In the recent case of English & American Insurance Company Limited v AXA Re the Court of Appeal upheld the Commercial Court's decision to grant EAIC summary judgment (2 October 2007).  EAIC had fronted for Axa and was 100% reinsured in contracts intended to be fully back-to-back. The Court expressed disapproval of "dogged insistence" on having claims checked to satisfy a reinsurer of its liability to pay.

Julian Miller and Daniel Silver of Beachcroft LLP, who represented EAIC, explain.

Background
EAIC provided liability insurance cover to the Dow Corning Corporation. For 10 of these contracts, EAIC was reinsured by AXA, on all but one of the contracts for 100%.  Each of the reinsurance contracts contained a follow settlements provision as well as a clause requiring reinsurers to "follow the fortunes of [EAIC] in all things". 

In the early 1990s, numerous claims were made against Dow in respect of Dow's manufacture and sale of breast implant materials, and in 1995 Dow filed for Chapter 11 bankruptcy protection.  Very significant claims were presented by Dow to its liability insurers, including EAIC.  In October 1995, Dow reached a settlement (in essence a commutation) with a number of solvent London Market Insurers.  By this stage EAIC was insolvent, and was not party to the London Market Settlement Agreement ("LMSA").

Shortly after the conclusion of the LMSA, Dow pursued claims against various other insurers in the Michigan court.  The court's decision was substantially favourable to Dow in a number of respects, including on coverage issues, defence costs, cover for certain types of injuries, and number of occurrences.  In light of the judgment, it became clear that the LMSA had been a good deal for the solvent London Market Insurers who had participated in it.  Accordingly, when EAIC attempted to reach settlement with Dow on terms equivalent to the LMSA, Dow refused and indicated that it would only now settle for an amount approaching full policy limits.

This development disturbed AXA, who claimed that EAIC's non-participation in the LMSA had prejudiced their interests, and indicated that it would not reimburse EAIC for an amount higher than what would have been EAIC's share of the LMSA.  In a letter dated 4 December 2001, AXA appeared to indicate that it would follow a settlement up to the LMSA level:

"Without prejudice to our right to deny liability for losses arising out of EAIC's settlement with Dow Corning, we will support a settlement up to the present value of what our share of the 1995 Market Settlement would have been."

Following this letter, the scheme administrators, KPMG, acknowledged that EAIC had a liability to Dow of at least US$3.77 million - the amount which EAIC would have paid as its share of the LMSA.  EAIC paid an interim dividend, and sought recovery from AXA of its share as reinsurer, US$772,358.  Axa refused, claiming that the interim payment was not capable of being a "settlement" within the meaning of the follow settlement clause, and that EAIC had not taken prudent and businesslike steps to settle claims - in effect, all EAIC had done was recognise a minimum amount for which it might in due course become liable.  EAIC sought summary judgment for the sum of US$772,538.  In the alternative, EAIC argued that it was entitled to summary judgment in the sum of US$673,808, this being AXA's share of the paid claims presented by Dow as at the date of the interim payment.

Commercial Court decision
The court found that EAIC was entitled to summary judgment in the amount of US$673,808 plus interest.  It held that at the date of payment to Dow there were paid claims on policies reinsured by Axa of this amount.  The Judge found that there was no real dispute that amounts in relation to these claims had been settled, and that Axa was obliged by the follow settlements clause to reimburse EAIC.  The Judge also gave an alternative basis for summary judgment: in her view, even if the follow settlements clause had not been triggered, there was no plausible basis for asserting that there was a realistic prospect of defending EAIC's claim up to US$673,808.  None of the concerns raised went to the underlying merits. Although the Judge held that the 4 December 2001 letter did not represent a contractually binding agreement to follow the interim settlement, the commercial reality of the letter reflected a recognition by the reinsurer that it was liable up to the LMSA level without further enquiry or determination.  The Judge added that it was "just about conceivable, although unlikely" that Axa might have a defence in relation to settlement amounts paid in respect of IBNR, as opposed to paid claims, and gave Axa the benefit of the doubt in this respect.

Appeal
Axa appealed the Commercial Court's decision.  Before the appeal could be heard, EAIC adjusted and settled the claims presented by Dow through to the end of 2004.  Of necessity, this involved an adjustment of those claims presented up to January 2002 (when the interim payment was made) and in respect of which summary judgment had been granted.  In light of the adjustment exercise, Axa accepted liability up to the LMSA level (though not the claims paid beyond this level).  Axa maintained that the summary judgment application had been premature and wrongly decided, and continued its appeal in respect of the costs of the summary judgment hearing.   

The Court of Appeal upheld the Commercial Court's decision.  The Court expressed disapproval at having to hear an appeal where the substantive issues were moot.  The Court went on to say that in these circumstances it was not appropriate to explore in full the merits of the Judge's decision on the follow settlements issue. The Court noted that the Judge had clearly been correct in her alternative basis for judgment, namely that there was no realistic prospect of defending the claim up to US$673,808.  There was no substance to any of the objections raised as to the scope of cover, merely a "dogged insistence" on putting EAIC to proof.  The claims in question had been looked at in the context of the LMSA, and again when claims were presented by Dow to EAIC, and the Judge's view of what had been realistically in prospect had been entirely borne out by events.   

Comment
The Court side-stepped the "refined jurisprudence" on follow settlements clauses as it was not necessary to consider this in detail.  Nor did the court comment on the recoverability of contingent liabilities.  What marks out the decision is the common-sense commercial realism of the decision.  The trial Judge could see no point in scheme creditors being put to expense in satisfying reinsurers determined to "sit on their rights".  The Court of Appeal was equally unwilling to go down this course.  Meanwhile, further substantial claims have arisen, and the litigation continues.

Julian Miller ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ) is a partner and Dan Silver ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ) is a solicitor in the reinsurance department of Beachcroft LLP.