Neutral Citation Number: [2004] EWHC 1086 (Comm)

Case No: 2002 folio 1059
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Wednesday 12th May 2004    

Before :

THE HONOURABLE MR JUSTICE MORISON 
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Between :

	(1) Goshawk Syndicate Management Limited
(2) SVB Syndicate Limited
(3) Goshawk Dedicated (No.2) Limited
(4) SVB Underwriting Limited	Claimants	
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	 XL Speciality Insurance Company    	Defendant	

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Mr A. Schaff QC & Mr P. MacDonald Eggers (instructed by Barlow Lyde & Gilbert) for the Claimants
Mr M. Howard QC & Mr T. Howe (instructed by Eversheds) for the Defendant

Hearing date: Friday 7th May 2004    
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Judgment

Mr Justice Morison : 
1.	This is an application by the Claimants for summary judgment.   The Claimants are the Reinsurers of the Defendant insurance company.  The Defendants insured a company called The Limited, a well-known American retailer of clothes and other goods, which has a large number of stores throughout that country.   The terms of the reinsurance contract, for the period of 12 months from 1 July 2001, are contained in a slip policy on the MAR 91 form.   It was a renewal.   Four or five of the Assured’s stores, together with their contents, were destroyed as a result of the collapse, due to terrorism, of the twin towers of the World Trade Centre on 11 September 2001.   The Insurers have paid the Assured’s claims.  The issue in the present proceedings is whether the Reinsurers are liable to indemnify them in relation to the destruction of the clothes and goods and fixtures and fittings.   The total sum involved is about US$10 millions.   The reinsurance contract did not respond to claims for property damage or business interruption; those risks were retained by the Insurers.     
2.	The Claimants issued proceedings in this jurisdiction: essentially for negative declaratory relief.   Their claim is based upon three principal allegations: misrepresentation, non-disclosure when the risk was broked to them and a discrete allegation that under the terms of the Slip Policy there was no liability.   This application relates to the third point.   In a nutshell, the Reinsurers contend that they were only liable under the Slip policy (assuming they were liable at all) after the Annual Aggregate Deductible of US$5 millions had been exhausted, and it had not been at the relevant time.   The Insurers say that this is not the proper interpretation of the contract.   Thus, there is a short, discrete point of construction which will determine the outcome of this application.   It is common ground between the parties that the summary judgment procedure is an appropriate method for the determination of this issue.   No doubt its resolution will assist the parties in resolving their dispute, perhaps without the need for a trial.

3.	I start with the parties’ formal position on the pleadings.

The Claimants plead:

“30.	On the true construction of the Reinsurance Contract, in particular the “SUM INSURED” provision, the Third and Fourth Claimants are not liable to indemnify the Defendant unless and until:

(1)	the Annual Aggregate Deductible of US$5,000,000 has been exhausted; and

(2)	the Individual Maintenance Deductibles applicable under the Original Policy in respect of the particular loss or occurrence have been exhausted.

31.	If (which is not admitted) The Limited Inc sustained a loss by reason of the attack on the World Trade Center on 11th September 2001, the Annual Aggregate Deductible of US$5,000,000 had not then been exhausted.

32.	In the premises, and without prejudice to all defences available to
the Claimants under and/or in respect of the Reinsurance Contract, the 
Third and Fourth Claimants are not liable to indemnify the Defendant under the Reinsurance Contract in respect of the Reinsurance Claim.”

