American International Marine Agency of New York Inc & Anor v Dandridge [2005] EWHC 829 (Comm)

2005] EWHC 829 (Comm)Case No 2003 Folio No. 764IN THE HIGH COURT OF JUSTICEQUEEN=S BENCH DIVISIONCOMMERCIAL COURTVenue Royal Courts of Justice, Strand, London, WC2A 2LLDate 5 May 2005
Before
MR RICHARD SIBERRY QC, sitting as a DEPUTY HIGH COURT JUDGE
Between
CHRISTINE E. DANDRIDGEDefendant
Mr Michael Collett (instructed by Waltons & Morse) for ClaimantsMr Charles Kimmins (instructed by Clyde & Co) for DefendantHearing Hearing date: 17 th March 2005
JudgmentRICHARD SIBERRY QCIntroduction
[1]This judgment follows a trial, on agreed facts, of the Claimants’ claim for US$225,000 (plus interest and costs) under a “Total Loss Only” (“TLO”) reinsurance (“the Reinsurance”) subscribed to by the Defendant (sued as representative underwriter) and other underwriters (together “Reinsurers”). Reinsurers thereby reinsured the Claimants in respect of the Claimants’ participation in a hull and machinery (“H&M”) insurance of the MV Avon (“the Vessel”), for a twelve month period commencing on 30th March 2000. The Claimants had participated in this H&M insurance as following insurers, on terms which included a widely-worded “follow the leader” clause (set out in para 12 below). The Vessel ran aground on 9th September 2000, and was thereafter declared a total loss.[2]The case raises issues as to the proper construction and effect of various terms of the Reinsurance, in particular the provision whereby it was expressed to be “a reinsurance and subject to the same clauses and conditions and against the same perils as in the original policy or policies but only against the Risks of Total and/or Constructive Total and/or Arranged Total and/or Compromised Total Loss of vessel”, and as to whether that provision was effective to incorporate the follow the leader clause in question. If it was, further issues arise as to the effect, upon the Reinsurance, of the expiry of the Vessel’s classification with Det Norske Veritas (“DNV”), and of the agreement of the leading underwriter under the underlying H&M insurance, both to the Vessel’s reclassification with INSB, and to a reduction in the Vessel’s insured value, from US$2.5million to US$1.5million. The Agreed Facts and Issues[3]It is convenient first to set out the agreed facts, which were recorded in Schedule 1 to the Claimants’ Outline Submissions for the trial (“the Agreed Facts”). These were as follows:
“1. The mv “AVON” (“the Vessel”) was insured for 12 months from 30 March 2000 under a hull and machinery policy incorporating the Institute Time Clauses (Hulls) CL. 280 dated 1/10/83 (“the Insurance”). 2. It was a term of the Insurance that the Vessel was classed with DNV and had a H&M value of US$2.5million. 3. The Vessel was originally classed with DNV. 4. The lead underwriters of the Insurance were Axa Global Risks (“Axa”). 5. The First and/or Second Claimants (collectively “the Claimants”) had a 15% participation in the Insurance. 6. The terms of the Claimants’ participation in the Insurance are evidenced by the binder dated 18 April 2000 bearing reference number 20734. 7. The Vessel’s Class with DNV expired on 31st August 2000. The Vessel was reclassed with INSB as from 6th September 2000. The Vessel was out of Class between 31st August 2000 and 6th September 2000. 8. Axa had orally agreed with the Owners (or their agents) prior to the casualty to cover the vessel on the terms that its class had been changed, and its value was reduced from US$2.5million to US$1.5million. 9. On 13th September 2000, Axa agreed in writing (by an endorsement no.10) to cover the Vessel on the terms that its class had been changed, and its value was reduced from US$2.5 million to US$1.5million. 10. The Claimants issued an endorsement no.7 to the Binder in respect of the Vessel’s change in class and noted in writing the change in the Vessel’s value. 11. Each of the changes referred to in paragraphs 8 to 9 above (i) amounted to material changes to the terms of the Insurance, and to the risk, (ii) were potentially prejudicial to the rights and obligations of the Defendant, and (iii) were never agreed to by the Defendant, nor would the Defendant have agreed to the same if they [sic] had been asked to do so at the time. 12. The Vessel ran aground on 9 September 2000 and was thereafter declared a total loss. 13. At the time of the casualty, Axa and the Owners (or their agents) were in the process of negotiating cover for a scrap voyage. At the time of the casualty, the Vessel had not embarked on the scrap voyage, and any cover for the scrap voyage had not yet incepted. 14. By reason (in particular) of the facts and matters set out at paragraph 8 above, the Vessel was covered by the insurance provided by Axa at the time of the casualty and Axa was legally obliged to pay the claim arising out of the casualty (and did so). 15. The Claimants paid US$225,000 in respect of a claim for constructive total loss of the Vessel. 16. When the Claimants settled the Owners’ claim under the Insurance: (1) the Claimants believed that they were liable to do so; and (2) the Claimants acted honestly and took all proper and business like steps in making the settlement. 17. Various London reinsurers including the Defendant (“the Reinsurers”) agreed to reinsure the Claimants’ participation in the Insurance against risks of total loss (“the Reinsurance”). 18. The terms of the Reinsurance are evidenced by cover note no. TT201870T. 19. For the avoidance of doubt: (1) The above paragraphs are without prejudice to the following questions: (a) whether the changes agreed by Axa in paragraphs 8 to 9 above amounted to amendments to an existing policy of insurance, or to a new policy of insurance; and (b) whether Reinsurers were bound by Axa’s decision to hold the Vessel covered despite the change in Class in circumstances when Axa did not agree to do so in writing before the casualty.” (1) the Claimants believed that they were liable to do so; and (2) the Claimants acted honestly and took all proper and business like steps in making the settlement. (1) The above paragraphs are without prejudice to the following questions: (a) whether the changes agreed by Axa in paragraphs 8 to 9 above amounted to amendments to an existing policy of insurance, or to a new policy of insurance; and (b) whether Reinsurers were bound by Axa’s decision to hold the Vessel covered despite the change in Class in circumstances when Axa did not agree to do so in writing before the casualty.”
