King v Brandywine Reinsurance Company
| Jurisdiction | England & Wales |
| Judge | Lord Justice Waller,Sir Martin Nourse,Lord Justice Rix |
| Judgment Date | 10 March 2005 |
| Neutral Citation | [2005] EWCA Civ 235 |
| Docket Number | Case No: A3/2004/1226 |
| Court | Court of Appeal (Civil Division) |
| Date | 10 March 2005 |
[2005] EWCA Civ 235
Lord Justice Waller
Lord Justice Rix and
Sir Martin Nourse
Case No: A3/2004/1226
2002 Folio No 1132
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Justice Colman
Royal Courts of Justice
Strand, London, WC2A 2LL
Colin Edelman QC, David Joseph QC and Neil Hart (instructed by CMS Cameron McKenna) for the Appellant
Christopher Butcher QC and Richard Slade (instructed by Holman, Fenwick & Willan) for the Respondent
This is a judgment of the court to which all members have contributed.
Introduction
This is an appeal from the judgment of Colman J dated 10 th May 2004. It relates to excess of loss claims arising from the Exxon Valdez disaster. Colman J found that the respondent reinsurers (the "defendants") were not liable under their Excess of Loss reinsurance contracts to indemnify the reinsureds in respect of settlements reached with the underlying insured, Exxon Corporation ("Exxon"). If the judge is right the case demonstrates the perils of settling under primary insurance when the reinsurance is not subject to a full follow the settlements clause. The main thrust of this appeal is the appellant reinsureds' (the "claimants") challenge to his ruling, although, in so far as the judge was against them on certain points, the defendants also challenge those aspects of the judge's judgment.
The Basic Facts
We are indebted to the full skeletons of both parties. There is no issue as to the facts, and in our view much of the full background set out in the defendants' skeleton is important in considering the questions which arise on the appeal. We accordingly gratefully adopt in large measure their summary of the facts and background.
The Exxon Valdez went hard aground on Bligh Reef in Prince William Sound, Alaska, at 00.04 on Good Friday (24 March) 1989 loaded with 1,264,155 barrels of North Slope crude oil. The grounding led to the spillage of some 11 million gallons of that oil. At the time of the grounding, Exxon Valdez was owned by Exxon Shipping Corp ("ESC"), a wholly owned subsidiary of Exxon. Exxon was the owner of the cargo on board at the time. The spill resulted in crude oil flowing into the waters of Prince William Sound, and the oil then spread westwards so that by 18 May 1989 some oil had reached 470 miles away in the Gulf of Alaska. Some of the oil washed ashore. By September 1989 790 miles of shoreline within Prince William Sound had been identified as having been oiled, and in Western Alaska more than 2,400 miles of shoreline were found to be oiled.
ESC (until August 1989) and Exxon proceeded (under the supervision and direction of the Federal and State On Scene Coordinators, or "FOSC" and "SOSC") to take steps to contain the spill, and to clean up the polluted shoreline. The steps taken included:
(i) The lightering of the Exxon Valdez;
(ii) The skimming of oil from the surface of the water;
(iii) Booming off sensitive areas of shoreline (for example to protect fish hatcheries);
(iv) Burning of oil on the surface of the water;
(v) Washing the shoreline, by cold water and subsequently warm water flushing, coupled with the skimming of oil washed off the shoreline into the sea;
(vi) Moving rocks/pebbles etc into the tidal zone to allow natural tidal flushing;
(vii) Bioremediation (whereby compounds are added to the environment to assist in the natural process in which bacteria and other micro organisms alter the organic molecules in oil into other substances such as fatty acids and carbon dioxide);
(viii) The cleaning up of animals, including otters and birds.
The costs of all these containment and clean up measures were calculated by Exxon as having been US$ 1.25 billion in the case of Exxon itself, and US$ 885 million in the case of ESC.
In addition to the costs of these various containment and cleanup operations, Exxon Corp and ESC were also the subject of a number of claims against them. In particular:
(i) Claims were made against Exxon and ESC by both the United States of America (Federal Government) and the State of Alaska, in respect of the losses which they had suffered. These led to the payment of some US$900 million by Exxon, pursuant to an Agreement and Consent Decree, approved on 8 October 1991.
(ii) Sums were claimed from and paid by Exxon (about US$267 million) to commercial fishermen for lost income due to fish stock damages, to Alaska Natives for lost harvest foods, to seafood processors, seafood processor employees and some other organisations for lost income, and to private landowners for damage to their land as a result of oil fouling.
