AGF Insurance Ltd v Lexington Insurance Company; Wasa International Insurance Company Ltd v Lexington Insurance Company
| Jurisdiction | England & Wales |
| Judge | Mr Justice Simon |
| Judgment Date | 25 April 2007 |
| Neutral Citation | [2007] EWHC 896 (Comm) |
| Docket Number | Cases No: 2005 Folio 928 and 2006 Folio 374 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 25 April 2007 |
[2007] EWHC 896 (Com)
IN THE HIGH COURT OF JUSTICE
QUEEN's BENCH DIVISION
Commercial Court
Mr Justice Simon
Cases No: 2005 Folio 928 and 2006 Folio 374
Mr Alistair Schaff QC and Ms Sioban Healy (instructed by Addleshaw Goddard) for Wasa
Mr Neil Calver QC and Mr Stephen Midwinter (instructed by Charles Russell LLP) for AGF Mr John Lockey QC (instructed by Chadbourne & Parke) for Lexington
Hearing dates: 13–15 February, 25 April 2007
The Hon. Introduction
In this litigation, the respective Claimants (“Wasa” and “AGF”) seek declarations that they are not liable to indemnify the Defendant (“Lexington”) under a contributing facultative reinsurance contract (“the Reinsurance Contract”) in respect of Lexington's underlying insurance of Aluminum Company of America (“Alcoa”). Lexington counterclaims for an indemnity or damages in respect of a settlement which it reached with Alcoa, and legal costs incurred by it in defending Alcoa's claim.
The period of reinsurance cover was 36 months from noon on 1 July 1977 until noon on 1 July 1980. These dates were intended to coincide with the period of the underlying insurance. The subject matter of both the reinsurance and the insurance was the risk of physical loss and damage occurring to property at Alcoa's worldwide sites.
Environmental damage was sustained at a number of Alcoa sites in various states of the United States during the relevant three year period. The damage arose out of continuing failures on Alcoa's part in respect of the escape of waste products and the failure of manufacturing units to contain pollutants. The relevant causative acts and omissions of Alcoa first occurred and first began causing damage in 1942 and continued at least until 1986.
Alcoa began proceedings against a large number of insurers (including Lexington) in the courts of the State of Washington. On 4 May 2000 the Washington Supreme Court ('the Supreme Court') reversed the findings of the Superior Court; and held that, as a matter of Pennsylvania law, Lexington's insurance of Alcoa was to be construed as rendering Lexington jointly and severally liable for the remedial costs of cleaning up all the environmental damage at various specified sites.
Following the judgment, and after various unsuccessful attempts to reduce its financial impact, Lexington settled Alcoa's claims. The settlement, which forms the subject matter of the present action, was made on the basis that the insurance covered the cost of cleaning up environmental damage at the relevant sites, irrespective of whether the damage had been sustained before, during or after 1 July 1977 to 1 July 1980.
The Contracts
Insurance Contract
Lexington insured Alcoa (of 1501 Alcoa Building, Pittsburgh, Pennsylvania) in respect of loss or damage to property (and business interruption risks) under a Policy on Lexington's Special Floater form signed and dated at Boston, Massachusetts on 22 August 1977. The insurance, referred to as a DIC (Difference in Conditions) Insurance, provided for the insurance of Alcoa from noon on 1 July 1977 until noon on 1 July 1980. The Limit of Liability was stated to be:
$20,000,000 loss or damage arising from any one occurrence.
The 'occurrence' was defined as:
… any one loss(es), disaster(s), or casualty(ies) arising out of one event or common cause;
and there was a property damage deductible of $250,000 per occurrence.
Although there was no express choice of law clause, the Insurance Contract contained a standard US Service of Suit clause:
In the event of the failure of this Company to pay any amount claimed to be due hereunder, [Lexington] at the request of the Insured, will submit to the jurisdiction of any Court of Competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.
Reinsurance Contract
The reinsurance incepted at noon on 1 July 1977 and provided cover in respect of all risks of physical loss or damage to the property reinsured occurring in the period of 36 months from 1 July 1977, subject to a limit of $20,000,000 per occurrence. The terms were set out in a Slip:
TYPE: CONTRIBUTING FACULTATIVE REINSURANCE
FORM: Jl. or NMA 1779 covering All Risks of Physical Loss or Damage excluding Fire and Allied Perils &/or as original.