[4]The parties also agreed upon the following formulation of the issues for trial (“the Agreed Issues”), as set out in Schedule 1 to the Claimants’ Outline Submissions:
“Was the claim recognised and paid by the Claimants not within the risks covered by the Reinsurance as a matter of law, which raises the following issues: (1) Without prejudice to sub-paragraph (2) below: (a) whether any amendment to the Insurance in respect of the Vessel’s class and/or insured value was binding upon the Reinsurers by virtue of the express terms of the Reinsurance. (b) Whether the Claimants were in breach of classification warranties in the Reinsurance, and if so what is the effect thereof. (c) Whether the Claimants were in breach of the Reinsurance by virtue of the amendments to the Insurance in respect of the Vessel’s class and/or insured value, and if so what is the effect thereof. (2) Whether: (a) on a true construction of the Reinsurance, the “follow the leader” provision …. was incorporated into and/or to be given effect in the Reinsurance such that the Reinsurers were precluded from contending that a claim recognised by the Claimants did not fall within the risks covered by the Reinsurance as a matter of law if the Claimants were bound to pay the claim by virtue of the operation of the “follow the leader” provision. (b) by virtue of the operation of the “follow the leader” provision the Claimants were bound by Axa’s decisions on the change in the Vessel’s class and the reduction in the insured value of the Vessel and/or bound to pay the claim.” (a) whether any amendment to the Insurance in respect of the Vessel’s class and/or insured value was binding upon the Reinsurers by virtue of the express terms of the Reinsurance. (b) Whether the Claimants were in breach of classification warranties in the Reinsurance, and if so what is the effect thereof. (c) Whether the Claimants were in breach of the Reinsurance by virtue of the amendments to the Insurance in respect of the Vessel’s class and/or insured value, and if so what is the effect thereof. (a) on a true construction of the Reinsurance, the “follow the leader” provision …. was incorporated into and/or to be given effect in the Reinsurance such that the Reinsurers were precluded from contending that a claim recognised by the Claimants did not fall within the risks covered by the Reinsurance as a matter of law if the Claimants were bound to pay the claim by virtue of the operation of the “follow the leader” provision. (b) by virtue of the operation of the “follow the leader” provision the Claimants were bound by Axa’s decisions on the change in the Vessel’s class and the reduction in the insured value of the Vessel and/or bound to pay the claim.”
[5]Schedule 1 further recorded the parties’ agreement that:
“Unless the claim recognised and paid by the Claimants was not within the risks covered by the Reinsurance as a matter of law on the basis of one of the matters referred to in [the Agreed Issues], it is common ground that the Reinsurers are liable to the Claimants.”
The evidence[6]The agreed trial bundles included, at Bundle B tabs 1-4, various contractual documents which were incorporated by reference into Schedule 1, and to some of which it will be necessary to refer by way of elaboration of the Agreed Facts as set out above. Bundle B tab 5 contained various other contemporaneous documents which were made available to the Court by way of background, but which were not intended by the parties to form the basis for any additional findings of fact.[7]Because the trial was conducted on agreed facts, no witness evidence was led. The parties supplemented their written Outline Submissions/Skeleton Arguments with oral submissions, and the hearing was concluded within a day. However, following the hearing I invited further submissions on the issue as to the proper construction of the provision of the Reinsurance which I have set out in paragraph 2 above, and on related matters. The parties responded by way of further written submissions, and following service of the Claimant’s Reply Submissions, I was invited to proceed to judgment without any further oral hearing. The Insurance[8]The Agreed Facts state that the Vessel was insured under a H&M policy defined therein as “the Insurance” (a definition which I adopt), of which the lead underwriters were Axa, and in which the Claimants had a 15% participation evidenced by a binder dated 18th April 2000 bearing reference number 207354 (paras 1, 4-6). In fact, no single policy document appears to have been issued. A document entitled “Insurance Slip H-2131-00”, and bearing the date 3rd April 2000, was issued by Cap-Marine Assurances & Reassurances SA, evidencing the insurance of the Vessel, and of another vessel, the LESZECK G, both managed by ASP Seascot Shipmanagement Ltd. of Glasgow, in respect of H&M risks, for 12 months with effect from 30th March 2000. This document identified Axa as “Rating and Claims Leader”, and nominated Axa for the purposes of claims handling. It included a security schedule setting out the percentage lines written by Axa and by other French market underwriters, together totalling 85%, and also recording that the balance of 15% was underwritten by the First Claimants, American International Marine Agency (“AIMA”). However, the document expressly provided that it was “FOR FRENCH MARKET USE ONLY”, and stated “ORDER hereon: 85%.” In view of its title I shall refer to this document as “the French Market Slip”, although it appears to be more in the nature of a broker’s cover note.[9]The conditions to which the French Market Slip was subject included the Institute Time Clauses Hulls CL. 280 dated 1st October 1983 (“the ITC”), and a Hull Classification Clause dated 1st January 1993 (“the Classification Clause”), which was attached to the French Market Slip. A schedule of vessels, also attached, gave details of the AVON and the LESZECK G, specified the insured value of each vessel as US$2.5 million, and indicated that the AVON was classed with DNV (referred to in the schedule as “NV”).[10]Clause 4 of the ITC provides, so far as material, as follows:
“TERMINATION This Clause 4 shall prevail notwithstanding any provision whether written typed or printed in this insurance inconsistent therewith. Unless the Underwriters agree to the contrary in writing, this insurance shall terminate automatically at the time of 4.1 change of the Classification Society of the Vessel, or change, suspension, discontinuance, withdrawal or expiry of her Class therein, provided that if the Vessel is at sea such automatic termination shall be deferred until arrival at her next port. However where such change, suspension, discontinuance or withdrawal of her Class has resulted from loss or damage covered by Clause 6 of this insurance or which would be covered by an insurance of the Vessel subject to current Institute War and Strikes Clauses Hulls-Time such automatic termination shall only operate should the Vessel sail from her next port without the prior approval of the Classification Society. ……… A pro rata daily net return of premium shall be made.” 4.1 change of the Classification Society of the Vessel, or change, suspension, discontinuance, withdrawal or expiry of her Class therein, provided that if the Vessel is at sea such automatic termination shall be deferred until arrival at her next port. However where such change, suspension, discontinuance or withdrawal of her Class has resulted from loss or damage covered by Clause 6 of this insurance or which would be covered by an insurance of the Vessel subject to current Institute War and Strikes Clauses Hulls-Time such automatic termination shall only operate should the Vessel sail from her next port without the prior approval of the Classification Society. ……… A pro rata daily net return of premium shall be made.”
