Baker v Black Sea & Baltic General Insurance Co Ltd

A proportional reinsurer is not liable, merely by implication of law, for its proportion of the insurer’s reasonable and claim-specific costs of investigating, defending or settling claims. Such a term requires necessity, which does not arise simply from the proportional sharing of premiums and losses.

The term may nevertheless be implied from an established market usage. The evidence must show a universal and acknowledged practice that reinsurers bear those costs even without an express provision, or a market understanding that exclusion requires express words. Where the existing evidence may have been misunderstood and further evidence is justified by exceptional market-wide considerations, the issue may be remitted for determination on a proper evidential basis.

The appellant Lloyd’s syndicate sought reimbursement from Black Sea under a 50:50 proportional reinsurance contract for a corresponding share of variable costs incurred in investigating and defending claims. The costs were not liabilities insured under the underlying policies, and the syndicate did not claim overheads or fixed costs.

Potter J rejected that issue in the Commercial Court, although he decided the remaining preliminary issues substantially in the syndicate’s favour: [1995] L.R.L.R. 287. The Court of Appeal dismissed Black Sea’s appeal and the syndicate’s cross-appeal: [1996] L.R.L.R. 353.

Before the House, the syndicate contended that liability arose through a term implied by law or through insurance-market practice and usage. Equitas intervened and sought to adduce fresh evidence concerning market practice. The central issue was whether a proportional reinsurer must bear its share of the insurer’s claim-specific defence and settlement costs.

1. Appeal allowed to a limited extent. Lord Lloyd of Berwick delivered the leading speech, with which Lord Browne-Wilkinson, Lord Woolf, Lord Hoffmann and Lord Hutton agreed. All questions concerning trade practice and usage were remitted for a further hearing in the Commercial Court.

2. Per Lord Lloyd, no term requiring Black Sea to contribute to the syndicate’s defence costs could be implied by law. A proportional reinsurance is not a partnership. The parties’ arrangements for overriding and profit commission also left insufficient material to conclude that contribution to defence costs was necessary. The applicable varieties of implication depended on necessity, save for implication based on established mercantile usage, and necessity was not established.

3. The weight of authority supported that conclusion. Scottish Metropolitan Assurance Co Ltd v Groom and the majority decision in Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd, [1985] 1 Lloyd’s Rep. 312, supported the absence of an implied indemnity for defence costs. British Dominions General Insurance Co Ltd v Duder, [1915] 2 K.B. 394, did not establish a general implied term concerning such costs. Uzielli & Co v Boston Marine Insurance Co, (1884) 15 Q.B.D. 11, should not be regarded as authority for any relevant principle.

4. Per Lord Lloyd, a term may be implied where an established mercantile usage forms part of the parties’ understood bargain. The Court of Appeal correctly required evidence of a universal and acknowledged market practice that proportional reinsurers pay such costs without express provision, or that exclusion requires express words. However, both courts below appeared to have misunderstood evidence that pro rata sharing was customary. The House could neither affirm the adverse finding safely nor substitute a positive finding on the limited material.

5. Fresh evidence was admitted because Equitas’s exceptional intervention and the market-wide importance of the issue justified any departure from the rules in Ladd v Marshall, [1954] 1 WLR 1489. A commercial judge was better placed than an examiner to determine evidential, pleading and admissibility questions and to provide an authoritative assessment of market practice. Costs in the House and Court of Appeal relating to the remitted issue were to await the result. Black Sea’s cross-appeal was withdrawn by agreement, with no order as to its costs.

1. House of Lords: The syndicate’s appeal was allowed to the limited extent of setting aside the conclusions below on trade practice and usage and remitting those questions to the Commercial Court. The conclusion rejecting implication by law was affirmed. Black Sea’s cross-appeal was withdrawn.

2. Court of Appeal: Black Sea’s appeal and the syndicate’s cross-appeal were dismissed with costs: [1996] L.R.L.R. 353.

3. Commercial Court: Potter J determined preliminary issues concerning sample claims, deciding all but one in the syndicate’s favour. He rejected the syndicate’s claim to recover a proportion of its defence costs: [1995] L.R.L.R. 287.