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Judgments and decisions from 2001 onwards

Swiss Reinsurance Company & Ors v United India Insurance Company Ltd

[2005] EWHC 237 (Comm)

Neutral Citation Number: [2005] EWHC 237 (Comm)

Case No: 2002 FOLIO NO 725

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 24/02/2005

Before:

THE HON MR JUSTICE MORISON

Between:

SWISS REINSURANCE COMPANY AND OTHERS

Claimant

- and -

UNITED INDIA INSURANCE COMPANY LIMITED

Defendant

Mr John Rowland QC and Mr Stephen Houseman (instructed by Clyde & Co) for the Claimants

Mr Luke Parsons QC and Miss Poonam Melwani (instructed by Ince & Co) for the Defendants

Hearing dates: 17, 18, 19, 20, 24 and 25 January 2005

Judgment

MORISON J:

1.

This case concerns a reinsurance policy written by Swiss Re, leading a following company market, in favour of the cedant, United India Insurance Company (‘UII’). The cedant is based in India. By the laws of that country an assured is required to contract insurance with a locally based company, such as UII. Although the reinsurance arrangements essentially controlled the writing of the risks, UII were not merely a front; they retained a share of the risk for themselves. The ultimate assured was Dabhol Power Company, a company incorporated in India, as principal together with 15 named contractors “and/or others to be agreed and/or associated/affiliated companies and/or subcontractors of any tier.”

2.

The subject of the insurance/reinsurance was Phase II works for the construction of the Dabhol Power Project. This was a very substantial civil engineering undertaking. It was carried out in two phases. The first phase, which was completed in 1998, involved the construction of one generating plant, Block A. The second phase involved the construction of two more generating plants, Blocks B and C, and a liquefied natural gas [LNG] facility on site, including jetties for the docking of LNG tankers, and associated facilities for offloading this cargo to holding tanks for regasification. It was intended that the turbines used for electricity generation would be powered by LNG as an alternative fuel to Naptha and distillate.

3.

The Project was a joint venture between Enron, Bechtel and the Maharashtra State Electricity Board [MSEB] these together forming the Dabhol Power Company [DPC]. MSEB agreed to buy the electricity generated by Dabhol under a Power Purchasing Agreement [PPA]. For whatever reason, MSEB failed to pay sums due to Dabhol under the PPA. Dabhol were, therefore, without the funds required to complete Phase II; the contractors were unpaid and, as a result, they left the site on about 18 June 2001, having terminated their construction contracts. As at that date, in relation to Phase II, the construction phase of the power plant project [that is, the two blocks] was 97% complete, and 88% of all commissioning tests were also completed. Phased handovers as between subcontractors and contractors [all co-assureds] had taken place. In relation to the LNG terminal and associated works, the construction was 87% complete but no testing using natural gas had been done. The LNG lines from the jetty had been tested pneumatically, with damaging consequences. The parties do not agree as to whether the pneumatic testing was part of the commissioning and testing phase of the works or was part of the construction element of the works. But that issue was not, by the end of the trial, pursued by the Insurers.

4.

As at the date when the contractors walked off the site, there were outstanding claims under the Phase II Policy including that in relation to the LNG pipeline, which amounted to some US$6 million. There is also, apparently, a large claim for increased costs of working made by one of the contractors. The claim relates to an alleged delay during the construction period of the LNG regasification facility due to a fire.

5.

The dispute between the parties centres on the question whether, in the circumstances described above, UII are entitled to any refund of the reinsurance premium paid, and if so how much.

6.

The relevant terms of the reinsurance policy are as follows, the wording having been agreed between the parties to this Action in June 1999. For convenience, I append as Appendix A to this Judgment a copy of the whole policy, but the parts cited in the Judgment hereafter appear to me the more important provisions which bear on the questions at issue.

7.

The title of the policy is “Project Insurance, Construction All Risks and Delay in Start-Up etc”. The Policy is divided into two sections: section 1 covers the contract works on an all risks basis in relation to direct physical loss of or damage to any part of the Property insured from any cause whatsoever arising during the Period of insurance; section 2 provides cover which is conveniently referred to in the Action as DSU (Delay in Start Up) cover, or sometimes ALOP [Advance Loss of Profits].

8.

The policy in relation to the contract works covered two elements: construction and erection occurring at the Contract site until the issue of the Taking Over Certificate, and maintenance liability. Maintenance liability gave indemnity during the Maintenance period in respect of physical loss of or damage to any part of the Property insured which occurred due to faults in design or workmanship, or due to the fault of the Contractors or due to the Contractors attending on site in order to fulfil their maintenance obligations.

9.

“The Property” is defined in these terms:

“The Works to be undertaken in terms of the Project including all temporary works erected or in the course of erection and all material and other things for incorporation therein being property of every kind and description belonging to or in the care, custody or control of the Insured or held by them in trust or on commission or for which they are responsible, including but not limited to machinery apparatus materials equipment temporary building, site huts, accommodation, offices and structures and contents thereof, landscaping and planting and supplies; fuel and other consumables and spares all including free issue used in connection with the Project or intended for incorporation therein (to the extent they are included in the Sum Insured) in respect of construction of a 1550 MW combined cycle power plant, LNG unloading jetty and associated marine works, LNG storage and regasification facilities and housing and ancillary associated facilities.”

10.

“The Project” is defined in these terms as:

“All works in connection with the construction of Phase II of the Dabhol Power Project comprising Blocks B and C, the LNG regasification facility and all associated and ancillary facilities, each herein “a Block””.

11.

The DSU cover in section 2 of the Policy is in these terms:

“The Insurer agrees that in the event of the Project or the business carried on by the Insured being delayed, interrupted or interfered with during the period of Insurance caused by physical loss or damage covered by Section 1 of the Policy or which would have been covered but for the operation of any deductible thereunder, then in accordance with the provisions contained in the Schedule and the terms, Conditions, Exclusions and Memoranda of this Policy, the Insurer will indemnify the Insured in respect of the actual loss sustained by the Insured during the Period of Indemnity as a result of delay in completion of the Project beyond the Anticipated Date of Completion.”

12.

Under “Period of Insurance” there are two subheadings: “Construction Period” and “Guarantee Maintenance Period”. Under the first subheading the period is defined as:

“44 months (inclusive of up to 6 months testing and commissioning separately in respect of Block B, Block C and the LNG regasification facility) from 00:01 hours Local Time (India) at 22 December 1998 until the date of commercial operation of individual units (estimated as June 1 2001 for Block B, October 1 2001 for Block C, and Jan 31 2002 for the LNG Facility) and until final taking over of the Breakwater.

Extensions in period automatically held covered as original at additional premium calculated at 0.015% per month (on the value of the work not handed over at its scheduled date) for the first 6 months construction, plus 2 months testing and commissioning covered at additional premium of 0.15% per month (on the value of the equipment being tested/commissioned). Further extensions in period at additional premium and to be agreed by insurers hereon.”

13.

