Eagle Star Insurance Company Ltd. v Cresswell & Ors

Introduction

The clause is a typewritten clause and is one of a collection of clauses under the heading

“Attaching to and forming part of Policy Number 69/12966/4”.

Policy 69/12966/4 dated 7th April 1970 is a Lloyd’s Reinsurance Policy in the familiar J1 form which named Eagle Star Insurance Company as the Assured and in its printed wording described itself as

“Being a Reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company.”

The schedule to the policy specified that the original Assured was Varian Associates of San Francisco, that Eagle Star’s retention was to be 40% and described the interest reinsured as being 42.64% part of 100% of 60% of original limits. The agreed amount of indemnity was described in the following terms:-

“UMBRELLA LIABILITY REINSURANCE

POLICY FOR LIMITS OF: $1,000,000 any one occurrence

EXCESS OF Primary limits OR $25,000 for uninsured perils.”

The primary limits referred to were set out in a further schedule called “Schedule of Primary Limits” which provided:-

“General Bodily Injury, Property Damage Liability Insurance including Products, Occupational Disease and Automobile Liability	Policy for a Combined Single Limit of U.S. $500,000 any one occurrence, and in the aggregate in any one policy year as regards Products Liability and Occupational Disease.
Aircraft Bodily Injury and Property Damage Liability Insurance.	Policy for a Combined Single Limit of U.S. $500,000 any one Occurrence.
Uninsured Perils	Original Assured his own Insurer for the first U.S. $25,000 any one occurrence.”

There is a companies policy on the same terms as the Lloyd’s policy and I shall refer to Lloyd’s Underwriters and the relevant companies as “the reinsurers”.

Eagle Star assert that they have given notice of claim pursuant to sub-clause (a) of the Claims Co-operation Clause, that they have settled with Varian, the original insured, and that reinsurers are obliged to indemnify them in respect of that settlement. Reinsurers’ defence to the claim is that they were not given control of the negotiations or settlement of the claim, that it was settled without their knowledge or consent and that pursuant to sub-clause (b) they are not liable to pay the claim.

On 16th January 2003 Morison J ordered the trial of preliminary issues including

“3.

Is compliance by the Claimant with sub-paragraph (b) of the “Claims Co-operation Clause” a condition precedent to any liability on the part of the Defendants to indemnify the Claimant under the contract(s) of reinsurance in respect of the Claimant’s settlement with Varian?

4.

Are the Defendants bound, pursuant to the “follow the settlements” clause, to indemnify the Claimant notwithstanding any breach by the Claimant of the sub-paragraph (b) of the “Claims Co-operation Clause”?”

On Friday 10th October 2003 Morison J answered those questions No and Yes respectively and accordingly struck out paragraphs 8 and 9 of the reinsurers’ defence which had, inter alia, alleged that reinsurers did not control the negotiation or settlement of the claim or claims “and neither were they given the opportunity to do so”.

For the purposes of trying the preliminary issues, the parties agreed a statement of facts which relevantly provided as follows:-

“1.

The Claimant issued a comprehensive general liability excess of loss policy of insurance to Varian Associates Inc for the period 1st November 1969 to 1st November 1970 (the “Varian Policy”);

2.

The First to Fifteenth Defendants issued to the Claimant a Lloyd’s policy of reinsurance no 69/12966/4/BB 14058 G dated in London 7th April 1970 for the period 1st November 1969 to 1st November 1970;

3.

The Sixteenth to Eighteenth Defendants issued to the Claimant an Insurance Companies Collective Policy dated 8th June 1970 for the period 1st November 1969 to 1st November 1970;

4.

A number of environmental pollution (liability) claims were asserted against Varian. Varian made a claim against the Claimant under the Varian Policy;

5.

In July 1992, Varian commenced proceedings in the San Francisco Superior Court against, inter alia, the Claimant, seeking indemnity pursuant to the Varian Policy in respect of the environmental claims referred to above. The Claimant denied coverage.

6.

In October 1995, Varian and the Claimant agreed to compromise those proceedings and to settle their dispute and entered into a Settlement Agreement and Release, which was executed by each of them on 30th October 1995;

7.

There is a dispute between the parties as to what was done by the Claimant in notifying the Defendants (and which) of the Varian proceedings and the settlement. The following facts are nevertheless agreed:

a.

In the period from June to August 1990 a letter dated 6th June 1990 was shown by the Claimant’s brokers to various underwriters including the First Defendant (the leading underwriter) and the Eighteenth Defendant. The First Defendant scratched the document in the following terms: “R/I Eagle Star 12 Mos at 1/11/69 $1M x/s $25,000. Seen, without prejudice to Reinsurers’ Rights. Status report by 30/09/91 please to include evaluation of potential exposure to this protection. A.L.S. 19/6/91.”.

b.

In or about June 1991 a manuscript memorandum entitled “Varian Associates – Pollution” was shown by the Claimants’ brokers to various underwriters including the Eighteenth Defendant.

c.

In or about August 1992 a letter dated 13th August 1992 entitled “Initial Reinsurance Claims Advice” was shown by the Claimant’s brokers to various underwriters including the Eighteenth Defendant.

8.

The Defendants did not control the negotiations or settlement of the claim or claims in respect of which the Claimant now seeks indemnity;

9.

The Claimant paid $1 million to Varian pursuant to the Settlement Agreement and Release;

10.

The Claimant incurred costs and expenses totalling $615,177.36 in defending and/or investigating the claim against it by Varian;

11.

The Defendants have refused to indemnify the Claimant in respect of their proportion of the Varian Claim (or claims) and in respect of their proportion of the Claimant’s costs and expenses.”

