complaint there is a document called “Certification of Named Plaintiffs Pursuant to Federal Security Laws”. That states that the Plaintiff has made no transactions during the Class Period in debt or equity securities that are the subject of the action save those that are set out in Schedule A. The Schedule gives details of the securities that were acquired. Bundle 2/I (1) pages 579 and 581.

[45]The “Lavalla” Class action is brought by Gaetan Lavalla for himself and others. The defendants are Coca Cola, Mr Ivester and two other officers of the company at the relevant times. The Complaint was filed on 15 November 2000. The thrust of the allegations and the facts relied on are the same as in the Carpenter Action. It is alleged that, as a “ …direct and proximate result of [the] defendants’ wrongful conduct, plaintiff and other members of the Class suffered damages in connection with their purchases of the Company’s securities during the Class period”. The “Class Period” is that between 21 October 1999 and 6 March 2000.

[46]On 26 December 2000 the claimants in the Carpenters Class Action filed a Memorandum of Law Bundle 3/M(2) page 1045. in support of a Motion to consolidate the two Class Actions and to appoint a lead Plaintiff and counsel. In support of the Motion an affidavit, sworn by Martin D Chitwood, Bundle 3/M (2) page 1063. was served with the Memorandum of Law. The affidavit exhibits a chart entitled “Purchases and Losses” of the Carpenters Pension Fund and another Pension Fund claimant in that action. Bundle 3/M (2) page 1066. The chart gives details of the purchase and sale of Coca Cola shares and gives a figure of “Total Loss” of those two claimants at US$ 939.974. Mr Harvey submits that this is evidence of an actual loss by the claimants in the Class Actions, although he accepts that he is not in a position to prove that the actual loss was caused by the acts or defaults of Coca Cola’s Directors or Officers. Nor does he suggest that RSA had these two documents before 19 January 2001.

[47]Allianz was notified of the Carpenter Class Action by letter dated 1 November 2000. That enclosed a copy of the Complaint. Allianz was notified of the Lavalla Action between 20 and 29 November 2000 and was given a copy of that Complaint also.

[48]From the documents in the trial bundles it appears that Allianz informed both RSA and Winterthur of the two Class actions by fax on 12 December 2000. Bundle 2/J (7) page 635. The reference to “Coca Cola” in emails of 5 December 2000 appear to concern other D&O claims, not the two Class Actions. Allianz included a letter from Marsh USA Inc dated 29 November 2000. That stated that Mr Joel Neuman of Coca Cola’s legal department would be co-ordinating the defence of the cases, together with external lawyers. Marsh’s letter said that Coca Cola extended an invitation to the insurers to a meeting on 9 January 2001 “…to give an overview of the claim and to discuss a process for your involvement going forward.”

[49]Vivien Seymour of Marsh (UK) informed Beverley Quartly of RSA (in Chelmsford) of the two new D&O claims in a “Very Urgent” fax of 30 December 2000, whilst apologising for the delay in doing so. The fax included the whole of the two Complaints. Miss Quartly was asked if she would attend the meeting of 9 January 2001. Miss Quartly sent Miss Seymour a fax reply on 4 January 2001, saying that neither she nor her American colleague Janice Rizzo would be attending the meeting because her understanding was that the RSA “…line on D&O is reinsured out 100% and that Marsh placed this for us”. Miss Quartly asked Miss Seymour to confirm that “our D&O Reinsurers have been notified of these claims”. Bundle 2/J(17) page 670.

[50]At the meeting on 9 January 2001, Mr Joel Nueman, one of Coca Cola’s internal lawyers, put forward reasons why Coca Cola should manage the claim from within its own legal staff. Mr Greg Worthington, who represented Allianz, said that he did not anticipate hiring “monitoring counsel”. The position of the Reinsurers, (who were not represented, of course), was not discussed. The brokers, Marsh, were represented at the meeting. Meeting Note: Bundle 2/J(19) page 673 – 5.

[51]Miss Quartly became concerned that the Reinsurers had not been notified of the claims asserted in the Class actions. On 11 January 2001 she e-mailed Miss Seymour and asked her to notify the Reinsurers immediately if she had not already done so. Bundle 2/J (20) page 676. The reinsurance syndicates were notified on 19 January 2001.

The pleaded cases

[52]In its Re-amended Points of Claim, Paragraphs 11 to : Bundle 1(A) (2) pages 9 and 10. RSA has pleaded that the two Class Actions are “Claims” within the meaning of Section V of the MSP; that RSA “may be liable to indemnify” Coca Cola or its relevant directors and officers in respect of “Loss” as defined in Section V of the MSP and that RSA may be liable to advance “Defense Costs” if and when it becomes liable to do so. The pleading then asserts that to the extent to which RSA suffers any loss because of its obligation to indemnify Coca Cola or its officers and directors in respect of a “Loss” suffered by them in respect of the two Class Actions, the Reinsurers will be liable to indemnify RSA under the reinsurance contracts. All these allegations were put in issue in the re-re-amended Points of Defence, but they were not the subject of argument at the trial.