Under the second heading, “Guarantee Maintenance Period”, were the following provisions:

“(i)

Not exceeding 24 months after the date of Taking-Over in respect of the gas turbines and steam turbines scope of supply and the Civil and structural works forming part of the Project.

(ii)

Not exceeding 12 months after the date of Taking-Over in respect of the remainder of the Project.

Plus such further period not exceeding 24 months as required in respect of the Extension of Warranty Period provisions of the contract for repairs or replacements.”

14.

The provisions for the payment of Premium are in these terms:

“Minimum And Deposit Premium

“US$14,830,456 (plus tax) calculated as follows and adjustable in accordance with General Conditions 9 and 10.

Section 1: 0.591% on total insured values (estimated as USD 1,339,457,000 and adjustable on final values)

Section 2:

(a)

1.091% on fixed costs (USD 363,500,000)

(b)

0.682% on MSEB costs (USD 75,000,000)

(c)

0.682% on Deemed Gas Costs (USD 87,000,000)

(d)

0.43% on Fuel Take or Pay (USD 242,200,000)”

15.

There then followed provisions for the payment of the premium by instalments. In relation to Section 1, 40% was due at Inception, calculated on the estimated contract value of the LNG regasification plant; 40% at 1 March 1998 (being the date of commencement of Work on the Power Plant) calculated on the balance of the estimated contract value (as an Additional Premium); 30% at 1 December 1999 and 30% at 1 December 2000 calculated on the full estimated contract value (as additional premiums). In relation to section 2 there were various different percentages on different items, such as fixed costs, MSEB costs, Deemed Gas Costs and Fuel Take or Pay.

16.

Conditions 9 and 10 referred to in the Minimum and Deposit Clause provided as follows:

“9.

The Premium having been calculated on information provided by or on behalf of the Insured, the Insured shall notify the Insurer of:

(i)

the completed value of the Project upon termination or completion or within 6 months after termination or Completion;

(ii)the dates upon which construction period shall have been terminated or shall have been completed.

10.

Upon declaration by the Insured in terms of Condition 9 of this Policy, the earned premium shall be calculated in accordance with the agreed rates and the Insured shall pay such additional as may be due.”

17.

I set out the following three Conditions, which are important. Condition 12 lies at the heart of the case.

“11.

The due observation and fulfilment of the terms, Conditions and Endorsements of this Policy insofar as they relate to anything to be done or complied with by the Insured shall be a condition precedent to any liability of the Insurer to make any payment under this Policy.

12.

Should the Work insured or any part thereof be entirely stopped by any cause whatsoever and the Insured give notice thereof, the cover under the Policy shall continue without interruption up to a maximum period of six months without additional premium with any further extension of this period to be agreed by the Insurer, provided that the Insured shall take reasonable precautions to protect the Work from physical loss or damage during the period of cessation.

13.

The Insured shall give the Insurer notice in writing as soon as reasonably practicable of any alteration which materially affects the risk insured.”

18.

When the work stopped there was a discussion about the effect of Condition 12 and its application to the abandonment of the works by the contractors. In order to resolve their differences, the parties to the reinsurance contract, on 21 August 2001, agreed an endorsement in these terms:

“Endorsement Dabhol

Forming integral part of the Reinsurance Contract.

It is noted that commissioning / testing works of Block B & C were suspended due to non-availability of fuel with effect of May 17th. The Insured has advised that with effect of June 18th all works had ceased and demobilisation of work was being carried out and that pursuant to General condition 12 of the policy continuance of up to 6 months of coverage has been requested.

General Condition 12 of the policy leaves room for different interpretation and SR’s interpretation of this Condition is outset in attached letter which however is contested by United India.

In the light of circumstances prevailing and without any prejudice of Reinsurer’s rights under the Reinsurance Contract and policy, SR is prepared to continue coverage without additional premium as follows:

Material Damage Section

In respect of Block B & C as from suspension of commissioning / testing works until December 17th and

In respect of the reminder of the project as from June 18th until December 17th 2001

Adjustment premiums will need to be evaluated for and charged to the different Power Blocks depending upon the actual time these Blocks underwent testing and/or for the time construction was extended to meet the suspension date of June 18th 2001.

DSU Section

With effect as from June 18th 2001 DSU cover is suspended and terms and conditions for reinstatement of this Section of the Policy shall be negotiated once the date of resumption of the works is known.

All terms and conditions of this Reinsurance Contract as well as the policy remain otherwise in full force.”

19.

When the contractors left the site, having terminated their construction contracts, work was done to endeavour to mothball the project. No work has yet been resumed on site and whether it does get going again is speculative, although the amount of investment in the project so far would suggest that resumption at some stage in the future is likely. The 6 month period provided by Condition 12 expired on 17 December 2001 and Swiss Re terminated the Cover from that date, or the reinsurance contract simply ‘lapsed’ as at that date. Negotiations between the parties took place as to a premium refund, but Swiss Re’s offer [not to insist on the full payment of an outstanding instalment of the premium, but accept 87% of it] was rejected and instead UII insisted that they were entitled to a return of premium to the extent of US$8.5 million. This demand, regarded by Swiss Re as extraordinary and unprincipled, provoked them into seeking negative declaratory relief from this court. Swiss Re had every reason to suppose that they and UII would have a common interest in refuting any claim for premium return which the assured might make. UII say that they do not regard themselves as entitled to keep any money which the Court might award them; and in this sense they are acting for the benefit of the assured. Their presentation in court which implied that they were in an unfortunate predicament squeezed between a demanding assured and a reluctant reinsurer was not convincing. I do not know whether the assured, which went into receivership in April 2000, are agitating for a return of premium. Whatever the position actually is, I am satisfied from what I have been told that UII are not acting improperly in any way by defending these proceedings and seeking to recover the premium.

20.

I turn to the pleadings and the Parties’ arguments as to the proper interpretation of the insurance contract and the claim for a refund of premium based thereon.

The pleadings

Swiss Re’s case

21.

Swiss Re and UII did not agree to any further extension of cover for the period after 17 December 2001 and, accordingly, the cover under Phase II lapsed at midnight on 17 December 2001; alternatively the policy lapsed by that date, at the latest “by reason of a material alteration to the risk originally insured/reinsured.” The material alteration relied upon is the cessation of work by the contractors; the termination of the construction contracts and the fact that work had not resumed and was not in prospect as at 17 December 2001.

22.

On a true construction of the Policy “and as a matter of general law” Swiss Re are entitled to retain the premium which has been paid to them by UII”. It is averred that UII has been on risk under section 1 of the Policy since its inception and there has been no failure of consideration. There is no express provision entitling UII to a return of premium; the premium was a “minimum premium” and adjustable upwards only. The risk run by UII under section 1 of the Policy is not divisible. As for section 2 of the policy, the risk incepted at the outset and section 2 is triggered by delay arising from the occurrence of an insured event occurring during the period of insurance and the period of indemnity merely defines the commencement date when benefits would become payable.

23.

