IS THE REINSURER BOUND BY A JUDGMENT OR AWARD AGAINST THE REINSURED? AIDA Reinsurance Working Party Athens, Thursday 8 MAY

English law: basic rule “There are only two rules, both obvious. First, that the reinsurer cannot be held liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. Second, that the parties are free to agree on ways of proving whether these requirements are satisfied. Beyond this, all the problems come from the efforts of those in the market to strike a workable balance between conflicting practical demands and then to express the balance in words.” Hill v Mercantile & General [1996] LRLR 341, 350 per Lord Mustill 2

English law: theory Reinsurer not party to (even English) proceedings on underlying policy between insured and (reinsured) insurer is not bound by result as res judicata: Hayter v Nelson [1990] 2 Lloyd’s Rep 265, 271, Saville J No implied term that reinsurer liable for payment by reinsured insurer to insured under settlement following court judgment against insurer: Insce Co of Africa v SCOR [1985] 1 Lloyd’s Rep 312, 331 (CA) 3

English law: practice Equivalent treatment of liability insurance (direct) and reinsurance “I consider that the better view is that, absent some agreement to be bound, it will be open to a liability insurer or a reinsurer to challenge findings of liability in an underlying judgment in proceedings to which it was not a party in order to question whether in fact the insured is under a liability. In other words, whilst the judgment may ascertain or establish the loss, it will not necessarily establish the legal liability of the insured or reinsured, although it may be compelling evidence of such liability, depending on the circumstances in which it was obtained.” Astrazeneca v XL [2013] Lloyd’s Rep IR 290 per Flaux J at [65] (dicta) (liability ins) Court or tribunal deciding liability insurance dispute may decide that court hearing underlying dispute as to liability of insured was in error on the facts or the law or both: Astrazeneca [2013] EWCA Civ 1660 per Christopher Clarke LJ at [17] 4

English law: foreign judgments Dicta of Potter LJ in CU v NRG Victory [1998] 2 Lloyd’s Rep 600 at 610 (CA) that foreign court’s judgment on reinsured’s liability should be binding, subject to (1) competent jurisdiction, (2) no breach of exclusive jurisdiction clause, (3) reinsured taking all proper defences, and (4) judgment not manifestly perverse, not followed in subsequent cases. Different substantive law may be applied by different courts to same clause in underlying policy and reinsurance, with different result: Wasa v Lexington [2010] AC 40 (HL) 5

Danish, Norwegian & Swedish law: The basic rules Reinsurance not governed by the Insurance Acts in DK, N and S Some principles may apply by analogy (not the provisions which are devised to protect the insured) The permissible extent of construction by analogy is not well defined 6

Danish, Norwegian & Swedish law: Construction of reinsurance contracts Customs and usages on the relevant international markets are important when constructing the reinsurance contract: No case law in DK and S but in N: Gjensidige v Continental Insurance and others (unpublished): ”This indicates that a literal construction be applied also under Norwegian law …” ND : ”The insurance policy is developed by brokers at the insurance market in London … Norwegian practice must be considered to comply with English practice in this regard” (Direct insurance) 7

Danish, (Swedish and Norwegian) law: Contracting Cedant and Reinsurer are free to agree that the Reinsurer shall be bound by a settlement, an award or a judgment in a case between the Insured and the Cedant ”Follow the Fortunes” clauses –(North River v Cigna 52 F.3d 1194, 3rd Circ, 1995) –(North River v ACE 361 F.3d 134, 2nd Circ, 2004) ”Follow the Settlements” clauses 8

Danish, (Swedish and Norwegian) law: Contracting cont. Danish case law: U SC & U SC (Co-assurance ) Case concerning defective windturbines: The leading insurance assurer could decide and the other insurers obliged to follow (1996) The principle did not apply to payments made to owners of non-insured windturbuines (1999) 9

Danish, (Swedish and Norwegian) law: Point of Departure: Absent an agreement: The Reinsurer is (probably) not bound by a judgment or an award in a case between the Insured and the Cedant … but may be (at least in DK) i.e. only ”res judicata” between the parties and the principle of ”ne bis in idem” does not apply to a subsequent case between the cedant and the reinsurer 10

