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Insurance Law INSURANCE LAW. LEE KIAT SENG LLB (NUS), LLM (Lond), Advocate & Solicitor (Singapore)

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15. INSURANCE LAW

LEE KIAT SENG

LLB (NUS), LLM (Lond), Advocate & Solicitor (Singapore)

Rights of insurers under the Third Party (Rights Against Insurers) Act 15.1 The first significant case which was reported in 2002 was the Court of Appeal decision in Hartford Insurance Co (Singapore) Ltd v Chiu Teng Construction Pte Ltd [2002] 1 SLR 278. The Court of Appeal comprised Yong Pung How CJ, Chao Hick Tin JA and L P Thean JA.

Facts

15.2 The respondents, Chiu Teng, were the main contractors of a housing development estate. In 1996, Brentford Construction, whilst carrying out construction work at an adjacent worksite, caused some damage to property on the respondents’ estate which were subsequently rectified by Chiu Teng. Chiu Teng then sought to recover the cost of the rectification works from Brentford. In April 1998, Brentford was wound up and the Official Receiver was appointed as liquidator. Chiu Teng obtained leave of court to commence proceedings against Brentford. In May 1999, Chiu Teng obtained an interlocutory judgment with the consent of the Official Receiver.

15.3 An assessment of damages was conducted and judgment for the sum of $466,600.08 was granted to Chiu Teng in May 2000. Hartford were the insurers of Brentford under an ‘all risk’ policy under which the agreement was for an indemnity against ‘such sums which Brentford shall become legally liable to pay as damages’ consequent upon accidental loss or damage to property belonging to third parties occurring in direct connection with the construction works carried out by Brentford. Hartford had been informed of Chiu Teng’s action but declined to get involved in the case on the basis that it was not liable under the policy in question.

15.4 With this judgment in hand, Chiu Teng proceeded to commence an action against Hartford, in reliance on s 1(1) of the Third Parties (Rights Against Insurers) Act (Cap 395, 1994 Ed) (‘the Act’), in order to procure payment of the judgment sum.

15.5 In the High Court (Suit 603/2000, unreported judgment dated 30.5.2001), two main lines of arguments were relied upon by Hartford in defence to the action. The first, which related to policy arguments, was dismissed by the court as being of no merit. The second line was interesting. The argument was made that the judgment sum obtained by Chiu Teng

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against Brentford was not binding on Hartford and in order to succeed in the recovery, Chiu Teng would have to prove the quantum of the loss in the current action. Although no objection was raised in respect of Brentford’s liability, the reasonableness of Chiu Teng’s claim was challenged.

15.6 This second line of defence did not find favour with the trial judge either. It was held by the High Court that the extent of liability or the quantum of the judgment obtained by Chiu Teng was binding and conclusive against Hartford. Since Chiu Teng stepped into the shoes of Brentford, in light of the winding up of Brentford, and by virtue of s 1(1) of the Act, the former was entitled to be indemnified by Hartford to the full extent of the judgment debt, in the same manner and extent as Brentford was entitled to be indemnified under the insurance policy. Hartford appealed against the trial judge’s ruling that Hartford was estopped from challenging Chiu Teng’s earlier judgment against Brentford.

Decision of the Court of Appeal

15.7 The Court of Appeal was not amenable to Hartford’s arguments either. It held that it was not open to Hartford, who had been notified of the underlying action, to now re-open the issue of quantum of loss since judgment had already been obtained on that. The Court of Appeal was not comfortable with the possibility of re-opening the issue of the extent of liability and quantum thereof, because to permit such a challenge would incur the risk of inconsistent judgments being made and the insured being indemnified less (or none at all) than what the policy provided. In any event, by virtue of s 1(1) of the Act, Chiu Teng stepped into the shoes of Brentford and should therefore be indemnified by Hartford.

