Follow The Lead Clauses And Whether A Following Underwriter Is Bound By A Settlement Which Is Expressed Not To Be Binding On Him

Author:Mr Jon Turnbull and Michelle M. Radom
Profession:Clyde & Co

The insured's vessel was covered by two insurance policies: (1) a policy issued by three Lloyd's syndicates covering 50% of the interest in the vessel; and (2) a policy issued by the defendant covering 30% of the interest in the vessel (the remaining 20% interest was uninsured). The policy issued by the defendant contained a Follow Clause which read as follows: "Agreed to follow [two of the Lloyd's syndicates] in claims excluding ex gratia payments" (thus, although the syndicates were not expressly referred to as lead underwriters, this was in effect a follow the lead underwriter clause).

Following damage to the vessel and a claim under both policies, a settlement agreement was entered into between the three syndicates and the insured. The loss was agreed by those parties to be USD 1.5 million and the syndicates agreed to pay their respective shares of an aggregate sum of USD 779,500 (ie just over 50% of the loss). The insured argued that the defendant was bound by this settlement to pay 30% of the agreed loss (ie USD 450,000). However, the defendant argued that it was not obliged to follow this settlement for the following reasons:

1) The Follow Clause authorised only the Lloyd's syndicates to act on the defendant's behalf to settle claims and did not bind it to the follow any settlement. That argument was rejected by Teare J. The insured's interpretation of the clause was said to "ignore, and add to, the simple words of the Follow Clause". Nor was there any need to introduce a concept of agency into the clause. Although there is uncertainty as to the basis on which a follow clause operates, the issue of what duty the Lloyd's syndicates owed to the defendant did not fall to be decided in this case.

2) The settlement agreement contained the following clause (Clause 7): "The settlement and release pursuant to the terms of this Agreement is made by each Underwriter for their respective participations in the Policy only and none of the Underwriters that are party to this Agreement participate in the capacity of a Leading Underwriter under the Policy and do not bind any other insurer providing ... cover in respect of [the vessel]."

Teare J accepted that the insured had, by virtue of Clause 7, agreed that the settlement agreement would not be binding on the defendant (and this conclusion was unaffected by the absence of a reference to the Follow Clause in Clause 7). However, the defendant had not been a party to the settlement agreement. The...

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