(iii) Proceedings were brought in the US District Court for the District of Alaska and in the State of Alaska Courts by some 30,000 plaintiffs (fishermen, processors, Alaska Natives, landowners and others). These proceedings were consolidated. After a jury trial in Alaska, the claimants were awarded US$287 million compensatory damages, and US$5 billion in punitive damages. After appeals and remands the District Court has recently reduced the punitive damages element to US$4.5 billion.
Insurance
(a) ITIA
At the time of the casualty, the Exxon Valdez was entered with the International Tanker Indemnity Association Ltd ("ITIA"). ITIA is a mutual P&I insurer which was set up in the aftermath of the Torrey Canyon disaster of 1967, specifically to cover oil pollution risks. Specifically, ITIA provides cover for liabilities assumed under TOVALOP (Tanker Owners' Voluntary Agreement Concerning Liability for Oil Pollution). TOVALOP is an agreement which was made in 1969 between major tanker owners (including Exxon). Under TOVALOP it was agreed that tanker owners should assume certain liabilities for pollution damage including responsibilities for clean up. ITIA was set up in large measure to insure liabilities assumed under this agreement.
In 1989, at the time of the Exxon Valdez casualty, the ITIA Rules provided, in part, as follows (judgment paragraph 98):
"24(A) The liabilities, costs and expenses in respect whereof Owners and Co-Assureds shall be insured by the Association in respect of their interest in the Entered Tanker… are limited to the following:-
(i) Those for which the Owner may, as a party to [TOVALOP] be liable.
(ii) Those for which the Owner or Co-Assured may be legally liable under statute or otherwise … by reason of the discharge or threatened discharge of oil, other than any damage, except pollution damage, caused directly or indirectly by fire or explosion … "
In 1989 the limit of cover provided by ITIA for "all oil pollution risks" was US$ 400 million each incident or occurrence. ESC as the owner of the Exxon Valdez, made a claim for and recovered the full amount of that US$400 million cover in respect of its clean up costs in relation to the Alaskan oil spill.
(b) The GCE
In addition, at the time of the casualty, Exxon and affiliates had cover under the policy which is central to the present appeal and which is referred to in the judgment below and herein as the GCE (Global Corporate Excess). This covered various different types of risk, worldwide. Exxon had long placed such insurance in the London market. At the time of the casualty, the policy in force covered the period 1 November 1988 to 1 November 1989.
The GCE had a number of different Sections, viz Sections I, IIIA and IIIB.
(i) Section I provided property insurance. Its essence was the cover of loss or damage to the property of the insured. It provided US$600 million cover above US$410 million of aggregate deductibles. It was given a separate policy no. of "03–0364B-88" and gave rise to a separate premium.
(ii) Section IIIA provided coverage for an array of marine risks, including in particular third party liabilities of vessel owners and operators. It was placed in three layers, which together provided cover of US$250 million per occurrence above aggregate deductibles of US$210 million.
(iii) Section IIIB was placed in the same layers as Section IIIA, and also provided cover of US$250 million per occurrence above aggregate deductibles of US$210 million. It provided general third party liability coverage. Sections IIIA and IIIB had their own (joint) policy number, viz "03–0366B-88" and gave rise to their own separate premium.
Sections I, IIIA and IIIB were the subject of two placements. There was a London placement, placed by Bowrings, and led by Richard Youell of the Janson Green Syndicate. In addition there was a smaller Scandinavian-led placement. As the judge found, the policy language approved by Messrs Youell and Compton-Rickett of Janson Green was largely adhered to by the underwriters in the Scandinavian market.
The London placement took 70.83% of Section I, and the Scandinavian-led placement 29.17%. In relation to Sections IIIA and IIIB, these were placed in layers of US$100 million (above the aggregate deductibles), US$100 million above that, and US$50 million above that. The first of these layers was a Scandinavian-led layer; the second and third layers were London layers. The Scandinavian layer was as Mr Edelman put it an "enduring layer" since it was simply subject to a deductible of $10 million each and every claim, whereas the London layers covered simply $100 million in aggregate.
As the judgment records (paragraph 33(2)), it was common ground and is to be assumed that Sections I, IIIA and IIIB were presented by the placing brokers to the participants on both the London and Scandinavian markets as a single package and during a very short period of...
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