Dornoch Ltd. & Ors v The Mauritius Union Assurance Company Ltd. & Anor (No. 2)

An excess reinsurance policy covering physical loss or damage under premises and transit clauses does not cover monetary defalcations from bank accounts caused by deception. An extension for employee infidelity, subject to a 72-hour discovery period, extends the physical-loss cover to limited employee complicity; it does not create freestanding infidelity cover or remove the requirement for physical loss or damage. The 72-hour condition excludes systemic losses accumulated over a lengthy period and discovered only later. Where cover is subject to a deductible for each loss, separate transfers made on separate occasions generally constitute separate losses, rather than one aggregate loss.

The claimant reinsurers sought declarations that they were not liable to the first defendant under excess reinsurance covering premises and transit risks. The underlying insured, the second defendant, claimed in Mauritius for losses allegedly caused by an employee’s unauthorised transfers over approximately 11 years. The preliminary issues concerned whether the losses fell within physical loss or damage cover, whether they were discovered within the 72-hour period, and whether they exceeded the applicable deductible. The court also considered the effect of the reinsurance’s incorporation of the primary policy terms and the commercial context of the Specie market.

1. Scope of cover. The Excess Reinsurance covered only insuring clauses 2, premises, and 3, transit, of the BRS 98 form. The alleged diversion of funds from bank accounts through deception was not physical loss or damage. It might in principle fall within clause 1, employee infidelity, but that clause was not included in the Excess Reinsurance. The general infidelity extension did not alter that fundamental limitation.
2. 72-hour condition. The 72-hour wording was a London market extension to physical loss or damage cover for limited employee complicity. Its commercial purpose was to exclude cumulative losses arising from systemic infidelity which remained undiscovered for a lengthy period. It was not merely a notice requirement under which longstanding losses became covered if notified within 72 hours of discovery. None of the alleged losses was discovered within 72 hours of occurrence.
3. Deductible. The applicable threshold was MRS 50,500,000 for each loss. Each transfer or procurement of a transfer was a separate conscious act, occurring on different dates and involving different accounts or counterparties. Each therefore constituted a separate loss capable of a separate claim. The analysis in Glencore International v Alpina Insurance Co Ltd [2004] 1 Lloyd’s Rep 111 was applied, with support from Philadelphia National Bank v Price (1938) 60 Ll L Rep 257.
4. Disposition. The claimants had no liability under the Excess Reinsurance for the facts and matters relied upon in the Mauritian proceedings, without prejudice to their separate non-disclosure and misrepresentation case.

The judgment records that Aikens J dismissed the defendants’ jurisdictional challenges: [2006] Lloyd’s Rep IR 127. The Court of Appeal dismissed the resulting appeals: [2006] EWCA Civ 389; [2006] 2 Lloyd’s Rep 475. Those decisions concerned jurisdiction and choice of law, not the merits determined in this judgment.