Cover in respect of both maintenance and testing formed part of a single indivisible risk but that if they are divisible then “it is averred that cover in respect of both those parts came on risk before the works ceased on 18 June 2001”. In this connection Swiss Re rely upon the testing of the LNG lines pneumatically and the fact that part of the works relating to the jetty for the LNG facility had been handed over by a subcontractor to another contractor so that the part was covered in respect of maintenance liability; so also were part of the works on the power blocks handed over by a subcontractor to Bechtel.

UII’s Case as pleaded

24.

The maintenance Cover under section 1 of the Policy never came on risk and nor did the testing cover for the LNG facility. The provision in the contract for a minimum deposit on its true construction was concerned with the quantification of premium following completion of the works and provides that the premium amount is adjustable upwards based on final values and not, notwithstanding lower than estimated values, downwards. The risks were divisible “in the sense that in calculating total premium the risk was divisible (and would, by re-insurers have been divided) by reference to, in particular, the different units, different risks and different periods.” The maintenance cover and the testing of the LNG facility were “divisible and/or apportionable”.

25.

As to condition 12, it provided for an additional six months period of cover without additional premium and following expiry of that period “cover did not simply lapse. Instead there remained in place the unexpired portion of the term of insurance and reinsurance (such term having also been extended by virtue of the General Condition 12 period).” It was pleaded that the wording of the Phase II contract was intended to be the same as the existing Phase I contract, as envisaged by the parties and two faxes from Swiss Re which referred to the policy wording being “basically the same as the existing Dabhol Phase I Insurance policy wording” and to the wording of Dabhol I “to apply”. Thus, it is argued, by treating the Policy as terminated as at December 17 2001, Swiss Re “acted in breach of the terms of the Phase II Slip Policy.”

26.

In the pleading it is alleged that following Swiss Re’s “termination of cover and refusal to consider their position” UII terminated cover under their contract of insurance with DPC by letter dated 7 December 2001. “In the premises, any liabilities which UII may be under to DPC by reason of the termination of the Phase II contract of insurance between UII and DPC (including, without limitation, any liability in respect of claims by DPC for return of premium and/or interest and/or costs or otherwise howsoever) together with UII’s costs in relation thereto constitute UII’s loss and damage arising by virtue of [Swiss Re’s] aforesaid breach of contract.”

27.

There is a further claim by UII against Swiss Re based upon an alleged estoppel by convention with which I must deal separately.

The Parties’ Arguments:

28.

For the Insurers, Mr Parsons QC submitted as follows:

i)

The premium in respect of guarantee maintenance cover is severable from the other parts of the policy and the Insurers are entitled to a refund of that amount, less brokerage and commission. The experts were able to agree on the gross sum in issue: US$ 1,141,172.50. Whilst it is arguable that the claim in relation to testing and commissioning of the LNG lines was severable, the amount in issue was too small to warrant the Insurers in pursuing the point.

ii)

The law as to severability is to be found, principally, in section 84 of the Marine Insurance Act, where the focus is apportionability of the consideration and of the Cover. Severability is not a unique feature of marine insurance and a claim for reimbursement is simply part of the general law of restitution and there is no reason why the law as stated in the Act should not apply equally to non marine insurances. The fact that the premium is expressed as a lump sum does not show that it cannot be apportioned.

iii)

On the facts, I should hold that the maintenance cover is not part of the standard CAR cover and the rates are separate. Swiss Re’s internal rules to which Mr Rocchini was working required him to achieve a ‘technical rate’ by rating each risk separately. The fact that the rate is then discounted to produce a commercial rate is not important. The guarantee maintenance period has a start date which is triggered by a taking over of the particular works. In this context, ‘taking over’ means taking over by DPC, the employer. This part of the Cover is very different in nature from the CAR risks. It is not an all risks cover. It is a separate operational policy which may be separately contracted for or it may simply be attached to a CAR policy; the form does not matter. It is also irrelevant that the following market does not know what rates Swiss Re, as leader, has adopted. If the risk is severable then restitutionary principles will apply. If severability is available because of the way the policy is worded then the following market must be taken to have appreciated that, on severance, part of the premium would have to be returned, on normal restitutionary principles.

iv)

No part of the risk under the guarantee maintenance cover had been run when the work stopped. In the first place, the upgrade to the Phase I work in relation to the turbines in Block A was not covered by the policy and this was confirmed by Mr Rocchini in his evidence: reference to the upgrade work had been deleted by Mr Rocchini from the slip before he scratched it. It appears likely that the upgrade work was intended to be carried out during the monsoon period in 2004. Whilst there may have been taking over certificates issued by main contractor to sub contractor that was irrelevant since the taking over certificate referred to in the policy is confined to taking over certificates issued by the employer to the main contractor and I should reject the Reinsurers loss adjuster’s [Mr Ford] evidence on this point.

The Reinsurers’ arguments:

29.

(i) On the facts, there has been no attempt to justify the contention made by the Insurers that they were entitled to a refund of premium of US$8.5 million; a sum which represented over 85% of the net premium received. That claim was manifestly excessive and unprincipled because the construction of Blocks B and C was 97% complete; 88% of all testing and commissioning on the power plants was complete; the LNG facility was 87% completed and there were numerous outstanding claims under the policy including in particular a US$6 million claim arising out of the pressure testing of the LNG lines and a US$21 million claim for increased cost of working under section 2 of the DSU policy.

(ii)

The Insurers have abandoned their claim that there was some market practice relating to the way a return of premium was to be calculated. That was always a non-starter. But their implied term claim and their estoppel claim are based upon a contention that a return of premium was to be ‘adequate’. Without the custom or practice, the word “adequate” is robbed of any certain meaning. The Insurers’ latest attempt to justify a return of premium was based upon a ‘quantum meruit’ argument but this is just another way of asking the court to fix for the parties a method of calculation which the parties themselves were, apparently, unable to agree.

(iii)

The evidence established that with regard to various parts of the project, there had been a handing over of works from one sub-contractor to a main contractor, for example with regard to dredging works for the LNG facility and other marine work. From that time the subcontractor concerned no longer had any insurable interest under the all risks section of the policy but Insurers/Reinsurers were exposed to the risk of a claim brought by that subcontractor under the Maintenance section.

30.

As I understand the pleadings and the parties’ supporting arguments, the following issues arise:

i)

On a proper construction of the Policy did Swiss Re act unlawfully in treating the Policy as at an end as at midnight on 17 December 2001? This involves considering two matters: the proper interpretation of Condition 12 and the principle in insurance law as to what constitutes a material change in risk.

ii)

On a proper construction of the Policy and as a matter of general law are UII in principle entitled to a refund of part of the premium? This involves the question whether the premium can be ‘unpicked’ and apportioned between different parts of the cover. It will also involve the question whether, as Swiss Re contend, they have already run part of the risk in the guarantee maintenance section of the cover.

iii)

If premium is to be refunded how is the refund to be calculated? The Insurers have dropped their contention, which was without foundation in any event, that there was a market practice which defined the method by which a refund could be calculated.

Issue 1

31.