4.	In response the Defendants say:

“41.	As to paragraphs 29 and 30:

41.1  it is in the premises admitted and averred that the Reinsurers are 
not entitled to avoid the 2001 Reinsurance Contract;

41.2  it is denied that the Reinsurers are not liable to indemnify XL 
under the 2001 Reinsurance Contract in respect of its Reinsurance Claim, 
for the reasons alleged in paragraph 30 or otherwise:

41.3 the construction of the 2001 Reinsurance Contract alleged in 
paragraph 30 is denied;

41.4  on the true construction of the 2001 Reinsurance Contract, in the 
event of a claim on the 2001 Original Insurance which contributes to the 
erosion of the AAD (of US$5 million) and;

41.4.1	which does not exhaust the AAD, then the Reinsurers are liable to indemnify XL in respect of the amount by which such claims exceeds US$1 million (subject to the individual maintenance deductibles applicable prior to the exhaustion of the AAD to the particular loss or occurrence), up to the limit of the 2001 Reinsurance Contract (US$20 million), and the AAD is eroded by the amount of that claim, subject to a maximum erosion of US$1 million, in respect of any single loss;

41.4.2	which exhausts the AAD, then the Reinsurers are liable to indemnify XL in respect of the amount by which such claim exceeds the unexhausted balance of the AAD prior to that claim (subject to the individual maintenance deductibles applicable upon exhaustion of the AAD to the particular loss or occurrence), up to the said limit of the 2001 Reinsurance Contract;

41.4.3	which applies after the exhaustion of the AAD, then the Reinsurers are liable to indemnify XL in respect of the whole of such claim (subject to the individual maintenance deductibles applicable after exhaustion of the AAD to the particular loss or occurrence), up to the said limit of the 2001 Reinsurance Contract;

41.5	save as aforesaid paragraphs 29 and 30 are denied.”

5.	The relevant terms of the underlying policy are to be found at Clause numbered 5.    There is a dispute between the parties as to whether a “binder” was part of the Original Policy, as the Defendants say, or not.   For present purposes, the Claimants are prepared to accept that it is, but I think that the outcome of the construction issue is unaffected whichever way that point is eventually decided.   The underlying policy provided for Cover under three sections: global transit, real and personal property and Business Interruption and Extra Expense.   It was for a period of 12 months from 1 July 2001; the premium was US$1,200,000 and the limit of liability was US$20,000,000 any one occurrence.
6.	Clause 5 provides as follows:
A. Annual Aggregate Retention: This Policy shall be subject to an Annual Aggregate Retention of US$5,000,000 for all cargo losses and occurrences resulting in covered losses under this Policy. Only occurrences resulting in paid losses equal to or greater than $25,000 for Property, Business Interruption and Extra Expense, and $2,500 for cargo losses shall be counted towards the accumulation of the Annual Aggregate Retention. Any paid loss which does not meet the applicable threshold shall not contribute to the Annual Aggregate Retention. Any paid loss which is equal to or greater than the applicable threshold shall contribute in full to the Annual Aggregate Retention. The maximum amount applied to the Annual Aggregate Retention shall be no greater than US$1,000,000 any one occurrence or cargo loss. Any one occurrence or cargo loss in excess this $1,000,000 to be paid by the Company.
The Assured shall be responsible for all loss amounts up to the amount of the above Annual Aggregate Retention for any one policy year. All such losses paid by the Assured shall be reported to the Company at the end of each calendar quarter.
All loss amounts in excess of the Annual Aggregate Retention shall be paid by the Company subject to the application of the Individual Maintenance Deductibles as set forth below.
Notwithstanding that the Company may pay covered losses directly to third parties, to the extent any portion of said payments is subject to the Annual Aggregate Retention, the Assured agrees to indemnify the Company for any amount falling within the Annual Aggregate Retention within 30 days of payment by the Company.
In the event of an occurrence or cargo loss under this Policy triggering multiple Individual Maintenance Deductibles, only the largest Individual Maintenance Deductible triggered by said occurrence shall be applied to any and all covered losses arising out of that occurrence. 
Individual Maintenance Deductibles: Once the Annual Aggregate Retention has been exhausted, the following Individual Maintenance Deductibles shall apply to each and every occurrence or cargo loss.
Section I: Global Transits.
All claims under this section are subject to the following deductibles: US$2,500 per cargo loss except for claims at  Local Delivery Agents which are subject to a deductible of US$750 per carton or two cartons maximum per cargo loss.
Notwithstanding the foregoing, claims recoverable under the Institute Cargo clauses….shall be payable in full.
Section II. Property and Where Insured Physical Loss or Damage Causes Insured Business Interruption or Extra Expense under Section III.
All claims except California Earthquake under this section are subject to deductible of US$25,000 per store, per occurrence, subject to a $250,000 maximum per occurrence, per mall.
California Earthquake: Real property and personal property losses are subject to a deductible of 5% (five per cent) of the total insured value with a minimum deductible of US$250,000 per occurrence.
In the event of an occurrence or cargo loss under the Policy triggering multiple Individual Maintenance Deductibles, only the largest Individual Maintenance Deductible triggered by said occurrence shall be applied any and all covered losses arising out of that occurrence.
For the purpose of administering recoveries it is agreed that where the Assured assumes responsibility for payment of a claim under the above annual aggregate deductible then they shall be entitled to receive 100% of any recovery amount obtained from third parties for such claim regardless of whether the annual aggregate amount has been exhausted or not”. 