[53]RSA then pleads that, “in anticipatory breach of contract”, the Reinsurers have asserted that they are not liable to indemnify RSA in respect of any losses sustained by it by reason of the two Class Actions, because RSA did not notify the Reinsurers of the existence of the claims within 72 hours of first knowing of them. RSA pleads that this fact, (which is admitted) does not constitute a breach of the Claims Control Clause. Its case is then set out. Re-amended Points of Claim: para 17. It is much the same as was argued before me. RSA claims a declaration that the Reinsurers are liable to indemnify it under the reinsurance contracts in respect of any losses sustained by it under the MSP in relation to the two Class Claims. There is an alternative claim for damages for anticipatory breach of contract. That alternative was, rightly, not pursued at the trial, as it is not pleaded that the anticipatory breach was accepted or that the reinsurance contracts were brought to an end.

[54]In the re-re-amended Points of Defence, the Reinsurers admit that in the two Class Actions the plaintiffs and the other members of the class allege My emphasis. “that they had suffered loss (described as damage) from the purchase of Coca Cola stock at artificially inflated prices” between 21 October 1999 and 6 March 2000. Re-re-amended Points of Defence: para 10(1) and (2). In answer to RSA’s allegation that the Reinsurers are in “anticipatory breach of contract” ( by asserting that they are not liable to indemnify RSA for any losses sustained by RSA by reason of the Class Actions), the Reinsurers plead RSA’s failure to notify them of the existence of the two claims within 72 hours of RSA knowing of such matters. Paragraph 15(3) of the re-re-amended Points of Defence refers to “the losses suffered by the plaintiffs and other class members in the [two Class Actions]”. In other words, what was referred to as alleged losses in paragraph 14 has become “the losses” by paragraph 15. That paragraph also states that “the said losses suffered by those plaintiffs and the other members of the respective classes were losses which might give rise to claims under the Reinsurance Contract”. This plea appears to accept therefore that such “losses” might come within the terms of the MSP as well as the terms of the reinsurance contracts. There was no argument to the contrary at the trial.

[55]Paragraph 14 of the re-re-amended Points of Defence sets out the principal case of the Reinsurers. It asserts that it is a condition precedent to any liability of the Reinsurers that “RSA notify [the Reinsurers] of the existence of [the two Class Actions] (and in particular the losses suffered by the plaintiffs and other class members in the [two Class Actions]) within 72 hours of RSA knowing of them”. It is pleaded that RSA failed to notify the Reinsurers of the existence of the two Class Actions or the losses suffered by the claimants in those actions within 72 hours of RSA knowing of them. Therefore the Reinsurers are not liable to indemnify RSA in relation to either of the two Class Actions. The Reinsurers claim a declaration to that effect.

The Issues

[56]Both sides accepted that the wording in part (a) of the CCC constituted a peremptory procedural bar to a claim which is otherwise within the terms of the reinsurance policies, whichever side’s construction is correct. The success of the Reinsurers’ defence to the declaration claimed must depend on the meaning to be attributed to the words “knowledge of any loss or losses which may give rise to a claim under this policy” in the CCC. Two issues were argued. The first is: whose “loss or losses” are being referred to on the three occasions that the phrase is used in parts (a) and (b) of the CCC. If the phrase refers to the actual loss of the claimants against Coca Cola, then, subject to the second issue, it is accepted that RSA did not give timely notice to the Reinsurers, so RSA would be barred from recovering on the reinsurance contracts in respect of the present claims against Coca Cola. It is accepted on both sides that the words “loss or losses” must have the same meaning in both parts (a) and (b) of the CCC and that the same “loss or losses” are being referred to in both parts. Neither side asserts that the parties to the reinsurance contracts had intended to give any special meaning to the words “loss or losses”. It is not argued that the words “loss or losses” must have the same meaning as in the definitions in the MSP. Nor is it suggested that the words have any particular trade meaning.

[57]The second issue arises if the Reinsurers are correct in their submission that "loss or losses" refers to the loss of the claimants against Coca Cola. Then the question arises: at 30 December 2000 (or at the latest, 11 January 2001) did RSA, objectively speaking, have “knowledge of any loss or losses which may give rise to a claim under” the reinsurance contracts? It is accepted that to come within the wording, at the relevant time, RSA must have actual knowledge that the claimants against Coca Cola have suffered “actual losses” as opposed to alleged losses. The Reinsurers say that, as at 30 December 2000, the claimants had suffered actual losses, because the value of the Coca Cola stock that the claimants had bought had decreased and so RSA was aware of the fact that the claimants had bought the stock at inflated prices. RSA says that it could only have “knowledge of a loss or losses that may give rise to claim under [the reinsurance]” if RSA had knowledge that the value of the stock was inflated when purchased and the fact that this was caused by something that may give rise to a claim against Coca Cola and hence a claim under the MSP and then under the reinsurance. But on either 30 December 2000 or 11 January 2001, RSA only knew that Complaints had been filed against Coca Cola, its Directors and officers in which it was asserted that the claimants had suffered loss as a result of the acts and defaults of the directors and officers of Coca Cola. That is an asserted loss, not an actual loss.

[58]Both Mr Harvey QC and Mr Sumption QC relied on the general rules of construction of contracts in support of their contention as to the meaning of the crucial words. Mr Harvey did, however, submit that he could rely on the so – called “contra proferentem” rule, if need be, in support of his construction of the words.