It seems to me that Condition 12 of the policy does not have the meaning ascribed to it by UII. The clause could have said that where the condition operated “the period covered by this Policy shall be prolonged without additional premium for a similar period”, but these words were missing. Such words had appeared in the Phase I Insurance Policy. Although there was some correspondence which supported the notion that the wording would be the same in the Insurance for Phase II that was not, in fact, the case. There is no claim for rectification. I am not prepared to assume that the words quoted have somehow been overlooked or forgotten. By the time the new wording had been agreed, there had been a period of substantial delay shortly after the ground work for Phase I had started. Work was resumed after some 14 months. The parties had had experience of the operation of this clause on the Insurance Policy. It seems to me that I must approach the proper interpretation of the condition on the basis of the words the parties have actually used and not on some kind of assumption as to what they might have intended the condition to incorporate.

32.

On the basis of the words used, I take the view that Condition 12 is there to avoid the risk that on a cessation of work, the Insurance would lapse due to a material alteration in the risk. The Insurance was directed to cover a substantial building project, with its attendant risks. When a project is abandoned by the contractors, then the nature of the risk alters. The site is no longer an active building site; rather it becomes a warehouse or repository for the various equipment and installations which were more or less completed at the time of abandonment. The nature of the hazards has changed. Instead of there being risks associated with a building project with a contractors’ all risks cover, the emphasis is now on the dangers of fire, deterioration owing to climate and damage due to inclement weather. The site is passive and not active. What was insurance in relation to a substantial building project has become an insurance resembling property insurance; CAR policies are essentially different from property insurance, although some of the risks may be the same in each. But for condition 12 I take the view that as at June 18 2001 Swiss Re would have been entitled to say that the Policy was at an end as the underlying risk had altered. If work resumed during the 6 month period then the Cover would remain in place although the assureds would no doubt have to consider asking for extensions to the completion dates, and would have to pay additional premium accordingly. But if the works did not recommence within the 6 month period then, in the absence of any agreement as to a further period, the contract would come to an end. As it seems to me, that is how the Condition is worded; it would make no commercial sense to argue, as do UII, that after the six months, the Policy continues in force for the balance of the 44 months [whether extended by 6 months or not] even though no further extension was agreed under Condition 12. I ask why should a contractors’ all risks policy continue to bind the parties when there were no contractors and no work being done?

33.

Mr Parsons QC argued that the words “without additional premium” in Condition 12 must mean that the total period of the contract was to be extended for the same period as the stoppage lasted because otherwise after a stoppage the Insurers/Reinsurers would be entitled to ask for additional premium as a condition of agreeing to extend time for completion. But that is not, I think, what the words “without additional premium” mean. Those words confirm that during the period of stoppage there will be no additional premium for that period. I also reject an argument which appeared to be based upon a different clause in a different contract which Mr Parsons QC contended produced the result for which he was contending. The court was not shown the wording of such a clause and its existence is irrelevant when construing the words of this Policy.

34.

I see no difficulty with the words “in part” in Condition 12. There could be circumstances where a part of the project was so large that its permanent cessation might bring the whole policy to an end; or the part could be regarded as sufficiently small not to have that effect. It would all depend on the facts. If a part of the works was re-started within the six months period then the Cover would remain in place and the parties would or might have to agree an extension to the completion date, with an additional premium. If the work did not resume on a relatively minor part the Cover would continue in place for the rest of the project. That condition 12 anticipated and dealt with a concern as to a material change of risk is to some extent reinforced by the way the Conditions are set out, with Condition 13 following on and dealing with material alteration to risk [noscitur a sociis].

35.

The principles of law in relation to ‘material change of risk’ is best taken from the unreported judgment of Lord Justice Saville in Kausar v Eagle Star Insurance Co Ltd 2000 Lloyds Rep IR 154

“The first ground relied upon by Eagle Star is that Mrs Kausar failed to disclose to Eagle Star in October 1990 that the premises were being used in part as a Turkish social club. The judge appears to have decided this point against Eagle Star on the grounds that since this use of the premises would not be covered anyway by the Policy, disclosure of such user would, in effect, have had no influence on the mind of the underwriter when renewing the cover.  

I disagree with this view of the cover. It is important to bear in mind that although the Tradestar Policy Form is designed so that cover can be provided not just in respect of the buildings themselves, but also for the trade contents and the like, all that Mrs Kausar did was to insure the buildings against certain enumerated perils, including damage caused by vandals or malicious people. I can find nothing in the Policy which indicates that cover for the buildings was somehow conditional on any particular use of the premises or (which was the other way it was put in argument) that loss or damage to the buildings from any use other than that stated in the Policy would somehow fall outside the terms of the cover. It is true that in the previous years, the business carried on at the premises was described in a Schedule to the Policy as Video Tape Hire and that at some stage Eagle Star had been informed that this had changed on a hair dressing salon, but there is no term in the Policy to the effect that this business would continue or that no other business would be carried on at the premises, let alone that cover for the buildings was in any way dependent upon either of these states of affairs…  

I now turn to the third ground of appeal, which relates specifically to Condition 3 of the Policy. This condition was in the following terms: -

You must tell us of any change of circumstances after the start of the insurance which increases the risk of injury or damage. You will not be insured under the policy until we have agreed in writing to accept the increased risk.

Eagle Star submit that there was a change of circumstances within the meaning of this Condition, because after the cover had been renewed the tenant and those to whom the tenant had unlawfully sublet the building threatened to damage the premises; because Mr Kausar had discovered on 20 April 1991 that the main shop window (not insured under the cover) had been broken; and because, for a period at least, Mr Kausar believed that this damage had been caused by the tenant or subtenants. These events were not communicated to Eagle Star, so Mr Davis submits that the clause operates at least so as to exclude claims for damage arising from the operation of perils to which the change of circumstances related, in this case malicious damage.

The judge did not accept this submission. He appears to have concluded that the Condition only operated so as to preclude recovery for damage caused by reason of, as he put it, enhancement of risk during the period between 20 and 27 April 1992. The Judge chose the latter date because it seems that he took the view that after this date Mr Kausar no longer believed that the tenant or the subtenant had broken the window or made the threats.

I do not accept either of these analyses of Condition 3. In my judgment all that this Condition does is to state the position as it would exist anyway as a matter of common law, namely that without the further agreement of the insurer, there would be no cover where the circumstances had so changed that it could properly be said by the insurers that the new situation was something which, on the true construction of the policy, they had not agreed to cover. The mere fact that the chances of an insured peril operating increase during the period of the cover would not, save possibly in the most extreme of circumstances, enable the insurers properly to say this, since the insurance bargain is one where, in return for the premium, they take upon themselves the risk that an insured peril will operate. In calculating that premium it is for the insurers to assess the chances of insured perils operating; and the fact that they may (in hindsight) have got this assessment wrong does not begin to establish that what has happened falls outside the cover they have agreed to give. In the present case all that the facts and matters upon which Eagles Star rely show is, at best, that during the period of the cover events occurred which increased the chances that an insured peril (namely damage to the buildings by vandals or malicious people) would operate. Thus to my mind Condition 3 does not afford a defence to the claim in question.”

