R.E. Brown and Others v GIO Insurance Limited

A contractual clause making the reinsured the sole judge of what constitutes an event may entrust it with questions of fact, construction and mixed fact and law. The decision remains subject to good faith and reasonableness, and may be challenged for perversity, dishonesty or answering the wrong question.

A decision is not invalid merely because a court might later construe the contract differently. If the contractual decision-maker answers the right question in a reasonable way, the decision is binding. An originating cause and an event are not necessarily identical, but may produce the same aggregation result depending on the facts.

The appeal concerned excess of loss reinsurance contracts covering liabilities arising from Lloyd's errors and omissions business. Each contract aggregated liability by reference to losses arising out of one event and contained a special condition making the reinsured the sole judge, or its definition final and binding, as to what constituted an event.

The reinsured presented claims on the basis that losses associated with each underwriter's negligent approach to underwriting constituted separate events. Langley J rejected the reinsurers' challenge. The central questions were whether the special conditions permitted the reinsured to decide questions of construction and mixed fact and law, whether its decisions were unreasonable or legally misdirected, and whether it had to reconsider them after later authority concerning the distinction between an originating cause and an event.

1. Appeal dismissed unanimously. Waller LJ and Chadwick LJ gave reasoned judgments; Neill LJ agreed with both judgments. The reinsured was entitled, subject to good faith and reasonableness, to decide what constituted the event from which the relevant losses arose.
2. The special conditions covered questions of fact, construction and mixed fact and law. They did not unlawfully oust the jurisdiction of the court. The court could intervene where the decision-maker acted unreasonably, perversely or in bad faith, or answered a different question from that assigned by the contract. Chadwick LJ adopted the reasoning in Nikko Hotels (UK) Ltd v MEPC plc [1991] 2 EGLR 103: answering the right question wrongly does not invalidate the decision, whereas answering the wrong question does.
3. The reinsured had asked the contractual question, namely what event caused the losses. It had not simply treated the answer to the different question of originating cause as legally conclusive. Its decision to follow the analysis in Cox v Bankside [1995] 2 Lloyds Rep 437 was reasonably open to it.
4. The House of Lords decision in Axa Reinsurance v Field [1996] 1 WLR 1026 established only that an originating cause is not necessarily an event. It did not establish that the two concepts could never coincide or lead to the same aggregation result. The distinction depended on the circumstances.
5. It was unnecessary for the Court of Appeal to decide whether it would itself have reached the same conclusion on the number of events. The issue was whether the reinsured's conclusion was reasonable. It was not shown to be unreasonable, legally misdirected or unarguable. Nor was there any obligation to reconsider a reasonable decision merely because payment had been delayed or the law had subsequently been clarified.

The appeal was dismissed with costs, payable forthwith. Leave to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division) — Appeal from the judgment of Langley J dated 28 January 1997; appeal dismissed with costs and leave to appeal refused.
2. High Court of Justice, Queen's Bench Division, Commercial Court — Langley J decided the construction issue in favour of the reinsured. The citation of that judgment was not stated in the judgment.