Royal & Sun Alliance Insurance Plc v Dornoch Ltd & Ors

A claims control clause in a reinsurance contract referring to knowledge of a loss which may give rise to a claim may refer to the actual loss of third-party claimants against the original insured. It need not refer only to the subsequently ascertained loss of the original insured or the reinsured. The notification obligation arises only where three conditions are met: an actual loss exists, the loss may give rise to a claim under the reinsurance, and the reinsured has actual knowledge of it. Whether those conditions are satisfied is an objective question of fact. Allegations in pleadings do not necessarily establish actual knowledge of actual loss where the facts necessary to establish the loss remain disputed.

Royal & Sun Alliance Insurance Plc reinsured its participation in Coca Cola’s directors’ and officers’ liability insurance with Lloyd’s syndicates. The reinsurance contained a claims control clause making notification within 72 hours of knowledge of a loss which might give rise to a claim a condition precedent to liability.

Two United States class actions alleged that Coca Cola’s directors and officers had caused investors to buy shares at artificially inflated prices. RSA received the complaints on 30 December 2000 and notified the reinsurers on 19 January 2001. The central questions were whose loss the clause covered and whether RSA then had actual knowledge of an actual loss.

1. The claim was determined in RSA’s favour. RSA was not in breach of the condition precedent, because it was not obliged to notify the reinsurers before 19 January 2001.

2. The claims control clause was construed in its contractual and commercial context. The words “loss or losses” referred to actual losses suffered by third-party claimants against Coca Cola and its directors and officers. Those losses could ultimately give rise to claims against the original insured, under the original insurance, and then under the reinsurance.

3. The clause did not adopt the definitions of “Loss” in the master subscription policy for the purpose of construing its own express wording. Nor did the contra proferentem rule resolve the issue. Standard claims control clauses should receive a uniform construction, whoever proposed them.

4. The notification obligation required three conditions: an actual loss; a loss which might give rise to a claim under the reinsurance; and the reinsured’s actual knowledge of that actual loss. Knowledge was to be assessed objectively, but it had to be actual knowledge rather than constructive knowledge.

5. RSA’s receipt of the complaints did not establish actual knowledge of actual loss. The alleged loss depended on disputed matters, including whether Coca Cola’s financial position had been misstated, whether the directors and officers had caused that state of affairs, and whether the share price would otherwise have been lower. Those matters remained unproved and therefore the complaints established alleged loss only.

6. The court recognised that the three conditions might be satisfied at different points in the chronology, including after proof, admission or settlement. The precise point was fact-sensitive. Any declarations were to be considered after the judgment.