Case law - Miscellaneous topics Flashcards
Double Insurance - Bruce v Jones [1863]
Effect of different valuations in two or more policies
In this case, the shipowner held four separate insurance policies on the same ship, with varying valuations. After a total loss of the ship, the assured received payments from the first three policies totaling £3,126. The dispute arose when the shipowner sought to recover under the fourth policy, and the court had to determine the recoverable amount.
Key Points:
1. Indemnity Principle: The court emphasized that marine insurance is a contract of indemnity. The assured cannot recover more than the agreed total value of the insured subject matter.
2. Agreed Value: The ship’s agreed total value was deemed to be £3,200 (as per the fourth policy).
3. Deductions: The amounts received from the first three policies (£3,126) were treated as “salvage” and deducted from the total agreed value.
4. Recoverable Amount: The assured was entitled to recover only the remaining balance of £74 under the fourth policy.
The court rejected the plaintiff’s argument that the prior recoveries should be treated proportionally to each policy’s valuation. Instead, it held that the total sum recoverable across all policies could not exceed the agreed value of the ship.
Double insurance - Newby v Reed [1762] 96 E.R. 237
In cases of double insurance, insurers are liable to pay the loss ratably, not based on the priority of the contract. If one insurer has paid the entire loss, they can seek contribution from the other insurers for their proportion of the loss.
Key Points:
1. Double Insurance: The vessel was insured under multiple policies. When it was captured and condemned by a French privateer, the insured recovered sums from various insurers, fully covering the loss.
2. Liability of Insurers: In the case of double insurance, the loss is divided equally among the insurers, rather than being paid according to the priority of the contracts.
3. Legal Approaches:
o English and American Law: Insurers contribute ratably to the loss to prevent the financial ruin of a few.
o Spanish Law: The first policy pays the maximum liability, then the second pays the balance, and so on.
4. Recovery: The insured can recover the full loss amount from any of the insurers but can only receive one total payment. They may choose which insurer to sue for the actual loss, and the insurers must then recover their respective shares from the others.
This system ensures fairness and prevents the insured from being compensated more than the actual loss.
Double insurance - Weddell v Road Transport and General Insurance Co Ltd [1932]
When the other policy negatives liability where there are two policies:
Each policy contained extended cover providing indemnity not afforded by the other policy. Award that R company were liable to pay only a rateable proportion (one-half) of damages awarded - Held, affirming the award, that the general purpose of the proviso seemed to be to make such extensions operate only as secondary cover, available only in the absence of other insurance regarded as primary; and that the reasonable construction was to exclude from the category of co-existing cover any cover which was expressed to be itself cancelled by such co-existence, and to hold in such cases that both companies were liable (apart from the question of the omission to give notice to the C company).
Contribution - Commercial Union Assurance Co. v Hayden [1977]
There, the Court of Appeal was concerned with double insurance under public liability policies containing different limits on liability. The limit under one policy was £10,000 and under the other £100,000. It was argued on the one side that contribution should be on the basis that the policy with the greater limit should bear ten-elevenths of any loss, whatever its amount (the maximum liability method). The argument on the other side, which was accepted by a majority of the Court of Appeal, was that any claim up to £10,000 should be borne equally by the two policies, whereas on a claim for, say, £40,000, the loss should be apportioned in the ratio of 4:1, with £32,000 being borne by the policy with the greater limit of £8,000 by the policy with the smaller limit (the independent liability method).
Contribution - Legal and General Assurance Society Ltd v Drake Insurance Co Ltd [1992]
In this case, two insurance companies insured the same driver under separate policies, each containing a condition precedent requiring immediate written notice of any event that might give rise to a claim. Additionally, both policies stated that if there was “any other insurance covering the same loss,” the insurers would only contribute their rateable proportion.
