Ralph Fearnhead

1. Follow the Fortunes Clauses in Reinsurance Law – Practical Problems in Ensuring their Effectiveness Ralph Fearnhead

2. Follow the Fortunes Clauses Reinsurer Reinsurer Reinsurer Reinsurer Reinsurer Reinsurer Reinsurer Insurer Policyholder

3. Example wordings • Single Proviso "Settlements hereunder in respect of losses coming under the scope of clause AVN.48B [War Hijacking and Other Perils Exclusion Clause] from the Reinsured's Excess of Loss acceptances are to follow those made by the Reinsured in all respects…..“ (LSW 343) • Double Proviso "….All loss settlements by the Reinsured 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 Contract.” (LSW 334)

4. Single Proviso Clauses “... the reinsurers agree to indemnify insurers in the event that they settle a claim by their assured, i.e. when they dispose, or bind themselves to dispose, of a claim, whether by reason of admission or compromise, provided that the claim so recognized by them falls within the risks covered by the policy of reinsurance as a matter of law, and provided also that in settling the claim the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement.” Robert Goff L.J., Insurance Company of Africa v Scor

5. Double Proviso Clauses • Losses must be within the terms and conditions of the original policies and the reinsurance • Acting in good faith when settling the claim is not enough. There must be evidence of legal liability (not just the risk of an adverse jury determination). • An Insurer’s good faith determination of the facts will bind reinsurers but it must still prove (on the balance of probabilities) that those facts would have given rise to a liability within the terms of the reinsurance. • In the case of a settlement the matters of fact alleged must give rise to a liability under the relevant governing law and of a type within the terms of the contract.

6. The Nature of 9/11 Losses • Total losses estimated at around $40bn. • Loss of life and personal injury dealt with primarily through various victim compensation funds. • $4.4bn claim brought against airlines and security companies by certain plaintiffs and subrogated insurers relating to property damage. • $1.2bn settlement entered into in July 2010 by the airlines and their insurers.

7. The Property Damage Settlement • ATSSSA limits liability to amount of available insurance. • US courts affirmed the settlement counted towards the ATSSA limits. • Questions over the existence and scope of any duty of care owed by Airlines to victims on the ground. • £1.2bn was a “reasonable settlement” and a 72% discount from the original claim. • Huntleigh’s limit’s of indemnity exhausted and Airlines released from any future claims by plaintiffs. • Settlement apportioned 60/40 between American and United.

8. Potential issues - Aggregation • "each and every loss or accident or occurrence or series thereof arising out of one event, each aircraft." • "All such losses sustained by the Reinsured which occur during any one period of 24 consecutive hours and within an area of radius 10 miles which arise from one of the perils stipulated in clause AVN.48B [War Hi-jacking and other perils]".

9. Potential Issues – Proving the Loss “There are only two rules, both obvious. First, that the reinsurer cannot be held liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. Second, that the parties are free to agree on ways of proving whether these requirements are satisfied. Beyond this, all the problems come from the efforts of those in the market to strike a workable balance between conflicting practical demands and then to express the balance in words. These practical demands can be seen most easily in the context of traditional reinsurance, where the party reinsured is the insurer under a contract made directly with the person whose property or other interest is at risk. Two impulses act in opposite directions. The first is to avoid the investigation of the same issues twice; and, moreover, an investigation on the second occasion by a reinsurer whose knowledge of what happened when the risk was written, and whose facilities for investigating the claim, are inferior to those of the direct insurer. The second impulse, acting in the other direction, is to ensure that the integrity of the reinsurer's bargain is not eroded by an agreement over which he has had no control.” - Lord Mustill, Hill v M&G, [1996] 3 All ER 865 at 879

10. Possible Solutions? • Broader follow the settlements terms to ensure Reinsurers are bound. • Standard form contracts under a universal governing law. • The adoption of a completely new form of Reinsurance contracts.