15.8 To understand the reluctance of the Court of Appeal to accept Hartford’s line of argument, one has to understand the state of affairs in the absence of such a statutory provision. At common law, a third party has no direct right of recourse against a tortfeasor’s insurer in respect of any wrong which has been inflicted on him by the tortfeasor because of the doctrine of privity of contract. Such third party has no claim of any sort either at law or in equity against the insurer and he cannot direct the insured to pay over to him any sum of money which has been received by the insured under the insurance policy (see eg, King Lee Tee v Norwich Union Fire Insurance Society Ltd (1933) MLJ 187, where the plaintiff sought to rely on the English Third Parties (Rights against Insurers) Act 1930, which was applicable by virtue of s 5(1) of the Civil Law Ordinance No 111 of 1920. In view of the settlement between the parties and the failure of the plaintiff to comply with the conditions in the policy, any rights acquired under the English Act were defeated as the Act did not cover a settlement situation. In any event, at

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common law, the plaintiff had no right to sue the tortfeasor’s insurers. It was rightly pointed out by Whitley J that ‘[i]t is clear that the person injured is not a party or privy to the contract of insurance and that neither at common law nor in equity has he any rights against the insurers.’

15.9 Happily, the common law position has been altered and the position of third parties has been improved by the Third Parties (Rights Against Insurers) Act (Cap 395) and the Motor Vehicles (Third-Party Risks and Compensation) Act (Cap 189). Further considerations have to be taken into account where the insured is bankrupt or is making a composition or arrangement with his creditors. Before the introduction of compulsory motor insurance, an injured third party could not sue the insurer of the tortfeasor. In the event of the insured becoming bankrupt or insolvent, the indemnity under the insured’s policy would be paid to the liquidator and become available to all other creditors of the policyholder.

15.10 Not only did an injured third party not have any right to the indemnity payable under the tortfeasor’s insurance policy because the third party was a stranger to the contract of insurance, there was also nothing in law to prevent the insurer from paying the indemnity under the policy to the insured or the liquidator. Under such circumstances, additional protection is required for the third party. In Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363, Lord Denning MR explained the need for statutory provisions to transfer and vest the insured’s rights against his insurer in the third party in the event of the insured’s bankruptcy in the following terms (at 373):

‘In the days before the [Third Parties (Rights against Insurers)] Act of 1930, when an injured person got judgment against a wrongdoer who was insured, and the wrongdoer then went bankrupt, the insured person had no direct claim against the insurance moneys. He could only prove in the bankruptcy. The insurance moneys went into the pool for the benefit of the general body of creditors: see Inre Harrington Motor Co Ltd ex parte Chaplin [[1928] 1 Ch 105], applied in Hood’s Trustees v Southern Union General Insurance Co of Australasia [[1928] 1 Ch 793]. That was so obviously unjust that Parliament intervened.’

15.11 Hence, it can be seen that to allow the arguments of Hartford to succeed would be to risk defeating the legislative intent behind such statutory changes to what was perceived to be the unsatisfactory legal position of the unfortunate third party victim of an insolvent tortfeasor.

15.12 A collateral argument was made by Hartford that the implications of the decision of the trial judge were increased costs to insurers and consequently increased costs to insured parties. It was argued that the decision of the High Court, if allowed to stand, would in effect require an insurer to engage itself in legal proceedings even before it could be established

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that the insurer was liable to indemnify the insured in respect of the losses allegedly caused by the insured to a third party. Such a decision would clearly be erroneous and unnecessary costs would eventually be passed on to insured persons in terms of higher premiums payable.

15.13 The Court of Appeal was persuaded by, and followed, the following statement of Lord Carloway in Cheltenham & Gloucester plc v Royal & Sun Alliance Insurance Co plc2001 SLT 347 at [9] and [10]:

‘Where the insurer, on the other hand, forms the view that he is not liable to indemnify his insured, then he still has at least two options. The first is to refuse or withdraw cover in respect of any defence to the pursuer’s action. In that event, if the pursuer proceeds with his action and secures decree against the person thought to be insured, the amount of the decree will be determinative of the liability of the insured to the pursuer unless and until that decree is reduced on the grounds of, for example, fraud or collusion. The insurer cannot normally reopen the question of the amount of the liability in circumstances where he has declined to enter the process and fund the defence to the action or has withdrawn his instructions and funding in the course of the action. The question of liability between the pursuer and the insured has to be litigated in an action between those two parties and a decree in that action has to be seen as a final determination of that liability so long as the decree stands unreduced.