REASSURED: LEXINGTON INSURANCE COMPANY
ASSURED: ALCOA ALUMINIUM
PERIOD: 36 months 1.7.77 L/U &/or pro rata to expiry of original.
INTEREST: All Property of every kind and Description and/or Business Interruption and O.P.P. &/or as original.
SUM INSURED: Policy to pay up to $20,000,000 each occurrence and in the aggregate annually in respect of Flood and Earthquake
SITUATED: Worldwide &/or as original
CONDITIONS: Retention $1,675,000 subject to excess of Loss &/or Treaty
R/I
Full R/I Clause No. 1 amended
C.C. as original plus 30 days
PREMIUM: Calculated at GOR
BROKERAGE: 25% and tax
The 25% brokerage was divided, with 10% payable to Lexington and 15% to CE Heath as brokerage.
On 1 June 1977 Sentry Underwriting Agencies Ltd subscribed to a 2.5% line of the Reinsurance Contract. WAS A is the successor in title to 1% and (for present purposes) AGF accepts that it is the successor in respect of 1.5%.
Features of the Reinsurance Contract
It is convenient to identify certain features of the Reinsurance contract.
i) The risk was placed in London with London reinsurers by London insurance brokers in 1977, prior to the coming into force of the Rome Convention. It is common ground that the governing law is to be determined in accordance with English common law principles. It is also common ground that by the proper application of those principles, the Reinsurance Contract is governed by English Law, since the contract was broked in the London Market on one of two alternative London forms. It follows that the construction and legal effect of the Reinsurance Contract is governed by English Law.
ii) Since it appears that no contract was ever drawn up, it is common ground that the terms of the Reinsurance Contract are contained in the Slip.
iii) The Slip refers to a choice of forms (Jl or NMA 1779). This reflects an administrative practice in the London market for the issue of formal policy documentation. The Jl form is a 'policy jacket' containing a policy, which is then put to various underwriters for subscription. The NMA 1779 form was generally used as an attachment to a Slip, obviating the need to issue a formal Policy.
iv) The Jl form contains the words:
Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the [reassured].
The NMA 1779 form does not have a follow settlements clause. However it contains an obligation:
… to pay or to make good to the Reinsured all such Loss as aforesaid as may happen to the subject matter of this Reinsurance, or any part thereof during the continuance of this Policy.
v) Although the 'Full R/I Clause No.l as amended' referred to in the 'Conditions' has not been identified, it is common ground that the 'Full R/I Clause No.l' was a standard clause used in the London market and that it was in the following terms:
Being a Reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the … Company and that said Company retains during the currency of this Policy at least … on the identical subject matter and risk and in identically the same proportion on each separate part thereof, but in the event of the retained line being less than as above, Underwriters' lines to be proportionately reduced.
Since the Jl form contained a similar provision, it can reasonably be inferred that the Full Reinsurance clause was specifically referred to in the Slip in the event that the NMA 1779 form was used.
vi) There is no express clause in the Reinsurance Contract which provides an indemnity to Lexington in respect of legal costs incurred in defending claims brought under the original Insurance Contract.
The insurance claim and the settlement
In the early 1990s the US Environmental Protection Agency and various state environmental agencies required Alcoa to clean up pollution and contamination of groundwater, surface water and soil at numerous manufacturing sites in the United States used by Alcoa. On 2 December 1992 Alcoa began proceedings in the Superior Court of the State of Washington (King County) against various insurance companies which had provided liability or all risks property insurance to Alcoa during the period 1956–1985. In this litigation Alcoa sought a declaration of entitlement to insurance coverage in respect of the clean-up costs at 35 manufacturing sites in the USA. Lexington was one of the defendants. A second action against first party property carriers, including Lexington, was commenced on 31 May 1996 in relation to 23 manufacturing sites worldwide. The two actions were subsequently consolidated.
The Superior Court selected 3 of the 58 manufacturing sites, Massena in New York, Vancouver in Washington State, and Point Comfort in Texas (“the Phase 1 test sites”) to be the subject of an initial trial, with trials on the other sites to follow. In March 1996 the Phase 1 trial commenced before a jury. In due course most of the insurers sued by Alcoa were found not to be liable, either because the claim was time barred under suit limitation provisions in the policies or because the losses were excluded by pollution exclusions.
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