North Atlantic Insurance Company Ltd v Nationwide General Insurance Company

JurisdictionEngland & Wales
JudgeWaller,Tuckey,Jacob L JJ
Judgment Date02 April 2004
Date02 April 2004
CourtCourt of Appeal (Civil Division)

Court of Appeal (Civil Division).

Waller, Tuckey and Jacob L JJ.

North Atlantic Insurance Co Ltd
and
Nationwide General Insurance Co & Ors

D Mildon QC and G Davis (instructed by Mr Charles Russell) for the first appellants.

M Crane QC and L Tamlyn (instructed by Richards Butler) for the first respondents.

A Zacaroli (instructed by Mayer, Brown, Rowe & Maw) for the third respondents.

The following cases were referred to in the judgment of Waller LJ:

British Eagle International Airlines Ltd v Compagnie Nationale Air FranceWLR [1975] 1 WLR 758.

Clarke v Earl of Dunraven (The Satanita)ELR [1895] P 248.

Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co LtdUNK [1988] 2 Ll Rep 409.

Insurance — Underwriting pool — Reinsurance protections — Insolvency of pool members — Agency obtained reinsurance protection for pool — Identity of principal or principals reinsured — Whether principals were all pool members each for their several interest — Whether individual pool members entitled to recover for their several share on any reinsurances — Whether reinsurance could only be enforced for benefit of pool as a whole — Whether reinsurance recoveries held on trust — Whether scheme purporting to impose trust in event of insolvency invalid.

This was an appeal by the defendants from a judgment of Cooke J ([2003] 2 CLC 731) giving directions in relation to the effect of the insolvency of members of an underwriting pool on the reinsurance protections obtained for the pool members by the underwriting agency.

The first defendant (“Nationwide”) was used as a front for the pool and it remained solvent. the claimant (“Naic”) was used as a front but to a much more limited extent, and it was insolvent. Nationwide argued that because as the front it was 100 per cent liable to the insured on the risks underwritten by the agency (“Rutty”), it was entitled to claim directly the proceeds of the reinsurances taken out by Rutty to protect the pool. Naic argued that the position in law was that it had a liability to take its share as a pool member and indemnify Nationwide and other fronters to that extent, and that although the liquidator would only be able to pay a dividend in respect of that liability, it had a claim to the reinsurance moneys. cooke j held that naic was correct in that contention. nationwide appealed.

Held, dismissing the appeal:

1. The question whether, where risks were fronted, it was the fronter who had the claim on the reinsurance (the direct method) or each member to the extent of their contribution (the indirect method) turned on the identity of the parties to the reinsurance contracts. When Rutty began to underwrite it did so without any authorisation to front and each of the companies for which Rutty underwrote accepted the risk up to the extent of their share. The agency agreement gave Rutty authority to make each pool member a party to the reinsurance protections. The addition of authority to front did not affect the reality that Rutty was authorised to and did reinsure the risk of each member of the pool. Each member was liable for its share of the premium for the reinsurance and each member was to be entitled to the benefit of the reinsurance arrangement for which it had paid. The contributing members were parties to the reinsurance contracts.

2. Nationwide argued that the accounting arrangements of the Rutty pool prevent the liquidator of NAIC from collecting the reinsurance proceeds but any arrangement between the members as to how the proceeds of the reinsurance were to be dealt with once collected by the agent on behalf of the member could not affect the right of the liquidator to collect the asset for the benefit of the general creditors. Such arrangement as there was did not bind the reinsurers, and thus the debt due from the reinsurers was in fact a debt owed to each member. An arrangement between the members alone could not, unless a trust was established, affect the right of the liquidator to collect the asset of the member. The accounting arrangements did not create a trust. Clause 15 of the Rutty agreement which made express provision for what was to happen in the event of insolvency was clearly invalid as contrary to the principle in British Eagle International Airlines Ltd v Compagnie Nationale Air FranceWLR [1975] 1 WLR 758 but its existence meant that no intention to create a trust could be implied. The debts due from the reinsurers were debts which the liquidators of the insolvent members of the pool were entitled to collect in accordance with their percentage share.

JUDGMENT

Waller LJ:

1. 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 [not reproduced]. I shall refer to parties by the names by which they became known, and in the nomenclature adopted during the hearing of the appeal.

2. 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.

3. By a judgment dated 13th March 2003 Cooke J ([2003] EWHC 449 (Comm); [2003] 2 CLC 731) 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.

4. 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.

5. 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.”

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