Other policy provisions

I do not think that this can be right for two reasons. First the words “the limits stated in the Schedule hereto” must be intended to have the same meaning as the phrase “the limits expressed in the Schedule” in the first paragraph of the attached clauses. Secondly it makes little sense for the parties to agree that reinsurers, if they agree, will pay a proportionate share of costs incurred in relation to a loss to which they may be liable to contribute, but then to provide that for a loss to which they will be liable to contribute, they shall not pay any legal costs. The second sentence of the fourth paragraph must, therefore, be referring to a case where it is practicable to settle within the deductible. In such an event, it makes good sense to provide that reinsurers will not be liable for legal costs for the simple reason that they would never have been liable to indemnify Eagle Star in the first place.

It must follow that the phrase in the fifth paragraph “a sum in excess of the limits stated in the Schedule hereto” (which uses the same words as used in the fourth paragraph under the heading “Apportionment of Costs”) must refer to a sum which is greater than the deductible and thus a sum for which reinsurers will be proportionately liable. This fifth paragraph thus provides that any settlement in excess of the deductible has to be with the consent of underwriters. This is, on the face of it, inconsistent with the reinsurers’ agreement in the printed words of the policy “to follow the settlements of the Company” and, in accordance with normal principles of interpretation, the typed words, unless for some reason they are inapplicable, will prevail over inconsistent printed words in the contract.

After the fifth paragraph of the policy, there followed the heading “INSOLVENCY CLAUSE”. Next came the sixth paragraph of the attachments which need not be set out. Paragraph 7 then provided:-

“Being a Reinsurance of and warranted same (except as regards the premium amounts, and limit of liability and renewal agreement and except as otherwise provided herein), terms and conditions as set forth in the Policy issued to the Original Assured by the Company and that the Company retains during the currency of this Policy at least the amount stated in the Schedule. This Policy to pay excess of that retention up to a maximum of $1,000,000 ultimate net loss any one occurrence and in the aggregate in any one policy year with respects to Products Liability and occupational disease.”

This clause starts in similar terms to the third printed paragraph of the policy but omits any reference to the phrase “and to follow the settlements of the Company”. The judge thought that this seventh paragraph was all part of the insolvency clause but leading counsel for Eagle Star did not seek to support that particular conclusion of the judge. It must, in my view, have a wider application than the judge thought but in the light of what I have said about the earlier clause about settlements without reinsurers’ consent that may not greatly matter.

After these clauses came the original Claims Co-operation Clause. That constituted the 8th paragraph but, as I have already said, the phrase “This clause void” was stamped over it and the new Claims Co-operation Clause appeared on a separate sheet of paper.

Submissions

Mr Julian Flaux QC for Eagle Star submitted:-

(1)

sub-paragraph (b) of the Claims Co-operation Clause conferred an option on reinsurers whereby they could, if they wished, opt to control the negotiation and settlement of claims. That option was triggered by Eagle Star giving notice of claims under sub-paragraph (a). In this case reinsurers did not so opt, so sub-paragraph (b) had no application;

(2)

in any event, sub-paragraph (b) did not state that the control of negotiations or settlement was a condition precedent to liability;

(3)

the printed words “follow the settlements” could and should be read with the typed attached clauses; the fifth paragraph came under the heading of “Apportionment of Costs” and in any event did not provide that payment would not be made under the insurance policy if reinsurers had not consented to the settlement;

(4)

reinsurers were, therefore, obliged to follow Eagle Star’s settlement of Varian’s claim; alternatively if, contrary to (3) above, the obligation to follow Eagle Star’s settlements had been replaced by the typed attachments and (pursuant to the fifth paragraph of the attachments) no settlement was to be effected without the consent of reinsurers, the effecting of such a settlement was a breach of contract; but such breach of contract caused no loss because Eagle Star were (and could prove that they were) liable to indemnify Varian in any event and reinsurers were therefore liable to indemnify Eagle Star, irrespective of Eagle Star’s breach which would only give rise to a claim for nominal damages. For this proposition, reliance was placed on Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312.

The preliminary issues only required answers to be given to the second and third submissions; this the judge did. It might be said that, strictly speaking, Mr Flaux’s first submission was not, therefore, open to him. But since he would be entitled to make the submission at trial and since, if it is right, the preliminary issues would become academic and since it is, in any event, rather difficult to decide whether sub-paragraph (b) is the equivalent of a condition precedent unless one knows what it means, I consider that the submission should be addressed at this stage even though the judge did not think he needed to deal with it as a separate issue. Indeed his view that sub-paragraph (b) was not to be treated as a condition precedent (whatever it meant) made it unnecessary for him to consider this construction point at all.

Sub-Paragraph (b) – First sentence: Option or allocation of role?

Attractively as the argument was presented, I cannot accept it. The clear intent of the clause is that the reinsurers are to be entitled (not themselves to negotiate or settle but) to control any negotiation or settlement that takes place between Eagle Star and Varian. All that this requires is for Eagle Star to inform reinsurers when negotiations begin so that reinsurers can say (if they choose) what form the negotiations should take and what offers should be made. Likewise if Eagle Star propose to settle the case, reinsurers have to be informed and have to consent. Of course many reinsurers may be content to leave their reinsured to do the negotiation and settlement of claims but the reinsurers on this particular policy have stipulated for a decisive role. There is no true uncertainty, since it is not difficult to know when a negotiation of a claim begins; it is even easier to know when a settlement can be made. To construe the sub-paragraph as conferring an option would lead to at least equal uncertainty as that complained of by Eagle Star, because there may not be enough information for a decision to be made about controlling negotiations or settlements at the time when notice of claim is given. Sometimes notices of claim are informal and do not disclose very much often because the reinsured does not himself at that stage know a great deal. The examples of notification given in paragraph 7 of the Agreed Statement of Facts are typical and would not be informative for the purpose of making a once and for all decision as to controlling negotiations or settlement at those particular times.

For these reasons I prefer Mr Edelman’s submission viz. that the function of sub-paragraph (b) is to allocate a controlling role to reinsurers. It will be for the reinsured to say if and when negotiations are about to take place to enable the reinsurers to decide whether to exercise control at that stage. The position will be similar if it becomes apparent that a settlement can be made. This does not mean that there is any obligation on the reinsured to inform reinsurers of any negotiations or settlement; it just means that if reinsurers do not control negotiations or settlement, then (subject to waiver or estoppel) reinsurers will not be liable.

