North Atlantic Insurance Company Ltd v Nationwide General Insurance Company Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Waller,Lord Justice Tuckey,Lord Justice Jacob |
| Judgment Date | 02 April 2004 |
| Neutral Citation | [2004] EWCA Civ 423 |
| Docket Number | Case No: A3/2003/0684 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 April 2004 |
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE COOKE
Royal Courts of Justice
Strand,
London, WC2A 2LL
The Right Honourable Lord Justice Waller
The Right Honourable Lord Justice Tuckey and
The Right Honourable Lord Justice Jacob
Case No: A3/2003/0684
A3/2003/0669
Mr D Mildon QC, Mr G Davis (instructed by Mr Charles Russell) for the First Appellants
Mr M Crane QC, Mr L Tamlyn (instructed by Richards Butler) for the First Respondents
Mr A Zacaroli (instructed by Mayer, Brown, Rowe & Maw) for the Third Respondents
Once again the "Rutty Pool" is the subject of extensive litigation in the Commercial Court and now the Court of Appeal. M E Rutty Underwriting Agency Limited (the Rutty Agency) wrote business on behalf of certain companies (the pool) during the period 1962 to 1967. The agency was authorised by written agreements to underwrite "any risk whatever" for an amount not exceeding a fixed percentage of the limits set out in schedules to agreements, each company binding itself to accept liability for its share. The First Agency ran from 1st August 1962 to 31st December 1966. It commenced with agreements with individual members of the pool dated on or about 1st August 1962. They were amended from time to time by addenda and all terms were consolidated ultimately into one document dated 18th February 1965. The Second Agency covered the period 1st January 1967 to 31st December 1967. Again the Rutty Agency had written contracts with individual members of the pool. The agreements for 1967 contained some additional terms, but no one has suggested before us that it is likely that those differences would lead to a different result in relation to the points in issue. Indeed the second appellants (Wurttembergische) who were represented below, and who were parties to the Second Agency agreement, which the first appellants (Nationwide) were not, have not appeared before us, content to rely on the arguments of Mr Mildon QC for Nationwide. I append to the judgment the chart, exhibit CW10, showing the different percentages which different members of the pool had from time to time. I shall refer to parties by the names by which they became known, and in the nomenclature adopted during the hearing of the appeal.
The Rutty Agency ceased underwriting in 1967. It was thereafter concerned with the run-off. The business written by the pool was long tail in nature and although there must have been an expectation that some ten years after ceasing underwriting all would have been finalised, as a result of the massive asbestosis and pollution claims in the United States of America large volumes of claims continued to be received. The problems that arise so far as this piece of litigation is concerned relate to the fact that certain of the pool members have become insolvent. In particular disputes have arisen as to the effect of the insolvency of one or more of the pool members in the context of the reinsurance protections obtained by the Rutty Agency for the protection of the pool.
By a judgment dated 13th March 2003 ( Cooke J [2003] EWHC449 (Comm)]; answered 26 questions to assist in the resolution of the disputes. Some of the answers to the questions had been agreed between the parties and were confirmed by the judge. Others he resolved but not all to the satisfaction of Nationwide (or Wurttembergische). They also appeal, but I can deal with the points by reference to Nationwide's appeal alone.
As I will explain in more detail below, Nationwide were used as a front during the period of the First Agency, and they remain solvent. NAIC were used as a front but to a much more limited extent, and they are insolvent. AFG were only rarely used as a front and are insolvent. Nationwide argue that because as the front they are 100% liable to the insured on the risks underwritten by the Rutty Agency, they are entitled to claim directly the proceeds of the reinsurances taken out by the Rutty Agency to protect the pool. NAIC and AFG argue that the position in law is that they have a liability to take their share as pool members and indemnify Nationwide and other fronters to that extent, and that although it is true the liquidator will only be able to pay a dividend in respect of that liability, they have the claim to the reinsurance monies.
Cooke J held that NAIC and AFG were correct in their assertion. Nationwide describes the result in emotive terms. They suggest that the effect of the judge's decision is that they suffer a "double whammy". They say "Having picked up 100% of inwards liabilities in accordance with their obligation to the original insureds, not only do they find that their claim to pool contributions from the insolvent member is worthless, but the liquidator of the insolvent pool member is entitled to "make off" with part of the reinsurance which was intended to protect the self-same inwards risk."
Those acting for NAIC and AFG say that such use of emotive language is not helpful. They say that insolvency can produce, what may seem to those who suffer as a result, unfairness. They point out that if it was Nationwide, which had become insolvent, Nationwide's solution would possibly produce "unfairness" of a different kind. Where insolvency intervenes, (and this was ultimately realistically accepted by Mr Mildon), the solution is unlikely to be found by looking at what is fair or unfair to one party. The court is simply concerned to identify what assets form part of the estate of the bankrupt or the company in liquidation at the material time.
I would make another general point. Mr Mildon sought to suggest that the answer that the judge gave in this case would have an unexpected impact over many aspects of the insurance and reinsurance market. For example Mr Mildon submitted that if the judge was right in this case, then where any contract of reinsurance taken out for "common account" refers to the reinsured "and /or their quota share insurers", and where the quota share insurer becomes insolvent, the effect will be that the liquidator of the insolvent quota share insurer will have a claim on the reinsurance but only pay a dividend on his obligation as quota share insurer.
I do not necessarily accept that wide reaching proposition. It is fair to Mr Mildon, to say that the judge rather assumed that the above would be the position [see paragraph 40 of the judgment], and it would seem that this did influence him in the conclusion he reached – treating the pool arrangement as, in effect, a quota share arrangement. I would simply say that as was accepted by Mr Crane QC for NAIC, an insurer may seek to protect himself by reinsurance or share the risk in a variety of different ways. He could make a bargain or bargains under which he has a direct claim and the only claim on the reinsurance, and share the net result with his quota share insurers; (what I shall call for short "the direct method"); or he could make a bargain or bargains under which he is authorised to make the quota share insurers the reinsured to the extent of their share, leaving himself and the quota share insurers with claims on the reinsurance each to the extent of their share (what I shall call for short "the indirect method"). Which bargain has been made will simply depend on the proper construction of the contracts made. In many cases it may not actually matter whether the direct or indirect method has been used because while all are solvent, the result will be the same. Where insolvency is involved it clearly does matter, and what the court is concerned to identify is not what in the light of an insolvency a party might wish he had achieved, but in the interests of the creditors of the insolvent company or companies, whether that company or those companies have an asset i.e. in this case a claim on a particular policy.
One further general point which is important in considering the points that arise, is the rule of public policy confirmed by the House of Lords in British Eagle v Air France [1975] 1 WLR 780. That rule is expressed in the words of Lord Cross who gave the speech on behalf of the majority in the following words:
"The respondents argue that the position which, according to them, the clearing house creditors have achieved, though it may be anomalous and unfair to the general body of unsecured creditors, is not forbidden by any provision in the Companies Act, and that the power of the court to go behind agreements, the results of which are repugnant to our insolvency legislation, is confined to cases in which the parties' dominant purpose was to evade its operation. I cannot accept this argument. In Ex parte Mackay, Ch.App. 643, the charge on this second half of the royalties was – so to say – an animal known to the law which on its face put the charge in the position of a secured creditor. The court could only go behind it if it was satisfied – as was indeed obvious in that case – that it had been created deliberately in order to provide for a different distribution of the insolvent's property on his bankruptcy from that prescribed by the law. But what the respondents are saying here is that the...
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