[59]There was very little argument about the meaning of the word “loss” in the CCC. Mr Harvey accepted that the word denoted an actual loss, as opposed to an alleged loss. Both parties recognised that because RSA have an obligation only to notify “any loss or losses which may give rise to claim under this policy”, the nature of the loss must be such as to have the possibility of giving rise to a claim under the reinsurance. This must mean, whichever loss is the relevant one, that the type of loss that the draftsman of the CCC had in mind is one that may give rise to a claim on the original policy that is reinsured, as well as one that may give rise to a claim on the reinsurance. Therefore the words “loss or losses” in the CCC must refer to the type of loss by a third party claimant against the original insured which may give rise to a claim under Section V of the MSP and, thereafter, the reinsurance. Thus the words “loss or losses” must broadly follow the definitions of “loss” in clauses V and XI of Section V of the MSP, as qualified by the exclusions in clauses VI and XII. Effectively the words must refer to a financial loss of either the third party claimant against the original insured or the insured itself.

[60]The arguments of the parties concentrated on the issue: whose “loss or losses” is referred to in the CCC? If, as everyone accepted, the phrase “loss or losses” refers to a financial loss that can become the subject of a claim under the MSP and the reinsurance, then all of the entities involved could, potentially, suffer losses at some stage in the chronology. The real issue is when, in the overall chronology, RSA has to notify the Reinsurers that it had knowledge of a loss or losses.

[61]Mr Sumption submits and Mr Harvey accepts that there are three possible answers to the question: whose “loss or losses” are being referred to in the CCC? The losses will occur sequentially. In chronological order the possibilities are:(i) the losses of claimants against the original insured (ie. in this case, respectively: the claimants in the Class Actions against Coca Cola and its Directors and officers). Such losses may lead to:

(ii) losses of the original insured (ie. here Coca Cola and its Directors and officers), which occur when they have been held liable to the third party claimants. Such losses would be recoverable under the original insurance. In this case the losses of Coca Cola and its Directors and officers which arise from claims by third parties will be losses that are recoverable under the MSP. Those losses can lead to (iii): losses of the original insurer, ie. in this case RSA, because it has become liable to pay the insured under Section V of the MSP.

[62]Neither side supports the third possibility. This means that both parties accept that, in these reinsurance contracts, RSA’s obligation to inform the Reinsurers of “loss or losses” must refer to a loss which has not yet been ascertained to be a liability of RSA to its original insured, because RSA would not have been held liable or agreed it was liable in a settlement. Therefore the words “loss or losses” refers to a loss which cannot, at that time, give rise to any rights as between RSA and the Reinsurers. This must follow from the rule that rights of an insurer on a reinsurance only arise when the insurer’s liability to its original insured have been ascertained as to its existence and amount. See: Versicherungs und Trasport AG Daubava v Henderson

(1934) 49 Lloyd’s Rep 252

at 2534 – 5; Gan v Tai Ping (Nos 2 & 3) [2001] Lloyd’s IR 667 at 690 per Mance LJ.

[63]Both Mr Sumption and Mr Harvey accept that the words “loss or losses” in the CCC could, as a matter of language, refer to either the losses of a claimant against the original insured or the losses of the original insured itself. There is nothing in the words themselves to identify which is the “loss or losses” concerned. The arguments of both counsel therefore analysed the crucial words in their context and explored the legal and commercial consequences of each of the two suggested interpretations. Both Mr Sumption and Mr Harvey urge that their opponent’s interpretation produced a legally nonsensical or commercially absurd result, which the parties to the reinsurance contracts could not have intended; therefore that interpretation must be wrong.

[64]Mr Sumption emphasised that the obligation to notify is placed on RSA. So far as RSA is concerned, the only losses which may give rise to a claim under the reinsurance are the losses of its insured, ie. Coca Cola and its Directors and officers. I accept that those losses “may give rise to a claim” under the reinsurance. But, one asks, why start the chronology there? Losses to Coca Cola will be caused by something; they could be caused by losses of third parties who have successfully claimed to recover those losses from Coca Cola, thereby causing Coca Cola to suffer loss. There will be a time prior to the point when third party claimants have successfully claimed against Coca Cola. At that earlier time the third party claimants could have suffered an “actual” loss which cannot be controverted. I do not wish to pre-empt the argument on Issue Two, so an actual loss must be assumed at this stage. If there has been such an actual loss and the third party claimants assert that the loss was caused by the acts or omissions of the insured’s directors and officers, then that “loss” may give rise to a claim on the reinsurance contracts. This is because:(i) such losses by third party claimants may give rise to a claim against Coca Cola, which

(ii) may give rise to a claim by Coca Cola on the MSP, which

(iii) may then give rise to a claim on the reinsurance. In those circumstances it can be said that losses of third party claimants against Coca Cola may “give rise to” a claim on the reinsurance, even though that would involve three steps rather than two in following through the chronology.

[65]However, Mr Sumption submits that this third step back is impermissible for two reasons. The first is because RSA’s insured cannot suffer a “loss” and so claim on the MSP until such time as the insured’s “loss” has been ascertained by a court or arbitration decision or by settlement: Post Office v Norwich Union Fire Insurance Society Ltd.

[1967] 2 QB 363

Therefore, he submits, until Coca Cola’s “loss” has been ascertained, there can be no “loss” that “may give rise to a claim” under the reinsurance contracts. That, he submits, would make the construction of “loss” consistent with the definition of “Loss” in Section V of the MSP.