I would be a little concerned if it followed from this conclusion that on the true construction of the clause reinsurers could dictate that negotiations should begin earlier than Eagle Star thought was right or sensible. Mr Edelman submitted that that indeed was the position. This is not a matter which arises in this case and should be left to be decided, if it ever needs decision, on another occasion.

Sub-paragraph (b) – Second sentence: Condition precedent to liability?

The answer to this question is “Yes”, because the clause says in terms that in the event of there being negotiations or settlements reinsurers will not be liable to pay any claim not controlled by them. The judge was able to avoid this conclusion by (inter alia) pointing out the clause did not use the term “condition precedent” as such, whereas the deleted clause did use that term. As to that, it is not essential that the very words “condition precedent” be used to achieve the result that reinsurers will not be liable unless a certain event happens. Other words can be used, if they are clear. Other words have been used which, in my view, are clear.

The judge’s main reason, however, was that the seventh paragraph of the attached clauses contemplated that some settlements would be made outside the control of reinsurers. This appears to depend on the words “in excess of the limits stated in the schedule hereto” being interpreted as “in excess of the limits as stated in the schedule in the policy” viz in excess of $1,000,000 any one occurrence excess of the primary limit of $500,000. On that basis it would be only losses in excess of $1,500,000 that could not be settled without reinsurers’ consent. This, for the reasons given in paragraph 7 above, cannot be right – it would be a most curious agreement to make. The words must refer to claims which are going to fall within the reinsurance policy limits not claims in excess of the policy limits. So read, they are entirely consistent with the Claims Co-operation Clause.

The judge’s two grounds for saying that sub-paragraph (b) was not a condition precedent cannot, therefore, stand up to examination and question 3 of the preliminary issues should in principle be answered Yes.

Follow the settlements

Proving the reinsured were liable

I would, therefore, allow this appeal and would be minded to answer questions 3 and 4 of the preliminary issues Yes and No respectively. In the light of the issues that remain alive on the pleadings, however, it is no doubt appropriate that the formal answers should be qualified as suggested by Lord Justice Rix in the final paragraph of his judgment. Subject to any further argument at the time of handing down I gratefully accept his formulation.

I gratefully adopt Lord Justice Longmore’s exposition of the agreed facts and structure of the dispute. The essence of the matter is whether Lloyd’s and company reinsurers have any liability to indemnify the reassured, Eagle Star, in respect of a claim by the original assured, Varian, notice of which is asserted by Eagle Star to have been given promptly, but the negotiations and settlement of which were not controlled by, the reinsurers. The reinsurers rely on para (b) of the claims co-operation clause for its provision that reinsurers “will not be liable to pay any claim not controlled as set out above”. Eagle Star, however, says that control by reinsurers is not a condition precedent to liability and that in any event the reinsurers have by their own inactivity lost any right of control and with it any defence which they might otherwise have had.

The background chronology is striking. The reinsurance policies in question cover a period from 1 November 1969 to 1 November 1970. There is a dispute about what Eagle Star did to notify the reinsurers about Varian’s claim, but it is at least agreed that in the summer of 1990 some of the reinsurers, including the leading underwriter, were shown a letter which was scratched “without prejudice to Reinsurers’ rights”, and that thereafter in June 1991 and again in August 1992 further advices were shown to various reinsurers. In July 1992 Varian had commenced proceedings against Eagle Star in California claiming an indemnity under the original policy, but Eagle Star denied liability. I will assume, but it is not expressly stated in the agreed facts, that the advice to some reinsurers in August 1992 included notice of those proceedings. More than three years later Varian and Eagle Star compromised those proceedings and entered into a settlement agreement executed on 30 October 1995, pursuant to which Eagle Star paid Varian $1 million.

These proceedings, however, are still at the stage of preliminary issues. Once the agreed facts are left behind, the parties’ pleadings express the shape of the dispute as follows. In their defence the reinsurers rely on para (b) of the claims co-operation clause as a condition precedent and merely state that they “did not control the negotiation or settlement” (that is common ground) “and neither were they given the opportunity to do so” (that is in dispute). In its amended reply Eagle Star pleads that “despite notification, the [reinsurers] simply reserved their rights and did not at any time take steps to assume control of negotiations and settlement of the Varian claims, thereby waiving their rights to do so” under the clause. Eagle Star further pleads that this conduct amounted to an estoppel and/or to a breach of contract by the reinsurers themselves, and that the reinsurers, in breach of an implication contained in the clause that the reinsurers would act in a reasonable and timely manner to assume control of the negotiations and settlement, failed to do so.

The two preliminary issues considered by Morison J below and again debated on this appeal are as follows:

“3.

Is compliance by [Eagle Star] with sub-paragraph (b) of the “Claims Co-operation Clause” a condition precedent to any liability on the part of the Defendants to indemnify [Eagle Star] under the contract(s) of reinsurance in respect of [Eagle Star’s] settlement with Varian?

“4.

Are the [reinsurers] bound, pursuant to the “follow the settlements” clause, to indemnify [Eagle Star] notwithstanding any breach by [Eagle Star] of the sub-paragraph (b) of the “Claims Co-operation Clause.”?”

Issue 3 of course raises the condition precedent defence taken by the reinsurers. Issue 4 raises a slightly different problem: on the assumption that the reinsurers have no complete defence under the claims co-operation clause, are they obliged to follow the Varian settlement, or does Eagle Star have otherwise to prove its case for an indemnity? Although issue 4 was framed in terms of breach of the claims co-operation clause, the argument ranged more widely, for the reinsurers submitted that the follow the settlements provision contained in the standard J1 form’s reinsurance clause was ousted by other provisions in the policies. Morison J answered issue 3 “No” on the basis that the claims co-operation clause was not a condition precedent, and issue 4 “Yes” on the basis that the follow the settlements provision was not ousted and remained operative despite any lack of consent by the reinsurers to the Varian settlement.

