Charter Reinsurance Co Ltd v Fagan

In an excess of loss reinsurance contract, an ultimate net loss clause referring to sums “actually paid” does not necessarily make prior payment by the reinsured a condition precedent to recovery. The clause must be construed in the setting of the policy as a whole and its commercial function.

Where the clause defines the measure of indemnity, the expression may identify the reinsured’s finally ascertained net liability rather than require an actual transfer of funds. Clear language is required to impose a term which fundamentally postpones the reinsurer’s liability until the reinsured has discharged the underlying claim.

Charter Reinsurance Co Ltd, then in provisional liquidation, sought a summary declaration under three whole-account excess of loss reinsurance policies. It could not satisfy the underlying claims for which it sought reinsurance recoveries.

The Lloyd’s syndicates accepted that the underlying losses otherwise engaged the policies. They contended that the ultimate net loss clause required Charter first to have actually paid the underlying claims.

Mance J granted the declaration sought. The Court of Appeal upheld that decision by a majority, with Staughton LJ dissenting. The appeal concerned whether the phrase imposed a condition precedent to reinsurance recovery or was directed only to measuring the ultimate net loss.

1. Appeal dismissed unanimously. Lord Mustill gave the leading speech. Lord Goff, Lord Griffiths and Lord Browne-Wilkinson agreed with it. Lord Hoffmann gave separate concurring reasons. The declaration in Charter’s favour was upheld, with no order as to costs.

2. The policies required an insured event and an ultimate net loss sufficient to reach the relevant reinsurance layer. Clause 2(c), read with clauses 2(a), 2(d) and 2(e), was concerned with the measurement of that loss. It did not add a temporal condition that Charter must first discharge the precise underlying liability.

3. In that specialised contractual setting, “actually” referred to the position when the net loss was finally ascertained. “Paid” referred to Charter’s exposure to liability arising from the insured loss. The words therefore did not require a cash disbursement or other satisfaction of the underlying claim before recovery was available.

4. The ordinary meaning of contractual language remains the starting point, but its meaning depends on the document, commercial setting and function of the clause. An unreasonable result may justify close scrutiny of the wording, but the court cannot substitute a more attractive bargain for one which the language fairly bears.

5. In re Eddystone Marine Insurance Co; Ex parte Western Insurance Co [1892] 2 Ch 423 supported the established principle that reinsurance liability is, absent clear provision, unaffected by whether the reinsured has discharged the underlying claim. The United States authorities showed that prior payment may be made a condition precedent by materially different wording, but did not affect the construction of these policies.

6. The differences in the aviation policy did not affect this issue. The same construction applied to all three policies.

• House of Lords: dismissed the syndicates’ appeal and affirmed the declaration in favour of Charter.
• Court of Appeal: upheld Mance J’s decision by a majority; Simon Brown and Nourse LJJ were in the majority and Staughton LJ dissented.
• Commercial Court: Mance J granted Charter a summary declaration that prior satisfaction of the underlying claims was not a condition precedent to recovery.