Phoenix General Insurance Company of Greece S.A. v Halvanon Insurance Company Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE KERR,LORD JUSTICE PARKER,LORD JUSTICE BALCOMBE |
| Judgment Date | 09 October 1986 |
| Judgment citation (vLex) | [1986] EWCA Civ J1009-8 |
| Docket Number | 86/0860 |
| Court | Court of Appeal (Civil Division) |
| Date | 09 October 1986 |
[1986] EWCA Civ J1009-8
Lord Justice Kerr
Lord Justice Parker
and
Lord Justice Balcombe
86/0860
1982 P No. 2937
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
(MR. JUSTICE HOBHOUSE)
Royal Courts of Justice
MR. NICHOLAS PHILLIPS QC and MR. STEVEN GEE (instructed by Messrs. Linklaters & Paines, Solicitors, London EC2V 7JA) appeared on behalf of the Plaintiffs (Appellants)
MR. SYDNEY KENTRIDGE QC and MR. DAVID OWEN (instructed by Messrs. Thomas Cooper & Stibbard, Solicitors, London EC3A 2DJ) appeared on behalf of the Defendants (Respondents)
This is an appeal and cross-appeal from a judgment of Mr. Justice Hobhouse delivered on 31st July 1985 reported in [1985] 2 Lloyd's Reports 599. The name of the defendant in the report, Halvanon Insurance Co. Ltd., stems from a parallel action which has not gone to appeal. It had been agreed that the judgment should apply to both actions, since the issues were largely the same. The defendants in the present action are the State Insurance Corporation of Roumania, and I will refer to them for short as "Adas". The plaintiffs in both actions ("Phoenix") are a Greek insurance company which also carried on business in the City of London. Phoenix entered into reinsurance contracts with Halvanon and Adas as reinsurers. The subject-matter of the reinsurances were various types of primary "aviation contingency" insurances, as described hereafter. Adas (like Halvanon) have denied liability under these contracts on many grounds, and in order to make the actions more manageable a number of preliminary issues were formulated for trial, as described by the judge at the beginning of his judgment. Two of these are raised on the present appeal and cross-appeal respectively, under the broad headings of "Illegality" and "Retention". The illegality issue raised on the appeal is based on the contention by Adas that Phoenix were not authorised to write the "aviation contingency" business comprised in the primary contracts of insurance. In consequence, as Adas submit, these contracts were illegal and void, with the result that Phoenix cannot recover under their contract of reinsurance with Adas. While such a purely technical defence on the part of these reinsurers may be surprising, we are not concerned with its conspicuous lack of substantive merit. It is also fair to say, as Mr. Kentridge pointed out, that insurers ceding primary risks under facultative/obligatory reinsurances may now be carrying on business in a very different way from former times, when no such defence would have been raised by reinsurers in the Commercial Court. But we know nothing about the primary insurances in this case.
The issue concerning retention under the cross-appeal raises an entirely different point. Adas allege that it was a term of the reinsurance contract that Phoenix should retain part of the risk for themselves, and that their failure to do so absolves Adas from liability on this further or alternative ground.
I will deal with these defences in that order.
Illegality
This defence raises three issues:
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(1) Were Phoenix authorised to write the primary "aviation contingency" insurance contracts?
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(2) If not, were these contracts illegal and void?
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(3) Depending on the answers to (1) and (2), is the reinsurance contract enforceable against Adas?
The judge answered all three questions in the negative and accordingly upheld the defence of illegality despite his negative answer to (2). Phoenix challenge his answers to (1) and (3) and Adas challenge his answer to (2). In relation to issue (1) the court permitted Phoenix to rely on a new contention, without opposition from Adas, which had not been argued below. Issue (2) raises a question of general importance to the insurance market, since it has led to conflicting decisions in the Commercial Court by Mr. Justice Parker (as he then was) in November 1983 in Bedford Insurance Co. Ltd. v. Instituto de Resseguros do Brasil [1985] 1 Queen's Bench 966 ("Bedford") and by Mr. Lustice Leggatt in March 1984 in Stewart v. Oriental Fire and Marine Insurance Co. Ltd. [1985] 1 Queen's Bench 988 ("Stewart"). In the present case the position is complicated by the fact that Mr. Justice Hobhouse preferred the reasoning in Bedford but nevertheless reached the same conclusion as in Stewart. In this connection I should add that when it became known that Lord Justice Parker happened to be a member of the division of this court before which the appeal was listed, both parties were given the opportunity of suggesting a change in the composition of the court, but both were content to leave matters as they were. In the event we heard very full arguments on all three issues.