However (Danish law)… U AC (Retrocession) By implication, the retrocessionaire obliged to follow the decisions by the reinsurer U SC (Reinsurance) Cedant: The principle of ”Follow the Fortunes” applies Reinsurer: An implied obligation to ”follow the fortunes” apply in treaty reinsurance AC: Since the case deals with facultative reinsurance, the principle of ”follow the fortunes” does not apply by implication SC: Did not opine on the matter 11

Case law concerning direct insurance (Danish law): U AC (”The Turkey farm”) Liablity insurance – Turkey Farm Judgment between the injured and the person causing the loss (insured) establishing the insured’s liablity … Insured had kept the insurer informed about the case while it was pending and the result (judgment) before the time an appeal had lapsed … The insurer had not insisted or suggested an appeal … The insurer was barred from challenging the finding of liability in the judgment … U AC (”The Vet”) Insurance company not barred from asserting that the insured had not been negligent 12

Increased focus on loyalty in ”Relational Contracts” … ? Yam Seng v ITC, [2013] Lloyds Rep 1, 526: "(M)any contracts … involve a longer term relationship between the parties in which they make a substantial commitment. Such "relational" contracts, as they are sometimes called, may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties' understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long-term distributorship agreements." 13

And finally… Commercial Union v NRG [1998] Lloyd Rep 600 (obiter): ”(I)t would be quite impractible, productive of endless dispute and against the presumed intention of the contract of insurance (absent contrary or special provision of a kind …) for an English Court trying a dispute concerning the reinsurer’s liability not to treat the the judgment of a foreign court as the the resinured’s original liability as decisive and binding, save within the most circumscribed limits”. 14

German law: basic rule “If there are two lawyers involved discussing an issue this will most certainly result in at least two differing opinions on the subject matter” German (civil) law is governed by a structured set of codified norms German Courts do not set rules of law, they interpret the rules set by legislature or by executive authorities if authorized by legislature Laws may be imperative (compulsorily binding) or non-imperative – i.e. binding but variable by agreement of the parties to a contract Customs of a trade have the effect of a non-imperative norm (§ 346 HGB – German Commercial Code) Superior Court’s interpretation of a rule of law does not establish “precedent” (is not binding in principle) to a lower Court Scholars, academics and other learned people also interpret the law, but in the absence of binding interpretation there’s no right or wrong 15

German law: reinsurers’ duties to follow no interpretation by a superior commercial Court available on the application of § 346 HGB – commercial custom – in relation to any customs of the reinsurance trade prevailing opinion: it is a custom of the reinsurance trade that the reinsurer shall have to follow the settlements and the fortunes of ceding company unless –otherwise agreed in the reinsurance contract or –the original settlement or other liability incurred by the ceding company does not fall into the scope of coverage of the reinsurance contract differing opinion: …not unless specifically agreed in the contract 16

German law: (prevailing opinion) custom of the reinsurance trade prevailing opinion: long running and persistently, the participants trading in the reinsurance market adhere to the consistent, uniform and voluntary practices (gleichmäßige, einheitliche und freiwillige Übung) –to empower and to oblige the reinsured to manage any reinsured business as if it were not reinsured –the oblige the reinsurer to follow the reinsured in any decision taken in the course of managing reinsured business and to follow the fortunes of the reinsured incurred in course of this management differing opinion: such practice cannot be consistently nor uniformly asserted for German reinsurance practice 17

German law: scope of following duties, if in force the reinsured is obliged to manage and execute a reinsured insurance contract as if it were unreinsured (duty to manage / Geschäftsführungspflicht) thus, the reinsured has to be entitled to manage a reinsured insurance contract as if it were unreinsured (power to manage / Geschäftsführungsrecht) thus, the reinsurer has to follow any settlement by the reinsured undertaken within the limits of this “power to manage” thus, the reinsurer has to follow the reinsured ’s fortunes incurred while managing within the limits of this “power to manage” but only inasmuch as reinsurance cover is provided by the scope of the reinsurance contract in question 18

