(2005-06-02) Addleshaw Goddard
In American International Marine Agency of New York Inc (2) American Home Assurance Co v Christine E Dandridge (sued on her own behalf & on behalf of all other underwriters subscribing to the contract of insurance) (2005), the Commercial Court held that an "incorporation provision" in a reinsurance agreement did not incorporate a "follow the leader" clause set out in the underlying insurance binder.
Background: The Claimants insurance companies had a 15% participation in a hull and machinery policy lead by Axa Global Risks, which they had reinsured with the Defendants under a facultative reinsurance providing cover for total loss. The terms of the Claimants' participation were set out in an insurance binder which post-dated the reinsurance. The binder contained a "follow the leader" clause ("Following French Market Leaders (Axa Global Risks) in all respects, including rates and claims but excluding ex gratia") which was not in the terms governing the rest of the market.
On 9 September 2000, one of the vessels covered under the policies ran aground and was declared a total loss. Shortly before the incident, and in breach of the terms of the underlying policy, the vessel had been re-classified. Axa had agreed orally to continue providing cover despite the change of classification prior to the incident, which they confirmed in writing on 13 September 2000, when they also acknowledged that the value of the vessel had been reduced from US$2.5million to US$1.5million. The Claimants took the view that they were bound by Axa's decisions under the terms of the "follow the leader" clause. They therefore paid US$225,000 towards the claim and sought recovery of their outlay from the Defendants under the terms of the reinsurance.
Issues: It was common ground between the parties that the re-classification and re-valuation of the vessel were breaches of the reinsurance which would have discharged the Defendants. However, the Claimants argued that an "incorporation provision" ("subject to the same clauses and conditions and against the same perils as in the original policy or policies but only against the Risks of [Total Loss]") in the reinsurance meant that the reinsurers were also bound by the "follow the leader" clause in the underlying i.e. the reinsurers were also bound by Axa's decisions and therefore estopped from relying on the re-classification and re-valuation to reject the Claimants' claim.
Decision: Richard Siberry QC held that:
The general words of incorporation referred to the underlying insurance as a whole and not the binder. Since the "follow the leader" clause was included in the binder but not in the other terms of the underlying, it could not have been incorporated into the reinsurance.
In any event, none of the criteria for incorporation as set out in HIH General Casualty and Insurance Ltd v New Hampshire Insurance Co (2001) (whether the provision was germane to the reinsurance, whether it made sense in the context of the reinsurance, whether it was consistent with the express terms of the reinsurance and whether it was apposite to the reinsurance) were met.
Richard Siberry QC pointed out that Axa were not of course the leader of the reinsurance and that the reinsurers had no contractual relationship with Axa whatsoever. This was not for example, a case where the lead reinsurer had paid and the Claimants were seeking to argue that the "follow the leader" clause as incorporated into the reinsurance compelled the following reinsurance market to pay.
In any case we would question whether general words of incorporation can incorporate a "follow the leader" clause in an underlyng policy, given that the clause concerns the relationship between the leader and its market. It seems to us that such a clause is specific to the underlying insurance, and therefore would not be considered as being "germane" or "apposite" to the reinsurance.