[11]The material terms of the Classification Clause were as follows:
“1. Warranted that : 1.1 The vessel is classed with Classification Society as mentioned in the policy. 1.2 The class is not suspended, discontinued, or withdrawn. 1.3 the existing rating class is maintained. ……… 1.5 Any changes to the above warranties is subject to prior agreement of Underwriters who are entitled to cancel this insurance or to review the conditions of the contract. But if the vessel is at sea, such cancellation shall be deferred until arrival of her next port of call. Should the Assured and/or his Representative fail to comply with any of the above warranties, then the insurance cover is cancelled as from the date the failure took place.” 1.1 The vessel is classed with Classification Society as mentioned in the policy. 1.2 The class is not suspended, discontinued, or withdrawn. 1.3 the existing rating class is maintained. ……… 1.5 Any changes to the above warranties is subject to prior agreement of Underwriters who are entitled to cancel this insurance or to review the conditions of the contract. But if the vessel is at sea, such cancellation shall be deferred until arrival of her next port of call. Should the Assured and/or his Representative fail to comply with any of the above warranties, then the insurance cover is cancelled as from the date the failure took place.”
[12]The binder evidencing the terms of the Claimants’ participation in the Insurance, as referred to in para 6 of the Agreed Facts (“the Binder”), was indeed dated 18th April 2000, though it appears to have been signed on behalf of the Claimants 2 days later, on 20th April 2000. It recorded the Claimants’ 15% participation in the H&M insurance of the AVON and the LESZECK G, each valued at US$2.5 million as stated in a schedule of vessels attached thereto. This schedule (unlike its equivalent in the French Market Slip) did not specify the Class of either vessel, though in the event nothing turns on this. The Binder was subject to the same Conditions as the French Market Slip, including the ITC, and a Classification Clause in identical terms to that in the French Market Slip. In addition, the Binder contained the “follow the leader clause” referred to in sub-paragraph (2)(a) of the Agreed Issues. This clause (“the follow the leader clause”) was in the following terms: “Following French Market Leaders (Axa Global Risks) in all respects, including rates and claims but excluding ‘ex gratia’ ” (my emphasis). It was not in dispute that this was a widely-worded follow the leader clause, which, potentially at least, gave Axa a more extensive role than that provided for in the leading underwriter provisions in the French Market Slip (see para 8 above). As some reliance was placed by Reinsurers on the position of this clause, I should record that it was printed at the foot of the page on which the ‘Terms and Conditions’ and ‘Trading Warranties’ were set out, but as a separate provision. The Reinsurance[13]Para 18 of the Agreed Facts records that the terms of the Reinsurance are evidenced by a Cover Note No. TT 201870T. This was issued by the Claimants’ brokers SBJ Limited (“SBJ”), and is dated 14th April 2000 – 4 days before the date of the Binder, and 6 days before the Binder was signed on behalf of the Claimants. The Cover Note is, of course, merely evidence of the Reinsurance. The reinsurance contract itself was, at least originally, contained in a Mar. 91 Slip Policy on an SBJ printed form (“the Reinsurance Slip”), with the policy number TT 201870T printed at the bottom of the first page. It was subscribed to by the four Lloyd’s Syndicates and the one reinsurance company who together comprise Reinsurers, during the period 10th –12th April 2000. The percentage lines scratched by Reinsurers together totalled 15.5%.[14]The Reinsurance Slip contained the following material provisions:
“TYPE: TLO Reinsurance FORM: Mar. 91 Slip Policy REASSURED: ORIGINAL ASSURED: SEASCOT SHIPMANAGEMENT VESSEL: 1) “AVON” 2) “LESZECK G”
Including new and/or acquired and/or added as original h/c [held covered – the abbreviation ‘h/c’ was added in manuscript]. FORM: Mar. 91 Slip Policy REASSURED: ORIGINAL ASSURED: SEASCOT SHIPMANAGEMENT 2) “LESZECK G” Including new and/or acquired and/or added as original h/c [held covered – the abbreviation ‘h/c’ was added in manuscript]. 15. INTEREST: Hull, Machinery and everything connected therewith. Valued at 1) US$2,500,000 2) US$2,500,000 or as valued in original policy or policies and/or Interest as original. 16. SUM REINSURED: 17. CONDITIONS: Being a reinsurance and subject to the same clauses and conditions and against the same perils as in the original policy or policies but only against the Risks of Total and/or Constructive Total and/or Arranged Total and/or Compromised Total Loss of vessel. 18. To follow the settlements of original Underwriters but only as far as applicable to this Reinsurance. 19. No Claims in respect of Salvage, Salvage charges or Sue and Labour. 20. Continuations and/or Deviations and/or Extensions as original policy or policies whether notice be given or not. 21. Valuation Clause as and/or if in original policy. 22. Class Warranties if and/or as in original. 23. Trading and other Warranties as original but half additional premiums or as Institute or other scale, if paid on original. 24. …….. 25. Premium in full to be presented to LPSO and/or LPC on or before 60 days of original payment date. 26. RATE: 1) 1.50% C.R.O. [cancelling returns only] 2). 0.375% C.R.0. 28. U.S. 29. CLASSIFICATION: U.S. Reinsurance.”

