King v Brandywine Reinsurance Company (UK) Ltd (formerly Cigna Re Company (UK) Ltd) [QBD (Comm)]

JurisdictionEngland & Wales
CourtQueen's Bench Division (Commercial Court)
JudgeColman J.,Colman J
Judgment Date10 May 2004
Neutral Citation[2004] EWHC 1033 (Comm)
Docket NumberCase No: 2002 FOLIO NO. 1132

[2004] EWHC 1033 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEENS BENCH DIVISION COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

The Honourable Colman J.

Case No: 2002 FOLIO NO. 1132

Between:
David George King and Others
Claimant
and
Brandywine Reinsurance Co (uk) Ltd
Formerly known as Cigna Re Co (uk) Ltd
Defendant

Mr Colin Edelman QC, David Joseph QC and Mr Neil Hart (instructed by Messrs CMS Cameron McKenna) for the Claimants

Mr Christopher Butcher QC and Mr Richard Slade (instructed by Messrs Holman Fenwick) for the Defendant

Approved Judgment

Hearing dates: 1, 4, 8, 9, 11, 12 and 15 March 2004

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Colman J. Colman J
1

Introduction

2

Fifteen years ago on 24 March 1989 there occurred one of the worst pollution disasters ever experienced by the shipping industry. The Exxon Valdez ran aground in Prince William Sound on the coast of Alaska. There was an oil spill of some 258,000 bbls of crude oil, which was carried by wind and current on to the shore of Alaska. The length of coastline contamination extended for many hundreds of miles. The oil, upon being mixed with the seawater, decomposed into a viscous sludge, then into more solid tar balls and into a viscous mousse which had to be cleaned off the shoreline by scraping it with shovels or with hoses or other equipment. Efforts had also been made in the early stages following the grounding to contain the spread of the oil. These had a very limited effect and were soon discontinued.

3

Exxon Corporation ("Exxon") owned the oil which was in the course of being shipped from Exxon's terminal at Valdez, Alaska, on board the Exxon Valdez owned by Exxon Shipping Corporation ("ESC") an affiliate of Exxon.

4

Immediately following the grounding, Exxon, the biggest oil company in the world, initiated a massive containment and clean-up operation. This involved cleaning not only the surface of the sea but also the shoreline, including harbours and other landing facilities. This exercise was directed both at property owned by the State of Alaska or for which it was responsible, including the sea surface offshore and the shoreline as well as property owned by private owners, such as fishing facilities. This operation was at first carried out by ESC as owners of the vessel. It was an immense exercise which was organised in conjunction with Exxon and in consultation with the United States Coastguard and the State of Alaska. It could not be carried out during the winter months due to weather conditions. It was therefore only completed in June 1992, some three years after the grounding.

5

The clean-up operations were immensely expensive.

6

Initially the cost was mainly carried by ESC but by 7 August 1989, its financial resources had been exhausted, it was declared insolvent and Exxon Corporation took over as paymaster. ESC spent about US$800 million and Exxon about US$1200 million.

7

Under Alaskan legislation ESC was under a statutory obligation to clean up the pollution and Exxon, as cargo owner, and ESC, as shipowner, were under a strict liability to third parties, including the State, for any losses which were sustained caused by the oil.

8

The losses sustained by Exxon and ESC had become a highly significant part of the history of the London insurance market, particularly at Lloyd's. This single loss made a major impact on the LMX spiral which has given rise to a large part of the Lloyd's litigation in this court and to much other litigation as well.

9

The claim now before the court is brought by Claimant reinsurers against Defendant Retrocessionaires under several excess of loss retrocession. The claim is made up of thousands of individual claims against the Claimants under many different inward reinsurances. All those claims, the details of which do not matter for present purposes, originated in one of three underlying primary policies by which Exxon was insured.

10

The largest primary policy and that which is relevant for present purposes is the so-called Exxon GCE Policy. The payment of claims which have found their way down the reinsurance chain originating from the GCE Policy has been held up in the London market by reason of the coverage disputes now before this court. Although this is not a test case as such, I am told that the excess of loss market's response to all such claims is likely to be influenced by this judgment.