[66]I must, of course, accept that an insured has no cause of action on a liability insurance until the insured has suffered a loss and it will not have done so until the loss is ascertained by a court, arbitration tribunal or by settlement. But the fact that Coca Cola can have no cause of action against RSA until Coca Cola’s losses have been ascertained does not seem to me to help Mr Sumption’s argument in favour of the words "loss or losses" referring to those of Coca Cola rather than claimants against Coca Cola. His point only means that at an early stage in the chronology of any claim which could ultimately give rise to a claim on the reinsurance, the loss of Coca Cola has not been ascertained for the purpose of seeing whether Coca Cola has a cause of action against RSA under the MSP.

[67]But an application of the rule in the Norwich Union Fire Insurance case also has a correlative consequence. It means that, at an early stage in the chronology of claims, the first actual, ascertained, “loss” capable of identification would be that of the third party claimant against the insured. As I have attempted to demonstrate already, as a matter of language such a loss can be a loss which “may give rise to claim under this [reinsurance]”. However, to be such a loss, it must be established that the third party claimant has not only suffered an actual loss (as opposed to an alleged loss), but also that the loss is one that the third party claimant alleges has been caused by the act or default of the insured, ie Coca Cola in this case.

[68]Mr Harvey countered this part of Mr Sumption’s argument by pointing out that under the MSP the insurers have an obligation to meet defence costs once the deductible has been exhausted. He submits that Coca Cola must suffer a “loss” each time that it pays out costs to its legal team, even when Coca Cola is disputing the liability of Coca Cola for “losses” of third party claimants. Therefore, although at that stage the “loss” of Coca Cola as to the principal claim of third party claimants will not have been ascertained, Coca Cola has still suffered an ascertained loss in the form of the defence costs paid out. Mr Harvey submits that the fact that defence costs paid out by Coca Cola must be ascertained losses suggests that the words "loss or losses" are not linked only to the amount of the ascertained liability of Coca Cola for actual losses of third party claimants.

[69]I agree that when Coca Cola pay defence costs they must suffer a “loss” which is quantified. But Coca Cola would have to obtain the agreement of RSA to the payment of any defence costs if Coca Cola wished to recover them under the MSP See: Section V clause VII A: “Only those…defense costs which have been consented to by the Consortium shall be recoverable as Loss under the terms of this Coverage Section”. . So RSA would have knowledge of that “loss” and would have no difficulty in passing it on to the Reinsurers. Mr Sumption was inclined to accept, in argument, that if Coca Cola did pay out defence costs then once RSA knew of that fact it would be obliged to notify the Reinsurers. Transcript: page 143 lines 12-13. However he did suggest that perhaps RSA would only have to give one notification on the first occasion that defence costs were paid out. But I agree with him that none of this argument helps to decide whether the words "loss or losses" in part (a) of the CCC refer to the actual losses of third party claimants against Coca Cola or of Coca Cola itself.

[70]Mr Sumption’s second argument for saying that the words "loss or losses" cannot refer to the losses of third party claimants is that such losses are too remote from the reinsurance contracts. He suggests that, logically, if “loss or losses” refers to those of third party claimants, then RSA would have to give notice of those losses even before any claim had been made on the insured, in this case Coca Cola. It would be enough that RSA knew that a third party had suffered an actual loss, which might give rise to a claim against RSA’s Insured. That, he suggests, is commercially absurd and would mean (for instance) that RSA would have to notify the Reinsurers every time the stock of an insured went down in the market, for fear that some stockholder might allege that the fall was due to the default of a director of the insured.

[71]I agree with that submission to some extent. But the scope of the obligation to notify is kept within limits by the wording of the whole phrase in part (a) of the CCC. There is only an obligation to notify if the reinsured, RSA, has: (i) knowledge of (ii) an actual loss that (iii) might give rise to a claim under the reinsurance. So if a third party claimant has not asserted that the cause of his loss is an act or omission that might give rise to a claim under the original insurance, then RSA does not have “knowledge of a claim that might give rise to a claim under [the reinsurance]”. That is because RSA has no knowledge to link the actual loss (which I can assume for these purposes) with a possible claim under the MSP and thence the reinsurance.

[72]The last positive argument of Mr Sumption (as opposed to his arguments aimed at rebutting points advanced on behalf of the Reinsurers) is that because the notice provision is a peremptory procedural bar to the reinsured’s exercise of contractual rights under the reinsurance, it should not be given a meaning that is the most onerous to the reinsured unless that is clearly the meaning of the clause. Mr Sumption relied on statements made by Potter LJ in George Hunt Cranes Ltd v Scottish Boiler and General Insurance Co Ltd. [2002] Lloyd’s IR 178 at 181 – 182; para 11. In that case the court had to consider whether a clause requiring the insured to submit a claim to the insurer within 30 days of a loss constituted a condition precedent to liability under the policy. The judge and the Court of Appeal held that it was. The actual wording does not matter for present purposes. But Mr Sumption relies on the statement from McGillivray on Insurance, 9th Ed. para 19 – 35. which is referred to and approved by Potter LJ:

“Such clauses [ie notice clauses]….should be construed fairly to give effect to the object for which they were inserted, but at the same time so as to protect the assured from being trapped by obscure or ambiguous phraseology”

. Mr Sumption says, if necessary, that in the present case the phraseology is both obscure and ambiguous. He submits that if it is given the meaning the Reinsurers contend for then it has a draconian effect in limiting the rights of the reinsured. He says that the clause should only be construed as having that consequence if it is clear and so obviously intended to have such a consequence. In this case, he submits, it is not clear and so those consequence cannot follow.