The second option is for the insurer to offer to instruct the defence to the action but make it clear ab ante, or at least as soon as possible, both to the pursuer and the insured, that his position is to remain that he is not liable under the policy.’

15.14 The collateral argument hardly found any empathy from the members of the Court of Appeal. As far as it was concerned, the insurer had a choice. If it takes the risk of not intervening, it cannot later be heard to complain if judgment is obtained against the insured – it would simply have to indemnify the insured if there are no contractual defences based on the policy itself.

15.15 The Court of Appeal was not impressed with the concern raised by Hartford that its decision could lead to an escalation in premiums. The court noted that to begin with, this was not even a legal argument. Further, most policies invariably contain terms under which the insurer reserves the right to conduct the defence of the insured and, in fact, such a term existed in the policy issued by Hartford to Brentford. This, one assumes, although it is not expressly articulated by the court, would take the wind out of any argument based on debilitating additional costs as a result of undertaking the defence of actions against insureds. Finally, in a free economy and in light of open competition, the market will ultimately dictate acceptable levels for premiums, and presumably, therefore, Hartford’s claims of escalating

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premiums threatening the affordability of insurance covers remain just that – mere claims.

15.16 In the ultimate analysis, the decision of the Court of Appeal has to be right. To allow the argument of Hartford to succeed would be to turn the policy behind the Act on its head. The Act is not perfect by any means. There have been suggestions that it could be simpler for the victims of insolvent tortfeasors to directly sue the insurers of such tortfeasors rather than to first establish liability of the tortfeasor (see the arguments before the English Court of Appeal in Post Office v Norwich Union Fire Insurance Society). Much as there is attractiveness and indeed logic in such arguments, the Act must be adhered to. If any amendment is to be made to the statutory framework, it has to be made by the Legislature.

15.17 What is clear from this case is that a clear message has been sent to all insurers – if they neglect to be involved in litigation, they do so at their own peril. Insurers can expect to find no sympathy from the courts if they should later be dissatisfied with the extent or quantum of liability established under the judgment rendered in respect of the action between the insolvent insured and a third party.

Commutation agreements and retrocessionaires

15.18 The difficulties faced by Overseas Union Insurance Ltd (‘OUI’) in attempting to get out of the reinsurance market and its attempts to run off its Excess of Loss (‘XOL’) reinsurance business is well documented in the past couple of years. The case of Overseas Union Insurance Ltd v Home and Overseas Insurance Co Ltd (No 2) [2002] 4 SLR 104 evidences the legal pitfalls faced by a reinsurer when it enters into commutation agreements in respect of its liabilities under the reinsurance agreements it has entered into. One can perhaps say that the lesson to be learned from the case is that when one is faced with a back-to-back contractual situation, one should always bear in mind that what one manages to negotiate and agree with one side of the equation may not be binding on the other parties down the line.

Facts

15.19 Between 1980 and 1984, the plaintiff, OUI, entered into various insurance and/or reinsurance contracts with CJ Warrilow (‘CJW’) Syndicate No 553, amongst which was NM 8100270 for Excess of Loss (‘XOL’) Reinsurance in respect of a so-called ‘Casualty Account’ (‘the XOL contract’). OUI in turn reinsured this liability with the defendant, Home and Overseas Insurance Co Ltd (‘Home’), an insurance company incorporated in the United Kingdom (‘the retrocession contract’).

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15.20 OUI’s venture into the reinsurance market was less than successful and from 1984, OUI began to run off its loss-making XOL reinsurance business. In December 1995, OUI successfully negotiated and entered into a commutation agreement with CJW to commute reinsurance claims under ten contracts between them. OUI would pay CJW USD625,650 in return for which it would be released from all claims by CJW. Consequent to this agreement and its payment thereunder, OUI sought payment of USD74,773 under its retrocession agreement with Home. The USD74,773 was derived purely from a mathematical formula of apportionment used by OUI.