Lord Justice Longmore has already set out the relevant terms of the policies, but I think it is helpful to restate the essence of the clauses which have had to be considered for the purpose of these two issues. Thus the printed J1 reinsurance clause reads –

“Being a Reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company and that the Company retains during the currency of this Policy at least the amount stated in the Schedule…”

The remaining clauses are all typed attachments (albeit in standard form). One such attachment contains the claims co-operation clause, as follows:

“The company agree

(a)

To notify all claims or occurrences likely to involve the Underwriters within 7 days from the time that such claims or occurrences become known to them.

(b)

The Underwriters hereon shall control the negotiations and settlements of any claims under this Policy. In this event the Underwriters hereon will not be liable to pay any claim not controlled as set out above.

Omission however by the Company to notify any claim or occurrence which at the outset did not appear to be serious but which at a later date threatened to involve the Company shall not prejudice their right of recovery hereunder…”

Another such attachment contains the remaining typed clauses that I need to refer to. Thus apparently under the heading of “Apportionment of Costs” the second paragraph of that clause provides as follows:

“No settlement of a loss by agreement shall be effected by the Company for a sum in excess of the limits stated in the Schedule hereto, without the consent of the Underwriters.”

I shall call this the “no settlement without consent” provision (it is what Lord Justice Longmore refers to as the fifth paragraph of this attachment). Then, apparently under the heading of “Insolvency Clause”, the second paragraph (or what Lord Justice Longmore refers to as paragraph 7 of this attachment), contains a new reinsurance clause, set out at paragraph 10 above, which begins

“Being a Reinsurance of and warranted same…terms and conditions as set forth in the Policy issued to the Original Assured by the Company and that the Company retains during the currency of this Policy at least the amount stated in the Schedule…”

The important matter for present purposes, however, is that this attached reinsurance clause omits any reference to “and to follow the settlements of” the reassured.

Finally, there is the clause which has been struck out by a stamp “This clause void” and which would have read as follows:

“Notwithstanding anything herein contained to the contrary, it is a condition precedent to any liability under this policy that

(a)

the Company shall upon knowledge of any loss or losses which may give risk [sc rise] to a claim under this policy advise the Underwriters thereof within seven days,

(b)

the Company shall furnish the Underwriters with all information available respecting such loss or losses and shall co-operate with the Underwriters in the adjustment and settlement thereof.”

I think it is easier to start with terms which are in dispute other than the claims co-operation clause itself. Thus in the course of his judgment Morison J held (i) that the attached reinsurance clause was part of the insolvency clause and only operated in the context of liquidation and therefore did not undermine the follow the settlements provision of the printed reinsurance clause; and (ii) that the “no settlement without consent” clause, being part of the apportionment of costs clause, only operated, where there was no consent, to deprive Eagle Star of its legal costs. I do not think that he was correct in these views. It is true that the attached clauses are most unhelpfully headed. However, some clauses have no headings at all, such as, for instance, the deleted claims co-operation clause. It is quite plain that the attached reinsurance clause is intended to operate generally, and not only in insolvency, and to deal expressly with agreed figures as to retention and limits of liability. It is equally plain that the “no settlement without consent” provision is dealing with settlement as a whole and not merely with the question of costs.

In this latter connection Mr Colin Edelman QC, on behalf of the reinsurers, pointed out that “the limits stated in the Schedule hereto” is a reference to the deductibles there set out; and that was not disputed by Mr Julian Flaux QC, counsel on behalf of Eagle Star. Thus any settlement which in its amount breached the deductibles set by the policies and thus would potentially render the reinsurers liable required their consent. It is understandable that such a provision should be part of the apportionment of costs clause, because that clause is dealing with issues of the incidence of costs in terms of factors such as reinsurers’ consent and the practicality of settlement for a sum below the scheduled deductibles. It therefore makes sense for a general provision to emphasise that in any event the reinsurers’ consent is required for a settlement in excess of those deductibles. Whether the “no settlement without consent” clause is therefore considered to be part of the apportionment of costs clause or as a separate clause logically placed immediately subsequent to it, it cannot be said that it is inappropriately placed within the attachment, or that its natural meaning should be subverted so as to refer to a liability for costs only.

It was also common ground that the “no settlement without consent” clause is not a condition precedent to the reinsurers’ liability. A failure to obtain reinsurers’ consent will prevent reliance on the follow the settlements provision, but it is still open to prove that the settled claim falls within the liability of reinsurers to indemnify their reassured. This is clear from The Insurance Co of Africa v. Scor (UK) Reinsurance Co Ltd[1985] 1 Lloyd’s Rep 312 at 330/331 and 334 and Gan Insurance Company Ltd v. Tai Ping Insurance Company Ltd (Nos 2 and 3)[2001] Lloyd’s Rep IR 667 at 687/688. Thus in Scor, where the clause said that “the Reassured hereby undertake…that no settlement shall be made without the approval of the Underwriters”,Robert Goff LJ said (at 331):

“In other words, the follow settlements clause must be construed in its context in the policy, containing as it does a claims co-operation clause in this form, as only requiring reinsurers to follow settlements which are authorized by the policy, i.e. those which have received their approval, though presumably reinsurers can, if they wish, waive that requirement. This effectively emasculates the follow settlements clause; but it is nevertheless, in my judgment, what the parties to a policy in this form have agreed.”

And as Mance LJ said in Tai Ping at 688, after referring to both Scorand Vesta v. Butcher[1986] 2 Lloyd’s Rep 179 at 187:

“In neither case was the clause expressed as a condition precedent or warranty, and in neither was it suggested that the reinsurers had suffered any recoverable loss arising from failure to comply with it.”