36.

Another way of putting the same point is to be found in the judgment of Warrington J in Law Guarantee Trust and Accident Society v Munich Re Insurance Company [1912] 1 Ch page 138 at page 153:

“The defendant company says that the result of those facts is that it has been released from its contract of insurance. …. The defendant company rests its case upon the general principle applicable in all cases of insurance that the obligation of the insurer is confined to the particular risk insured, and that if the risk in respect of which a claim is made against the insurer differs from the risk he has insured, he is not liable to make good that claim. That, of course is an undoubted principle of the law of insurance, and the only question is whether it applies to the facts in the present case; whether there has been such an alteration of the risk as to relieve the insurer from meeting the claim arising under it.

It is hardly necessary to enlarge upon that principle, but I take it that it involves this. The alteration, if there has been an alteration, must be a real alteration of the risk; if what appears on the face of it to be an alteration of the conditions is only such an alteration as, on the true construction of the contract of insurance might be taken to have been within the contemplation of the parties at the time they entered into the contract, then, of course, though apparently an alteration, it is no real alteration at all, because the fact that such an alteration might take place was an element within the contract itself.”

37.

It seems to me that the question in this case is not related to the extent of the risk which the Insurers/Reinsurers were running before and after the stoppage of work, but rather whether the new situation, with contractors off site for 6 months, having terminated their contracts, and with DPC in financial difficulties, was something contemplated by the Reinsurance Contract. In my view there can only be one answer. As Clause 12 contemplated, after an all-out stoppage of work, Cover would only continue in a no work situation if the Reinsurers were willing to agree an extended period of stoppage of work. In the absence of any further agreement between the parties then the Cover came to an end. The situation which was contemplated by the policy was a site where the Project work was being pursued by the contractors and subcontractors who were parties to the insurance. But in order to accommodate a stoppage for a period not exceeding 6 months, the policy would continue; absent clause 12, I am of the view that a stoppage of the sort that occurred here on or about 18 June 2001 would have brought the insurance to an end because of a material change in the risk. Clause 12 was there to prevent the automatic termination of the insurance in respect of stoppages that lasted for less than six months. But whether or not I am right about that, I am clear that in the absence of any further agreement, it was the common understanding and intention of the parties to be derived from the wording of clause 12 that after 6 months the insurance and reinsurance contract came to an end. That position is made clear by a letter which UII wrote to their assured on 7 December 2001 when an equivalent to endorsement 19 was being considered:

“… In this connection, we draw your attention to the specific wording of the endorsement issued to the insured for the six months suspension cover granted up to 16.12.2001 with a specific proviso that the policy cease to operate from 17.12.2001 provided any further extension is agreed by the insurer.”

38.

In the light of this letter it is difficult to understand the argument made by Mr Parsons QC that the policy continued even if the parties were unable to reach agreement.

39.

Whilst some of the elements of cover of a moth-balled site were included within a contractors’ all risk policy, the essence of the cover changed: a contractors all risk policy is written on the basis of a defined set of works being carried out by identified [and, presumably, acceptable to the Insurers/Reinsurers] contractors. The Works came to a halt and have never resumed.

40.

I should add that I have not been assisted in reaching my conclusion on what Swiss Re may have written as to their understanding of clause 12. On the evidence it is clear that they recognised that the proper interpretation depended upon legal advice and their understanding of the clause after legal advice is the same as that reached by me, for what that is worth. I have simply tried to apply the normal canons of construction to the factual matrix.

41.

The Insurers maintain that if the works stopped in part that would not be a material change in the risk yet clause 12 was engaged. It seems to me that this is more of a lawyer’s than of a commercial man’s point. In my view there was a good commercial reason for including a stoppage of part of the works in clause 12. Whether there was a change in the risk to a material extent must depend on the facts. Had the work on the whole of the LNG facility stopped, an Insurer might have wished to argue that the stoppage affected the totality of the insured risk sufficiently to bring the whole contract to an end. There was good business reason to include a stoppage of part of the works to make the position plain. The clause would work perfectly well if part of the works were delayed through stoppage, but resumed before the expiry of six months, as the completion dates would probably need to be adjusted, for an additional premium. Meanwhile the rest of the works could continue and be handed over as and when ready, thus reducing the insurers’ risk under the CAR cover.

42.

As I have said, Swiss Re were not offering a property insurance policy which is a different contract from that originally entered into; on a proper construction of the policy the new situation which obtained after the work ceased was not one which the Reinsurers had agreed to cover. Condition 12 prescribes the only circumstances in which the Cover continued when no work was going on and that lasted for a period of 6 months unless the parties to the Policy agreed a further extension. Therefore, on the basis of the wording of the Policy and by virtue of the principle enunciated by Lord Justice Saville Swiss Re were entitled to treat the Policy as defunct as from 17 December 2001.

43.

Mr Parsons QC argues that if he is wrong about the proper construction of clause 12 there is to be implied into the Policy that in the event of no agreement for a further stoppage period and the Policy lapsed there would be a refund of premium in respect of risks not run. As to necessity, Mr Parson relies on the fact that Swiss Re were prepared to consider a return of premium and said so in correspondence. A refund is consistent with Swiss Re’s own rating guide as to how a reduction in policy period is requested. He relied on the fact that the two experts were able to agree on a figure, rating each risk separately with the aid of the rating guidelines and Mr Rocchini’s notes. In my judgment, the case for the implication of such a term is hopeless. There is no need to imply such a term; it does not necessarily lead to a just result; the parties have chosen to enter into a contract with a requirement for payment of a Minimum premium. Had the officious bystander been present he would not say ‘of course’ to the suggestion; at best he might say ‘it all depends’.

44.

The claim for damages for breach of contract fails and is dismissed. 

Issue 2 

45.

The premium charged by Swiss Re was substantial and commensurate with the size of the contract. It was calculated by Mr Rocchini, an experienced underwriter, then employed by Swiss Re. He had spent several years in the construction industry and been to a business school. He was an impressive witness and the care which he had taken to rate this policy, with the aid of Swiss Re’s rating computer programme, showed that he had a good grasp of the nature of the risk he was writing. He was working with Swiss Re’s International Project Team handling large projects such as this one. As leaders on the reinsurance, Swiss Re had, as he put it, “effective control over rating and terms of the reinsurance and the right to approve the underlying terms of cover.”

46.

The rating exercise he carried out required an analysis of the nature of the items being constructed and applying a rate to each one for the relevant period. He was required to exercise judgment of his own to this process, although the rates were contained in the programme on his computer. He had to think about each item and what could go wrong during the Project. Commissioning and testing were more risky for the reinsurers, as defects at this stage could have dramatic consequences for the equipment itself and, possibly, for adjacent property. He had to think about natural perils, the remoteness of the site and the risks of delays in delivery of equipment and goods which could slow the project down. He would have to apply his mind to the question of ‘deductibles’. For some items such as the LNG facility Mr Rocchini’s computer programme would report “on request” meaning that there was no suggested rate and he would then have to seek advice about it, and then make his own judgment; which he did. The indicative technical rates he arrived at produced the following premium rates: 

CAR/EAR: 10.153

DSU / ALOP: 21.981

LNG “take or pay” ALOP 8.346.