[73]I do not accept all of this argument. It is plain that part(a) of the CCC is intended to impose a duty on the reinsured to tell the Reinsurer of a loss or losses that may give rise to a claim under the reinsurance. It is obvious that the clause intends that, if the reinsured does not do so, its right to be indemnified under the reinsurance is to be removed. That much is clear. Part

(b) of the CCC also contains a condition precedent to any liability under the reinsurance. This stipulates that the reinsured must furnish the Reinsurers with all information available “respecting such loss or losses”. That is also clear.

[74]I accept, of course, that the wording does not identify whose “loss or losses” must be notified by the reinsured. But, if RSA does have knowledge of the loss or losses, in my view it is no more onerous for the reinsured to have to notify the Reinsurers (within the stipulated time) of the loss of a third party claimant against the original insured than it is for the reIinsured to notify the Reinsurers of the loss of its original insured. So that does not advance the argument.

[75]However, the requirement and the rights given to the Reinsurers in the second half of part (b) of the CCC formed the principal foundation of Mr Harvey’s argument in favour of his submission that “loss or losses” must refer to those of the third party claimants against Coca Cola. Mr Harvey submits that if RSA is not obliged to advise the Reinsurers of its knowledge of any actual loss of third party claimants against the original insured, but only has to advise Reinsurers of its knowledge of an actual loss by Coca Cola itself, then the utility of part (b) of the CCC would be zero. He submits that the parties cannot have intended such a result; therefore "loss or losses" in parts (a) and (b) of the CCC must refer to the actual loss of third party claimants.

[76]Mr Harvey’s argument is that part (b) of the CCC must confer on the Reinsurers a right to control all negotiations, adjustments and settlements in connection with a third party claim against an original insured. Although he did not say so, I assume that his analysis of this obligation is that the reinsured (RSA here) undertakes to procure for the Reinsurers the right to negotiate etc. as between the third party claimant and the original insured. Mr Harvey says that it is at the time when that claim as between the third party claimant and the insured is being contested that it is important for a reinsurer to have control of negotiations, adjustments and settlements. Once the insured and the third party have reached a settlement, then that cannot be impugned by the Reinsurers, unless it was concluded in bad faith or in an un-businesslike manner. Therefore if the right of the Reinsurers to control all negotiations, adjustments and settlements only arises “in connection with” the ascertained “loss or losses” of the original insured (ie. Coca Cola here), then thereafter there will be nothing worthwhile to negotiate, adjust and settle. Quantum will have been dealt with already. And, because the reinsurance is on a “pay as may be paid thereon” basis, the Reinsurers do not need to be involved in negotiations on the issue of coverage under the original insurance. That is because in order to recover under the reinsurance the reassured has to prove that the loss of the original insured fell within the terms of the original insurance. See paras 37 and 38 above.

[77]Mr Sumption’s principal response to this argument is that this Claims Control Clause is in a standard form and the parties here did not specifically consider whether part (b) would work in the context of the type of insurance and reinsurance that were in place in this instance. He submits that it does not follow that because the clause would be more useful to one party if a particular construction of the meaning of "loss or losses" is adopted, then that construction must be the one that the parties intended. He also points out that part (b) concerns the rights of the parties to the reinsurance contracts only. Therefore the right to control all negotiations, adjustments and settlements is a right as between the reinsurer and the reinsured; part (b) of the CCC cannot directly give the reinsurer a right as against the original insured or any third party claimant. He notes that the rights of RSA under the MSP Section V clause VIIA and XIIIA. to take part in negotiations as between the original insured and any third party claimant are strictly limited. Effectively the insurer has no right to interfere, but it will only pay a “Loss” that has been agreed in a settlement between the third party claimant and the original insured, if RSA has approved it; but RSA must not unreasonably withhold its approval. He submits that the terms of the reinsurance cannot grant the Reinsurers a greater right to interfere in negotiations between the third party claimant and the insured than the insurer has under the original insurance.

[78]I agree with Mr Sumption on this argument. It is quite clear from the witness statements that, at the time that the reinsurance contracts were concluded and re-signed, neither side gave any thought to how the CCC would operate in the context of Section V of the MSP and the reinsurance contracts. The Reinsurers wanted a CCC and expected to have one as in the terms of the reinsurance, but at the time they did not think further about the issue. They certainly did not apply their minds to the question: in connection with which loss or losses would the Reinsurers be able to control all settlements; or, if the "loss or losses" referred to those of third party claimants against the original insured, how could the Reinsurers’ right to control settlements between the claimant and the insured be enforced?

[79]Mr Harvey also relied on the existence in many states of the USA, of “Fair Claims Settlement Practices” to support his contention that the parties intended to give the Reinsurers a right to intervene at the earliest stage, ie. when the third party claimant had suffered a loss. He pointed out that these Practices impose strict timetables on insurers to respond to claims on policies and stipulate that there could be a liability for “bad faith claims” if the insurer does not comply. I would accept that there are such codes. But that does not assist with the present problem. Any “bad faith” claims will not be covered by the Reinsurance contracts. Any failure to comply with such codes by RSA would not expose the Reinsurers to potential additional liability. So that cannot be a reason to say that the Reinsurers should take control of matters at the earlier stage when a third party claimant has suffered a loss.

