AIG Europe (Ireland) Ltd v Faraday Capital Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Longmore,Lord Justice Thomas,Lord Justice Dyson |
| Judgment Date | 22 November 2007 |
| Neutral Citation | [2007] EWCA Civ 1208 |
| Docket Number | Case No: A3/2006/2469 |
| Court | Court of Appeal (Civil Division) |
| Date | 22 November 2007 |
[2007] EWCA Civ 1208
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE MORISON
The Right Honourable Lord Justice Dyson
The Right Honourable Lord Justice Longmore and
The Right Honourable Lord Justice Thomas
Case No: A3/2006/2469
2004 FOLIO 1056
Mr Jonathan Sumption QC & Mr Peter MacDonald Eggers (instructed by Clyde & Co LLP) for the Appellant
Mr David Foxton QC (instructed by Chadbourne & Parke) for the Respondent
Hearing dates: 18 th October 2007
Judgement
Lord Justice Longmore
Introduction
Once again this Court is called upon to construe a standard form Claims Co-operation Clause in a reinsurance policy which is apt for property damage insurance but inapt for liability reinsurance. In liability reinsurance, insurers (and therefore reinsurers) respond to assertions of liability by third party claimants, or, in other words, claims. A liability insurer needs to know when a claim is made against his insured and this requires notice of such claim (or sometimes of a circumstance which may give rise to a claim) before he is required to respond. The giving of such notice may be a condition precedent to his liability. One would therefore expect a reinsurance of a liability insurer likewise to require notification of a claim (or a circumstance). It appears that some reinsurers do not always require a notification of this kind but instead require notification when their reinsured has “knowledge of a loss”. While this might be appropriate for reinsurance of a ship, a house or a work of art when destruction, damage or theft is obvious and will constitute a loss which an insured or a reinsured can be said to “know”, it is much less appropriate for insurance of liability since a loss cannot readily be “known” until a claim that the insured is liable is disposed of by admission or adjudication.
So in Royal Sun Alliance v Dornoch [2005] EWCA Civ 238 [2005] Lloyds IR Rep 544 in which the Claims Co-operation Clause required notification within 72 hours of knowledge of a loss which might give rise to a claim, this court (affirming Aikens J) held first that the relevant loss was that of the third party claimant seeking to recover from the original insured but, secondly, that no loss would be “known” until the insured settled the claim. Before the settlement the loss was an “alleged” loss and would not, therefore, be “known” to be a loss. That was a case where it was alleged that the directors of a company (Coca-Cola) insured under an E & O policy had made false statements which caused the value of company shares to be artificially inflated. When the falsity of the statements was discovered, shareholders brought a claim for the difference between the artificially high value of the shares and their true worth. Coca-Cola denied making any false statements and asserted that the different values of the shares were caused by ordinary market fluctuations. In these circumstances, the reinsured could not have “knowledge” of any loss and the Claims Co-operation Clause was not triggered. Reinsurers argued that such a conclusion rendered the clause entirely useless in the very circumstances when it should be operative but this court held that, in the circumstances of the case, the reinsured could not know that there had been a loss before it was ascertained by the fact of settlement.
The facts of the present appeal have a superficial resemblance to Royal Sun Alliance v Dornoch. The underlying insurance policy is, again, a Directors E & O Policy and thus constitutes insurance against the liabilities of the directors of the company and of the company itself, in this case a U.S. company called Smartforce which provided course work and materials for what is known as “e-learning”. Again it is alleged by shareholders that as a result of financial statements (made in this case in the company accounts) the value of the company shares was artificially inflated beyond their true worth. The (perhaps critical) distinction from the Coca-Cola litigation is that on 19 th November 2002, Smartforce, before the stock market opened for business in New York, made an announcement that they intended to re-write the previous three years' accounts and gave four separate reasons for that intention. These reasons included:
1) revenue from arrangements for re-sale should have been recognised only as payments were received from the re-seller;
2) revenue recognised from shipment of software under contracts with payment schedules extending over several years should have been discounted to recognise the time value of money rather than in full at the moment of shipment;
3) revenue from several other long-term contracts should not have been recognised on execution of those contracts, but rateably over the contract period;
4) the bad debt reserve needed to be upwardly adjusted.
Not surprisingly the company's shares lost a third of their value on 19 th November falling from $4.63, the closing price on 18 th November, to $3.07, the closing price on 19 th November. During that day the price had fallen to $2.50 but there was a rally before the market closed.
As in the Coca-Cola case, shareholders instituted proceedings against Smartforce and its directors. These were no less than 6 class suits which were eventually consolidated into one single action. The company's liability insurance policy required notification of a claim within 30 days and that notification was duly given to the company's liability insurers (AIG Europe (Ireland) Ltd (“AIG”)). For some reason that notice was not passed on by AIG to their reinsurers. The U.S. action was in due course settled for $30.5 million, AIG gave notice to reinsurers within 30 days of that settlement but one of the reinsurers Faraday Capital Ltd (“Faraday”) has relied on the wording of the Claims Co-operation Clause in the reinsurance policy in the following terms:—
“Claims Co-operation clause
Notwithstanding anything contained herein to the contrary, it is a condition precedent to any liability under this Policy that:
a) The Reinsured shall upon knowledge of any loss or losses which may give rise to a claim, advise the Reinsurers thereof as soon as is reasonably practicable and in any event within 30 days …
b) The Reinsured shall furnish the Reinsurers with all information available respecting such loss or losses, and shall co-operate with the Reinsurers in the adjustment and settlement thereof.”
Faraday allege that once Smartforce had announced their intention to re-write the last 3 years' accounts and the share price had fallen by a third on the day of the announcement there was a loss which might given rise to a claim and, when AIG had been notified by Smartforce that a claim had been made against them, that loss was “known” to AIG.
The judgment
The judge following the Dornoch case held that the word “loss” in the Claims Co-operation Clause could not mean an alleged or potential loss, and that a claimant could not be said to have suffered a loss until it had been proved that he had bought shares at a value which was inflated due to the default of the company's directors or officers in the execution of their duty...
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