15.21 Home disclaimed liability on two main bases. Firstly, the sum claimed was in respect of loss for which liability had yet to attach and crystallise, and hence Home was not liable to indemnify OUI for its purported share of the commutation sum as it did not come within the contractual agreements between the parties. Secondly, Home pointed out that it did not participate in the commutation negotiations and hence could not be bound or prejudiced by the conclusions of any settlement thereunder. The claim was dismissed by the district court, whereupon OUI appealed to the High Court.

Decision of the High Court

15.22 The first fundamental flaw in OUI’s case was that it sought to rely on art XVIII of the XOL contract (which suggested that once notice of loss was given, the retrocessionaire would be bound by any settlements entered into by OUI), which turned out not to have been pleaded by OUI. Even if that fatal flaw in its case could be overcome, OUI sought to redefine its contractual relationship with Home through an incorporation by reference in the reinsurance slip. However, as was quite rightly pointed out by the High Court, it must be trite law that one could not incorporate into a contract, even if it is by reference, a term which was not in existence at the time of first concluding the contract. Another basic flaw in that line of reasoning was that the reinsurance slip had since been replaced by a policy of reinsurance, and so had been superseded. The High Court pointed out that OUI could not have its cake and eat it – when Home had attempted to stay the action in favour of arbitration based on another term in the XOL contract, OUI had taken the stand that the article in question was inapplicable. The court further expressed frustration that OUI, despite seeking to rely on the XOL contract, consistently failed to produce the original of the same despite repeated requests in the discovery process.

APPLICABILITY OF ARTICLE XVIII TO COMMUTATION AGREEMENTS

15.23 The High Court took the view that even if art XVIII could be relied upon, it would still not assist OUI in its case as this article would not bind

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Home to the commutation agreement. Woo Bi Li JC (as he then was) opined that if a reinsurer had wished to bind the retrocessionaire to a commutation agreement, this possible scenario should in the first place have been contemplated and provided for in the retrocessionaire contract. Additionally, Home was not invited to participate in nor was it in any way involved in the negotiations for the agreement. Consequently, OUI could not unilaterally impose the agreement on Home.

15.24 OUI sought to rely on the first sentence of art XVIII:

‘NOTICE OF LOSS CLAUSE

All loss settlements made by the Reinsured, including compromise settlements, shall be unconditionally binding upon Reinsurers provided such settlement [sic] are within the conditions of the original policies and/or contracts (other than as provided for in Article V hereof) and within the terms of this reinsurance, and amounts falling to the share of the Reinsurers shall be payable by them upon reasonable evidence of the amount paid being given by the Reinsured.

In the event of a claim arising hereunder notice shall be given to the Reinsurers through Butcher, Robinson and Staples Limited, London House, 6 London Street, London EC3R 7LQ, as soon as practicable, and all papers in connection therewith shall be at the command of the Reinsurers on this reinsurance or parties designated by them for inspection.’ [emphasis added]

15.25 The court took the view that regardless of how ‘loss settlements’ would be interpreted, ‘compromise agreements’ were also in the nature of loss settlements. The issue was simply whether the nature of the term ‘loss settlements’ was sufficiently broad to encompass the commutation agreement. The term, in its nature, tends to suggest that there is a crystallised loss, which is then settled either by way of court order, arbitration award or through a compromise. A commutation agreement is premised upon something else – it is not premised upon there being a loss in existence. The reason for such an agreement is to enable a reinsurer to run off its business and terminate the contract of reinsurance.

