Eagle Star Insurance Company Ltd. v J.N. Cresswell & Ors

A reinsurance policy containing a follow the settlements provision may give the reinsurer a right to take control of negotiations and settlement. That right does not, without clear language, make control a condition precedent to liability. Where reinsurers exercise control, a settlement made outside that control is not binding on them. Where they do not, the reinsured may settle claims which fall within the reinsurance, subject to any separate contractual restriction on recovery of legal costs. A condition precedent must be clearly expressed. The court should construe the policy as a whole and give effect to its commercial structure.

Eagle Star sought indemnity from its reinsurers for liabilities and costs arising from environmental pollution claims brought by Varian Associates under a 1969–1970 liability policy. The reinsurers had not controlled the negotiations or settlement. They contended that the Claims Co-operation Clause made such control a condition precedent to liability and that legal costs were excluded.

The court tried preliminary issues concerning the construction and effect of the reinsurance policies, including the interaction between the follow the settlements provision, the Claims Co-operation Clause and the Apportionment of Costs provision.

1. The court rejected the argument that the reinsurance clause in the Insolvency Clause displaced the printed follow the settlements provision. The written clause applied only if the reinsured went into liquidation. Outside liquidation, the printed clause governed.

2. The follow the settlements provision formed part of the basic reinsurance obligation. The reinsured retained 40 per cent of the risk and the parties were, in commercial terms, co-adventurers. The reinsured therefore had authority to make settlements binding on the reinsurers, subject to the contractual right of the reinsurers to intervene.

3. Clause (b) of the Claims Co-operation Clause gave the reinsurers a right, rather than imposing an obligation, to take control of negotiations and settlement. The words “in this event” referred to the event that the reinsurers exercised that right. If they took control, the reinsured could not settle behind their backs and recover under the policy. Clause (b) did not impose a condition precedent to liability.

4. The construction was supported by the clause’s wording and structure. Clause (a) imposed a commercially important notification obligation but was not said to be a condition precedent. The deleted clause showed that the parties knew how to use that expression. A condition precedent therefore required clear language, which clause (b) lacked.

5. The Apportionment of Costs provision separately required the reinsurers’ consent for recovery of legal costs. A settlement could bind the reinsurers even without their consent, but the reinsured might then lose recovery of costs incurred in making it. Any estoppel issue concerning reliance on absence of consent was left for later determination.

The parties were directed to draw up an order reflecting the judgment.