11

Not all the issues between the parties have been tried on this occasion. Those issues now before me fall into two groups:

(i) issues arising in relation to the scope of coverage under the primary policies; and

(ii) one issue relating to the application of an exclusion —the Seepage, Pollution and Contamination Exclusion in the outward reinsurance contract between the Claimants and the Defendants.

12

Those issues in relation to coverage under the primary policies arise for the following reasons.

13

The Claimants' outward retrocession contracts contained the following JELC Reinsurance Clause:

"It is a condition precedent to liability under this contract that settlement by the reassured shall be in accordance with the terms and conditions of the original policies or contract"

14

Further, the retrocession Claims Clause was in these terms:

"All loss settlements by the Reinsured shall be binding upon the Reinsurers provided that such settlements are within the terms and conditions of the Original Policies and within the terms and conditions of this policy and the Reinsurers shall pay the amounts due from them upon reasonable evidence of the amounts paid being given by the Reinsured."

15

It is common ground that upon these provisions the Claimants must prove that all the losses were covered by the primary policies and therefore within the terms of the inward retrocession, as well as being within the terms of the outward retrocessions.

16

There were three relevant primary policies comprised within the Exxon GCE Policy. These were:

(i) Section I in respect of loss of or damage to property;

(ii) Section IIIA in respect of Marine Liabilities;

(iii) Section IIIB in respect of Public and Third Party Liability.

17

Exxon and its Affiliates were the Insured under all three policies. ESC was an Affiliate.

18

The extent of coverage under the three Sections differed. Section I provided US$600 million per loss occurrence in excess of US$400 million annual aggregate deductible in excess of US$10 million per occurrence deductible. That section was underwritten as to US$425 million by Lloyd's and the Companies Market in London and as to US$175 million by Scandinavian leaders with a mixed following market from many different countries.

19

Section IIIA, the Marine Liabilities policy, consisted of three layers, the lowest being of US$100 million any one loss in excess of US$200 million annual aggregate deductible in excess of US$10 million per occurrence deductible. That lowest layer was written by Scandinavian leaders and a mixed following market, but not of exactly the same composition as those underwriting Section I. This Section was subject to a combined single limit per loss occurrence under Sections IIIA and IIIB.

20

The middle layer of Section IIIA was of US$100 million per loss occurrence and in the annual aggregate in excess of $300 million and $10 million per loss occurrence deductible. That was written by Lloyd's and the companies market in London but not all the same insurers who underwrote Section I. The top layer was US$50 million excess of US$400 million in the aggregate with a US$10 million deductible. It was written by Lloyd's and the companies market, but not all the same participants as for Section I.

21

Section IIIB also consisted of three layers excess of US$200 million in the annual aggregate and were all also in excess of a $10 million per occurrence deductible. Each of the three layers were of the same amount of cover as for Section IIIB. The participants were in some cases different from the insurers of both Sections I and IIIA.

22

There has already been significant litigation involving Exxon in respect of the Exxon Valdez oil spill.

23

Thus on 26 October 1990 the Superior Court of the State of Alaska held that, as owner of the cargo, Exxon was under strict liability under the law of the State of Alaska for all damage proximately caused by the oil. In 1991 the jury in the trial in the Federal Court in Anchorage, Alaska, of claims brought by private claimants in respect of loss and damage caused by oil pollution awarded damages totalling US$287 million and a further US$5 billion in punitive damages. This was later reduced on review to US$ 4 billion punitive damages.

24

On 25 November 1992 Exxon settled claims for damages for clean-up costs, environmental damage and litigation costs brought by the US Federal Government and the State of Alaska for a total amount of US$ 900 million.

25

On 4 August 1993 Exxon commenced proceedings in Harris County, Texas against Lloyd's Underwriters claiming under the Section IIIA policy. These proceedings went to trial and resulted in a jury verdict in Exxon's favour and final judgment on 3 July 1996 under which Exxon was awarded US$238,473,752.50 above the US$210 million deductible together with interest of US$161,106,406.87 and fees and costs of over US$10 million.

26

Exxon's primary insurers entered into two settlement agreements with Exxon.

27

On 15 March 1996 there was a settlement of all Exxon's claims under the Section I policy. That resulted in a payment by insurers of US$300 million.

28

On 23 January 1997 there was a settlement of all Exxon's claims under the Section IIIA and IIIB policies, including those claims under Section IIIA which were the subject of the...

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