47.

He said this [witness statement 1, paragraph 34]

“As I knew that our rates would have to be heavily discounted for the Phase II Project, the technical rating exercise that I went through was no more than a very rough guide for internal purposes. It will be readily appreciated that there were a number of inconsistencies in these rough calculations. Mr Abisser [his boss] and I met with Mr Way and Mr Titman of Heath Lambert [brokers for DPC] in October and November 1998 to discuss and agree rates for Phase II. As a result of these negotiations, as anticipated, the rates were heavily discounted for each section of cover under Phase II. For example, my technical rate for CAR/EAR was discounted by about 42%.”

48.

After Mr Rocchini’s first statement, UII presented an expert’s report which suggested that the premiums for the maintenance cover and the testing and commissioning element under the policy were severable from the other parts of the premium and that there was a market practice which enabled a determination to be made of the amount of the premium to be returned. Mr Rocchini dealt with this in his second witness statement. He said that he agreed that the rating exercise he undertook involved considering the items of cover separately “but, once I had decided upon the theoretical rates for the separate items of cover, I produced a single rate for the whole cover.” He said that the individual rates and the composite rates were “simply a means of judging the adequacy of the global rate ultimately available from the insured. By this method I was able to obtain a feel for what lump sum premium I could accept against the inevitable attritional losses that a cover of this sort produces.” He was not prepared to accept that he would have rated the separate parts of the whole in the same way if Swiss Re were to insure those parts separately. In fact, it would be impossible for an insured and/or reinsured to obtain separate cover from a reinsurer in respect of testing and commissioning only, or indeed only in respect of maintenance liability.  

49.

I accept this evidence. In my judgment it is unrealistic to suggest that some elements of the premium can be unpicked from other elements on the mere basis that in arriving at an overall figure, they had been rated separately. The fact is that a global rate was arrived at which was itself then discounted. The discount makes the case for severability more difficult to sustain. An overall reduction does not mean that in the minds of Swiss Re each element in the rating process should be reduced proportionately. There might have been more ‘slack’ in some figures than in others and the rating exercise does not identify where the slack is to be found.  

50.

However, the Period of Insurance identified both a Construction Period, which would include the testing and commissioning phase, and a Guarantee Maintenance Period which would only be reached after the date of Taking Over. Even if it would not be commercially feasible or appropriate to ‘unpick’ the rates for elements within the Construction Period, what is the position with regard to the Guarantee Maintenance Period which UII contend was never reached because nothing had been Taken Over within the meaning of the Policy? 

51.

I turn to the principles of law which the parties referred to in their arguments.

52.

Mr Parsons QC for the Insurers relied upon the principles set out in section 84 of the Marine Insurance Act. The general principles in that Act do not seem to me to carry the argument much further forward. I set out the relevant provision.

Marine Insurance Act 1906  

“84(1) Where the consideration for the payment of the premium totally fails, and there has been no fraud or illegality on the part of the assured or his agents, the premium is thereupon returnable to the assured.

(2)

Where the consideration for the payment of the premium is apportionable and there is a total failure of any apportionable part of the consideration, a proportionate part of the premium is, under the like conditions, thereupon returnable to the assured.

(3)

In particular –

(a)

Where the policy is void, or is avoided by the insurer as from the commencement of the risk, the premium is returnable, provided that there has been no fraud or illegality on the part of the assured; but if the risk is not apportionable, and has once attached, the premium is not returnable;

(b)

Where the subject-matter insured, or part thereof, has never been imperilled, the premium, or, as the case may be, a proportionate part thereof, is returnable: Provided that where the subject-matter has been insured “lost or not lost” and has arrived in safety at the time when the contract is concluded, the premium is not returnable unless, at such time, the insurer knew of the safe arrival.

(c)

Where the insurer has no insurable interest throughout the currency of the risk, the premium is returnable, provided that this rule does not apply to a policy effected by way of gaming or wagering;

(d)

Where the assured has a defeasible interest which is terminated during the currency of the risk, the premium is not returnable;

(e)

Where the assured has over-insured under an unvalued policy, a proportionate part of the premium is returnable;

(f)

Subject to the foregoing provisions, where the assured has over-insured by double insurance, a proportionate part of the several premiums is returnable: Provided that, if the policies are effected at different times, and any earlier policy has at any time borne the entire risk, or if a claim has been paid on the policy in respect of the full sum insured thereby, no premium is returnable in respect of that policy, and when the double insurance is effected knowingly by the assured no premium is returnable.”

53.

There was some debate during argument whether the Act was applicable to non-marine insurance policies, such as this one. I see no reason why the Act should be so confined in as much as it sets out general principles of insurance law. The question remains as to when it can be said that the consideration for the payment of premium is apportionable and that is the question which arises with both marine and non-marine policies.

54.

I was also referred to a decision in the Companies’ Court. In Re Drake Insurance Plc [2001] I Lloyd’s Rep IR 643 Neuberger J considered whether an assured who terminated his motor policy was entitled to a refund of premium for the remaining period of the policy.

55.

Drake, a motor vehicle insurer, ran into financial difficulties and was placed into provisional liquidation on 11 May 2000. Over 200,000 policyholders were affected, the majority having had their policies arranged by one of 13 insurance brokers forming the “broker group”. The broker group had identified new insurers prepared to provide replacement insurance to policyholders for the unexpired period of their policies, and a scheme was being negotiated by the broker group, the Policyholders Protection Board [PPB] and the provisional liquidators. Under the scheme, the PPB would provide a sum equal to 90 per cent of the return premiums to which the policyholder was entitled for the unexpired term of his policy, and the broker group would provide the balance. The policyholder would be given notice determining his policy and would be notified of the right to have replacement insurance effected with the new insurance company at no extra cost. The policyholder would forego any claim against the Policyholders Protection Board (under the Policyholders Protection Act 1975) for return premiums. Each policyholder would have the right to decline these arrangements.

56.

The conditions of the policies, so far as material, were as follows:

“6A We…may cancel this policy if you are given at least 7 days’ notice…

6B You may cancel this policy by writing and telling us … and at the same time returning the certificate. If you do this, we will return part of your premium for the rest of the period of the insurance, calculated from the date the certificate is received.

We will not return any of your premium if you cancel a 3 month policy.

We will only provide a refund if a claim has not been made under the policy in the current period of insurance.

8 If you or anyone else makes a claim under the policy which is fraudulent, exaggerated or supported by an false or fraudulent statement or document, we will not pay the claim or return any premium.”

57.

The questions which arose for determination were as follows: (1) did a policyholder have a right to a return of the balance of the premium if the insurer determined the policy under condition 6A; (2) was the right a contractual right or a restitutionary right; (3) did the right to a refund only run from the date on which the policyholder returned the certificate or from the date on which notice under condition 6A expired; (4) was the right to a refund vitiated if the policyholder had made a claim under the policy?

