Reinsurers Kept on the Hook Despite Cedent’s Settlement in $28 Million Kuwait Oil Claim
This case centers on the relationship between cedents and reinsurers and compliance with a claims control clause which requires the cedent to allow the reinsurers to control aspects of claim handling. In this case the claimant reinsurers claim they are not liable under the reinsurance policy while the cedents assert that the reinsurer owes coverage.
By way of background, on October 3, 2005 the Kuwait Oil Company entered into a contract with M/S Hyundai Heavy Industries Co Ltd to build 15 new crude oil storage tanks in Kuwait. After construction, one of these tanks i.e. Tank 84 was found to be defective due to unacceptable settlement of the tank base allegedly because it was constructed on made or filled ground which contained refuse under the sand. The cost of repair is around $28 million.
The claim for repair costs was made against the original insurers who then notified the reinsurers of the claim.
The reinsurance contract contained an exclusion known as the LEG2 exclusion which provides that liability is excluded on the basis of a defect in design of the tank. Initially, all reinsurers denied liability based on the LEG2 exclusion. The cedent insurers were caught in the middle of the dispute and eventually aligned with the insured in pressing the reinsurers to pay the claim.
One of the reinsurers, AIG, and its broker, AON, sought to work out a business solution outside of the legal process in order to maintain business with the insureds. The other reinsurers continued to rely on the LEG2 exclusion. AIG then settled the claim with the insured without consultation of the other reinsurers and without bringing up the LEG2 exclusion. AIG settled the total claim for around $19 million, and paid its 20 percent of the claim.
The other reinsurers disagreed with the value of the claim due to the LEG2 exclusion. The cedent insurers then paid their portion of the settlement agreed to by AIG ($19 million) and discharged their duty to pay anything more.
The central issue is a claims control clause (CCC) incorporated into the reinsurance agreement which provides that the cedent must notify the reinsurer of a claim that will trigger the reinsurance as soon as possible, furnish the reinsurer all information available, and not settle or compromise without the approval of the reinsurer. Compliance with the CCC is a condition precedent to liability of reinsurers for a particular claim.
The cedent insurers claimed that they were not in breach of the CCC and that the reinsurers still retained their LEG2 exclusion defense which they could rely on to deny payment of the claim. The reinsurers brought proceedings against the cedents in England in order to establish non-liability under the reinsurance contract based on the CCC. The reinsurers claimed that the cedents breached the CCC by failing to allow the reinsurers to control negotiations with the insureds and by conducting negotiations in secret with AIG and admitting liability for the insured’s claim. Moreover, the reinsurers argued that the cedents settled without prior approval of all the reinsurers.
The judge found that the discussions between the cedents and insured were not negotiations, and they amounted to confirmations rather than settlements.
Regarding settlements, the judge found that the CCC did not prohibit the cedent from settling/compromising or admitting liability in respect to its own retained share rather than in respect of that part of the claim covered by another reinsurer’s share. The reinsurers were not bound by the settlements and could still attempt to deny or decrease the amount of coverage they owed despite the cedent’s admission of liability. Therefore, the judge dismissed the reinsurers’ case and the case will now progress to the hearing on the scope and effect of the LEG2 exclusion.