ASSURED: SEASCOT SHIPMANAGEMENT

[15]It will be noted that the Reassured was not identified, and that the Sum Reinsured was left blank. It was not suggested that anything turned on either omission. As to the first, it was common ground that the Reinsurance was a renewal, which may explain why the Claimants were not identified in the Reinsurance Slip. The classification as “US Reinsurance” is at least consistent with an intention to reinsure the Claimants. There was in any event no issue as to the identity of the Reassured, and, as the Claimants pointed out in their Reply Submissions, it was not suggested by Reinsurers that it was of any relevance whether Reinsurers were aware of the identity of the Claimants at the time that they wrote the risk. As to the second omission, in the absence of any separate specification of the sum reinsured, it is clear that the percentage lines scratched by subscribing underwriters, which as already mentioned totalled 15.5%, were intended and would have been understood to be expressed as percentages of the insured values as stated in the “Interest” Clause, not as percentages of the Reassured’s participation.[16]SBJ’s instructions had been to obtain reinsurance of a 15% line on the underlying H&M insurance. Accordingly, the Reinsurance was over-subscribed by ½%. What then appears to have happened is that someone at SBJ recalculated Reinsurers’ lines as percentages of that 15% order, thereby at the same time “writing down” each original line in accordance with market practice because the order had been oversubscribed. The resultant percentages were noted down in manuscript on the Reinsurance Slip. Thus, for example, Hiscox Syndicate No. 33’s scratched 5% line was re-expressed as “32.258”, that is, 32.258% of the 15% order, being (5/15.5) x 100%.[17]On 14th April 2000, SBJ issued its Cover Note No. TT 201870T in respect of the reinsurance it had thereby placed on behalf of the Claimants. The material terms of this Cover Note were, as one would expect, identical to those of the Reinsurance Slip, save only that in the Cover Note, the First Claimant, AIMA, was identified as the Reassured, the sum reinsured was stated as “15.00% of values”, and the “US Classification” was omitted. Reinsurers’ (written down) percentage shares of the risk were expressed as percentages (together totalling 100%) of the “15.00% of values” reinsured. The stated percentages corresponded with those noted in manuscript on the Reinsurance Slip.[18]In due course a closing off slip was prepared by SBJ for the Lloyd’s market. This identified AIMA as Reassured, stated the sum reinsured to be “15.00% of values”, and recorded the signed lines percentages as in the Cover Note, but otherwise set out the terms recorded in the original Reinsurance Slip. This closing off slip appears to have been scratched by an underwriter at MED Syndicate No. 609 on 5th January 2001. It was not suggested that any of the terms of the closing off slip bore a different meaning from that of its counterpart in the Reinsurance Slip. The Claimants’ submissions[19]The Claimants submitted that they were, by virtue of the wide ambit of the follow the leader clause (the terms of which were if anything wider than those of the follow the leader provisions discussed in cases such as Barlee Marine Corp. v. Mountain [1987] 1 Lloyds Rep. 471 and Roadworks (1952) Ltd. v. Charman [1994] 2 Lloyds Rep. 99), bound by Axa’s agreement to continue the Vessel’s cover, notwithstanding the expiry of its Class with DNV on 31st August 2000, on terms that it was classed with INSB as from 6th September 2000, and also by Axa’s agreement to the reduction in the Vessel’s insured value, from US$2.5million to US$1.5million, with effect from the latter date. They submitted that Axa’s oral and written agreement to these changes (the latter by Endorsement No. 10 to the French Market Slip, which they submitted was an agreement in writing compliant with clause 4 of the ITC) amounted to a waiver of any breach of clause 1 of the Classification Clause and of the provision in clause 4 of the ITC for automatic termination upon expiry of Class, such that insurers (including themselves) would have been estopped from relying on those provisions. These changes, they submitted, did not give rise to a new contract of insurance – they took effect as variations to the original H&M Insurance. They relied on Bremer Handelsgesellschaft m.b.H. v. Finagrain, Compagnie Commerciale Agricole et Financiere SA [1981] 2 Lloyds Rep. 259 for the proposition that estoppel could operate to revive a contract which had terminated pursuant to an “automatic cancellation” clause therein (see per Lord Denning MR at p. 263). The words “in all respects” in the follow the leader clause were sufficiently wide to make Axa’s decisions to agree to the Vessel’s change of Class and insured value, and to pay the claim, binding upon the Claimants. Accordingly, so they submitted, they had been bound under the Insurance to pay their proportion of the claim for a total loss, which, following the reduction in the insured value of the Vessel, was US$225,000 (15% of US$1.5 million).[20]The Claimants contended that I should approach the issue of whether the follow the leader clause was incorporated in the Reinsurance, and if so with what effect, bearing in mind that there is a presumption, in facultative reinsurance, that the parties intend the scope and nature of the reinsurance cover to be back-to-back with that of the underlying insurance – see Groupama Navigation et Transports v. Catatumbo CA Seguros [2000] 2 Lloyds Rep. 350, at paras 11-12, 17-21 and 28-30, HIH Casualty and General Insurance Ltd. v. New Hampshire Insurance Co. [2001] 1 Lloyds Rep. 596 (Court of Appeal), at paras 166-169. In a case such as the present, where the Reinsurance gave TLO cover only, they submitted that this presumption applied in relation to the equivalent cover in the underlying insurance. They pointed out that as a result of the follow the leader clause, they might have become bound by variations in the Insurance agreed by Axa without their knowledge, and therefore without any opportunity to obtain Reinsurers’ consent to such variations; and that if Reinsurers had good defences under the Reinsurance by reason of such variations, the resultant gap in cover would be the antithesis of back–to-back cover.[21]They submitted that the follow the leader clause in the Binder was incorporated into the Reinsurance by virtue of the incorporating provision set out in paragraph 2 above: they contended that the reference therein to “the original policy or policies” was to the Binder, and not to the French Market Slip; that the follow the leader clause was self-evidently a term of the Binder, and therefore a “clause” or “condition” thereof within the meaning of that incorporating provision; and that it satisfied each of the four criteria for incorporation identified and applied by both David Steel J and the Court of Appeal in HIH Casualty and General Insurance Ltd. v. New Hampshire Insurance Co. [2001] 1 Lloyd’s Rep. 378 (David Steel J), at paras 39-44, [2001] 1 Lloyds Rep. 596 (Court of Appeal), at paras 162-187, namely(1) whether it was germane to the reinsurance,(2) whether it made sense in the context of the reinsurance, with or without permissible manipulation,(3) whether it was consistent with the express terms of the reinsurance, and(4) whether it was apposite for inclusion in the reinsurance. They pointed out that it had not been suggested by Reinsurers that such a provision was unusual.