58.

Held, by Ch D (Companies Ct) (Neuberger J) that the questions would be answered as follows

i)

By virtue of an implied term, a policyholder was entitled to a return of the balance of the premium if the insurer determined the policy under condition 6A:

ii)

- Sun Fire Office v Hart (1889) 14 App Cas 98, considered;

a)

the parties had agreed that the policyholder would be entitled to a refund if he cancelled the policy, and it was nothing short of absurd if he had no right of refund if the insurer cancelled the policy (see p 646, col 1);

b)

condition 6A did not require any reason to be given for cancellation, and if there was no right of refund the insurer could give notice to cancel the day after the policy was entered into and the premium for the whole year had been paid (see p 646, col 1).

The right was contractual rather than restitutionary. The policy was a single risk policy which could not sensibly be divided, and the right to a refund arose not by way of restitution but by way of an implied term under condition 6A (see p 646, col 2; p 647, col 1)

“The insurance policies are in fairly familiar terms and contain, at the end, general conditions … If the parties expressly agree that the policyholder would be entitled to a refund if he cancels the policy, it is nothing short of absurd if he has no right to a refund if the insurer cancels the policy.

59.

That view is further supported by this consideration. Condition 6A, like condition 6B, does not require the canceller to have or to give any reason for cancellation. Accordingly, if there is no right to a refund if condition 6A is implemented, the insurer can cancel the day after the policy was entered into and the premium for the whole year has been paid, without the policyholder being entitled to any refund.

60.

It is argued that this is commercially unreal, because an insurer would never get any business if it acted in such a way. If anything, it seems to me that that argument assists the conclusion I have reached. The very fact that the argument that there is no implied term involves saying that the result is so commercially absurd that it would never happen, suggests to me that it is right to imply a term along the lines I have indicated.

61.

In certain circumstances, the premature determination of an insurance policy can lead to a restitutionary right in the policyholder to a return of part of the premium – compare Stevenson v Snow (1761) 3 Burrow 1237 and Tyrie v Fletcher (1777) 2 Cowper 666.

62.

In the present case, it seems to me that, absent a provision such as condition 6, the policy was a “single risk” policy which could not sensibly be divided.

63.

If the risk was once begun, the insured shall not deviate or return back, and then say “I will go no farther under this contract, but will have my premium returned”.

64.

In Tyrie Lord Mansfield, who was a party to, and indeed gave the leading judgment in, Stevenson, said this at 668-9:

“…And I take it, there are two general rules established, applicable to this question: the first is, that where the risk has not been run, whether its not having been run was owing to the fault, pleasure, or will of the insured, or to any other cause, the premium shall be returned; because a policy of insurance is a contract of indemnity … Another rule is, that if that risk of the contract of indemnity has once commenced, there shall be no apportionment or return of premium afterwards. For though the premium is estimated, and the risk depends upon the nature and length of the voyage, yet, if it has commenced, though it only be for twenty-four hours or less, the risk is run; the contract is for the whole entire risk, and no part of the consideration shall be returned; and yet, it is as easy to apportion for the length of the voyage, as it is for the time. If a ship has been insured to the East Indies agreeably to the terms of the policy in this case, and had been taken twenty-four hours after the risk was begun, by an American captor, there is not a colour to say, that there should have been a return of premium.”

65.

In this case, although it is obviously possible to apportion the premium in terms of time, it seems to me the application of those two judicial observations means the determination of the policy by either party, even if accepted by the other, would not give rise to a right to a refund absent condition 6. There was a single risk. 

66.

The right to a refund does, however, arise in the Drake case, not because it is analogous to the case in Stevenson but because of an express term to that effect in condition 6B and also in light of my reasoning by virtue of an implied term in condition 6A. The right to a refund under condition 6B arises from an express term. To my mind, that indicates that the right to a refund under condition 6A is by way of an implied term and not by way of a restitutionary right. The right to a refund under condition 6A has arisen because it implied that the parties intended it from the express right to a refund under condition 6B.

67.

It seems to me that this decision emphasises that the Court’s task is, first, to ascertain whether the risks under the policy can be apportioned to parts of the premium and that is a question of construction of the Policy. It is to be noted that an annual motor insurance was not treated by the Judge in the Drake case as being capable of being ‘apportioned’ on a time basis. It was one entire risk and but for the express and implied terms of the contract no premium refund would have been payable. In the present case there is one premium covering all the risks throughout the whole period of construction and maintenance. The premium clause says that the Premium is a minimum premium: the least that must be paid for the whole of the cover. Weight was attached to this word by a number of the Insurance witnesses both from Swiss Re and from the following market, themselves very experienced in writing this kind of business. Minimum does not itself mean non-refundable but the word suggests to me that the whole premium was being taken for the whole risk under all sections and that it is an indication that risks were non-apportionable. As a matter of construction, the wording of the Policy suggests to me that apportionability of risk was not in the contemplation of the parties when the wording was agreed. For the Cover, a minimum premium had to be paid whatever the period of the risk should turn out to be. 

68.

UII says that this is unfair; the premium was large and a stoppage having the result contended for by Swiss Re would be inequitable. I am not impressed by this argument. It sometimes happens that shortly after the commencement of a long term risk the property in question is destroyed and thus the policy comes to an end due to material alteration to the risk. There is, as Mr Rowland QC submits on behalf of Swiss Re, nothing unfair or uncommercial about such a result. Frequently the parties will be able to reach a commercial arrangement whereby part of the premium is returned. But in making such a deal the parties are acting outside the Policy terms. On the evidence one of the factors which an insurer/reinsurer would take into account would be the level of claims that had been made. An unprofitable insurance risk would be less likely to attract an agreement for a refund. It is interesting to note that in the Drake case, the terms of the refund showed that no refund was payable in the event that a claim on the policy had been made. It is arguably more inequitable that there should be a refund of premium when there have been claims and where the effect of the refund would be to make the insurance unprofitable.  

69.

But in any event I take the view that the Insurers and Reinsurers had run part of the risk under the Maintenance section of the Policy. Subcontractors were named Insureds entitled to the benefit of the Cover. As parts of the work were taken over by the principal assured so that item ceased to be on risk under the All risks section of the Policy. As between contractors and subcontractors there was a system for handing over. The Court did not have available either the main contract or the various subcontracts, but I did have the benefit of evidence of a self-employed loss adjuster, Mr Ford, who was professionally involved with the Works and any claims made under the Policy. He had visited the site on a number of occasions [6] and latterly in April 2001 in connection with the damage caused by the pneumatic testing of the LNG pipelines. He had assisted the Reinsurers in an arbitration relating to a dispute under the Works contract. Mr Ford’s understanding of the contracts was that in certain circumstances the Maintenance section of the Policy could be directly invoked by a subcontractor who had handed over part of the work to a main contractor. One of those circumstances would have been a main contractor becoming insolvent; or if such a contractor was unwilling to make a claim for the subcontractor’s benefit. As a matter of first impression, the more natural meaning of Taking Over is a reference to the process whereby the principal takes the item over. However, because the subcontractors were named beneficiaries of all sections of the Policy I consider that the Insurers/Reinsurers were on risk for claims made by subcontractors who had completed all their works and who were no longer protected by the all risks section of the Cover. The fact that this risk was somewhat remote, as the main contractor would normally be able to make a claim under the all risks section, nonetheless in relation to parts of the works completed by a subcontractor and handed over the Reinsurers were at risk. If they were at risk then the premium cannot be apportioned.  

