Lexington Insurance Co v Multinacional de Seguros SA
Multinacional provided property and business interruption cover for a Venezuelan aluminium company for 12 months from 1st July 1997. The risk was reinsured 100% by Lexington and others.
In April 1998, the insured suffered a problem on its production line, which led to the line being shut down and restarted, a process that caused a significant amount of damage.
From a fairly early stage, reinsurers raised concerns that the insured had failed to mitigate its loss. Multinacional strongly disagreed but, despite repeated requests, failed to provide any detailed technical evidence or analysis to refute the allegation.
On 7th January 2000, reinsurers denied all liability for Multinacional's reinsurance claim, relying on a claims cooperation clause in the reinsurance contract.
This stated it was a condition precedent to reinsurers' liability (a) that the reinsured advise them "as soon as is reasonably practicable" of any circumstances that might give rise to a claim under the policy, and (b) that the reinsured "furnish the reinsurers will all information in respect of such circumstances and shall cooperate with the reinsurers in the adjustment and settlement of the claim".
Discussions between reinsurers and Multinacional, however, continued on a without prejudice basis.
In April 2001, the 3-year limitation period allowed by Venezuelan law for the underlying insurance claim expired.
Reinsurers' position was that (in addition to any other defence) the claim was now time-barred so there could be no corresponding liability under the reinsurance.
Multinacional disagreed and, without reinsurers' knowledge, applied to the Venezuelan insurance administrator, who confirmed (probably wrongly) that the time limit had not expired. When they found out about this some weeks later, reinsurers took it as another example of a failure to cooperate.
Nevertheless, in October 2001 reinsurers and reinsured met and agreed that the time-bar defence (as well as other coverage issues) would be invoked against the insured and the underlying claim rejected.
Despite this (and again without reinsurers' knowledge), Multinacional wrote to the insured on 3rd April 2002 reporting that reinsurers were insisting on the time-bar defence "which we rejected as we considered that it was legally incorrect" and that reinsurers' attitude seemed "incomprehensible".
Reinsurers argued that this letter was a further breach of the claims cooperation clause. Not only had Multinacional failed to consult them beforehand, but the letter itself waived the time-bar defence, completely undermining the agreed strategy and any negotiations based on that strategy.
Multinacional, however, maintained that, once reinsurers had denied all liability in January 2000, the claims cooperation clause ceased to operate. By taking that stance, reinsurers had waived any right to rely on any future breaches of the clause.
The judge did not agree that reinsurers were precluded from relying on the claims cooperation clause.
If in January 2000, reinsurers were right to rely on the breach of the condition precedent, they were relieved of liability. If they were wrong, they were not. At this stage, it was simply an unproved assertion.
Raising a defence does not amount to an irrevocable decision to rely only on that defence. Insurers and reinsurers may change their minds (and often do) about which defence they assert and may even abandon a defence altogether. It is in the interests of both parties that, without prejudice to the denial of liability, the adjustment and settlement of the claim can progress.
Nor had reinsurers waived any right to rely on any future breach of the condition precedent. A denial of liability does not ordinarily relieve an insured or reinsured of any ongoing obligations in relation to claims. If the insurer or reinsurer refuses to have anything further to do with the claim, then clearly there can be no cooperation. But where, as here, the parties are still actively communicating on a without prejudice basis, cooperation can continue.
The judge was also satisfied that Multinacional's letter to the insured was a clear breach of its obligation to cooperate in the settlement of the claim. Ignoring the strategy that had been agreed, the letter implicitly told the insured that Multinacional thought a valid claim still existed. At the very least, it encouraged the insured to raise arguments it did not previously have.
Although expert evidence on Venezuelan law strongly suggested that the time-bar had expired, there was still a possibility that a Venezuelan court might take a different view. Alternatively, it might conclude that Multinacional had renounced the time-bar defence by its letter.
Ultimately, however, the outcome was irrelevant to the judge's decision on breach. Reinsurers were entitled to receive Multinacional's cooperation and Multinacional had not cooperated. The condition precedent in the reinsurance had been breached.
The case confirms that insurers and reinsurers can assert a defence at an early stage – and change their mind about that defence - while still attempting to settle the claim on a without prejudice basis.
In a similar vein, the Court of Appeal's decision in Kosmar Villa Holidays v Trustees of Syndicate 1234 confirmed that handling a claim in its initial stages does not mean the insurer has made an irrevocable choice to accept liability under the policy, even though insurers in that case had failed to reserve their position.
