AIG Europe (Ireland) Ltd v Faraday Capital Ltd

A claims co-operation clause requiring notification of a loss or losses refers to an actual loss suffered by third-party claimants, not an alleged, potential or claimed loss. In a liability reinsurance context, a loss is established when it becomes a proved and quantifiable fact, which may occur before judgment but requires more than a fall in share price, a reserve or an assessment of potential exposure. A court should give effect to the language agreed and should not rewrite a commercially mismatched clause. Where the clause states that notification must occur as soon as reasonably practicable and in any event within 30 days, the wording does not create two separate conditions precedent. A failure to notify unclaimed defence costs does not discharge liability for a separate notified loss.

AIG insured Smartforce under a directors’ and officers’ policy and obtained layered liability reinsurance from Faraday and others. Following a merger, Smartforce restated earlier financial statements and shareholder class actions were brought in the United States. The actions settled for US$30.5 million, after which AIG paid the underlying policy limit and sought reinsurance.

Faraday denied liability, arguing that AIG had notified the loss late, that the clause required notification of circumstances or potential losses, and that defence costs and claimant costs had not been notified. The central issues were the construction of the notification clause, the point at which AIG had knowledge of an actual loss, and the effect of the settlement.

1. Construction of the clause. The words loss or losses meant the actual loss of the shareholders who claimed against Smartforce, attributable to acts or defaults covered by the underlying policy. They did not mean an alleged, claimed or potential loss. The court followed Royal & Sun Alliance Plc v Dornoch [2005] 1 Lloyd’s Law Reports IR 544, even though the wording was not identical. Commercial mismatch between the underlying policy and the reinsurance did not justify rewriting the bargain.
2. Knowledge of loss. AIG did not have the requisite knowledge merely because the share price fell, the accounts were restated, reserves were posted, proceedings were issued or settlement negotiations began. The relevant loss required proof that the shares had been bought at an artificially inflated value because of the insureds’ defaults. On the evidence, that became an actual quantifiable loss, at the earliest, when the settlement memorandum was agreed on 23 March 2004.
3. Notification. Formal notification on 19 April 2004 was within 30 days. The words and in any event did not create a separate and uncertain condition requiring notification at some earlier point whenever it might reasonably have been practicable. In any event, notification was given as soon as reasonably practicable after the settlement information became available.
4. Costs. Claimants’ costs incurred in proving their claims were not the insured loss contemplated by the clause. Defence costs were also outside the relevant loss and, in any event, had not been paid or claimed by AIG under the reinsurance.
5. Settlement allocation. The reasoning in Lumbermen’s Mutual Casualty Co v Bovis Lend Lease [2005] 1 Lloyd’s Law Reports 494 was unsound and should not be followed. In a follow-the-settlements reinsurance case, insured losses could be established by evidence, without a preconceived exclusion of extrinsic evidence. The settlement here concerned insured liability exceeding the policy limits and was binding on Faraday.
6. The claim was well founded. Judgment was entered for AIG.