Law of International Insurance Contract - Coursework Example

? Marine Insurance Law By s Due Q A) Protection and Indemnity Insurance (P&I) refers to the marine insurance that is provided by P & I club. A ship is open to many risks when it leaves for a voyage. One of the major risks is the risk of perils of the sea. Hull & Machinery insurance provides cover to the ship owners for the risk of perils of the sea. These risks include the risks that are incidental to the case of a breakout of war. In some ways, Hull and Machinery insurance is similar to property insurance in which as it covers the ship itself, its machinery and equipment. The insurance also covers some liabilities that arise in cases where there is a collision with another ship and also the liability for colliding with other objects (FFO-Fixed and Floating Objects). Typically, claims under Hull and Machinery insurance include, total loss of the ship; damage to ship, engines and equipments; explosions and fires; groundings; collisions; and striking other objects. The scope of the type of damages covered by Hull and Machinery Insurance has been defined by International Hull Clauses (IHC). In clause 2.1.6, it states that HM & I covers the losses caused to the ship due to “contact with land conveyance, dock or harbor equipment or Installation.”1 There are certain risks and liabilities that are not covered under Hull and Machinery insurance. A prudent ship-owner may look to get insurance cover for liabilities to third parties. Such liabilities might arise due to a third party’s legal or contractual claim against the ship. P & I insurance is arranged by entering the ship into a mutual insurance association which is usually referred to as a “club”. All the members of this club are ship-owners. Therefore, the P & I club is only answerable to its members. A Marine Insurance company, on the other hand, is answerable to its shareholders. P & I clubs provide insurance covers for much broader risks than the Hull and Machinery insurance schemes. When a ship has an accident due to the perils of the sea, Hull & Machinery insurance provides cover for the loss that has occurred to the ship. There are many other things that are connected with the ship. The crew of the ship, the employees, may also get hurt and claim compensation for their injuries. Also, the owner of the cargo that may have been carried in the ship would also claim for his loss against the ship-owner. Hull & Machinery insurance does not provide cover for such liabilities to third parties. However, the ship-owner can get protection from such claims by pursuing P & I insurance. As far as the liability to the owner of the cargo is concerned, the cargo owner has a first claim against the carrier. The cargo owner may not succeed in his claim because either the ship-owner was not responsible for the loss or he is protected under Hague-Visby2 rules. In such cases, the cargo owner claims compensation from his insurer under Cargo Insurance. By the right of subrogation, the insurer, after compensating his client, would be able to pursue the claim in his own right against the carrier. To avoid this claim against him, the carrier seeks the services of P & I club. This means that the same cargo can be insured twice. P & I clubs also settle the claims against the ship-owner when the crew is injured. There can be other “Third” parties that can have legal or contractual claims against the ship-owner. P & I insurance addresses all of those claims. There are risks that are not covered by P & I insurance because they are covered by another form of insurance. In relation to Hull & Machinery Insurance, P & I insurance is able to cover almost all the risks that H & M leaves out. Even for the claims that are not fully covered by H & M insurance, the portion of the claim that is left out can be covered under P & I insurance. Therefore, P & I insurance complements Hull and Machinery insurance as the risks that are not covered by one are covered by the other. When both forms of marine insurance are sought by a ship-owner to cover for risks, the insurances are mutual and exclusive and no loss is recovered twice. A recurring scenario in which both P & I and H & M insurance work together is where a ship collides with another ship and causes damage. The owner of the other ship has a legal right to obtain compensation. When it is proven that the ship-owner acted with due diligence and still he could not stop the collision, his H & M insurance would compensate the other ship-owner. However, the English form of hull policy requires the ship's hull underwriter to pay three-fourths only of the liability of the insured ship in respect of loss or damage to another ship or its cargo as a result of the collision. Therefore, the one-fourth of the liability still remains. This one-fourth of the liability can be covered by the P & I insurance of the ship-owner. In such cases, P & I complements H & M insurance and the ship-owner is fully insured as a result. The P & I insurance, contrary to other forms of insurance, is not financed by premiums. It is an organization made by ship-owners who have similar interests i.e. saving themselves from risks. Therefore, P & I clubs are non-profit organizations. They are financed by “calls”. The members of P & I club contribute to a common pool which is used to pay the claims that are made against the ship-owners. There are cases where the claims made are substantial in nature. Such claims may arise when there is casualty among the injured employees. The representatives of the casualty have a legal claim against the ship-owner in such cases. The ship-owner can cover for that claim through the P & I club. It might be the case that the P & I club’s pool is insufficient to satisfy the claim. In this case, the club members