Mr Edelman submitted nevertheless that the follow the settlements provision in the J1 form reinsurance clause had not only been emasculated by the “no settlement without consent” clause, but had been wholly excluded by the replacement of the J1 clause with the new reinsurance clause to be found in the attachment – without any follow the settlements provision within it. In my judgment, however, that submission puts the matter too high. The two reinsurance clauses can be read together as far as they can, and on that basis the follow the settlements provision survives. Indeed, the “no settlement without consent” provision rather assumes the follow the settlements provision, for it is the latter which requires the reinsurers to pay any settlement to which they have given their consent. What is emasculated is Eagle Star’s ability to make its own (honest and business-like) settlement of a claim that fell within the risks covered by the reinsurance and thus bind the reinsurers to follow that settlement.

Thus far, therefore, the provisions of the policies do not exclude liability for a claim which has been settled without reinsurers’ consent, but only for a settlement of such a claim. Indeed, Eagle Star submits that the “no settlement without consent” provision, just because it is not a condition precedent to the reinsurers’ liability (other than to follow a settlement not consented to), demonstrates that the claims co-operation clause should likewise not be construed as a condition precedent. On the other hand, the reinsurers submit that, even if it is not in itself a condition precedent, it operates consistently with another provision concerning the dealing with claims which does amount to a condition precedent. It is now convenient to turn to the claims co-operation clause itself.

The following matters may be noted about this clause. It is not so much a co-operation clause, as a control cause. Although it begins, in paragraph (a), with a notice provision, it is common ground that that provision is not in itself a condition precedent. It seems to me that that is a debatable matter, for the proviso at the end of the clause suggests that in some circumstances the absence of due notice may “prejudice their right of recovery”: however, I am content to proceed on the basis which is common ground. It is nevertheless in dispute whether paragraph (b) is a condition precedent. The first sentence of paragraph (b) does not use the language of condition precedent. Neither does the second sentence, at any rate in the sense that there is no express reference to “condition precedent” in it. However, it does provide that in the circumstances there contemplated the reinsurers “will not be liable to pay any claim”. Those are strong words, if not the language of condition precedent, at any rate the language of exclusion.

Mr Flaux submits, nevertheless, that the absence of talk of “condition precedent” is critical. He refers to Butler & Merkin’s Reinsurance Law at C4.3-09 where it is said that the courts have traditionally refrained from construing policy conditions as conditions precedent to liability unless absolutely constrained to do so; cites Scorfor its conclusions that different parts of the same claims co-operation clause were to be construed differently on the ground that the first part of the clause contained the words “condition precedent” whereas the second part of the clause did not; relies on the reinsurers’ agreement that paragraph (a) of the clause is not a condition precedent; contrasts the deleted clause for its express reference to “a condition precedent to any liability under this policy” (as in Tai Ping at 687); and generally submits that paragraph (b) is too clumsy and ambiguous to be capable or worthy of being construed as a condition precedent. In this respect he submits that the words in the first sentence of paragraph (b) “shall control”, found in the phrase “The Underwriters hereon shall control the negotiations and settlement”, mean “shall be entitled to control” and that the judge was correct to regard “In this event” (at the beginning of the second sentence) as meaning “In the event that reinsurers (exercise their right to) take control of negotiations and settlement”. Thus the first sentence of paragraph (b) gave reinsurers an option to take control following notice under paragraph (a) and, if they did not choose to do so, then the exclusion of liability could not bite. It was understandable that the reinsurers should be put to their option when notice was given to them under paragraph (a), but the concept of negotiations was too uncertain to stand as a trigger for the reinsurers’ exercise of control. In any event, and even if paragraph (b) was a condition precedent, it was not a condition of the reinsurers’ liability as a whole, but only of their liability to follow the settlements.

Mr Edelman on the other hand submits that “shall control” is an assignment or allocation of role: if there are negotiations or settlements, it is the reinsurers rather than Eagle Star who are to control them. “In this event” means “in the event of negotiation or settlement taking place”. The express words “condition precedent” are not necessary if other words, such as “will not be liable to pay any claim not controlled as set out above”, clearly spell out the consequences of some failure of a required condition (see for instance George Hunt Cranes Limited v. Scottish Boiler & General Insurance Co Limited[2002] Lloyd’s Rep IR 178 at 181/2, where the wording was “No claim under this policy shall be payable unless the terms of this condition have been complied with”). Even if the deleted clause with its express reference to “condition precedent” had remained in the contract, it would not have prevented paragraph (b)’s clear wording from taking effect (ibidem); and in any event a deleted clause is an unsafe guide to construction: see Chitty on Contracts, 28^th ed, 1999, at para 12-067. As for Eagle Star’s concept that reinsurers are given an election to control triggered by the original notice under paragraph (a), this made no sense: negotiations and settlement may, as in this case, take place many years down the line, and will always follow prior investigation of a claim, which will remain the responsibility of the reinsured. Such a notice cannot therefore be regarded as the trigger for initiating the reinsurers’ controlling role. It was wrong for Eagle Star to have entered into negotiations or settlement without reference to the reinsurers, who were thus given no opportunity to control events. As for Eagle Star’s submission that the claims co-operation clause related at most to a limitation on the concept of following the settlements, there was no such provision outstanding in the contract, so that the submission could not be correct.

Three possible meanings to the words “shall control” in the first sentence of paragraph (b) have been canvassed during these proceedings. The first is that these words place upon the reinsurers the obligation to control negotiations and settlements. The second is that these words mean that the reinsurers shall be entitled to control negotiations and settlements. And the third is that the words allocate to reinsurers the role of controlling negotiations and settlements. The first was canvassed by Eagle Star before the judge, but rejected by him. As he remarked, such an obligation would be at odds with the consequence of reinsurers’ lack of control stated in the second sentence. This first meaning has not been pursued by Mr Flaux in this court. The second was Mr Flaux’s primary submission and adopted by the judge. The third was Mr Edelman’s counter-submission on this appeal. I am not sure how much difference there is between these second and third meanings. They are perhaps different ways of expressing the same thought. In either case they raise the question of what is to happen if the reinsurers simply refuse or fail to exercise the control which they are entitled to exercise, or if they simply ignore the role which the clause allocates to them. The reason why Eagle Star and the reinsurers have placed on these words their different constructions has been largely a matter of emphasis or flavour. Eagle Star wishes to emphasise that the reinsurers have an option. The reinsurers wish to emphasise that it is they rather than Eagle Star who have been allocated the right of control.