[22]As to their contention that the reference in the Reinsurance to “the original policy or policies” was a reference to the Binder, the Claimants submitted that the word “policy” was not to be construed as meaning “a policy document in the full technical sense”. It was to be construed in a looser sense as meaning the underlying contract of insurance. The underlying contract of insurance was, for these purposes, that evidenced by the Binder - not the French Market Slip, to which the Claimants were not parties. The reference to “Policy No. H/2131/00” in Endorsement No. 10 to the latter, signed by Axa on behalf of the French market, was not an indication that the French Market Slip was the subject of the words “original policy”.[23]The Claimants reminded me that when each line on an insurance is subscribed, that generally gives rise to a binding contract pro tanto between the underwriter and the insured (subject to the possibility that, as here in the case of the Reinsurance, the line may fall to be written down on closing if the insurance is over-subscribed) – see General Reinsurance Corp. V. Forsakringsaktiebolaget Fennia Patria [1983] 1 QB 856, at 864C, 866H-867A, and 867G. It followed that insurers’ respective participations could be on different terms - as was the case here, where the leading underwriter provisions differed as between the French Market Slip and the Binder.[24]In support of their submissions on incorporation and the effect thereof, the Claimants relied on the decision of the Court of Appeal in the HIH case (supra). In that case the Court held that clause 8.1 of the insurance policy in question, whereby insurers agreed that they would not seek or be entitled to avoid or rescind the policy on certain specified grounds, including non-disclosure or misrepresentation, was incorporated into the applicable reinsurance policy by a clause therein whereby the latter was expressed to be “subject to all terms, clauses and conditions as original…”. The Court of Appeal held that clause 8.1 was incorporated in unmanipulated form, with the effect that it operated in a back-to-back manner at the two different levels, such that for example reinsurers could not seek to avoid the reinsurance in respect of a non-disclosure which insurers could not have relied upon against their insured.[25]In the light of this decision, the Claimants contended that the follow the leader clause was incorporated into the Reinsurance in unmanipulated form, with the effect that Reinsurers were precluded from contending that a claim recognised by the Claimants did not fall within the risks covered by the reinsurance as a matter of law, if the Claimants themselves had been bound to pay the claim by virtue of the operation of the follow the leader clause, as they said they had been (see para 19 above). They submitted that it satisfied all four criteria for incorporation:(1) it was germane to the Reinsurance, because it affected the risks being run by the Claimants, and was a form of “follow the settlements” clause, albeit with a wider effect;(2) it made sense in the context of the reinsurance, without manipulation, if given effect to as described above;(3) it was consistent with the express terms of the reinsurance; and(4) it was apposite for inclusion in the reinsurance.[26]It followed, so they submitted, that Reinsurers could not take the defences(1) that the expiry of the Vessel’s classification with DNV resulted in the automatic termination of the Reinsurance under the ITC Clauses as incorporated in the Reinsurance, or(2) that such expiry of class, or the subsequent change of class, were breaches of warranty under the Classification Clause as incorporated therein, or(3) that the material alterations in the terms of the underlying insurance comprised by Axa’s agreement to the change in Class and to the reduction in the Vessel’s insured value were breaches of the common law warranty that there should be no variation of the underlying insurance without the consent of the reinsurer (see further para 30 below).[27]Accordingly, so the Claimants submitted, Reinsurers were, notwithstanding the expiry and change of Class and the alteration in insured value, liable to indemnify them in respect of their payment of their 15% share of the reduced insured value of the Vessel.[28]In their written Outline Submissions the Claimants advanced an alternative argument to the effect that by virtue of the “Interest” clause in the Reinsurance, and the references in the Conditions thereof to “Class Warranties if and/or as in original”, if the provisions as to the Vessel’s insured value and Class in the Claimants’ participation in the Insurance were amended, the Reinsurance was likewise amended, with the result that Reinsurers could not complain of a breach of the common law warranty that there should be no variation of the underlying insurance without the consent of the reinsurer. This argument was not developed in the course of oral submissions. Reinsurers’ submissions[29]The starting point for Reinsurers’ submissions was the proposition that, absent the incorporating provisions relied on by the Claimants and the follow the leader clause, the expiry of the Vessel’s Class with DNV, the change of Class to INSB, and the change in the Vessel’s insured value, were each matters which would have discharged Reinsurers, because each occurred without the consent of Reinsurers, whether prior or subsequent, written or oral. This proposition was not disputed by the Claimants.[30]Thus, absent the provisions relied upon, it was common ground that:(1) pursuant to clause 4 of the ITC Clauses as incorporated into the Reinsurance, the Reinsurance would automatically have terminated upon the expiry of the Vessel’s Class with DNV, without Reinsurers’ prior written agreement to the contrary;(2) the expiry of Class with DNV, and the change of Class to INSB, without the prior consent of Reinsurers, also constituted breaches of the warranties contained in the Classification Clause as incorporated therein, which would automatically have discharged Reinsurers from the date of breach – see the express terms of clause 1.5 thereof, and Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd. (The Good Luck) [1992] AC 233, at pp. 262-263; and(3) the change in the Vessel’s insured value, likewise without the consent of Reinsurers, was a material variation of the underlying insurance, which would have discharged Reinsurers at common law – see Norwich Union Fire Insurance Society Ltd. v. Colonial Mutual Fire Insurance Co. Ltd. [1922] 2 KB 461, in which McCardie J held that a reduction in the agreed value of the insured vessel under an insurance policy discharged reinsurers under the reinsurance policy, declaring, at p. 469: “The only sound rule seems to me to be that the head policy cannot be altered save with the consent of the re-insurer”; see also the HIH case, supra, per Rix LJ at para 109. The question of whether this common law principle only applies to material variations to the underlying insurance (to which Rix LJ referred in passing at para 111) does not arise in the present case, having regard to the parties’ agreement that each of the changes in question amounted to material changes to the terms of the Insurance, and to the risk, and was potentially prejudicial to the rights and obligations of the Defendant, who would not have agreed to the same if asked to do so at the time (see para 11 of the Agreed Facts).[31]Reinsurers contended that if they were to be deprived of the right to be consulted before the Insurance was varied, then clear words to that effect in the Reinsurance were needed – and that there were no such clear words. They emphasised that, with respect to the reduction in the Vessel’s value, there was no identity of interest between Insurers and Reinsurers. On the contrary, any reduction in value made it more likely that a casualty would be declared a constructive total loss, so as potentially to involve the liability of Reinsurers under their TLO cover.