Insurance/Reinsurance Bulletin, June 2009

Reinsurance Fraud Allegations Are Justiciable

Korea National Insurance Corporation v Allianz

Global

By Andrew Bandurka

In this unusual case, the Court of Appeal ruled that

reinsurer (Allianz) allegations of fraud against the North Korean

state-owned insurer, KNIC, are "justiciable" (i.e.

capable of being tried in England), and therefore capable of

forming a defence to KNIC's reinsurance claim, despite the

potential of those allegations to cause diplomatic embarrassment

between the UK and North Korea.

Overcoming Allianz' allegation of fraud, KNIC had obtained

judgment in the North Korean court against Allianz, in accordance

with the jurisdiction clause in the reinsurance contract, and

sought to enforce the judgment in the UK. Allianz alleged the

judgment had been procured by a fraud, instigated or approved by

the North Korean Government with KNIC's knowledge or

participation, and that the judgment was unenforceable on public

policy grounds since the North Korean judiciary, which gave the

judgment, was controlled by the Government, which instigated or

approved of the fraud.

The fraud allegations directly concerned the claim itself (which

involved a helicopter crash and resulting damage to a warehouse and

its contents), but also relied on fraud inferred from a

breathtaking litany of past alleged criminality on the part of the

North Korean state, including the involvement of North Korean

diplomats in drugs trafficking, and state involvement in

counterfeiting currency, cigarettes and pharmaceuticals.

These fraud issues will not now be decided by the court, because

the case has been settled, nevertheless the Court of Appeal did

rule that the fraud allegations were justiciable and should not be

struck out. This rested partly on the fact that the British

Government, despite having been give the opportunity, had not

indicated that a decision would embarrass diplomatic relations with

North Korea, and partly on the fact that the relevant legal

authorities did not support any proposition that, in a commercial

context, when allegations are made against a state, not in relation

to a sovereign act carried out in its own jurisdiction but in

relation to acts which affect the rights of a party under a

commercial contract, the court should exercise restraint. Waller LJ

said "If a foreign state were an insured under an

insurance contract the insurers cannot be precluded from alleging a

fraudulent claim simply because that might embarrass the foreign

state. It cannot be any different if a state entity makes the claim

and it is asserted that both the entity and the state owner were

involved in the fraud."

The case is quite unusual and may be confined to its facts.

Nevertheless it may provide some comfort to re/insurers of

state-controlled entities in certain regimes which are starved of

hard currency and where the independence of the judiciary and the

state is, at best, questionable.

Drop Down Clauses in Umbrella Policies

By Andrew Dunn

Multi-national assureds often supplement local insurance cover

(within a given single jurisdiction) with a worldwide master or

umbrella insurance policy which responds excess of the local policy

limit. Sometimes, the umbrella policy will contain "drop

down clauses" – which operate so as to

reinstate cover under a local policy which may otherwise have been

exhausted. This can give rise to the question: on what terms is the

local cover reinstated?

In Flexsys America L.P. v XL Insurance Company Ltd,

Tomlinson J. had to consider a claim by Flexsys under its global

umbrella liability policy (US$25 million x/s US$1 million) after a

local US liability policy up for $1 million had been exhausted in

defending "advertising liability" claims. Aside

from the different policy limits, the local policy provided cover

against advertising liability on terms which were materially

broader than those of the master policy. Flexsys tried to argue

that the drop down clause in the umbrella policy not only

reinstated the broader terms of the local cover, but sought to

apply those broader terms up to the full policy limit of the master

umbrella cover ($25 million) rather than just the $1 million limit

of the local policy.

Tomlinson J. decided that Flexsys could not do so. His...