One way perhaps to identify the difference thus emphasised is in terms of the following glosses or reformulations of the words “shall control”. Eagle Star in effect says that they mean “shall be entitled to control”. The reinsurers in effect say that they mean “shall be given control of”. The former focuses on the reinsurers’ right to control. The second focuses on the need to give the reinsurers the opportunity to control. That is what the reinsurers plead: that they were not given the opportunity to control the negotiations and settlement of the Varian claim.

I do not think, if this is what Mr Edelman intends, that the clause should be construed as obliging Eagle Star to give the reinsurers the opportunity to control negotiations and settlement. There is no implied term, for instance, that Eagle Star must give the reinsurers notice of any negotiations or settlement so as to enable them to take control of the situation. No such implied term has been formulated; and in the light of the express requirement of notice under paragraph (a), and the proviso to that requirement following paragraph (b), I do not think that an implied term could be satisfactorily pursued. Eagle Star is not in breach of any implied obligation. Nor can any breach of contract on the part of Eagle Star be extracted from the express words “The Underwriters hereon shall control…” If these words do not impose an obligation on the reinsurers I do not see that they should be construed as imposing an obligation on Eagle Star.

It is rather that if the reinsurers do not control any negotiations and settlement that take place, then they “will not be liable to pay any claim not controlled as set out above”. Whenever therefore negotiations or settlement have taken place which have not been controlled by the reinsurers, as has been agreed to be the facts here, the prima facie position must be that reinsurers “will not be liable to pay” the relevant claim. The question must then arise, or can arise: Is there any reason why the prima facie position should not take effect? In the present case, Eagle Star has pleaded that the reinsurers have waived their rights to control the negotiations and settlement of the Varian claim, or are estopped from contending that any breach of the clause has occurred, or had failed to act in a reasonable and timely manner in assuming control of the procedure. This court is not in a position on the preliminary issues before it to say what the result of those pleas on the facts are or should be – unless it be the case that those pleas are inherently bad in law.

However, it has not been suggested by the reinsurers that those pleas are doomed. On the contrary, Mr Edelman has accepted in his skeleton argument that the issue of waiver, for instance, is open to Eagle Star and that “whether [the reinsurers] did so or not as a matter of fact is outside of the preliminary issues presently at hand, which concern construction only”. Similarly, it seems to me that the issue whether, on any given state of notice, the reinsurers had acted in a reasonable and timely manner in assuming control, must be a question of fact.

It seems to me that the phrase “In this event” fits into this scheme of things and that Mr Edelman is right to say that it stands for “In the event of negotiation or settlement taking place”. It cannot mean “In the event that reinsurers (exercise their right to) take control of negotiations and settlement”, because in that case the relevant claim will not be “not controlled as set out above”.

There remains what is in effect an alternative submission made by Mr Flaux, that the words “will not be liable to pay” relate not to reinsurers’ ultimate liability to indemnify, but only to reinsurers’ additional liability to follow the settlements. Mr Edelman seeks to head off that submission by excluding such an additional liability from the policies as a whole. I have already given my reasons above for rejecting that view of things: the obligation to follow settlements which have received the reinsurers’ consent remains.

This alternative submission is in theory an attractive solution, for it focuses on the real vice of negotiations or settlements which have not been controlled by reinsurers, so that one could similarly posit that, just as the follow the settlements clause relates only to settlements which have received the reinsurers’ consent, so it similarly relates only to settlements which have been negotiated under the reinsurers’ control. Even so, it is in my judgment impossible to give effect to this solution, for the clause does not say that there will be no liability to follow or pay a settlement which has not been negotiated and agreed under the reinsurers’ control, but that the reinsurers will not be liable to pay “any claim not controlled as set out above”. If there is no liability to pay the claim, this is an exclusion which goes beyond a mere further curtailment of the follow the settlements obligation. Moreover it would not be enough for a settlement to be controlled by the reinsurers, if the negotiations were not also controlled by them.

Thus in Tai Ping the clause in question provided –

“…it is a condition precedent to any liability under this policy that (a) the reinsured shall, upon knowledge of any circumstances which may give rise to a claim against them, advise the reinsurers immediately…(b) The reinsured shall co-operate with reinsurers…in the investigation and assessment of any loss…(c) No settlement and/or compromise shall be made and liability admitted without the prior approval of reinsurers…”

This court there held that the language “and liability admitted” was disjunctive not conjunctive. Similarly it seems to me that “negotiations and settlement” in our clause, as submitted by Mr Edelman, is disjunctive. For ill conducted negotiations may muddy the waters or make settlement impossible. The reinsurers were not satisfied in these policies with a term simply stating that there was to be no settlement without their consent. They wished also to control any negotiations or settlement. If settlement were impossible because of poorly conducted negotiations, and Eagle Star was sued to judgment, the reinsurers would not be protected simply because Eagle Star could not enforce a settlement under the follow the settlements provision. They therefore stipulated for an exclusion of liability for “any claim” where negotiations or settlement had not been conducted under their control. As Mance LJ said in Tai Pingunder the heading “Issue (v) – condition precedent to what?”, under which a similar submission had been addressed to this court in that case (at 688):

“28.

Here, by contrast, the wording is very specific. Its apparent intention is clear. Nothing in the nature of any of its three sub-clauses suggests to me that it was or can have been intended to be directed simply to situations in which insurers might subsequently invoke the Full Reinsurance Clause…

“29.

Mr Railton submitted that, since the sub-clause (c) deals with settlements and compromises, the condition precedent that it involves can readily be limited to the application of the “follow the settlements” provision in the Full Reinsurance Clause. That is an ingenious argument, but, even on Tai Ping’s interpretation of sub-clause (c), it would be very difficult to reconcile with the opening words of the Claims Co-operation Clause. The present case, unlike Scor (UK)and Vesta v. Butcher, is one where the words really brook no doubt.”