are asked to pay a further call so that the claim can be satisfied. If there is a surplus in the pool, the calls are reduced for the next year or the club may even pay refunds to the members. There is always a risk of substantial claims against any of the ship-owners. Therefore, the “calls” are of such an amount that can make the pool sufficient to satisfy those claims in a timely manner. These days, the ship-owners provide the facility of settling these liabilities under P & I even before they are claimed. Q.1 (B) i. The judgment of Fanti and The Padre Island3 is a landmark decision in respect of cases where the “pay to be paid” rule causes problems. By principal, a member of P & I club can claim insurance only where he has actually paid a third party for loss caused by him. It is also essential that he has paid the liability out of his own pocket. He cannot claim indemnity from his P & I club in respect of a liability that he has not yet settled. The principle is simple but problem arises in cases where the insured becomes bankrupt or insolvent. The third party cannot be reimbursed for its loss in such cases by the insured. However, the Third Party (Rights against Insurers) Act, 2010 defines the rights of third parties against the insurer of an insolvent person. In Section 1(3), it is stated that, “The third party may bring proceedings to enforce the rights against the insurer without having established the relevant person's liability; but the third party may not enforce those rights without having established that liability.”4 The cases of Fanti and The Padre Island had almost similar circumstances. Coincidentally, they arose at a similar time. Both cases were heard together in the court of appeal and a further appeal took the cases to the House of Lords. In both cases, the third parties had lost their cargo. They claimed their losses through courts and the amounts of the Shipper’s damages were also determined but nothing was recovered. They filed against the owners of the ship so that they would be wound up. They succeeded in that too. To recover their loss, they invoked Section 1(3) of Third Party (Rights against Insurers) Act, 1930 and brought an action against the P & I clubs of the owners. In both cases, there was an arbitration clause. Arbitrations were held and both of them went into the favor of the P & I clubs. Therefore, the cargo owners brought actions against the P & I clubs in court. The major problem was of a contradiction that was created by the statute and the “pay to be paid” rule. As between the P & I club and the ship-owner, there is a contingent liability on the part of P & I club. It arises only when the ship-owner has reimbursed the third party. If a similar right passes to the third party under Third Party (Rights against Insurers) Act, the third party cannot satisfy the condition of “pay to be paid” rule because it is impossible for a person to pay himself. In Fanti, Judge Staughton stated that, “Such a term makes no sense. I do not consider that, in the ordinary or legal meaning of payment, a person can pay himself. At any rate it would be a futile exercise to do so.”5 However, the appeal of the cargo-owners was allowed in The Fanti whereas in The Padre Island, the appeal of the cargo-owners was dismissed. When the cases were heard together in the court of appeal, the court upheld the view of Judge Saville regarding the case of The Padre Island that as the ship-owner had not discharged their liability; the claimant had no right to be indemnified by the club. Appeal was then made in House of Lords. Lord Brandon of Oakbrook pointed out three key issues. “First, immediately before the members were ordered to be wound up, what rights, if any, did the members have against the clubs under their contracts of insurance in respect of the liabilities which the members had previously incurred to the third parties?”6 This issue was approached on the basis of equitable principles. On such basis, if the principle of “pay to be paid” was a condition, there could also be a condition that the insurer would have to discharge the injured party directly. However, the rules of equity were insufficient to overrule the rule of the contract that was expressly chosen by the parties i.e. “pay to be paid” rule. The first issue was concluded with a statement that the “pay to be paid” rule was mandatory to be fulfilled because it was the only conditional right in the contract. “Secondly, did the “pay to be paid” provisions, being terms of the contract of insurance made between the members and the clubs, purport, whether directly or indirectly, to avoid those contracts, or to alter the rights of the parties under them, upon the members being ordered to be wound up, so as to render those provisions to that extent of no effect under s. 1(3) of the 1930 Act?”7 The judges were reluctant to accept any changes in the “pay to be paid” rule by the operation of Third Party (Rights against Insurers) Act, 1930 because of the order of winding up of the ship-owner. This is because there were no such stipulations in the contract between the club and the member. Therefore, when the right has passed from the insured to the injured by statute, the injured is not in a better position than the one in which the insured would have been if the right had not passed. Therefore, the clubs had a legal right to reject the claims in the same capacity in which they would have been entitled to reject the claims of the owners. “Thirdly, having regard to the answers to the first and the second questions, what rights against the clubs, if any, were transferred from the members to the third parties upon the members being ordered to be wound up?”8 Under the aforementioned statute, the third party steps into the shoes of the insured. The insured has a right