7.	It is common ground between the parties that there is no distinction between the word ‘deductible’ and ‘retention’.   Thus the underlying policy refers both to the annual aggregate deductible [AAD] and the annual aggregate retention.   
8.	The proper interpretation of the workings of clause 5 is not in dispute between the parties.   As a result of the last sentence of the first paragraph of clause 5A (“Any one occurrence or cargo loss in excess this $1,000,000 to be paid by [the Insurers]”) the Insurers were on risk in relation to big claims arising from, amongst other things, damage to the Assured’s goods even though the annual aggregate deductible had not been exhausted.   It is also common ground that Clause 5 provides a code which determines how the AAD is to be calculated.   There is what might be called a basic deductible or threshold below which the AAD will not be hit.   Above that threshold, paid losses will hit the AAD.   But, for the purpose of calculating the AAD, there is an upper limit of $1 million per occurrence, although that limit does not affect the Assured’s right to an indemnity for the excess of $1 million, even though the AAD has not been exhausted.   Once the AAD has been exceeded then claims will be met in full, subject to ‘maintenance deductibles’ set out in paragraph B of Clause 5.
9.	As for the reinsurance slip, its relevant provisions are these:

i.	Interest clause. “ALL AS PER ORIGINAL POLICY” but only in respect of the risks covered by the reinsurance.

ii.	Basis of Valuation Clause: “VALUED AS PER ORIGINAL POLICY”.

iii.	Sum Insured Clause: “USD 20,000,000 any one loss, disaster or casualty, and in the annual aggregate in respect of California earthquake. This policy to respond only for losses in excess of original annual aggregate deductible of USD5,000,000 and original underlying deductibles.”

iv.	Conditions clause: “ALL AS PER ORIGINAL XL INSURANCE COMPANY POLICY- the risk hereunder commencing and terminating exactly as under the original policy.”

v.	Claims clause: “(1) The Reassured shall control and settle all claims with binding effect on Reinsurers who will bear their proportionate part of the losses and expenses connected therewith according to the settlement of the Reassured.
(3) The Reinsurers shall in all respects follow the fortunes of the Reassured and pay as may be paid in connections with the original insurance including any expenses……”

vi.	Information clause. This contained a summary of the provisions of the original policy regarding limits of liability and deductibles:

“Original policy terms are:
LIMITS OF LIABILITY:
Original Policy Limits:
USD 20,000,000 (first loss where applicable)
Or equivalent in other currencies.
Deductibles: USD 5,000,000 annual aggregate
However, only individual claims equal to or greater than:
Stock-USD25,000 per occurrence
Cargo-USD 2,500 per occurrence
Shall contribute to this aggregate.
Additionally, maximum individual claim contribution to the aggregate retention shall be set with a USD 1,000,000 stop loss
Should the annual aggregate be exhausted the following deductibles per occurrence shall apply:

All claims except California Earthquake:
a)USD 25,000 per store, subject to a USD 250,000 maximum, per occurrence per mall

b) USD 100,000 all other locations
In the event an occurrence involves deductibles described in (a) and (b) above, a USD 250,000 maximum deductible per occurrence shall apply.

