GE Reinsurance Corporation & Ors v New Hampshire Insurance Company & Anor

A contractual term in an insurance or reinsurance slip must ordinarily be construed according to the words used, read in their commercial context. The expectation that insurance and reinsurance will be back-to-back does not justify rewriting an express term or implying an inconsistent term. A term requiring the maintenance of a key employee’s employment may be a warranty where it is fundamental to the insured risk and damages would provide an inadequate remedy. A retention clause must express any obligation to retain risk with sufficient clarity; ambiguous wording will not be construed as imposing a substantial retention obligation.

The claimants were reinsurers of insurance written by New Hampshire in respect of financing provided through notes issued for a film distribution and production venture. The venture became insolvent, and the reinsurers sought declarations that they were not liable under the reinsurance contracts.

Two issues arose. First, whether the slip wording requiring the employment contract of the chief executive, Steven Stabler, to be maintained for the policy period was a term of the reinsurance and a warranty. Secondly, whether the wording that the ceding company retained 20% of the risk, “with Reinsurance”, required New Hampshire to retain that proportion for its own account. A further issue concerned contributory negligence in New Hampshire’s claim against its broker, Willis.

1. Stabler wording. The reinsurance contract was contained in the reinsurance slip. The wording requiring Stabler’s employment contract to be maintained for the policy period was expressed as one of the conditions of the reinsurance. The references to the insurance policy and operating agreement, the parties’ expectation of back-to-back cover, and reinsurers’ approval of related documents did not delete, vary or supersede that express term.
2. The court applied the ordinary principles of contractual construction stated in I.C.S. Ltd v West Bromwich B.S. (H.L.) [1998] 1 WLR 896. The words required Stabler’s employment as chief executive to continue throughout the policy period. The term was a warranty. It was fundamental to the risk, materially bore on the possibility of loss, and damages would be an inadequate remedy because the effect of Stabler’s departure on repayment prospects could not reliably be assessed.
3. Retention provision. The words “Ceding Company retains 20% (with Reinsurance)” were ambiguous. In the commercial context, a strict obligation to retain 20% of the risk would have required clearer wording. The clause was construed as recording that New Hampshire insured the relevant line, with 40% of it reinsured under the slip, rather than prohibiting further reinsurance of the 20% line.
4. Because the Stabler warranty was broken, the reinsurers were discharged from liability. The retention issue therefore did not affect the result. Had it arisen, the applicable LIRMA wording would have made the retention provision a warranty producing proportionate reduction rather than avoidance.
5. New Hampshire was entitled to recover damages from Willis without reduction for contributory negligence. In this novel transaction Willis bore the responsibility for obtaining and explaining appropriate back-to-back cover. New Hampshire had not received the reinsurance terms in time to identify the discrepancy, and the circumstances did not fairly justify attributing fault to it.

First-instance decision of the High Court (Commercial Court). The court directed that the parties be heard on the form of the orders, costs and ancillary matters.