German law: limitations to scope of reinsurance the parties may waive or limit the powers and duties envisaged by reinsurance custom –by express provisions of the contract –by conduct implying that intent (such as provisions to a contract which are in conflict with the provisions of a custom) the parties may expressly define the scope of coverage given by a reinsurance - customary powers or duties will not broaden nor reduce such scope –It is common practice that underlying terms and tariffs are incorporated by cross reference into the reinsurance contracts –the reinsurance agreement “to cover as original” may broaden this scope as well as limit it to the originally agreed insurance cover 19

20 Israeli law: Applicable Law on Reinsurance Contracts Excluded from Insurance Contract Law – a consumer protective law General Contracts Law Two separate contracts

Israeli law: Interpretation of Reinsurance Contract According to the commercial object of the parties – assumption of “back to back” coverage 21 Elbit v. Harel and Ors. : Same interpretation of terms, same applicable law.

Israeli law: Extra Contractual Damages Imposed on Reinsured 22 The Sky Club Judgment: The insured is entitled to compensation for losses caused by wrongful declination of coverage.

Israeli law: Extra Contractual Damages (cont’d) Is it outside the ceded risk? 23 Declination according to Reinsurer's instructions - award will bind Reinsurer

Mexican law: basic rule Insurance companies are fully liable for any insured risk before the insured, irrespective of their reinsurance coverage. The will of the parties as set forth in the respective contract is the prevailing law. 24

Mexican law: theory The reinsurer has the obligation to pay the reinsured an amount of money in case the conditions set forth under the reinsurance contract are met. It is deemed that the reinsurer is bound when the reinsured covers a risk – whether by a judgement or award - if the respective risk under which the judgement or award was granted is covered and not excluded under the reinsurance contract. 25

Mexican law: practice Considering the cedent obligation to cover the insured risk is independent from the reinsurance, there is a tendency to play a double standard in the market, on one side enforcing claims controls and on the other reserving rights for liabilities of the cedent putting stress on the local market. There is a lack of precedent and judicial decisions that is reverting with more judicial activity. 26

Spanish law: basic rule No connection between insured and reinsurer. Reinsurer not party to proceedings on underlying policy between insured and insurer (reinsured). There is case law confirming these principles (the Musini case). 27

Spanish law: theory Basic principles of reinsurance: community of risk and good faith between reinsured and reinsurer, hence reinsurer must follow (in principle). But no current explicit rule on follow the fortunes or settlements. The loss must be covered by underlying insurance contract and by reinsurance contract. Claims must be settled in a business-like manner. Ex- gratia payments are not recoverable. 28

Spanish law: practice No case law providing guidance on these principles. Not uncommon for reinsurance contracts to provide that reinsurer must follow where the reinsured is obliged by a court to indemnify under the terms of the original policy. 29

Spanish law: foreign judgments A foreign judgment against the reinsured will not bind the Spanish court in proceedings instigated by the reinsured against the reinsurer. The reinsured may present the foreign judgment as evidence in proceedings against the reinsurer. 30

31 Dr. Andreas Schwepcke ars/re Partners Schwepcke & Wieland PartG Max-Emanuel-Str Starnberg Julian Burling Serle Court 6 New Square Lincoln’s Inn London WC2A 3QS Jorge Angell L.C. Rodrigo Abogados Lagasca, Madrid Peggy Sharon, Adv. Levitan, Sharon & Co. Advocates and Notaries Yigal Alon 57 Tel Aviv Niels Schiersing Horten Advokatpartnerselskab Philip Heymans Allé 7 DK-2900 Hellerup, Copenhagen Dr. Reinhard Dallmayr BLD Bach Langheid Dallmayr PartG mbB Karlstraße München Yves Hayaux Du Tilly Nader Hayaux & Goebel Paseo de los Tamarindos 400 B 7o. Piso Bosques de las Lomas México DF 60 Lombard Street London EC3V 9EA (44)