Facts
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.
The time-bar
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
discovered 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.
Judgment
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.
Commentary
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.
