Baker v. Black Sea & Baltic General Insurance Company Ltd

The House of Lords considered whether an insurer can recover from a proportional re-insurer a share of the costs incurred by the insurer in investigating, defending or settling claims made by the insurer's own insured. The court rejected the claim that such recovery should be implied as a matter of law because the contract was not shown to require such a term and the authorities did not support implying such a term by necessity. The court held that a term could only be implied if there were an established market trade practice or usage to that effect; the existing evidence was insufficiently clear or comprehensive to establish such a universal usage.

The House therefore allowed the appeal in part by setting aside the concurrent adverse findings on trade usage and remitting the question of market practice and usage to the Commercial Court to hear fresh evidence. The court emphasised the distinction between costs incurred by the insured in meeting third party claims (which may fall within the indemnity) and costs incurred by the insurer in defending the insured's claims (the subject of the present dispute).

Background and parties: Mr Colin Baker, a member of Lloyd's Syndicate 947, sued on his own behalf and on behalf of other syndicate members against Black Sea & Baltic General Insurance Co. Ltd., their proportional re-insurer under a continuous contract incepting 1957 and terminable on notice. The syndicate alleged that Black Sea should bear a proportion of the insurer's costs of investigating, defending and settling claims made by the syndicate's insureds.

Procedural history: Proceedings began in 1989. Preliminary issues on sample claims were ordered and tried before Potter J. in the Commercial Court (judgment reported [1995] L.R.L.R. 287). The Court of Appeal dismissed the appeals in 1996 ([1996] L.R.L.R. 353). The syndicate appealed to the House of Lords; Equitas intervened and sought leave to adduce fresh evidence on trade practice.

Nature of the claim and relief sought: The syndicate sought a declaration and recovery of a proportionate share of the insurer's defence and settlement costs from the re-insurer under a proportional (quota share) re-insurance. The syndicate advanced three bases: (i) follow-the-settlements wording (abandoned), (ii) a term implied in law for business efficacy or obvious intention, and (iii) a term implied by reason of an established trade practice or usage.

Issues framed by the House:

• Whether a term should be implied as a matter of law in a proportional re-insurance that the re-insurer bears a proportion of the insurer's variable defence and settlement costs;
• Whether there is an established trade practice or market usage making such a term customary so that it should be implied into the contract;
• Whether fresh evidence of market practice should be admitted and how it should be dealt with.

Court’s reasoning and disposition: The court rejected implication of a term as a matter of law. It found the re-insurance did not operate like a partnership and there were contractual features (profit commission and overriding commission) and factual uncertainties that precluded finding necessity for an implied term. The court reviewed authority (including Scottish Metropolitan Assurance Co. Ltd. v. Groom and Insurance Co. of Africa v. Scor) as supporting the view that, absent express provision, the re-insurer is not liable for the insurer's defence costs. On trade usage, the House held the Court of Appeal applied the correct test (an established, universal and acknowledged market practice or usage). The trial evidence was insufficiently clear and comprehensive; but given the market importance and the offer of fresh evidence by interveners (Equitas), the House exercised its discretion to admit fresh evidence and, exercising caution, remitted the issue of trade practice and usage to the Commercial Court for a further hearing so that fuller evidence could be heard and determined authoritatively by a commercial judge. Costs on the remitted issue were to await the outcome of that hearing.

Appeal allowed in part. The House rejected the implication of a term in law that a proportional re-insurer must bear a share of the insurer's defence and settlement costs, on grounds of lack of necessity and contrary authority. However, the House accepted that such a term could be implied if established market usage required it; the existing evidence was inconclusive and the House therefore set aside the adverse findings on usage and remitted the question of trade practice and usage to the Commercial Court to hear fresh evidence and determine the issue. Costs in relation to the remitted issue were to await that hearing.

Trial on preliminary issues (Commercial Court, Potter J.; judgment reported [1995] L.R.L.R. 287); appeal to Court of Appeal dismissed [1996] L.R.L.R. 353; appeal to House of Lords allowed in part and remitted on trade practice issue [1998] UKHL 18.