Eagle Star Insurance Company Ltd. v Cresswell & Ors

In a reinsurance policy, a claims-control clause stating that reinsurers shall control negotiations and settlements, and will not be liable for a claim not so controlled, may operate as a clear exclusion of liability even without the words condition precedent. The initial notice of claim does not create a once-and-for-all election, and no separate duty to notify each negotiation or proposed settlement is implied. “In this event” refers to negotiations or settlement occurring. A no-settlement-without-consent term can qualify a printed follow-the-settlements clause, but failure to obtain consent does not itself extinguish the underlying right to indemnity. Waiver, estoppel and issues concerning the reinsurers’ conduct may remain open.

Eagle Star had reinsured liabilities under policies issued by Lloyd’s and company reinsurers. The policies contained printed follow-the-settlements wording, typed provisions requiring consent to settlements above the primary limits, and a modified claims-control clause. Varian, the original assured, brought proceedings against Eagle Star in California. The proceedings were compromised in 1995, with Eagle Star paying US$1 million. The reinsurers did not control the negotiations or settlement.

Morison J, determining preliminary issues in the Commercial Court, answered issue 3 No and issue 4 Yes. The reinsurers appealed. The central questions were whether sub-paragraph (b) excluded liability or operated as a condition precedent, and whether the follow-the-settlements obligation survived despite the absence of reinsurers’ consent or control.

The Court of Appeal unanimously allowed the appeal. The answers to the preliminary issues were set aside and required qualification in the light of the parties’ remaining pleadings.

1. Construction of the claims-control clause. The words “shall control” allocated a controlling role to the reinsurers. They did not create a once-and-for-all option triggered by the initial notice under sub-paragraph (a). Nor was there an implied obligation on Eagle Star to notify the reinsurers separately of negotiations or proposed settlement terms.
2. Exclusion of liability. “In this event” referred to negotiations or settlement taking place, not to the reinsurers’ exercise of an option. The words providing that the reinsurers would not be liable to pay a claim not controlled by them were sufficiently clear to exclude liability. The express words “condition precedent” were unnecessary. “Negotiations and settlement” were disjunctive, so failure to control either could engage the exclusion. Longmore LJ described the provision as a condition precedent; Rix LJ analysed it as an exclusion of liability, subject to possible excusing circumstances.
3. Consent and follow the settlements. The typed no-settlement-without-consent provision applied generally to settlements exceeding the primary limits or deductible, rather than only to legal costs. It qualified inconsistent printed wording. The attached reinsurance clause did not wholly remove the printed follow-the-settlements obligation; the clauses were to be read together. However, the reinsurers were not bound to follow a settlement to which they had not consented, or whose negotiation or agreement they had not controlled.
4. Limits of the preliminary decision. Failure to obtain consent under the consent clause was not itself a condition precedent to ultimate liability. The underlying claim could still be proved independently. The broader claims-control exclusion remained subject to matters such as waiver, estoppel, and whether the reinsurers had acted reasonably and in a timely manner. Those matters were not determined on the agreed facts.

1. Court of Appeal (Civil Division): in [2004] EWCA Civ 602, unanimously allowed the appeal and set aside the answers to preliminary issues 3 and 4, subject to qualified formal answers.
2. Queen’s Bench Division (Commercial Court): Morison J answered issue 3 No and issue 4 Yes on 10 October 2003 and struck out relevant parts of the reinsurers’ defence.