[32]It was Reinsurers’ case that pursuant to the express terms of the Reinsurance, only a limited number of changes to the Insurance would bind Reinsurers: new vessels added to the Insurance after inception would, if notice of the additions were given, be held covered by Reinsurers pending agreement on terms between the Claimants and Reinsurers; the only changes that would bind Reinsurers “whether notice be given or not” were “Continuations and/or Deviations and/or Extensions”, in respect of which they submitted that, pursuant to the Trading Warranties clause, half of any additional premium agreed between the assured and Insurers was to go to Reinsurers. Neither the “Continuations and/or Deviations and/or Extensions” provision nor the Trading Warranties clause applied to the separate provisions regarding Class. And the provision “Class Warranties if and/or as original” simply meant, so they submitted, that the classification provisions of the Insurance were incorporated into the Reinsurance.[33]As to the “Interest” clause in the Reinsurance Slip, which provided:
“Hull, Machinery and everything connected therewith. Valued at 1) US$2,500,000 2) US$2,500,000 or as valued in original policy or policies and/or Interest as original”
(emphasis added), Reinsurers submitted, in reliance on the Norwich Union case (supra), that this did not mean that Reinsurers agreed to cover the Vessel for their respective proportions of its value as amended from time to time by and between Insurers and the assured. In that case, the equivalent words were “valued at £313,050 or valued as original policy or policies….subject to valuation clause as and if in original”. McCardie J held (following the decision of the Court of Appeal in Lower Rhine and Wurtemburg Insurance Association v. Sedgwick [1899] 1 QB 179) that by reason of the reduction in the insured value of the vessel in question to £225,000, by way of variation of the original policy, “it cannot possibly be said that the policy as altered was the same as the original policy” (p. 467), and that as this variation was made without the consent of the defendant reinsurers, the reinsurers were discharged.[34]That left the general incorporating provision set out at para. 2 above. Reinsurers contended that the reference therein to “the original policy or policies” did not refer to the Binder, which, as they pointed out, postdated the conclusion of the Reinsurance contract. They submitted that it was “a reference to the original contract which the Claimants wrote”, that the indications in the documents were that the Claimants had written their line before the Binder was issued, and that there was no evidence that when they originally wrote their line, it was subject to the follow the leader clause.[35]Alternatively, they submitted that if these words did indeed refer to the Binder, they were not sufficiently wide to incorporate the follow the leader clause (in part, because there was no evidence that Reinsurers knew the Claimants were a following market, and in part because of the position of that clause in the Binder). They further submitted that the clause did not satisfy any of the four criteria for incorporation identified in the HIH case (supra): it was, so they submitted, neither germane nor apposite to the Reinsurance, because such a clause regulates the relationship between the leading underwriter and the following market, and is collateral to the reinsurance; it was inherently unlikely that reinsurers would delegate underwriting authority to the leader of the underlying insurance, with whom they had no contractual relationship; and to hold that the clause was incorporated with the effect that Reinsurers were bound by all changes agreed between the lead underwriter and the assured would be inconsistent with the express terms of, and would make no sense in the context of, the Reinsurance, for example because the Reinsurance contained a comprehensive code of changes that would bind Reinsurers, some with and some without notice (see para 32 above).[36]It was submitted by Reinsurers that if the Claimants’ arguments were correct, it would follow, having regard to the common law principle referred to in para 30 above, that a reinsurer who reinsured all subscribing insurers by the same reinsurance contract would be discharged as against the leading underwriter, but not as against the following market, in the event of material variations to the underlying insurance agreed to by the former. This would, it was submitted, be commercially absurd - though the Claimants riposted that there was nothing uncommercial about this, as it was always open to the leader to seek reinsurers’ consent to changes.[37]If, contrary to their primary submissions, the follow the leader clause was incorporated in the Reinsurance, Reinsurers contended that the changes in Class still did not bind them, because, so they contended, on the express wording of clause 4 of the ITC Clauses, the Reinsurance was automatically terminated on expiry of the Vessel’s Class with DNV, and accordingly was no longer in existence when Axa agreed, first orally and later in writing, to cover the Vessel on terms that it was classed with INSB. They submitted that that agreement had resulted in a new contract of insurance between the assured and Axa, not merely a variation of the original Insurance. But even if it was a variation, not a new contract, Reinsurers were only bound by variations made in accordance with the terms of the Insurance: they were not bound by Axa’s oral agreement made before the change in Class, or its agreement in writing made thereafter. For similar reasons Reinsurers contended that the Claimants were not bound by Axa’s agreement to the change in Class, so that the Claimants’ case failed at the first hurdle. Discussion[38]The first and, as it seems to me, the central question is whether the general words of incorporation in the Reinsurance, “…subject to the same clauses and conditions and against the same perils as in the original policy or policies…” (“the general incorporation provision”) are sufficiently wide, and are apposite, on their true construction, to incorporate the follow the leader clause in the Binder. It was this question upon which I invited and received further submissions after the conclusion of the hearing. It is necessary to determine this question before (if appropriate) addressing the separate question of whether the follow the leader clause satisfies the four criteria for incorporation identified in the HIH case (supra) – see Pine Top Insurance Co. Ltd. v. Unione Italiana Anglo Saxon Reinsurance Co. Ltd. [1987] 1 Lloyds Rep. 476.[39]This central question in turn raises the issue as to the meaning of the words, “the original policy or policies” as they appear in the general incorporation provision. It is only if those words are apt to refer to the Binder, or at least to all the terms of the Claimants’ participation in the Reinsurance as recorded in the Binder, including the follow the leader clause, that the general incorporation provision would be capable of incorporating the follow the leader clause, subject to compliance of that clause with the criteria for incorporation.