to claim compensation for the loss directly from the P & I club if it would have been able to fulfill the condition of “pay to be paid”. This was a contingent right that was available to the ship-owners in these cases. The same right had passed to the injured parties. This means that in order to recover the claim from the club, the third party would have to fulfill the condition of “pay to be paid”. The P & I clubs stood in the same capacity against the third parties as they would have stood against the insured parties. If the insured parties would have been unable to fulfill the “pay to be paid” rule, the P & I club would have been justified to reject their claim. They have a similar right when the third party has stepped into the shoes of the insured. As it was impossible for the third party to satisfy this condition, the insurers would have been entitled to rightfully reject their claim. Therefore, it was held that the third parties had no claim. ii. In the light of the cases discussed above, the Third Party (Rights against Insurers) Act 2010 has not qualified the rule of “pay to be paid”. It is probably the one area where this law has an application but no potency. A third party can step into the shoes of the insured by the application of this law. But the problem is that the third party does not have the same capacity as the insured. Firstly, it is impossible for the third party to pay itself so that it can be compensated by the club. As a P & I club is able to successfully defend a claim upon the non-fulfillment of this rule, the same is also effective against the third parties. Secondly, assuming that somehow, the third party has fulfilled the “pay to be paid” rule, it cannot satisfy the rest of the requirements to be reimbursed. These requirements include the proof of the ship’s seaworthiness and a proof that the ship-owner took reasonable steps to avoid or to mitigate the damage. However, reaching at this step is impossible as the “pay to be paid” rule cannot be fulfilled by the third party. Therefore, the “pay to be paid” rule stands its ground despite the enactment of Third Party (Rights against Insurers) Act, 2010 and it has not been modified in any way as a result. Q.2 Reinsurance is a contract under which an insurer (cedant) purchases insurance from another insurer (reinsurer). Wasa v Lexington9 is a landmark case in respect of the “back to back” rule. Prior to this case, it was thought safe “to assume that cover under a facultative contract of reinsurance, incorporating the terms of the underlying insurance contract, and cover under the insurance contract, will be back to back, even if the laws by which they are governed differ.”10 Lexington insured the Aluminum Company of America (Alcoa) against the risk of property damage on their sites all over the world. It was an “All Risks Difference in Conditions” Property Damage Insurance Policy. This policy was issued for the period 1 July 1977 to 1 July 1980. The policy contained a US Service of Suit clause that required Lexington to “submit to the jurisdiction of any Court of Competent Jurisdiction within the US”11 at the request of Alcoa. However, the policy was not subject to an express choice of law provision. Lexington reinsured the risk among various insurance companies with Wasa12 being one of those under a proportional facultative contract. Like the insurance policy, the Reinsurance Contract was also for the period 1 July 1977 to 1 July 1980. It had the following wordings: “Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company...” 13 It was agreed that the Reinsurance Contract was subject to an implied choice of English law. In the 1990s, Alcoa was required by the US Environmental Protection Agency to clean up the pollution and contamination of Alcoa sites. Alcoa had failed to control the escape of waste products over a period of 40 years. Alcoa did that and then proceeded against various insurers who had provided property insurance to Alcoa during the period from 1956 to 1985. Alcoa sought for a declaration of entitlement to insurance coverage in respect of the clean-up costs at the manufacturing sites. Lexington was one of those insurers and was defending the claim. The proceedings were brought against these insurers in the State of Washington. The trial court in Washington found that the damage for which Alcoa sought indemnity spread over many years including between 1977 and 1980 and in various areas which fell under different jurisdictions. There was a question of how this loss should be allocated to different insurers and the years of cover. Alcoa was incorporated and had its centre of business in Pennsylvania. The trial judge held that the property damage had occurred at several manufacturing sites of Alcoa and at each site, there were two occurrences. Therefore, the loss could be allocated to each year pro rata by dividing the total cost by the number of years during which the damage had occurred for each site. As the damage had occurred over many years before the contract of insurance between Lexington and Alcoa was entered into, Lexington was held liable for only a small percentage of the overall loss. Alcoa appealed against the trial court’s decision. The Supreme Court of Washington held that the Insuring Clause of the Policy, which was common with policies issued by other defendant insurers, purported to cover losses arising from damage that had occurred before inception of the policy and during the policy period. Supreme Court found that the defendant insurers were jointly and severally liable for the overall damage that was suffered by Alcoa. As a result, Lexington faced a claim of about US $180 million but settled for just over US $103 million and sought to recover from its reinsurers. As mentioned above, there was a “follow