The driver injured a pedestrian, and one insurer, Legal and General, settled the claim without knowing about the other policy held by the driver. Upon discovering the other policy, Legal and General sought a 50% contribution from the second insurer, Drake Insurance. However, Drake refused, arguing that the driver had breached the condition precedent by failing to notify them of the claim within the required time frame, providing them with a defence.
The Court of Appeal, with Ralph Gibson LJ dissenting, ruled that Legal and General was still entitled to a 50% contribution from Drake Insurance. The court held that the right to contribution arose at the time of the loss, and while the breach of the condition precedent occurred later, it did not affect the already accrued right to contribution. Therefore, Legal and General was entitled to recover half of the settlement amount from Drake Insurance.
Contribution - O’Kane v Jones [The Martin P] [2003]
Persons who may claim on the policy
If the assured is named, no real problem arises. A more difficult issue is determining whether a particular person falls within a class of assureds identified by description, as policies commonly refer to the named assured and other classes of person. In O’Kane v Jones (The Martin P) 12 the interest clause in a hull and machinery policy taken out by the managers of the vessel extended to the “managers and/or affiliated and/or associated companies for their respective rights and interests”. It was held that the owners of the vessel fell within these words “by reason of the close relationship between a shipowner and the manager of its ship”.
Reinsurance: compromised or agreed loss - Bergens Dampskibs-Assurance Forening v Sun Insurance Office Ltd. [1930]
Whether an arranged total loss, held that, as there was neither a constructive total loss nor a real claim for one, the loss did not come within the words “arranged total loss” and therefore that there was no right of recovery from the reinsurers.
In Bergens Dampskibs-Assurance Forening v Sun Insurance Office Ltd, the court examined whether a settlement agreement could be classified as an “arranged total loss” under a reinsurance policy. The case followed the precedent set by Street v Royal Exchange Assurance Co, where a total loss claim that was settled by underwriters, despite being only partially proven, was deemed a compromised total loss. However, in this case, the court found that there was no real claim for a total loss and therefore no right to recovery from the reinsurers. The judgment emphasized that for a loss to qualify as “arranged total loss,” it must involve a real or constructive total loss that is compromised. The court ruled that an agreement that merely treated the loss as a total loss for settlement purposes, without it being a true constructive total loss or claim, did not fall within the policy’s coverage. It concluded that “arranged” refers to a compromised claim, not an artificial reclassification of a partial loss to total loss by mutual agreement.
Reinsurance: compromised or agreed loss - Chippendale v Holt [1895]
It was established by Chippendale v Holt 115 and later cases that if the reinsured was liable for total loss only under the direct policy then the settlement of a partial loss as if it were a total loss would not be recoverable from reinsurers, notwithstanding the use of the formula “to pay as may be paid thereon”. To overcome these decisions, total loss only reinsurance policies began to provide cover not only for actual or constructive total loss, but also for compromised and/or arranged total loss (the precise wording used varied).
In Chippendale v. Holt, the English court addressed whether a “pay as may be paid thereon” clause in a reinsurance contract obligated reinsurers to indemnify reinsureds for payments made in good faith but based on doubtful liability. The court ruled against the reinsureds, finding that the clause did not require reinsurers to cover settlements without proof or admission of liability. The judgment emphasized that the clause presumed the existence of liability, either proven or acknowledged, under the original policy. The court’s interpretation meant that reinsurers could deny indemnity for ex gratia payments, even if made in good faith, and potentially revisit and challenge the underlying facts of a settlement at trial. This decision established that reinsureds needed to demonstrate proven or admitted liability under the original policy for reinsurers to be bound by the clause, limiting the protections it was intended to provide.
Reinsurance: compromised or agreed loss - Street v Royal Exchange [1913]
In Street v Royal Exchange Assurance Co the Court of Appeal held that there was a compromised total loss where the assured had brought a claim for total loss which was settled by underwriters on the original policy, notwithstanding that there was (by virtue of the Marine Insurance Act 1906 s.56(4)) an alternative claim for partial loss, and the settlement did not identify the basis on which the claims were settled, but merely settled all claims in the action. It was enough that there was a claim for total loss, persisted in up to the point of settlement, which was settled in common with all claims in the action.