California earthquake:
“Stock Only” personal property losses are subject to a deductible of 5% of the total insured value with a minimum deductible of USD 250,000 per occurrence.”
10.	The premium for the reinsurance was US$725,000 for the year.
11.	I turn to the parties’ arguments.
12.	For the Claimants, Mr Schaff QC submitted:

(1)	There are two types of deductible under the policy: the AAD of US$5 millions and deductibles that arise after the AAD has been exhausted [the maintenance deductibles].   These latter deductibles vary in amount and are affected by whether the damage has been caused by a Californian Earthquake.   

(2)	It is common ground that at the date of the disaster, the AAD had not yet been exhausted.   Therefore, looking at the words of the second sentence of the Sum Insured clause in the slip policy, the policy did not respond to it.   The policy was to respond “only” for losses “in excess of” the AAD and thereafter only after the maintenance deductibles had been exceeded.   The word “and” in that sentence confirms this interpretation: the “underlying deductibles” are the maintenance deductibles which only ‘come into play’ [my words] after the AAD has been exceeded.    The underlying deductibles are not apt to include the threshold points, which are not properly called deductibles.   These words also do not cover the $1 million stop loss which is not a deductible.   If it were, then there would have been no need for a reference in the Sum Insured Clause to the AAD; it would have been sufficient simply to say “in excess of original underlying deductibles”.

(3)	The Insurers’ argument is posited on the basis that the Reinsurers’ liability is back-to-back with them, but this is not supported by the wording of the policy itself: the natural and ordinary meaning of words.  There is a plain difference between saying that there is a liability to indemnify the Insurer for sums in excess of $1 million, any one claim or occurrence, and what the clause actually says.  It would have been easy for the draftsman to have used clear words had it been the parties’ intention to produce the result for which the Insurers are contending. 

(4)	On the Insurers’ interpretation, the Insurers would retain no risk in relation to the matters covered by the reinsurance.   They would effectively have been ‘fronting’ for the Claimants, and in such an event it would have been unlikely that the Reinsurers would have been content for the Insurers to retain claims control, with a follow the fortunes clause.

(5)	The Insurers also say that the result contended for would be ‘uncommercial’. In answer to that point, it is not for the court to re-write the parties’ bargain, even if it perceived the contract to be one-sided or even lop-sided.   I should make no ‘a priori’ assumption about the distribution of risk between the parties; I should simply construe the words they have used to express their bargain.   
13.	For the Defendants, the Insurers, Mr Howard QC made the following submissions:

(1)	The reinsurance contract must be construed as a whole.   In respect of the risks which were covered, the policy made it clear that it was “all as original”.   The words of the Sum Insured clause referred to the “original” AAD and the “original” underlying deductibles.   In respect of the risks covered by the reinsurance it was plainly intended that the cover should be ‘back-to-back’.   The Reinsurers are liable to follow the fortunes of the Insurers.   Accordingly, the provision for an annual aggregate deductible is varied with respect to large losses so that the Insurers, and thus the Reinsurers, are liable for large losses in excess of  $1 million, before the AAD has been exhausted.   The effect of the Reinsurers’ argument is to give them a different excess provision from that in the Insurance policy, thus subverting the concept of ‘all as original’.   

(2)	The Sum Insured Clause tracks the scheme of the original policy both as regards limits and retentions and deductibles.   The words “original” AAD and “original” deductibles reflect no more and no less than the whole of the terms of clause 5A of the underlying policy.

(3)	The AAD referred to in the Sum Insured clause incorporates within it the special arrangement relating to a claim in excess of $1 million.

(4) The Reinsurers’ argument is contrary to commercial and common sense.   The Reinsurers received almost two thirds of the whole premium for reinsuring only part of the risk.   For a series of low losses below $1 million the Reinsurers would be on back-to-back terms with the Insurers.   But for the larger losses the respective position of the parties is radically altered.   Had the World Trade Centre been attacked after the AAD had been exhausted then, subject to the maintenance deductibles, the Reinsurers would have borne the whole loss.   If the disaster occurred when the AAD had been eroded to the extent, say, of $3.5 million, then the Insurers would, on the argument of the Reinsurers, be responsible for the whole loss.   This is a capricious and unlikely result.    