statement” provision in the reinsurance contract. This suggests that the reinsurers would be bound by the settlement of the underlying insurance claim provided that the reinsurer (a) acted honestly and took all proper and businesslike steps in making the settlement; and (b) the claim so recognized by the reinsured falls within the risks covered by the policy of reinsurance (Insurance Co of Africa v Scor)14. Where the insurance and reinsurance contracts are on same terms—back to back—this principle applies there too as seen in Assicurazioni Generali v CGU .15 Wasa did not suggest that Lexicon did not act honestly and reasonably. They defended the claim by asserting the fact that the reinsurance agreement was governed by English law. Under English law, they were responsible only for the loss that occurred from 1 July 1977 to 1 July 1980. They contested that the majority of the loss that Lexington had covered for Alcoa had occurred before this period and they would not be liable to cover that loss. Wasa, with another reinsurer AGF, commenced proceedings in London. The first instance decision went in their favor but it was overturned by the court of appeal. The court of appeal said that the real question was about the intentions of the parties. If the parties intended that the terms should be identical in both contracts, then same effect should be given. The case was then taken to the House of Lords. The House of Lords approached the issue by acknowledging that a proportional reinsurance contract is usually co-extensive with the risk covered by the underlying insurance contract. Therefore, it could have been assumed that the wording of the reinsurance contract is to be interpreted as “back to back” with the insurance contract. However, reinsurance contract is a separate contract that is independent of the insurance contract. The House of Lords explained that under English law, the contract of reinsurance is not simply a contract under which the reinsurer is bound to indemnify the insurer for any liability that he may incur under the primary insurance - British Dominions General Insurance Co Ltd v Duder16. Therefore, the liability under a reinsurance contract will arise in respect of risks that fall within the cover created by the reinsurance. The obligation of Wasa should be determined with respect to the reinsurance contract. The House of Lords further explained that the decision of the Washington court was not perverse. In English law, the recovery to damage that occurs during that period covered by the policy is a fruit of the principle that the words of a contract should normally be given the meaning that they naturally bear. If the Washington court has decided to allow the cover for damage that has occurred outside the policy period, it should not be suggested that the words of the policy could bear an alternative meaning. The Washington court gave such a decision because “it has adopted a principle of construction that has been applied to contracts of insurance of property by the courts of Pennsylvania, and a minority of other American States.”17 And this principle had a specific origin. The House of Lords questioned the court of appeal’s decision regarding the intention of the parties. It is not reasonable to suggest that those who were party to the contract of reinsurance in 1977 could have anticipated that wording of the two contracts could differ radically due to the application of different laws in their interpretation. Therefore, it cannot be suggested that the parties agreed to the interpretation of the primary insurance under another law in preference to the English law. To reach at the judgment of this case, one needs to go back to the decision made in Forsikringsaktieselskapet Vesta v Butcher18. In this case, an insurer of a fish farm from Norway reinsured the risk in London market on such terms by which reinsurers followed the terms and conditions of the direct policy. The court held that the follow clause did not incorporate the choice of law of the direct policy into the reinsurance. Norwegian law was the choice of law of the direct policy. The reinsurance contract was governed by English law. The intention of the parties was that the reinsurance was to be "back-to-back" with the underlying policy. The Norwegian law required the reinsured to indemnify the insured in respect of loss sustained by him. The English law in turn required the reinsurer to indemnify the reinsured. This meant that the liability of the reinsurer was to be determined under the Norwegian law. The reinsurers had access to the Norwegian “legal dictionary” and they could have easily determined what conditions they were agreeing to follow. The Norwegian law had no provisions for a remedy in respect of insured's non-causative breach of warranty. The reinsurers could reasonably be believed to have known that they could not treat themselves as discharged from liability in such case. This principle has been firmly established and apart from the appeals in similar case, has been used in many subsequent cases too. This case was being used along with Groupama Navigation v Catatumbo 19by Lexington as an accessory to substantiate their case against Wasa. The House of Lords agreed to the fact that when insurance and reinsurance are written back-to-back, any loss under the insurance will fall within the reinsurance. However, there is rule of law that states that a reinsurance contract must respond to each claim that is granted under the insurance contract. The case that was brought to the House of Lords was of the reinsurance contract and it was made under English law. The question as to which losses were to be covered under the reinsurance contract had to be answered under the English law. In this case, both the insurance and reinsurance contracts were