The primary insurances and the resinsurance.
Phoenix were insurers in the marine, aviation and transport section of the insurance market (to which I will refer as "MAT") and were at all times authorised to write MAT risks, as explained later on. The reinsured risks, collectively described as "aviation contingency" business, comprised a number of different types. The first was on so-called "deductibles", i.e. that part of the risk on the aircraft hull, machinery and equipment which is retained by the insured and is also sometimes referred to as an excess. No problem arises on this, since it was gommon ground that "deductible" cover forms part of the cover on the aircraft itself. The issues concerning the authorisation of Phoenix to write the primary business related to other aviation contingency risks which the judge described with admirable clarity at p.605 of the report, and both parties accepted this passage as follows:
"These other types were called profit commission insurance, differentials on burning cost premium insurances, unearned premium insurance and increase in premium insurance. These all relate to the risks arising from the operation of premium adjustment clauses in policies on the hulls of aircraft (or similar objects). Aviation insurance has been very competitive particularly since the beginning of the 1970's and the premium rates on hull insurances have been expressed in ways which give the airline the benefit of a good claims record. This can be done in a number of ways. The hull premium can initially be expressed at a higher level and it then can be provided that the airline is to get a refund at the expiry of the contract, a 'profit commission' or a 'good experience return', If there has been a good claims record. (This is like a retrospective no-claims bonus.) Alternatively, the initial premium can be lower, but the policy provides for a much higher premium to be payable if there are claims. These additional sums are called 'burning differentials' or 'burning costs' or 'increase in premium' or 'penalty premium'. There is another form in which these additional sums may be collected, as where deferred instalments of premium may become payable if there is a total loss. Each of these financial adjustments occur under the hull (or similar policy) having regard to the casualties which the airline's aircraft have suffered during the relevant period. The airline, by reason of such casualties, either loses a financial benefit (e.g. profit commission) or suffers a financial liability (e.g. a burning cost). Airlines commonly wish to insure themselve against these financial losses. In theory, they could go back to the hull underwriters and ask them to insure the hulls on terms which did not expose the airlines to those financial consequences, but this would be expensive to the airlines and is not how the market works. Separate insurance slips are prepared by the airline's brokers which seek cover specifically for these specific financial consequences. Because the underlying fortuity is still the incidence of aircraft casualties, these slips, which are known as 'aviation contingency slips', are written by the underwriters in the aviation market. But it is unusual for an underwriter on the hull slip to be on the contingency slip for the same airline (although Phoenix quite often were), and it was very rare indeed for the same underwriter to lead both slips. Therefore, although the making of the contingency contract is a consequence of the making of the hull contract, the two contracts are separate and distinct, and are separately negotiated and agreed. Different individuals in the brokers' offices usually bring round the slips. The rating of the two types of contract is distinct and many hull underwriters will not write contingency business at all".
As regards the contracts of reinsurance, whereas the Halvanon action was concerned with a number of slips, the present action is only concerned with one. It was headed "Aviation Contingency Reinsurance Contract" for a continuous period beginning 1st April 1978 subject to a three months' cancellation clause at anniversary date. The relevant wording was the same as that set out by the judge at pp.602 and 603 of the report as follows, but omitting the irrelevant introductory words:
"on deductibles insurance, profit, commissioned insurance or classes, breach of warranty insurance, differentials on burning costs premium insurances, unearned premium insurances and increase in premium insurances, written by the reassured either direct or by way of facultative reinsurance".
The rate was quoted "Nett Premium as received by Reinsured" and there was an overrider "5% on nett. Brokerage 3%". Finally against the...
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