Centre Reinsurance International Company v Freakley

This appeal and cross-appeal are from an order made on 23 April 2004 by Mr Justice Blackburne in proceedings in and arising out of the administration of T&N Limited (formerly Turner & Newall Limited and latterly T&N plc). The parties to those proceedings were the administrators of T&N, Curzon Insurance Limited, the insurer under an asbestos liability policy effected by T&N on 30 December 1996, and reinsurers under a reinsurance agreement dated 27 December 1996 of Curzon's liability under that policy. The object of those proceedings was to resolve issues which had arisen between the administrators and the reinsurers in relation to the handling of personal injury claims arising from exposure to asbestos made or to be made against T&N.

In substance, there were three principal questions to be addressed: (i) whether, in the events which had happened, the administrators or the reinsurers were entitled to handle asbestos claims, (ii) whether the costs of handling claims handled by the reinsurers should be borne by the reinsurers or by T&N and (iii), to the extent that the reinsurers were entitled to reimbursement from T&N in respect of the cost of handling claims, what priority was to be given to that right to reimbursement in the administration of T&N.

The judge determined the first of those questions in favour of the reinsurers; that is to say, he held that, by reason of the administration order, the terms of the asbestos liability policy and the reinsurance agreement, the reinsurers had become entitled to handle asbestos claims. He determined the second question, also, in favour of the reinsurers; holding, in effect, that the reinsurers were entitled to reimbursement from T&N in respect of the cost of handling claims. But he determined the third question against the reinsurers. He rejected the contention that the administrators were required to treat the obligation to reimburse costs incurred by the reinsurers as an expense of the administration.

The administrators appeal from those parts of the order of 23 April 2004 which reflect the judge's determination of the first and second of those questions in favour of the reinsurers. The reinsurers cross-appeal from that part of the order which reflects the judge's determination, against them, of the third question. Both appeal and cross-appeal are brought with permission granted by the judge.

The underlying facts

In March 1998 T&N and its subsidiaries were acquired by the Federal-Mogul Group, a world-wide group of companies owned by Federal-Mogul Corporation. Federal-Mogul was incorporated in Delaware, in the United States of America. On 1 October 2001 it, and certain of its United States and United Kingdom subsidiaries (including T&N), filed for protection in the Federal Bankruptcy Court under Chapter 11 of the United States Bankruptcy Code. Immediately thereafter—and on the same day—Mr Justice Hart made administration orders under Part II of the Insolvency Act 1986 in respect of 133 United Kingdom subsidiaries within the Federal-Mogul Group, including T&N and a large number of its subsidiaries. The circumstances in which those steps were taken was described by Mr Justice Blackburne at paragraph 4 of his judgment ( [2004] EWHC 200 Ch):

“The bankruptcy and administration proceedings were prompted by the fact that the F M Group in general and T&N in particular have faced a huge quantity of personal injury claims arising from exposure to asbestos, both in the UK and in the US, in products manufactured or distributed by the Group. The Chapter 11 filings and the administrations have been sought to obtain the benefit of statutory stays while a plan of re-organisation under Chapter 11 and, possibly, a section 425 scheme of arrangement in the UK are formulated. A Cross-Border Insolvency Protocol, dated as of 1 October 2001, has been entered into with a view to co-ordinating the US and UK insolvency proceedings and assisting towards the development of an integrated re-organisation plan for all of the companies involved. The overall objective is to ring-fence the liabilities for the claims and the assets available to meet them so that solvency can be established and the Group can continue to trade. In the course of argument, I was told that, prior to any statutory stays coming into effect, payments totalling between £350 and £370 million had been made in satisfaction of claims.”

As the judge observed, at paragraph 5 of his judgment, a very substantial asset potentially available to meet the claims against T&N and its subsidiaries was the asbestos liability policy (reference CZ7/96, ASB/096), dated 30 December 1996, underwritten by Curzon. Curzon is a captive insurance company within the Federal-Mogul Group, registered in Guernsey and not subject to any insolvency proceedings. Under that policy Curzon had agreed to indemnify T&N, up to a limit of £500 million but subject to a retained excess of £690 million, in respect of personal injury claims arising from exposure to asbestos.

Curzon's liability under the policy was wholly reinsured by three reinsurers, Centre Reinsurance International Company (“Centre Re”), Münchener Rückversicherungs-Gesellschaft (“Munich Re”) and European International Reinsurance Company Ltd (“EIRC”). Under the reinsurance agreement dated 27 December 1996 the three reinsurers agreed severally to reinsure 33% of the loss payable from time to time by Curzon to T&N pursuant to the terms and conditions of the policy. As the judge explained, EIRC had purported to avoid its participation and proceedings were pending in the Commercial Court in which EIRC sought a declaration that it was entitled to do so. But nothing, I think, turns on that.

The asbestos liability policy

It is common ground that the issues raised by the administrators' appeal turn on the meaning and effect of the provisions in the asbestos liability policy read with the reinsurance agreement. It is necessary, therefore, to consider those provisions in some detail.

The policy comprises four sections: Section I—Coverage of Asbestos Claims; Section II—Limit of Insurance; Section III—Conditions; and Section IV—Definitions. The obligation to indemnify is set out in Section I, at clause 1:

“Subject to the terms and conditions of this Policy, the Insurer will indemnify the Policyholder during the Period of Insurance for any and all Ultimate Net Loss in excess of the Retained Limit in connection with Asbestos Claims. The total amount the Insurer will pay for Ultimate Net Loss is limited as described in SECTION II, LIMIT OF INSURANCE.”

Section II provides that the Limit of Insurance is the maximum in aggregate the Insurer will pay for Ultimate Net Loss; regardless of the number of subsidiaries, the number of asbestos claims made or brought, the number of persons making or bringing such claims, or any other circumstances whatsoever. “Limit of Insurance” is defined at Section IV, clause 8 to mean £500 million. The “Period of Insurance” means the period commencing on the “Inception Date” (1 July 1996) and continuing “without time limitation until the exhaustion of the Limit of Insurance or the commutation or other termination of this Policy”—Section IV, clause 9 (read with clause 4).

“Asbestos Claim”, “Retained Limit” and “Ultimate Net Loss” are also defined terms. “Retained Limit” means £690 million—Section IV, clause 15. “Asbestos Claim” has the meaning given by Section IV, clause 1:

“‘Asbestos Claim’ means any written demand or civil proceeding with respect to which the Policyholder or any Subsidiary is alleged to be or may be responsible (whether or not the demand or civil proceeding in question is made or brought, or could be made or brought, directly against the Policyholder or any Subsidiary) by whomever made or brought anywhere in the world and in whatever procedural posture such demand or civil proceeding may arise (including any judicial or administrative proceeding or arbitral or other alternative dispute resolution proceeding) seeking monetary relief (whether or not such relief is the only relief sought) for Personal Injury alleged to have been caused in whole or in part by the Asbestos Hazard.”

In that context “Asbestos Hazard” means “the mining, manufacture, sale, distribution, use, installation or removal of, or handling or exposure to, asbestos, asbestos products, asbestos fibres or asbestos dust.”—Section IV, clause 2.

“Ultimate Net Loss” has the meaning given by Section IV, clause 17:

“‘Ultimate Net Loss’ means:

a. All sums paid in fact by the Policyholder or any Subsidiary as cash or the purchase cost or (if lower) the fair market value of in kind disbursements (whether legal...