70.

The parties disagreed as to whether the upgrading work to the Block A turbines had been undertaken and completed and handed over. The evidence about this issue was unsatisfactory. I am unable to say whether the upgrading work was ever part of the Phase II contract. On the one hand it appears that Mr Rocchini deleted reference to this work before signing the slip policy; on the other the upgrading work featured on the surveyor’s programme which was presented to the arbitration. There was also some evidence suggesting that this work would be completed during the monsoon season in 2004. On the state of the evidence I am not able to conclude on a balance of probabilities that Block A, with its upgrade, had been taken over by DPC before the stoppage and that the Reinsurers were on risk in the Maintenance section of the policy in relation to this item.  

Issue 3

71.

I am grateful to the two experts who gave evidence on this issue. Mr Alderton for UII had originally supported the notion that there was some market practice relating to the calculation of premium refunds. He did not, however, support that position in his evidence and it would have been difficult to do so in the face of a contrary view expressed by six senior underwriters and Mr Bradbrook, Swiss Re’s expert. Mr Alderton is not an underwriter although he has had substantial experience as a consultant in relation to construction and construction related insurance and he is currently employed as a full time consultant to Zurich which has a large book of CAR policies. He is a fellow of the Chartered Insurance Institute and has co-authored three books on construction insurance. Mr Bradbrook has had experience of broking and underwriting in the construction and insurance fields. During his 27 years’ experience as an underwriter in the London market he was involved with about 700 to 1000 construction project risks every year and he could not recall more than 5 where a return of premium was made. He thinks that it is likely that in each of those cases there was a clause in the Policy which provided for a return of premium but he cannot now recall accurately.

72.

A return of premium is, on the evidence, a relatively rare event at least so far as CAR policies are concerned. That may be because it is rare for a project to be totally abandoned, as here. Normally the construction work overruns with additional premium payable. Both experts agreed that a failure to complete a project was rare and neither could recall a case in recent years.

73.

What both experts have done is to look at the rating schedule produced by Swiss Re and Mr Rocchini. Mr Alderton calculated what he called the “unearned premium” on a time elapsed versus time outstanding basis whereas Mr Bradbrook preferred what he described as using normal underwriting skills and applying the contract values and rates to the premium charged but he had grave reservations about the exercise he was being invited to follow. He said that he had had to attempt to apportion the composite rate between construction and testing and commissioning and then applied a discount to reflect the discount which was negotiated with the brokers. He had difficulty in knowing whether the whole of the premium for guarantee maintenance was ‘unearned’ because, like Mr Ford, he believed that Swiss Re were exposed to claims by subcontractors who had handed over part of their works to the main contractor. Mr Bradbrook would have wished to take into account the current claims position (paid and outstanding) and the reason for the termination of the Policy as well as the amount of work done and outstanding. However, out of respect for their duties to the court and with encouragement the experts were able to agree to disagree and put forward a composite figure which was, subject to deductions, US$2,676,300 or US$1,279,198, subject to deductions, in relation to the Guarantee Maintenance. Mr Bradbrook would argue for a 23% deduction from this figure; Mr Alderton for 10%. 

74.

In my judgment the difficulties which both experts encountered in trying to find a figure for ‘unearned’ premium demonstrates how difficult such an exercise is in the absence of an express contractual provision dealing with it. I can see a strong case for saying that if the amount of the premium to be returned is based upon restitutionary principles, the court might take into account the profitability of the Insurance. This point was not argued and it does not arise here because I am of the view that no refund is due for the reasons already given.

Estoppel 

75.

As to estoppel, the Insurers say that the principle which applies is clear, namely that where both parties to a transaction act on a shared assumption as to the state of facts or law, then the parties are precluded from denying the truth of the assumption if it would be unjust or unconscionable to allow them or one of them to go back on it. In this case, the parties proceeded on the assumption that following upon the termination of the policy with effect from 17 December 2001 Reinsurers would make a premium refund. It was not surprising that DPC should put forward calculations of the unearned premium which they alleged was due. Having exposed the Insurers to a claim for a return of premium it is unconscionable that the Reinsurers now deny that any refund of premium is due. “Further it is unconscionable for Reinsurers to seek a declaration against [the Insurers] in circumstances where it remains possible that [Insurers] will face claims by DPC”. DPC have not withdrawn their claims and it is unconscionable for Reinsurers to deny that a return of premium is owed. 

76.

The facts on which this allegation of estoppel is made do not justify the submission that Swiss Re are acting unconscionably in seeking a declaration from this court or that the Insurers have somehow been misled. On the contrary it is clear from the various letters that were written and what happened at a meeting between the parties that Swiss Re did consider making a refund of premium. The figure they had in mind was just over US$500,000, waiving outstanding premium. They corresponded with the brokers in the normal way; the brokers never suggested that a refund of about US$8 million was due. At the meeting Swiss Re put forward its offer which was rejected and were faced for the first time with a demand which appeared to them and to this court to be outrageous, having regard to the risks already run. That submission was, rightly, rejected by Swiss Re and it is not a claim advanced in this case. Meanwhile, Swiss Re were taking legal advice and on the basis of it decided that as their offer had been rejected they should proceed to a claim in this court. There is no credible evidence before the court of any change in position or that Swiss Re have somehow excited DPC into making its unprincipled and outrageous claim. The witness statements which Mr Parsons QC tendered in evidence on behalf of his clients have, in my judgment, no evidential weight. Only shortly before the trial began did the Insurers indicate that the witnesses would not be called to give evidence in person. In other words UII failed to comply with the rules in Part 33 and as a result Swiss Re were denied the opportunity of making an application under Part 33.4. In other words, Swiss Re were misled into thinking that the two witnesses would be called to give evidence in the normal way but was faced with a change of position at the door of the court.

77.

The estoppel case depends partly upon a need for UII to establish that it would be unjust or unconscionable to allow Swiss Re to deny their liability to make a refund of premium. That depends upon evidence as to reliance and change of position to their detriment. In the absence of any credible evidence of any weight from UII I am unable to say that the case on estoppel has been established. The witness statements are of little weight without cross-examination and the whole case on estoppel seems to me to be thin in the extreme. I dismiss it.

78.

Accordingly I grant the declarations sought and dismiss the counterclaim for a premium refund.

79.

I will hear the parties on the form of the Order.

Swiss Reinsurance Company & Ors v United India Insurance Company Ltd

[2005] EWHC 237 (Comm)

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