Although the wording of the clauses in that case and in this is by no means identical, and in particular the words “condition precedent” relied on there are not found here, nevertheless for the reasons given above I consider that the language of “will not be liable to pay any claim” is equally clear; and in other respects the arguments there deployed have equal resonance here.

Of course, such a clause can operate harshly on a reassurance. However, the solutions are in a reassured’s own hands. A reassured such as Eagle Star is not an inexperienced consumer, but well able to negotiate his own contract. He can take care to ensure that his reinsurers are kept in the picture of any negotiations or settlement activities. Moreover, if reinsurers simply refuse to exercise control, there remains the argument of waiver, as Mr Edelman concedes. And if, while exercising or refusing to exercise control, the reinsurers act in bad faith, capriciously or arbitrarily, then there is the implied term found by Mance LJ and Latham LJ in Tai Ping to protect the reinsured (ibid at paras 66 and 81), as Mr Edelman again concedes in his present skeleton argument. Sir Christopher Staughton (at para 97) there disagreed in this respect, on the basis that no term could be implied. But this protection may not depend only on a term to be implied “for business efficacy”, but may be inherent as a matter of law in the very essence of the reinsurers’ mutual obligation of good faith.

For all these reasons, I would answer the two preliminary issues in a way which amounts to allowing this appeal. But instead of answering them simply “Yes” and “No”, I would prefer to say, in relation to issue 3, that unless some reason is shown for excusing the agreed fact that the reinsurers did not control the negotiations or settlement of the Varian claim, then paragraph (b) of the claims co-operation clause amounts to an exclusion of their liability to indemnify Eagle Star; and as to issue 4, I would prefer to say that the reinsurers are not bound to follow the Varian settlement, first because they have not consented to it, and secondly because, subject, as already stated, to any defence emerging from Eagle Star’s amended reply, they did not control its negotiation or agreement.

This is an appeal from an order made following a trial of preliminary issues in proceedings brought to determine liability under a Lloyd’s policy of reinsurance. The issues were posed as questions of construction on the terms of the policy and on the basis that the facts in an agreed statement of facts were true.

The policy included a clause (inappropriately described as a “Claims Co-operation Clause) in these terms:

“The company agree

(a)

To notify all claims or occurrences likely to involve the underwriters within 7 days from the time that such claims or occurrences become known to them.

(b)

The Underwriters hereon shall control the negotiations and settlements of any claims under this Policy. In this event the Underwriters hereon will not be liable to pay any claim not controlled as set out above.

Omission however by the Company to notify any claim or occurrence which at the outset did not appear to be serious but which at a later date threatened to involve the Company shall not prejudice their right of recovery hereunder.

. . . ”

In that context “the Company” means the reinsured, Eagle Star Insurance Company Limited.

It appeared from the agreed statement of facts that Eagle Star had settled claims made against it by the original assured, Varian Associates Inc, by payment to Varian of US$1 million; and that the Underwriters “did not control the negotiation or settlement of [that] claim”. Question 3 in the preliminary issues required the judge to decide whether compliance by Eagle Star with sub-paragraph (b) of the Claims Co-operation Clause was a condition precedent to any liability on the part of the Underwriters to indemnify Eagle Star in respect of that settlement. Question 4 required the judge to decide whether the Underwriters were bound, pursuant to the “follow the settlements” clause in the policy, to indemnify Eagle Star “notwithstanding any breach [by Eagle Star] of sub-paragraph (b) of the Claims Co-operation Clause”.

The judge answered the questions numbered 3 and 4 respectively “No” and “Yes”. The Underwriters challenge those answers. I agree with the other members of the Court that that challenge succeeds and that the appeal must be allowed. The arguments have been fully addressed in the judgments already delivered and it is unnecessary for me to rehearse them. But it is, I think, appropriate that I set out the reasoning which has led me to the same conclusion in my own words. I can do so shortly.

Sub-paragraph (b) of the Claims Co-operation Clause poses three questions of construction: (i) to what do the words “any claims under this Policy” in the first sentence – “The Underwriters hereon shall control the negotiations and settlements of any claims under this Policy” – refer; (ii) does the word “shall” in that sentence impose an obligation - and, if so, upon whom and in what respect; and (iii) to what do the words “In this event” in the second sentence refer.

There has been no dispute as to the answer to the first of those questions. The claims which the parties had in mind were claims by Varian, as the original assured named in the schedule to the policy, against Eagle Star, as the reinsured named in that schedule. Nor is there any real doubt that the first sentence of sub-paragraph (b) imposes no obligation upon the Underwriters. It could not have been the intention of the parties that reinsurance underwriters should be obliged or required to control negotiations with the original assured. The contrary was not argued on this appeal.

It was accepted in this Court that – at the least - the effect of the first sentence of sub-paragraph (b) of the Claims Co-operation Clause was that the Underwriters were entitled to control negotiations and settlements. The Underwriters contended that it was an implied term, ancillary to that right to control, that Eagle Star was obliged to give notice to them of any negotiations with, or settlement terms proposed by, Varian so as to enable the Underwriters to exercise that right. Eagle Star denied the existence of any obligation to give notice other than that imposed by sub-paragraph (a) of the Claims Co-operation Clause. But it contended that the obligation to give notice of “claims or occurrences” - under sub-paragraph (a) - gave the right to exercise control over “negotiations and settlements” – under sub-paragraph (b) - the character of an option. The Underwriters were required to choose (within a reasonable time of being given notice of a claim) whether or not to take control of the negotiation and settlement of that claim. The Underwriters having (as it was said) chosen not to do so, sub-paragraph (b) ceased to have any application.

