HIH Casualty and General Insurance Ltd v New Hampshire Insurance Company
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE RIX |
| Judgment Date | 21 May 2001 |
| Neutral Citation | [2001] EWCA Civ 735 |
| Docket Number | Case No: A3/2000/3744.3745,3749,3752 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 May 2001 |
[2001] EWCA Civ 735
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
(Mr. Justice David Steel)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Peter Gibson
Lord Justice Mummery and
lord Justice Rix
Case No: A3/2000/3744.3745,3749,3752
Mr Julian Flaux QC and Mr Simon Picken (instructed by Holman Fenwick & Willan for the Appellants)
Mr Christopher Hancock QC and Ms Sara Masters (instructed by Messrs Kennedys for the Respondents (New Hampshire)
Mr Stephen Ruttle QC and Mr Tom Adam (instructed by Messrs Davies Lavery for the Respondents (Independent)
Mr Peter Gross QC, Mr Philip Edey and Mr Michael Collett (instructed by Messrs D J Freeman for the Respondents (Axa)
Introduction
Film production is a risky business. Just how risky was something that the parties to this appeal, insurer and reinsurers of two slates of "made for TV" films, discovered to their cost. The insurer, HIH Casualty & General Insurance Limited ("HIH"), has paid over $31 million to the investors in these films, and seeks recovery against three of the reinsurers concerned, Axa, Independent and New Hampshire who say, however, that they are not liable.
The insurance concerned is of a somewhat novel kind. It is of a class called "pecuniary loss indemnity" insurance. In essence it provides collateral for film finance. The peril insured is the risk that revenues from the films concerned will fail to reach the sum insured within a certain period. The sum insured is premised on the costs of production. The insurance is designed to enable the investors whose finance supports the production of the films to recoup their investment. Either they are paid from the films' revenues, or from the insurance, or from a combination of the two. If the films are successful, the insurer is not called upon to make any payment. If the films earn nothing whatsoever, the insurer is liable to pay the whole sum insured. If the films earn something but not enough, the insurer makes up the difference, up to the sum insured. The account is struck at a fixed date. The insurer may, however, manage to recoup more or less of its loss either from later earnings of the films, or from other protection or collateral for which he stipulates and upon which he may have either a direct or a subrogated claim.
It appears that this kind of insurance has proliferated in recent years, and that there are potentially many cases which may, in some respect or other, be guided by this appeal. Apart from the judgment under appeal, which is that of David Steel J, there has been only one other decision in this field, and that is HIH Casualty and General Insurance Limited v. Chase Manhattan Bank [2001] 1 Lloyd's Rep 30. There is, however, very little overlap between the two cases.
If this kind of insurance is novel, at any rate to the English courts, it bears some resemblance to commercial mortgage indemnity insurance, under which a lender of an advance secured on a mortgage insures against the risk that, following a default by the borrower, the security will not repay the principal of the advance, interest and associated costs. The point of resemblance is that the insurer is not insuring against damage or liability but against the risk that the insured's investment will not be repaid. There are, however, important differences. In commercial mortgage indemnity insurance, the property concerned is usually built and let, and its investment value can, subject of course to market fluctuations, be assessed, as can the credit-worthiness of the borrower. The insurer can therefore evaluate whether the loan is likely to be repaid, and it is only if the borrower defaults that the insurer can be called upon to pay at all. In what I shall call film finance insurance, however, the insurer's gamble is much purer. The films are not yet made, their earning potential is peculiarly difficult to evaluate and might remain so even when they have been made, and the insurer must pay, whatever the credit-worthiness of the borrower, unless the films quickly earn revenues which at least match the sum insured.
In the circumstances, the premiums charged in the present cases at any rate, are a significant percentage of the sum insured, namely 10%. HIH was also promised, as part of its premium, 7.5% of revenues above the sum insured. Somewhat paradoxically, if an insured loss would have been avoided, then HIH would have earned a larger premium. This interest in the films' profits was called a "Back End". Thus, HIH as insurer was in a very real sense a form of joint venturer in the project. On the downside, this sense of joint ventureship can be seen in the fact that the cost of the premium itself played a significant role in the make-up of the sum insured. One example will suffice: in the case of one of the slates of films whose production finance was insured, which I shall call "the 7.23 slate" by reference to its producer, 7.23 Productions LLC ("7.23 Productions"), the total sum insured was $16.4 million, of which the films' budgets amounted to only $10.9 million, and the balance was made up of "interest/fees" of $3.86 million and the insurance premium of $1.64 million.
Such insurance may be said to play a useful role in facilitating film finance and thus in the creativity and productivity of the film industry. But the danger for insurers is that they, albeit relative outsiders to the industry, are undertaking the fundamental risk of the costs of production. In such circumstances, what precautions do they take to ensure what may be called due diligence on the part of the insured financers? What constitutes a fair presentation of such risks? And what warranties or exceptions do they require for undertaking the risk?
I pose these questions, but can barely provide an answer, for this appeal arises on preliminary issues as to the construction of the insurance and reinsurance policies involved, without a trial in which the facts of the case have been investigated. For the purpose of the trial of the preliminary issues below before David Steel J, it was simply assumed that the facts were as stated in the reinsurers' defences. There was no live evidence before the judge, nor any witness statements. There were reports from two experts, but they were not called for cross-examination, and, to the extent that it was relevant to his decisions, the judge had to evaluate their opinions without further assistance. The placing documents (but I am not sure they are complete) were before the judge, as they are again on appeal before this court, but they were barely referred to by the judge, and have been invoked by counsel on appeal only sporadically. There are no agreed facts. There is no agreed chronology. The assumed facts to be taken from the reinsurers' defences have been nowhere summarised. In effect, the exercise of construction upon which the judge was asked to embark exists in a sort of no man's land, in which now and again some feature looms out of the mist. For instance, the judge referred to, and in this court we were taken to, a collateral agreement, made between HIH and a company called Flashpoint Ltd, which was designed to provide HIH with protection to support its insurance. Quite what its provisions amount to, however, could well be the subject of debate, but are not for decision here.
In the circumstances, apart from the insurance and reinsurance policies themselves, which exist as items for construction, there is, I think, nothing which can be regarded as a matter of fact, securely found. Any factual matter referred to has a sort of provisional quality. It is possible to say that a document of some sort exists and states such and such a thing, but it is impossible to affirm with any confidence that what is said in any single document is a secure foundation for some conclusion.
I make these comments at the outset because I feel some disquiet about conducting the exercise of construction which this court, as the judge below, has been asked to perform, without a clear understanding of the factual matrix of these novel arrangements. Insurance and reinsurance provisions are so often dealt with in such brief language, that their construction divorced from a firm understanding of their context can be a dangerous process. There is also, for instance, a question of fairness in the incorporation of a term which, as will be seen, has to be addressed, which I feel unhappy to decide, as it were, in the abstract.
I wish to say nothing to discourage the identification of preliminary issues for decision, which can perform a very useful function. In recent years, the previous climate of coolness or even hostility to the setting of preliminary issues has warmed considerably, and I believe that has been helpful to the litigants involved. I remain concerned, however, that in this case the judge and this court have been set an unusually academic examination paper, and in a sub-category of subject which cannot be said to be familiar territory. That said, the paper must be answered, wherever possible, as best as can be done, and the problems of context must be sought to be overcome where possible in a way which is fair and reflects the manner in which the parties have approached this litigation.
The issues on appeal
It is difficult to introduce the issues which were argued on the appeal (by HIH) and the cross-appeal (by the reinsurers) in any really meaningful way without...
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