made on “occurrence” basis. When such a policy is issued, only physical loss and damage that occurs during the policy period is covered under the English law. The reinsurers could not be held liable for the loss that had occurred outside the scope of the policy period. Therefore, Wasa was obligated to cover only the loss that had occurred between 1 July 1977 and 1 July 1980. The House of Lords could not have justified their unanimous decision if they had not distinguished it from Vesta v Butcher and Groupama v Catatumbo. In these cases, when the reinsurance contracts were entered into, the laws that governed the insurance contracts were readily ascertainable and the parties had the knowledge of it. On the contrary, in the case of Lexington, the policy was not subject to an express choice of law. It was subject to a US Service of Suit clause though. Also, the property was located in a variety of US and non-US jurisdictions. As there were too many laws to consider, the parties could not reasonably be expected to be able to ascertain that under which law the cover under the policy had to be determined. The idea of access to a “legal dictionary” was not applicable in this case because many different laws were involved. The House of Lords rejected the suggestion of the Supreme Court of Washington that as Pennsylvanian law was applicable in relation to coverage, it was also applicable in determining the questions of coverage. The House of Lords explained that the Washington Court was also aware of the fact that there were too many laws to consider. It had to choose a law to refer to in order to decide the case. Therefore, it picked the Pennsylvanian law because it was the only law that had a common connection with all the parties and the sites involved in the litigation. Also, there were many insurers and many jurisdictions involved. Pennsylvanian law seemed to be the pivot in this case. The House of Lords argued that the Washington court applied the Pennsylvanian law by giving references to factors that were “extraneous” to the policy.20 Therefore, Wasa’s liability was only limited to the period which was stated under the reinsurance contract and was liable to cover only those damages which were determined under the English law. The presumption in relation to “facultative contracts of reinsurance that are not governed by the same law as the underlying insurance, terms that the reinsurance incorporates from the underlying insurance are to be given the same meaning and effect as under the law by which the insurance is governed” has been modified by the House of Lords in the case of Wasa. Now, this rule is not applicable if, at the time when the insurance contract is entered into, the law under which the insurance contract is made is not able to be identified. The reinsurer must be able to understand what he is agreeing to when he enters into a contract. It is one of the basic essentials of a legally binding contract that both parties must agree to the same thing in the same sense. If the reinsurers are not able to understand what they are agreeing to, there would be no consensus ad idem. Therefore, now the ascertainment of relevant law and jurisdiction is a must in respect of “back to back” reinsurance contracts. This case has some profound implications for the insurance markets worldwide. Vesta v. Butcher, and Groupama v. Catatumbo have been applied in relation to many reinsurance cases. These cases had established a doctrine that reinsurance contracts were very similar in nature to the liability insurance contracts. The same approach had been endorsed by the court of appeal in this case. This meant that if a competent court in any jurisdiction had held the reinsured liable to pay a direct claim, the reinsurer would be obliged to indemnify the reinsured in the same capacity. The parties to a contract of reinsurance took it for granted that a “back to back” reinsurance would have a similar impact even if there were different jurisdictions and the decision of a foreign court was far-fetched. In this case, the decision of the foreign court was bringing about some extreme results. This issue required some serious scrutiny and the House of Lords obliged. The insurers who are looking to get reinsured have to be more careful in the drafting of the reinsurance contracts in the future. Now, the reinsurers are given protection by their own law in cases where the decision of a foreign court has extreme implications. In the context of this case, it is important that the House of Lords has not rejected the Vesta/Catumbo line of precedent. These cases stand on their own ground. The case of Wasa has just been distinguished from these cases. It was very important because while reaching a decision for this case, the closest precedents were Vesta and Catumbo. As one delves deeper into the circumstances of the case, one can easily observe that these precedents are not entirely applicable. In future, Wasa would be applied to cases where it is not made clear which choice of law would apply to the underlying policy at the time of underwriting. Therefore, Wasa would prove to be an encouragement for the insurers and the reinsurers to determine a clear choice of law at the outset when the contract of reinsurance is entered into. References Assicurazioni Generali v CGU [2004] EWCA Civ 429 British. Dominions General Insurance Co Ltd v Duder [1915] 2 KB 394 Groupama Navigation v Catatumbo [2000] 2 Lloyd’s Rep 30 Hague – Visby Rules Article IV (2a) Insurance Co of Africa v Scor [1985] 1 Ll.R. 312 International Hull Clauses (UK) c 2.1.6. Mayer Brown, Client Alert 1 (2009) Third Party (Rights against Insurers) Act, 2010 (UK) s 1(3) The Fanti and The Padre Island [1990] 2 Lloyd’s Rep 191 Vesta v Butcher [1989] 1 A.C 852 Wasa v Lexington [2009] UKHL 40 Read More