I agree that each of those contentions must be rejected. Sub-paragraph (a) of the Claims Co-operation Clause imposes, in express terms, an obligation upon Eagle Star to notify the Underwriters within seven days of claims or occurrences likely to involve them. There is no basis for implying a term that, if notice of an occurrence likely to lead to a claim by the original assured in respect of which Eagle Star may claim indemnity under the policy is given by Eagle Star to the Underwriters, the Underwriters should, without more, be put to an election whether or not to take control of the negotiation and settlement of whatever claim the original assured does make as a result of that occurrence. As Lord Justice Longmore has pointed out, notice of an occurrence, given at an early stage, cannot be expected to provide an informed basis for a “once and for all” election of that nature. Neither Eagle Star nor the Underwriters should be taken to have thought that it would.

That does not lead to the conclusion that there is some basis for implying a term that Eagle Star were, in addition, obliged to give notice of negotiations or proposed terms of settlement. If the parties intended a further obligation to notify when the claim by the original assured against Eagle Star reached the stage of negotiation or settlement, they could be expected to have said so. And there is no need to imply such an obligation. It is enough that the clause serves to allocate a role as between the Underwriters and Eagle Star in relation to claims by the original assured. The clause provides, in the second sentence, for what is to happen if the Underwriters are not given the opportunity to control the negotiation and settlement of claims.

It is, I think, plain that the opening words of the second sentence of sub-paragraph (b) – “In this event” – cannot mean “in the event that the Underwriters do control the negotiations and settlements of any claims”. To give the words that meaning would be inconsistent with the following words of the sentence – “the Underwriters hereon will not be liable to pay any claim not controlled as set out above”. The obvious purpose of the second sentence of sub-paragraph (b) – read in context - is that the Underwriters should not be liable to pay claims in respect of which there have been negotiations or settlements which they have not had the opportunity to control. The context requires that the words “In this event” must mean “In the event that there are negotiations and settlements of any claims”.

The question, then, is whether that construction of sub-paragraph (b) of the Claims Co-operation Clause can stand with the “follow the settlements” clause in the printed portion of the policy. The clause is in these terms, so far as material:

“Being a Reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company and that the Company retains during the currency of this Policy at least the amount stated in the Schedule . . .”

That printed clause must be read with a subsequent typed clause (incorporated as an attachment to the policy):

“Being a Reinsurance of and warranted same (except as regards the premium amounts, and limit of liability and renewal agreement and except as otherwise provided herein), terms and conditions as set forth in the Policy issued to the Original Assured by the Company and that the Company retains during the currency of this Policy at least the amount stated in the Schedule.”

It can be seen that the subsequent typed clause is, in form and in language, very similar to the printed clause; but that the typed clause does not include the words “follow the settlements”. In their place there is a reference to limitation of liability and the saving words “except as otherwise provided herein”.

It must be kept in mind that the effect of the Schedule of Primary Limits annexed to the policy is that the risk, in relation to a claim by the original assured which is within those limits, is borne exclusively by Eagle Star. The point is emphasised by the terms of the first paragraph of the Apportionment of Costs clause in the policy:

“In the event of a loss arising to which the Underwriters hereon may be liable to contribute, no legal costs shall be incurred on their behalf without their consent being first obtained and if they so consent they shall contribute to the said costs in the proportion that their share of the loss as finally settled bears to the total sum payable. If, however, a settlement of the loss be practicable prior to taking the case into Court whether by compromise or otherwise for a sum not exceeding the limits stated in the Schedule hereto, no legal costs shall be payable by the Underwriters hereon.”

The Underwriters are only obliged to contribute to costs to an extent proportionate to their share of the loss; and are not obliged to make any contribution to costs if the claim could have been settled, without litigation, at a sum within the primary limits.

Settlement for a sum within the primary limits does not require the consent of the Underwriters; but settlement in excess of those limits does require their consent. This is made clear by the paragraph which immediately follows that which I have just set out:

“No settlement of a loss by agreement shall be effected by the Company for a sum in excess of the limits stated in the Schedule hereto, without the consent of the Underwriters.”

If that provision (the “consent to settlement” clause) is to be given effect – and no reason has been suggested why it should not be given effect - the printed “follow the settlements” clause must yield in a case where there has been a settlement of a loss by agreement (for a sum in excess of the primary limits) to which the Underwriters have not given consent. In such a case, the liability of the Underwriters does not follow the settlement made by Eagle Star with the original assured. The policy must be read on the basis that the subsequent typed clause restricts or supersedes the earlier printed “follow the settlements” clause in so far as the two clauses are inconsistent; and that, at the least, the “follow the settlements” clause is itself qualified by the saving words in the subsequent clause “except as otherwise provided herein”.

It is clear that sub-paragraph (b) of the Claims Co-operation Clause has no application in a case where negotiations, not controlled by Underwriters, lead to settlement at a sum within the primary limits. In such a case Underwriters would not be liable to pay in any event. It is clear, also, that sub-paragraph (b) of the Claims Co-operation Clause adds little to the “consent to settlement” clause in a case where there has been a settlement in excess of the primary limits. In such a case, either the Underwriters have given consent to the settlement – and so cannot rely, thereafter, on a lack of opportunity to control the settlement (or, as it seems to me, on a lack of opportunity to control negotiations leading to the settlement to which they have given consent); or they have not given consent – and so do not need to rely on a lack of opportunity to control negotiations or settlement (save, perhaps, in relation to the obligation to indemnify in respect of the underlying claim). But there will be cases in which there have been negotiations which have not led to a settlement - that is to say, cases in which, following the breakdown or failure of negotiations in which the Underwriters have taken no part, the claim of the original assured has been quantified in litigation. In such cases it may be of importance to the Underwriters that they are able to rely on sub-paragraph (b) of the Claims Co-operation Clause, for the reasons given by Lord Justice Rix. In such cases, also, the “follow the settlements” clause must yield.

For those reasons, I would set aside the answers given by the judge to the questions numbered 3 and 4 in the preliminary issues. But I, too, would think it appropriate to go beyond unqualified answers – “Yes” and “No” respectively – to those questions. I would invite the parties to consider in what form the answers to those question should best be expressed in the light of our judgments.