Equitas Ltd v R & Q Reinsurance Company (UK) Ltd and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Gross |
| Judgment Date | 11 November 2009 |
| Neutral Citation | [2009] EWHC 2787 (Comm) |
| Docket Number | Case No: 2007 Folio No. 1418, 2007 Folio No. 1420 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 11 November 2009 |
[2009] EWHC 2787 (Comm)
Before: Mr Justice Gross
Case No: 2007 Folio No. 1418, 2007 Folio No. 1420
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Alistair Schaff QC and Simon Kerr (instructed by Slaughter and May) for the Claimant
John Lockey QC and Patrick Goodall (instructed by Barlow Lyde & Gilbert) for the Defendant
Hearing dates: 15/6/2009, 16/6, 17/6, 24/6, 25/6, 26/6, 30/6, 1/7 and 2/7,
INTRODUCTION
These actions concern claims by the Claimant (“Equitas”), as assignee of the rights of Lloyd's Syndicates (“the syndicates”), under various contracts of retrocessional excess of loss (“XL”) reinsurance (“the reinsurance contracts”), written by the Defendants (“R&Q” and “Ace” respectively) within the London Market Excess of Loss (“LMX”) spiral.
Given the sensible agreement of the parties to hiving off various matters of detail, this trial is squarely focussed on the issue which arises in the R&Q action: namely, whether the fact that, initially, the (LMX) market wrongly (1) aggregated certain losses; and (2) included irrecoverable losses, precludes Equitas from recovering under the reinsurance contracts for otherwise (potentially) recoverable losses thus “tainted”—absent an ability to replicate the LMX spiral at each level without the introduction of the wrongly aggregated and irrecoverable elements. It is common ground that Equitas has not sought to replicate or reconstruct the LMX spiral in this fashion and realistically common ground that it is (at least) now impossible to do so.
In a nutshell, the Equitas case is that it is entitled to succeed; its recoverable losses are capable of being proved and it has succeeded in proving them to a standard of the balance of probabilities, through the use of actuarial modelling – effectively, allowing appropriate discounts to strip out the wrongly aggregated or irrecoverable elements, so leaving a minimum recoverable amount properly due under each of the reinsurance contracts.
By contrast, the R&Q case is that Equitas is entitled to recover nothing at all. Unless Equitas can prove that the sums claimed are properly due, contract by contract —estimating and guesswork will not do -the losses must lie where they fall. As a matter of principle, the losses of individual syndicates, with their particular requirements as to exhaustion of underlying cover, attachment points and limits, cannot be proved by a generalised actuarial model which does not replicate the LMX spiral. Moreover, even if Equitas can overcome this hurdle of principle, the model utilised by Equitas is flawed and does not achieve its purpose; it does not approximate reality or, at least, does not approximate the LMX spiral even if it has created a hypothetical spiral. It may be noted that the R&Q case relies on criticism of the Equitas model; it does not suggest any rival model.
Equitas retorts that the R&Q case involves a counsel of despair; it is deeply unattractive to suggest that even otherwise manifestly recoverable claims must fail, because of initial “tainting” affecting only a small proportion thereof or arising only at a late stage by when a very significant percentage of allowable loss had already been sustained.
I was informed by the parties that the case is, in effect, a test case. In the light of the initial erroneous aggregation and allowance of irrecoverable claims, thereafter magnified in the LMX spiral, the market is now in “lockdown”. A number of other disputes and claims hinge or may hinge on the outcome. It is to be underlined at the outset (and need not be repeated) that this is in no way the “fault” of R&Q and no criticism attaches to the stance it has taken in these proceedings. Whether, of course, that stance is sustainable is another matter.
The background goes back some 20 years to events in Alaska and the Middle East, which continue to resonate today.
On the 24 th March, 1989, the tanker, the “Exxon Valdez” ran aground in Prince William Sound in Alaska, resulting in a major spillage of oil, in turn leading to an extensive clean-up operation.
On the 2 nd August, 1990, Iraq invaded Kuwait and by mid-morning was in control of Kuwait International Airport (“the airport”) and all the aircraft there on the ground. These included 15 aircraft owned by Kuwait Airways Corporation (“KAC”), together with spares for that fleet. Also at the airport on that day was a British Airways (“BA”) aircraft. In the events which happened, the KAC aircraft and spares were flown to Iraq while the BA aircraft remained at the airport, where it was destroyed in the course of the liberation of Kuwait by coalition forces (operation “Desert Storm”) on or around the 27 th February, 1991.