The Decision
14.	During the course of the argument, my views wavered.   The case was well presented on both sides and there is an obvious tension between the precise words used and the argument presented by Mr Howard.   But at the end of the day I have come to the conclusion that Mr Howard is right.   The route by which I reach that conclusion is a variation of his approach but not radically different from it.   It seems to me that it is inherently unlikely that the parties would have intended the consequences referred to above.   The emphasis was very much on creating a back-to-back arrangement relating to the risks covered by the Reinsurance Policy, as the constant references to ‘All as per original’ or words to that effect demonstrate.   Is it likely that the parties could have intended that despite these references, the regime was such that the Insurers’ fortunes depended on the happenstance of whether the AAD had been exhausted when disaster struck?   For two thirds of the premium the Reinsurers were potentially at little or no risk.   It seems to me that looking at the policy overall it was likely to have been the  parties’ common intention from the words they used that in relation to damage or loss to goods the Reinsurers took the whole risk leaving the Insurers with the other risks.   That would make commercial sense.  This was not a classic fronting arrangement where an insurer retained no risk but was a necessary part of the ‘loop’.   Here, the Insurers retained risk in relation to other aspects of the underlying insurance and simply reinsured a part 100%.  Thus, I think, there would be nothing odd about a policy which gave the right to control claims to the Insurer in respect of all types of loss, whether reinsured or not.    But the question is whether the words used in the Reinsurance Contract permit the construction contended for by Mr Howard QC.   
15.	I think they do.   There are two possible approaches.   The first, which I think Mr Howard favours is that the words “losses in excess of original annual aggregate deductible of US$5 million” incorporate within them the whole of clause 5A [the AAD regime, as it were] and permit the court to give effect to the true nature of the commercial bargain.   But this argument requires the court to read into the Sum Insured Clause some qualifying words such as “This policy to respond only for losses in excess of US$1,000,000 until the AAD has been exhausted and thereafter in excess of the original underlying maintenance deductibles.”   The alternative approach which I favour is as follows.   The Sum Insured Clause embraces within it the whole of clause 5A and 5B of the underlying policy.   The AAD regime is contained within the first paragraph of clause 5A.   That paragraph includes a retention by the Assured (or a US$1 million deductible) in relation to claims in excess of US$1 million, when the AAD has not been exhausted.   That retention or deductible is apt to be included within the words “original underlying deductibles” in the Sum Insured Clause.   The slip policy is an abbreviated form of contract and read in this way the clause makes sense.   Either the AAD has been exceeded or it has not been.   If it has then the first part of the sentence applies; if it has not been then the second part may apply.   All that is required to produce this result is an acceptance that the words “original underlying deductibles” are not confined to “maintenance deductibles”.   If the parties had intended so to confine them, they could simply have written “original maintenance deductibles”.   The word “and” does not need to be read conjunctively; it is apt to cover all situations where a relevant deductible has been exceeded and to which the reinsurance responds.   I do not accept Mr Schaff’ QC’s contention that the limit of US$1 million which forms part of the rules as to the calculation of an AAD cannot properly be called a deductible.   I simply do not see why not.   I think nothing of substantial significance turns on the format of the Information Clause of the reinsurance Slip on this issue, although the provision relating to the US$1 million appears under the heading [underlined] “Deductibles”.   I am of the view that the Reinsurers were under an obligation to pay out if the losses claimed exceeded the AAD and the relevant deductible and that that is the natural and ordinary meaning of the words used.   
16.	Accordingly, I dismiss the application for summary judgment with costs, to be assessed, and, as I indicated at the end of the argument, I give permission to appeal.   Different judges may take different views about the way the Reinsurance slip policy should be interpreted and an application for permission to appeal crosses the threshold test.