[80]Mr Harvey relied on two further points in support of his interpretation of the words “loss or losses”. First, the fact that the Reinsurer syndicates had to set adequate reserves for claims and had to close each year of account after three years. The sooner they knew of a potential claim the better; therefore it is more likely that “loss or losses” meant those of the third party claimant, which will occur first in time. I cannot accept that this is something that the parties would have had in mind when they agreed the terms of the CCC. The reserving practices of these Reinsurers was not in their minds and I am sure it played no part in the parties’ thinking or their intentions at the time the wording was agreed.

[81]Secondly, Mr Harvey submits that if, at the end of the debate, I concluded that there was ambiguity in the wording, then the Reinsurers are entitled to rely on the “contra proferentem” rule. He says that the CCC was drafted and submitted by Marsh, RSA’s brokers and, therefore, agents. As they proffered it on behalf of RSA, then if there is any ambiguity in the CCC, it must be construed against the interests of RSA.

[82]In my view the so – called “contra proferentem” rule of construction of a clause cannot be used in this case, for four reasons. First, although I accept that the CCC was put forward by Marsh, it was not put forward for RSA’s benefit. A clause requiring that the reinsured give notice of a loss to the reinsurer as a condition precedent to the latter’s liability is not for the benefit of the reinsured. Secondly, it is not RSA but the Reinsurers that wish to rely on the clause to their benefit. Thirdly, the CCC consists of standard wording. It cannot be said that it was put forward by RSA’s brokers with the intention of looking after the interests of RSA, as opposed to the Reinsurers. It plainly was not. Lastly, the issue of construction here is not whether to give a narrower or a wider interpretation to the clause, as so often happens when the contra proferentem rule is invoked. The issue is: which of two distinct meanings of this clause is correct? The proper meaning cannot depend on who proposed it. So I respectfully agree with the point made by Mance LJ in Gan v Tai Ping, [2001] Lloyd’s IR 667 at 686, para 21. that standard clauses such as Claims Control Clauses or Claims Co-operation clauses in reinsurance contracts should receive a uniform construction, whoever proposed them.

Issue One: Conclusions

[83]It will be apparent from the previous paragraphs that I have not found particularly persuasive any of the arguments adduced by each side as to the possible practical and commercial consequences of one construction or the other. In the end I have to decide what the words of the CCC mean using the basic rules of construction or interpretation of contractual documents. Those principles are not in issue. They were authoritatively stated by Lord Hoffmann in his speech in ICS Ltd v West Bromwich BS.

[1998] 1 WLR 896

at 912G to 913F. Two of Lord Hoffmann’s principles are of particular importance here. The first is that:

“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”

. The second is that:

“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 understood them 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 (sic) life), to conclude that the parties must, for whatever reason, have used the wrong words or syntax….”

[84]The “background” to the interpretation of the CCC includes the following relevant facts:(1) Coca Cola and its Directors and officers are insured against legal liability under Section V of the MSP.

(2) The type of “loss” of Coca Cola, its Directors and officers that is insured by Section V of the MSP is financial loss suffered as a result of claims made against one, two or all three by third party claimants. The claims by third party claimants will be for money compensation for financial loss that the third party claimants assert they have suffered as a result of the acts, defaults or omissions of Coca Cola, its Directors or Officers.

(3) The terms of Section V of the MSP, including the definition of “Loss”, were known to the Reinsurers when the reinsurance contracts were concluded.

(4) The reinsurance is on the same terms and conditions as the original policy, so far as applicable. Moreover, the subject matter of the reinsurance is the same as that of the original insurance in Section V of the MSP: viz. the liability of Coca Cola and its Directors and officers to third party claimants for acts, defaults or omissions of Coca Cola, its Directors and officers.

(5) The original insurance is a “claims made” policy. Therefore, in order to be entitled to indemnity under the MSP, claims by third party claimants must first be made against Coca Cola or its Directors and officers during the policy period (or any agreed extensions) Section V Clause II(A) and (B). .

(6) Under Clauses VII B (2) and XIII B(2) of Section V of the MSP, it is a condition precedent to the liability of the Consortium that it receives written notice “as soon as is practicable” from Coca Cola or its Directors and officers, of any “Claim” Which means a written demand for the payment of money or non – monetary relief: Clauses V and XI. that is made against them.

(7) There are provisions in Section V of the MSP which stipulate that the insurers under the MSP will not pay for any “losses” by the original Insured where a settlement has been agreed with third party claimants, unless the insurers have consented to the settlement. Clauses VII Aand XIII A. The consent must not be unreasonably withheld.

[85]Although I am straying a little into the territory of Issue Two, ie. what constitutes “knowledge” of RSA for the purposes of the CCC, for the purposes of Issue One I must record two propositions that were agreed by the parties. First, RSA must have actual, as opposed to constructive, knowledge of the relevant actual loss. Secondly, the issue of whether RSA had actual knowledge at any particular time must be judged objectively, not by reference to the opinion of those employed by RSA.

[86]I have concluded that the words “loss or losses” in the CCC refer to the actual loss or losses of third party claimants against the original insured, ie. in this case: Coca Cola and its Directors and officers. I have reached this conclusion for the following reasons:(1) the words have to be interpreted in their context to ascertain what, objectively, the parties to the reinsurance contract intended that they should mean. If possible, the words must make commercial sense.