Both the grounding of the “Exxon Valdez” and the loss of the KAC fleet of aircraft (and spares) gave rise to catastrophic losses which first entered the LMX spiral in the early 1990s. Thereafter and in events which happened, the history of the KAC and “Exxon Valdez” losses unfolded as set out in the paragraphs which follow.
KAC: The London market's treatment of the KAC losses became entangled, as early as 1991, with its treatment of the BA loss. The KAC and BA losses were presented to and paid by insurers and reinsurers within the LMX spiral on the basis that they arose out of one event —with a date of loss of 2nd August, 1990, namely, the Iraqi invasion of Kuwait. The initial losses involved sums of approximately US$300 million (for KAC hull losses) and US$28 million and US$15 million (for BA hull and liability losses respectively). All these losses were claimed and paid on an aggregated basis; no differentiation was made between the KAC and BA losses, which were given a single “Cat 90V” market coding. The market operated on this basis in relation to inwards and outwards claims for a period of about 5 years.
Subsequently, the correctness of the aggregation of the KAC and BA losses was called into question by certain retrocessionnaires within the LMX spiral. Pending resolution of the issues of aggregation, non-Lloyd's reinsurers stopped settling claims by about July 1996; Lloyd's reinsurers stopped settling non-Lloyd's claims by about January 1997; Lloyd's reinsurers stopped settling inter-Syndicate claims in about June 2002.
In the meantime, in 2000, the KAC spares loss of about US$259 million entered the market but, in effect, such settlements as occurred did not reach the level of XL on XL cover.
In Scott v Copenhagen Re Co (UK) Ltd [2003] Lloyd's Rep IR 696, which, I am told, was effectively a market-inspired test case, the Court of Appeal held that the KAC and BA losses ought not to have been aggregated as they did not arise out of the same event. The event in respect of the loss of the KAC fleet (and spares) was the invasion and capture of the airport. For present purposes, it suffices to say that the same could not be said in respect of the loss of the BA aircraft.
The “Exxon Valdez”: The Exxon history involves the initial inclusion of losses ultimately held to be irrecoverable, rather than, as with KAC, losses wrongly aggregated.
Taking the matter as shortly as I can, the pollution caused by the grounding of the “Exxon Valdez” resulted in a number of large claims made against Exxon Corporation (“Exxon”) and Exxon Shipping Corporation (“ESC”). In turn, Exxon made substantial claims against its insurers for indemnity in respect of the clean-up costs under (inter alia) a primary policy, the Exxon Global Corporate Excess Policy (“the GCE policy”). Claims were made under three sections of the GCE policy:
i) Section I (property damage);
ii) Section IIIA (marine liabilities);
iii) Section IIIB (public and third party liability).
Additionally, other heads of claim were advanced and paid by the insurance market: namely: (1) P&I group losses of US$389 million, paid in December 1989 —June 1990; (2) Atlantic Richfield losses of US$16 million, paid in November 1997; (3) BP losses of US$56 million paid in June 1998.
In August 1993, Exxon commenced proceedings against its insurers, in relation to its claims under the GCE policy, in Harris County, Texas. The fate of these claims was as follows:
i) On or about the 15th March, 1996, the insurers settled the claim brought under Section I (property damage) on terms involving the payment of US$303.5 million. It would appear that the insurers settled this claim on the basis of legal advice emphasising the risks of jury trial.
ii) The Section IIIA (marine liabilities) claim proceeded to trial in Texas. In the event, Exxon was successful and judgment was entered against insurers on the 3rd July, 1996, in an amount of (approximately) US$410 million. Insurers appealed.
iii) Subsequently, on the 23 rd January, 1997, insurers concluded a settlement agreement with Exxon of its claims under Section IIIA (see ii) above) and Section IIIB (public and third party liability), on terms involving payment to Exxon of US$480 million (in addition to the payment ofUS$303.5 million under i) above). As is agreed before me, of the US$480 million, the parties attributed US$414 million to Section IIIA and US$66 million to Section IIIB.
As to questions of timing, the P&I group losses would have entered the LMX spiral in 1990. So far as concerns the GCE policy payments, these all entered the LMX spiral in 1996–7. They were followed in 1997–8 by the Atlantic Richfield and BP losses. All these losses were grouped together by the market under the catastrophe code, “Cat 89G”, giving rise to thousands of individual claims dealt with on an aggregated basis.
These losses, it would appear, had become a highly significant...
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