[40]In approaching this question, I bear in mind that there is indeed a presumption, in the case of facultative reinsurance, that in the absence of clear words to the contrary, the scope and nature of the cover afforded is the same as the cover afforded by the underlying insurance - see the cases cited at para 20 above. I consider that this presumption is capable of application, with modification, to a case such as the present, where the insurance was for both total and partial loss but the reinsurance was on TLO terms – it can be applied in relation to the total loss cover under both insurance and reinsurance. I also bear in mind that wherever an issue of incorporation arises, the underlying question is whether the parties intended the particular clause in question to be incorporated, and that this will depend on the construction of the reinsurance as a whole and on the surrounding circumstances.[41]The first problem for the Claimants is that the Binder postdates Reinsurers’ subscriptions to the Reinsurance Slip by between 2 and 4 days – and the Claimants’ signature of the Binder postdates those subscriptions by a further 2 days. Thus on the face of it at least, the Claimants did not become parties and bound to the Insurance, whether on the terms of the follow the leader clause or otherwise, until several days after the contract of reinsurance had been concluded. That poses an obvious difficulty for the Claimants’ contention that references in the Reinsurance to “the original policy or policies” were references to the Binder.[42]Reinsurers contended that it was some time before 28th March 2000 that the Claimants agreed to provide insurance to the assured by taking a 15% line. They invited me to infer this from the fact that (as appeared from a document in bundle B tab 5) the Claimants requested SBJ to obtain a TLO reinsurance quote on 28th March 2000, and from the inclusion of a 15% line from AIMA in the security schedule attached to the French Market Slip – though, as mentioned above, this Slip provided that it was “FOR FRENCH MARKET USE ONLY”. However, there was, as the Claimants pointed out in their written Reply Submissions, no agreed fact as to when the Claimants agreed their participation in the Insurance, and it is not unusual for a reinsurance to come into existence before the insurance is written. In the absence of any such agreed fact, I must, as it seems to me, proceed on the basis that it was not until they signed the Binder that the Claimants became bound to their 15% participation in the Insurance.[43]Another strong indication that references in the Reinsurance to “the original policy or policies” were not references to the Binder, which recorded the terms only of the Claimants’ participation in the Insurance, is that, as mentioned above, the lines subscribed by the respective Reinsurers were scratched as percentages of the full insured values, not merely of the Claimants’ 15% participation. The “original policy” in respect of which (for example) Hiscox Syndicate No. 33 scratched a 5% reinsurance line cannot have been the Binder, or any other agreement, containing or evidencing only the Claimants’ 15% participation. The Claimants suggested that I could infer that it was explained to Reinsurers that the Claimants had only insured 15% of the underlying risk. But even if it was, it does not alter the fact that Reinsurers scratched their lines as percentages of 100%, not of 15%, of the underlying risk. In the light of this, the natural interpretation of the words “the original policy or policies” is that they refer to the Insurance as a whole, and not to any particular terms – in this instance the follow the leader clause - unique to the participation of particular insurers, even though it was on behalf of such insurers only that the Reinsurance was obtained.[44]It is not without significance that the Agreed Facts record that the Vessel was insured under a H&M policy (singular), defined therein as “the Insurance” (singular), of which Axa were lead underwriters, and in which the Claimants had a 15% participation. I accept that, as the Claimants contended in their Further Written Submissions, the parties cannot have intended, in the Agreed Facts, to use the word “policy” in the strict sense of a document entitled “policy of insurance” signed on behalf of all insurers; and that similarly the words “original policy or policies” in the Reinsurance should not be narrowly construed to refer only to such a document – which did not exist – but rather that the word “policy” should be understood in the looser sense of the underlying contract of insurance. The commercial reality was that there was indeed a single underlying “Insurance” of the Vessel, of which Axa were the leading underwriters and in which the Claimants had a 15% participation - albeit that the French market, and the Claimants, bound themselves to their respective participations in different contractual documents, and that the terms of the respective participations of the French following market and the Claimants differed as regards the role of Axa as leading underwriter.[45]In my judgment neither the fact that the Reinsurance was classified as “US Reinsurance”, nor the fact that it was a renewal, has any bearing on the interpretation of the general incorporating provision – indeed, the contrary was not suggested. There was no Agreed Fact, and no evidence, as to the terms of any prior year insurance by the Claimants.[46]Accordingly, I have concluded that the words “the original policy or policies” in the general incorporation provision (and indeed elsewhere in the Reinsurance) refer to the Insurance as a whole, and not to the Binder, and therefore that that provision was not apt to incorporate the follow the leader clause in the Binder. If the Claimants had wished to bind Reinsurers to any variation of the original Insurance agreed to by Axa, and to which the Claimants themselves might become bound as a result of having signed up to the follow the leader clause, they should have sought and obtained Reinsurers’ specific agreement to be bound by any such variation, contrary to the position that obtains at common law.[47]In the circumstances, it is not strictly necessary to consider whether, if contrary to the above conclusion the general incorporation provision did indeed refer to the clauses and conditions of the Binder, the follow the leader clause would have satisfied the four criteria for incorporation. As this issue was fully argued, however, I shall briefly express my conclusions thereon. For convenience I repeat the clause, which provided as follows: “Following French Market Leaders (Axa Global Risks) in all respects, including rates and claims but excluding ‘ex gratia’ ”.[48]In my judgment this clause does not satisfy any of the four criteria. It is neither germane nor apposite to the Reinsurance, it does not make sense (and cannot be made to make sense) in the context of the Reinsurance, and it is inconsistent with the express terms thereof. Whatever the correct legal analysis of the effect of a follow the leader clause in a contract of insurance (see the differing views of HH Judge Kershaw QC and Rix J in, respectively Roadworks (1952) Ltd v. Charman (supra) at pp. 105-106, and Mander v. Commercial Union Assurance PLC [1998] Lloyds Rep. (I & R) 93, at pp. 143-144, albeit in the different contexts of an facultative slip and an open cover respectively), such a clause concerns the relationship between the leading underwriter and the following market, as well as that between the following market and the insured. The leading underwriter and the following market generally have mutual interests, but the same is not true of the leading underwriter and the following market on the one hand, and reinsurers on the other. The present case provides a good illustration of this: the reduction in insured value agreed by Axa, presumably because it was thought to be in, or at least not contrary to, the interests of Insurers, would, if it had bound Reinsurers who had insured on TLO terms, have been potentially very prejudicial to their interests. This also illustrates why it is inherently unlikely that Reinsurers would have agreed, with respect to variations, to give their underwriting pen to Axa, with whom they had no contractual or other relationship. A follow the leader clause is not analogous to a follow the settlements clause in a reinsurance contract – as Mance J observed in Roar Marine Ltd v. Bimeh Iran Insurance Co [1998] 1 Lloyd’s Rep 423 at p. 430, the context is quite different. For these reasons it seems to me that the follow the leader clause is neither germane nor apposite to the Reinsurance.