(2) Here it is clear that the parties intended that there should be a condition precedent to the Reinsurers having any liability under the Reinsurance contracts. The precondition was that the reinsured gave notice to the Reinsurers. The reinsured only had to give notice when they had knowledge, which everyone agreed meant actual, not constructive knowledge, of “any loss or losses”.

(3) The critical words have to be interpreted against the background that this is a reinsurance of legal liability. The subject matter of these reinsurance contracts is the same as that of the original insurance: ie. the legal liability of Coca Cola and its Directors and officers for financial loss suffered by third parties who have made claims against Coca Cola and its Directors and officers. So although the cause of action under the original insurance does not arise until the “loss” of the original insured has been ascertained, and the cause of action under the reinsurance does not arise until the loss of the reinsured has been ascertained, nevertheless, both those rights will arise out of the same underlying event: viz. the actual loss of the third party claimant.

(4) Under Section V of the MSP, whose terms were known by both RSA and the Reinsurers at the time that the reinsurance contracts were concluded, the original insured has to give the insurers (RSA) written notice of any claim made against it “as soon as practicable”. Therefore RSA, as one of the Consortium, will obtain knowledge of the claims of third party claimants by such notice. If the Consortium does not get such notice, then there is no right to indemnity under the original insurance – the MSP. And without such notice it is highly unlikely that it could be said that RSA, as the reinsured under the reinsurance contracts, could have actual knowledge of any actual losses of third party claimants against the original insured, ie. Coca Cola.

(5) When the members of the Consortium are given that notice, it does not follow that they (including RSA) have knowledge of an actual loss of a third party claimant. Moreover, under the terms of the MSP, the insured is under no obligation to obtain for the original insurer further knowledge to substantiate the legitimacy of the claims of the third party claimant. However, once RSA, as one of the Consortium, has knowledge of a “claim” within the meaning of the MSP, it knows that a third party claimant may have suffered an actual loss, which may give rise to a claim by Coca Cola against RSA, which may give rise to a claim on the reinsurance.

(6) If and when RSA does obtain actual (not constructive) knowledge Whatever this means: see Issue Two below. that the third party claimant against Coca Cola has suffered an actual loss, then RSA will have actual knowledge of a loss which may give rise to a claim under the reinsurance. I have already stated, in paragaraph 64 above, why, as a matter of language, this is so. To repeat: (i) such losses by third party claimants may give rise to a claim against Coca Cola, which (ii) may give rise to a claim by Coca Cola on the MSP, which (iii) may then give rise to a claim on the reinsurance. Therefore the actual losses of third party claimants against Coca Cola may “give rise to” a claim on the reinsurance contracts.

(7) If RSA concludes, on an objective basis, that it has this actual knowledge, then I can see no commercial or practical reason why the Reinsurers should be kept ignorant of it. Once the Reinsurers are given notice, then they can take advantage of whatever rights they have under the second half of part (b) of the CCC. For the reasons already discussed, those may be limited. But Mr Sumption did not advance any cogent reason (other than his interpretation of the clause) why the Reinsurers’ opportunity to invoke their rights should be further limited by placing RSA’s obligation to notify further on in time, ie. to the point when Coca Cola’s “loss or losses” had become ascertained.

(8) The interpretation of the CCC that I favour accords with the wording. It does not impose an unreasonable burden on RSA, because there is no obligation on RSA to take positive steps to obtain knowledge of a third party claimant’s actual losses. Once RSA has actual knowledge of actual losses of third party claimants, then the obligation to advise the Reinsurers of that fact within 72 hours is not, in itself, more onerous than it would be if RSA’s proposed interpretation were correct. The same time scale will apply on either interpretation of the meaning of “loss or losses”.

(9) I think that, for the reasons I have given, this interpretation accords with the expectations of reasonable commercial men who know the background facts. I accept that my conclusion means that “loss or losses” in the CCC does not have the same meaning as the definition in Clauses VE and XIE of Section V of the MSP. But, given all the other factors involved, I have concluded that the parties to the reinsurance contracts did not intend that the words should have the same meaning or effect.

[87]There was no dispute about the facts on this issue. RSA had copies of the two Complaints by 30 December 2000. Those two Complaints alleged that the complainants had bought Coca Cola stock during the “Class Period” between 21 October 1999 and 6 March 2000. They also alleged that the complainants had paid “artificially inflated prices” The phrase is used in both Complaints: Carpenter at para 114; Lavalla at para 94. for Coca Cola stock during that period. There is no detail in either pleading as to what the price of the stock would have been had the true financial position of Coca Cola been known by the world during the Class Period.

[88]As I have already noted, there was also agreement on three points on the construction of the CCC relating to this issue. First, “loss or losses” means actual loss, as opposed to alleged loss. Secondly, “knowledge” meant actual knowledge of RSA rather than constructive knowledge. Thirdly, the question of whether RSA had the requisite knowledge had to be judged objectively rather than by RSA’s own views of its knowledge or lack of it.

[89]Mr Harvey makes two submissions. First he submits that once RSA had copies of the two Complaints, it had actual knowledge that the third party claimants had suffered actual losses. He argues that statements in the Complaint that the stock was bought at artificially high prices, coupled with others that say that the stock went down in value, show that the third party claimants had suffered an actual loss. He says that is because the complainants parted with more money than they should have done and were thereby financially deprived; so they suffered actual financial loss.

