Claims Cooperation and Follow Settlements Clauses
In this UK Kings Bench judgment (which also dealt with the question of the erosion of the reinsurance excess by defence costs), the court considered whether on a proper construction of the reinsurance policies and the facts of the case, the Claims Cooperation clause nullified, modified or circumscribed the operation and effect of the Follow Settlements Clause.
The court said that, under a Follow Settlements Clause, reinsurers are bound by a settlement provided that the claim so recognised by them fell within the risks covered by the policy of reinsurance as a matter of law and also provided that in settling the claim the insurers had acted honestly and had taken all proper business-like steps in making the settlement.
The Follow Settlements Clause read: “To follow original terms, conditions and settlements (as far as applicable to the layer)” .
The Claims Cooperation Clause read: “The primary insurers shall in the event of an occurrence or series of occurrences consequent upon one original cause which may be the subject of a claim under the policy and where the potential cost may exceed £4m, or in the event of the potential cost of such an occurrence or series of occurrences reaching £4m give notice to re-insurers as soon as practically possible and furnish all available information respecting such occurrence or occurrences if required.
In either such event the course to be adopted by the primary insurers shall be determined by agreement between the primary insurers and re-insurers and the primary insurers shall not without the consent of re-insurers litigate with regard to such loss but such consent shall not be unreasonably withheld.
In the event of a difference of opinion between the primary insurers and re-insurers in respect of an opportunity whereby settlement of a loss can be obtained by the acceptance of a standing judgment or transaction agreed by the claimant re-insurers retain the right to pay to the primary insurers the amount the equivalent to their liability under this policy according to such standing judgment or transaction and shall thereafter be under no further liability under this policy in respect of the loss.”
The court held that the Claims Cooperation Clause did not modify the obligation of the reinsurers to follow settlements. There was no inconsistency between the Follow Settlements Clause and the Claims Corporation Clause. There was no express prohibition on settlement without consent. The prohibition was in litigating without consent.
The stipulation was that “the course to be adopted by the primary insurers shall be determined by agreement” which raised the question of what was to happen if there was no agreement. The only provision made in that regard addressed the situation where the insurers want to litigate and the reinsurers wanted to settle. The situation where the insurers wanted to settle was not separately addressed. The court said that was an indication that the clause was intended to restrict the insurers’ freedom to litigate, not their freedom to settle.
In interpreting the Claims Cooperation Clause, it was unnecessary to consider the facts. On any view, however, the insurance parties had agreed the course to be adopted.
The insurers had taken the proper business-like steps in entering into the relevant agreement so that the reinsurer was bound to follow the settlement.
An allegation of failure to take proper and business-like steps would be tantamount to an allegation of professional negligence. If the final settlement figure were a good one, it could not be said that there was anything improper or unbusinesslike in taking points that would not have affected the bottom line.
The court said it had not been established that in entering the settlement the insurers failed to take all proper business-like steps. The advice of the attorneys on which the insurers acted was such as a careful lawyer, reasonably competent in the relevant jurisdiction, could have given.
Reinsurance policies are seldom litigated or arbitrated in South Africa. On the application the general principles the outcome would likely be the same in South African law. Insurance and reinsurance parties who do not have appetite for the risks and exposures identified by the judgment should consider appropriate amendments to their relevant wordings.
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