GAN INSURANCE COMPANY LTD v TAI PING INSURANCE COMPANY LTD (Nos 2 and 3)

A claims co-operation clause expressed as a condition precedent to any liability is effective according to its terms. It may bar recovery under the reinsurance even where the reinsured can prove that it was liable under the original policy.

Where poorly drafted wording permits competing readings, the court must construe it objectively in its contractual and commercial context. A requirement that no settlement or compromise be made and liability admitted without approval was construed as two separate prohibitions: neither a settlement or compromise nor an admission of liability could be made without prior approval.

A reinsurer's approval right is not subject to a general merits review. It must, however, be exercised in good faith, on the facts of the particular claim, and not arbitrarily or for extraneous purposes.

Tai Ping reinsured part of its exposure under an erection-all-risks and third-party-liability policy with Gan. The reinsurance included a full reinsurance clause and a claims co-operation clause. After fire damage, Tai Ping settled the original insured's claim without Gan's approval.

Longmore J determined preliminary issues concerning the claims co-operation clause. He held that compliance was a condition precedent, that sub-clause (c) required both a settlement or compromise and an admission of liability, and that Gan could not unreasonably withhold approval. He also held that breach prevented Tai Ping from proving its actual liability to the original insured as an alternative route to recovery.

The appeals concerned the construction and effect of that clause, and the extent of any implied restriction on Gan's approval right. A separate issue determined by Andrew Smith J depended upon the construction of sub-clause (c).

1. Disposition. The appeal against Longmore J's answers on issues (iii) and (iv)(a) was allowed. The cross-appeal on issues (ii) and (v) was dismissed. The Court held that the issue decided by Andrew Smith J rested on a false premise and need not be determined.

2. Sub-clause (c). Mance LJ, with whom Latham LJ agreed, held that the wording did not have a natural grammatical meaning. Read in context, and consistently with the commercial purpose of a claims co-operation clause, it imposed two separate prohibitions. Tai Ping could neither settle or compromise the original claim nor admit liability without Gan's prior approval. Sir Christopher Staughton agreed with that result, regarding the intended meaning as plain once the drafting error was recognised.

3. Condition precedent and its consequence. The clause expressly made its requirements a condition precedent to any liability under the reinsurance. That applied to all three sub-clauses. Breach of sub-clause (c) therefore prevented Tai Ping from recovering under the slip by proving that it was in fact and in law liable to the original insured. The clause was materially different from the clauses considered in Insurance Company of Africa v Scor (UK) Ltd [1985] 1 Ll.R. 312 and Vesta v Butcher [1986] 2 Ll.R. 179.

4. Approval. The Court declined to declare that approval could not be withheld unless there were reasonable grounds. Mance LJ and Latham LJ nevertheless held that the approval right had limited implied qualifications. Gan had to act in good faith, genuinely consider the facts of the particular claim, consider the claim as a whole, and avoid arbitrary or extraneous considerations. Gan was entitled to exercise its own judgment and the court could not substitute its view of the merits. Sir Christopher Staughton agreed that the pleaded broad term should not be implied, but did not adopt the wider reasoning.

• Court of Appeal (Civil Division): Allowed the appeal against the answers on issues (iii) and (iv)(a), dismissed the cross-appeal on issues (ii) and (v), and left the judgment to provide guidance on the qualified approval right.
• Queen's Bench Division (Longmore J): On 21 June 2000, determined preliminary issues arising under the claims co-operation clause.
• Queen's Bench Division (Andrew Smith J): On 8 February 2001, determined an issue concerning whether the settlement agreement contained an admission in writing. That issue became unnecessary after the Court of Appeal's construction of sub-clause (c).