[90]Secondly, he submits that once RSA had the Complaints and had studied the nature of the allegations being made by the complainants in the Class Actions, RSA would have had to conclude, looking at the matter objectively, that these actual losses “may give rise to a claim on this [reinsurance]”. That is because, analysed objectively,(i) the Complaints allege acts and defaults of Coca Cola’s directors and officers which may fall within the scope of the cover given by Section V of the MSP; and

(ii) the liability of RSA (as one of the Consortium insurers of the MSP) may give rise to a claim on the reinsurance.

[91]Mr Sumption’s arguments concentrated on the issue of whether RSA had knowledge of an actual loss by the third party claimants. He submits that the nature of the loss asserted in the Complaints in the two Class Actions is that the complainants paid a higher price for Coca Cola stock than would have been the case had the world (and so the stock markets) had accurate information about the state of Coca Cola’s finances at the relevant time. Mr Sumption accepts that RSA could attain actual knowledge of an actual loss by receiving that information from an exterior source. He gave as an instance the insurer who learns from Lloyd’s List that a ship has sunk. He accepts that in those circumstances the insurer would have actual knowledge of an actual loss of the insured owner of the ship. This follows, he said, because the probability is that Lloyd’s List is accurate and the loss has, in fact, occurred.

[92]But Mr Sumption submits that where the fact of the loss alleged depends on other facts which are themselves in issue, then it cannot be said that an assertion of the truth of those facts means that they are the case. So here the complainants say that they paid inflated prices for Coca Cola stock because:(i) the financial position of Coca Cola was misstated;

(ii) this was done deliberately or recklessly by its Directors and officers; and

(iii) if the true position had been known, then the stock prices would have been much lower. (There is even the allegation that the complainants may not have bought Coca Cola stock at all).

[93]Mr Sumption argues that when RSA received the two Complaints, the truth of each of the component facts which together would establish the conclusion of fact that the complainants paid an inflated price for the Coca Cola stock, was in issue. (It still is). Therefore one cannot say that RSA had actual knowledge of an actual loss by the third party claimants on or before 11 January 2001.

[94]To complete the argument, Mr Sumption says that if RSA does not have knowledge of an actual loss by the third party claimant, then it cannot have knowledge that such loss may give rise to a claim on the reinsurance. That must follow.

[95]I have concluded that the argument of Mr Sumption is correct. In this case the complainants say that they have suffered loss in that they paid more for the Coca Cola stock than they should have done and so they thereby lost money. If that were a proved fact, then the third party claimants would have suffered an actual loss. But, at the time RSA had received the Complaints, that was not a proved fact. That fact That is, that the complainants paid an inflated price. does depend on establishing that the Coca Cola stock would have been at a lower value if the financial position of Coca Cola had been accurately stated to the world during the Class Period. That in turn assumes that the financial position was not accurately stated. It also assumes that the reason for this was the acts, omissions or defaults of the Directors and officers of Coca Cola which were intended to mislead.

[96]I have concluded that, as at 11 January or 19 January 2001, RSA did not have actual knowledge of actual losses of third party claimants against Coca Cola. This means that, on the proper interpretation of the CCC, RSA did not have to give notice to the Reinsurers under the CCC before it did in fact give notice of the Complaints to the Reinsurers on 19 January 2001. Therefore RSA was not in breach of the condition precedent to the Reinsurers’ liability under the reinsurance contracts.

[97]I appreciate that the consequence of my conclusion on Issue Two is that in some cases, of which this may be one, the reinsured may only have actual knowledge of an actual loss of the third party claimant once it has been proved or admitted in court or arbitration proceedings between the third party claimant and the insured, or accepted as part of a settlement between them. It could be argued that this possibility falsifies my conclusion on Issue One, because it would place the “loss or losses” at the time argued for by Mr Sumption. However, I believe that my conclusion on Issue Two does not falsify my earlier conclusion. Ultimately the question that has to be posed is:

“has the reinsured actual knowledge of a loss or losses that may give rise to claim [sic] on this [reinsurance]”

. Three requirements have to be fulfilled before the reinsured is obliged to give notice to the Reinsurers under the CCC. First there must be an actual loss; secondly that loss must be one that may give rise to a claim on the reinsurance and thirdly the reinsured must have actual knowledge of that actual loss. Those three requirements can be fulfilled at any time in the chronology that must start, for the purposes of the CCC, when a third party claimant asserts it has suffered a loss as a result of the acts or defaults of the insured. When the three conditions are fulfilled must be a question of fact in each case. In this case so far as RSA was concerned the requirements were not fulfilled before 19 January 2001, so RSA were not obliged to give notice to the Reinsurers before that date.

Overall Conclusion

[98]On the first issue, I have concluded that the phrase “loss or losses” in the CCC refers to actual losses of third party claimants against Coca Cola. However, on the second issue, RSA was not obliged to give notice of the alleged losses of the complainants in the two Class Actions to the Reinsurers because at all times before 19 January 2001 RSA did not have actual knowledge of actual losses by the third party claimants against Coca Cola.

[99]It was agreed at the hearing that the parties would consider my judgment and then, if necessary, make further representations as to the form of any Declarations that should be given.