Claims Co-Operation Clauses - The Pendulum Swings Towards Reinsurers

Gan Insurance Co. Ltd. v. Tai Ping Insurance Co. Ltd. [2001] All ER (D) 33 CA (Eng) Subject to the terms and conditions of the policy, the effect of reinsurance is to transfer financial risk from the reinsured to the reinsurers. Generally, the risk has to be established, by judgment, award or settlement, before the reinsurers can be called upon to indemnify the reinsured under the policy. The effect of the normal 'follow the settlements' provision would be to bind reinsurers to settlements and compromises reached by the reinsured provided that they were made bona fide and in a proper and businesslike manner (see Insurance Company of Africa v. Scor (UK) Ltd. [1983] 1 Lloyd's Rep 541, [1985] 1 Lloyd's Rep 312). In the light of this decision, reinsurers (and especially reinsurers who were assuming a significant percentage of the underlying risk) began to insert claims co-operation clauses in their policies, in an attempt to give them more control over the ability of their reinsured to reach compromises which would trigger their liability to make payment. A standard clause, set out below, has been the subject of recent judicial examination by the English Court of Appeal.

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Background

Tai Ping placed facultative reinsurance with Gan for an erection all risks and third party liability policy issued by Tai Ping to Winbond, covering the erection of a building in Taiwan. During the currency of the policy, the building being constructed was damaged by fire. Initially, Tai Ping claimed to avoid the contract for misrepresentation, but on Winbond issuing proceedings and prosecuting those proceedings, a settlement was reached. Gan alleged, amongst other things, that Tai Ping failed, in breach of the reinsurance contract, to co-operate in the investigation and assessment of the loss and failed to obtain Gan's prior approval for the settlement.

The claims co-operation clause in the reinsurance contract, stated to be a "condition precedent to any liability under this Policy", read as follows:

The Reinsured shall, upon knowledge of any circumstances which may give rise to a claim against them, advise the Reinsurers immediately and in any event not later than 30 days;

The Reinsured shall co-operate with Reinsurers and/or their Appointed Representatives subscribing to this Policy in the investigation and assessment of any loss and/or circumstances giving rise to a loss;

No settlement and/or compromise shall be made and liability admitted without the prior...