15.26 The court has to be right in that unlike the settlement of a claim or loss, commutation agreements necessarily deal with uncertainties and with liability which may not have accrued. The agreement deals not with crystallised claims but with contingent liability which both parties are seeking to estimate on an actuarial basis. In any event, the obligation of a retrocessionaire, not unlike that of an insurer or reinsurer, is to indemnify for a loss which has occurred rather than to pay out on the settlement of anticipated losses in the future. Be that as it may, OUI in its negotiations to commute these contracts may be motivated not so much by bona fide claims alone but also by its desire to terminate these contracts. As such, it would be

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outside of the contemplated bargain of a retrocessionaire to undertake to cover OUI in such a situation.

‘FOLLOW SETTLEMENTS’ CLAUSES

15.27 The next issue was: if art XVIII applied, once a settlement was established by OUI, did OUI have to prove in addition that the settlement was within the conditions of the original policies as well as being within the terms of the reinsurance or retrocession agreement? OUI contended that all it had to do was to prove that there was a settlement within the terms of the provision; and the burden then shifted to Home to prove that these two conditions were not satisfied. Home submitted that the provision effectively required OUI to prove all three elements in order to recover under its agreement with Home.

15.28 The High Court found the interpretation placed by Lord Mustill on a similar clause in Hill v Mercantile and General Reinsurance Co plc [1996] 3 All ER 865 particularly instructive. The ‘follow settlements’ clause in that case stated:

‘All loss settlements by the Reassured including compromise settlements and the establishment of funds for the settlement of losses shall be binding upon the Reinsurers, providing such settlements are within the terms and conditions of the original policies and/or contracts ... and within the terms and conditions of this Reinsurance.’

Lord Mustill proceeded (at 874) to analyse the clause thus:

‘It is convenient once more to give the terms of the follow settlements clause, on this occasion dividing it into lettered paragraphs:

“[a] All loss settlements by the Reassured including compromise settlements and the establishment of funds for the settlement of losses shall be binding upon the Reinsurers,

[b] providing such settlements are within the terms and conditions of the original policies and/or contracts

[c] and within the terms and conditions of this Reinsurance.”’

15.29 The conclusion of the High Court was that the second part in the first paragraph of art XVIII could not be blithely ignored by OUI. If this article was applicable to the retrocession contract mutatis mutandis, it would require OUI to establish that the claim of the original insured was within the original insurance policy and within the terms of the XOL contract and the retrocession contract. As OUI never attempted to so prove, it would also have failed in its claim under this provision even if it had successfully argued that this provision did in fact apply to the commutation agreement.

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15.30 Although the consideration of the court in respect of the rationale for and the grounds upon which settlements could be challenged were strictly dicta, the observations are nonetheless helpful. The court referred to the comments of Mortimer J, of the Hong Kong court of first instance, in Insurance Co of the State of Pennsylvania v Grand Union Insurance Co [1990] 1 Lloyd’s Rep 208 at 210 as to the commercial reasons for having such a clause:

‘The aims of such conditions are these. (1) To avoid the expense of multiple claims enquiries by different insurers and reinsurers in the chain. (2) To simplify and hasten the claims procedures. (3) To reduce or avoid the possibility of disputes arising between reinsurers in the chain, and (4) to have an immediate flow of funds through the chain when a claim is agreed to be settled.’

The High Court seemed to accept, although in the end it was not necessary for the decision in the case before it, that such settlements, etc could be challenged by the party sought to be bound by the ‘follow settlements’ clause on the basis that such settlements were made without good faith or without taking all the proper and business-like steps to have the amount of loss carefully and fairly ascertained.

15.31 This case is rather unusual for the number of grounds relied upon by OUI in its claim. It is, however, instructive for the court’s analysis of the ‘follow settlements’ clause. It is clear that any insurer or reinsurer seeking to make its reinsurer or retrocessionaire liable under a ‘follow settlements’ clause may either face the defence that the loss does not fall within the underlying policy or the contract between the immediate parties; or the challenge that such settlement may not have been entered in good faith or with proper care. The first defence is usually apparent on the face of the policy. It is just as well that the second, which is implied to be incumbent upon the party seeking to rely on the ‘follow settlements’ clause, is enunciated and elaborated upon by the High Court, as it is not a duty apparent on the face of the contract.

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