[49]Moreover this follow the leader clause clearly does not make sense in the context of the Reinsurance in unmanipulated form: Axa were not the leaders, let alone the “French Market Leaders”, of the Reinsurance, and it was obviously not the intention of the parties to the Reinsurance that Reinsurers should follow Axa in respect of rates, whether in respect of the original insured values or of any alteration thereto - Reinsurers (or at least the leading Reinsurers) made up their own minds as to the appropriate rates for the TLO cover they wrote.[50]The Claimants’ response to these obvious problems was to submit that the clause was incorporated in unmanipulated form but with the same general effect as that achieved, as the Court of Appeal concluded, in the HIH case (supra) – in short, that reinsurers could not take a defence not open to insurers by virtue of the clause held to have been incorporated (see paras 24-25 above). Contrary to the Claimants’ submission, however, I do not think an analogy can properly be drawn with the HIH case. In that case, not only was there no issue as to the meaning of the words “as original” in the incorporation clause in the reinsurance policy: they clearly referred to the policy of insurance containing the clause, clause 8.1, about which the issue of incorporation arose. Unlike the follow the leader clause, clause 8.1 was a term which directly regulated the relationship between insurer and insured. The reasoning which led the Court of Appeal to its conclusion is not, as it seems to me, applicable to a follow the leader clause, which does not directly regulate that relationship, though it may have an indirect effect thereon.[51]It was not suggested by the Claimants that the follow the leader clause could be incorporated in a manipulated form, and it is difficult to envisage any manipulation that would make any sense in the context of the Reinsurance. None was suggested.[52]Moreover the clause would, if incorporated with the effect contended for by the Claimants, have been inconsistent with other provisions of the Reinsurance. Thus, for example, the Reinsurance provided that the vessels were valued at US$2.5 million each “or as valued in original policy or policies”. As the decision in the Norwich Union case (supra) makes clear (see para 33 above), such language refers to the valuation in the original policy in respect of which the reinsurance was obtained: it does not mean “as valued in the original policy as amended from time to time”. But if the follow the leader clause was incorporated, it would, as the Claimants contended, follow that the applicable valuation was that set out in the original policy or any amendment thereto agreed by Axa. Further, the Reinsurance expressly provided that certain categories of variation to the original policy (“Continuations and/or Deviations and/or Extensions”) would bind Reinsurers “whether notice be given or not”, and therefore necessarily without their agreement. I agree with Reinsurers that there is no room alongside this term, and the other provisions of the Reinsurance, for the incorporation of a term which would have had the effect that Reinsurers would have been bound by all variations to the Insurance by Axa, with or without notice to Reinsurers or their reinsured.[53]In the light of the foregoing, it is unnecessary for me to decide what the position would have been if the follow the leader clause had been incorporated into the Reinsurance with the general effect contended for by the Claimants, and in particular to decide whether Reinsurers would nonetheless have been discharged under clause 4 of the ITC, as they contended, on the grounds that both the Insurance and the Reinsurance terminated automatically upon the expiry of the Vessel’s Class with DNV, and that Axa’s agreement to insure the Vessel on terms that it was classed with INSB resulted in a new contract of insurance, rather than a variation of the original Insurance. Nor is it necessary for me to reach a decision on whether the Claimants were themselves bound by Axa’s agreement, having regard to the terms of clause 4 of the ITC and the follow the leader clause.[54]Suffice it to say that I saw considerable force in the Claimants’ argument that, although as a matter of strict analysis the Insurance may have terminated automatically on 31st August 2000 when the vessel’s Class with DNV expired, Axa would by virtue of their oral agreement before the casualty (but apparently after the vessel’s reclassification with INSB on 6th September 2000, as para 8 of the Agreed Facts indicates), and by their subsequent written agreement as recorded in endorsement No. 10 to the French Market Slip, have been estopped from contending as against the insured that the Insurance had expired; and that the Claimants would by virtue of the follow the leader clause (and also by their issue of Endorsement No. 7 to the Binder – see para 10 of the Agreed Facts) have been similarly precluded from taking the point that the Insurance had expired. If that is right, the Claimants were indeed bound by Axa’s agreement to the changes. Conclusions[55]Accordingly, I answer the questions posed in the Agreed Issues as follows: Was the claim recognised and paid by the Claimants not within the risks covered by the Reinsurance as a matter of law? – Answer: the claim was not within the risks covered by the Reinsurance as a matter of law. 1(a) Was any amendment to the Insurance in respect of the Vessel’s class and/or insured value binding upon the Reinsurers by virtue of the express terms of the Reinsurance? Answer: the amendments in question were not binding upon Reinsurers.(b) Were the Claimants in breach of classification warranties in the Reinsurance, and if so what is the effect thereof? Answer: Yes, with the result that Reinsurers were discharged from liability under the Reinsurance.(c) Were the Claimants in breach of the Reinsurance by virtue of the amendments to the Insurance in respect of the Vessel’s class and/or insured value, and if so what is the effect thereof? Answer: Yes, with the result that Reinsurers were discharged from liability under the Reinsurance. (2) (a) On a true construction of the Reinsurance, was the “follow the leader” provision incorporated into and/or to be given effect in the Reinsurance such that the Reinsurers were precluded from contending that a claim recognised by the Claimants did not fall within the risks covered by the Reinsurance as a mater of law if the Claimants were bound to pay the claim by virtue of the operation of the “follow the leader” provision? Answer: No. (b) By virtue of the operation of the “follow the leader” provision, were the Claimants bound by Axa’s decisions on the change in the Vessel’s class and the reduction in the insured value of the Vessel and/or bound to pay the claim? Answer: In view of my conclusions in respect of the Reinsurance, it is not necessary to answer this question.[56]It follows that the Claimants’ claim fails and must be dismissed.