“Pay to be paid” clauses - Fanti, The; and Padre Island, The No.2 The, [1991
Prior payment is required to prevent club members making a profit by receiving payment from the club and subsequently failing to pay the third party.
A typical example of a “pay to be paid” Clause can be found in Rule 3(1) of The London P&I Club’s Rules. This states that: “[i]f any Assured shall incur liabilities, costs or expenses for which he is insured, he shall be entitled to recovery from the Association out of the funds of this Class, PROVIDED that actual payment (out of monies belonging to him absolutely and not by way of loan or otherwise) by the Assured of the full amount of such liabilities, costs and expenses shall be a condition precedent to his right of recovery”.
The House of Lords considered two cases involving third-party claims against Protection and Indemnity (P & I) Clubs under the Third Parties (Rights Against Insurers) Act 1930. The key issue was whether third parties could bypass the “pay to be paid” rule in the insurance contracts, which required the insured to pay claims before seeking indemnity from the insurer.
1. The Fanti: The ship’s owners, insured by the Newcastle P & I Association, had not paid the salvage claim after the vessel was abandoned. Salvors sought to recover directly from the P & I Club under the 1930 Act. The insurers refused, citing the “pay to be paid” clause.
2. The Padre Island: Similar circumstances arose with the West of England P & I Club, where cargo claimants sought recovery under the 1930 Act after the insured owners failed to pay. The insurers again relied on the “pay to be paid” clause to deny liability.
The House of Lords ruled in favor of the P & I Clubs in both cases, upholding the “pay to be paid” clause as a fundamental term of the insurance contracts. It held that third parties could not gain better rights than those provided to the original insured under the policy. Since the insured parties had not fulfilled the condition precedent of making payment, the insurers were not liable to indemnify either the insured or third parties.
“Pay to be paid” clauses - Gurney v Grimmer [1932]
This case addressed the interpretation of the reinsurance clause “to pay as may be paid thereon” in the context of marine insurance. The key issue was whether reinsurers were obligated to follow settlements made by original insurers, particularly for claims involving constructive total losses or arranged total losses.
Key Points:
1. Historical Context: The clause “to pay as may be paid thereon” was commonly used in reinsurance contracts. While earlier opinions suggested it required reinsurers to follow genuine settlements by original insurers, the 1895 decision in Chippendale v. Holt rejected this interpretation. The judgment established that reinsurers were not automatically bound by the settlements of original insurers unless the loss was genuinely proven and properly assessed.
2. Modern Reinterpretation: This case revisited the issue. The court recognized that the clause intended to streamline the claims process by avoiding excessive litigation over constructive total loss claims. The inclusion of terms like “arranged total loss” was viewed as granting original insurers flexibility to settle claims without proving losses strictly under the original policy terms.
3. Reinsurers’ Obligations: The court held that reinsurers could not challenge settlements made in good faith by original insurers unless there was evidence of dishonesty or carelessness. Reinsurers must accept settlements if:
o A loss of the reinsured type occurred.
o The original insurer took reasonable steps to ascertain the loss.
4. Practical Business Considerations: The court emphasized the business rationale behind the clause, noting that the insurance industry relies on balancing losses and profits across multiple contracts. The clause aimed to reduce the expense and complexity of contesting constructive total loss claims.
5. Judgment: The appeal was allowed, and the court ruled in favour of the plaintiff. It concluded that the reinsurers were obligated to honour the settlement made by the original insurers, as the clause extended protection to such settlements. Interest was awarded from the date of the writ, and the plaintiff was granted costs at all court levels.
Conclusion:
The decision reaffirmed the binding nature of “to pay as may be paid thereon” clauses in reinsurance agreements for genuine and properly settled claims. It aimed to balance legal certainty and practical business needs in the marine insurance sector.
