Whether A Non-Reinsured Can Get A Declaration Of Liability Against A Reinsurer/Whether Reinsurer Had Acted In 'Businesslike Manner'

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

T&N, an English company which was a major producer and distributor of asbestos in the 20th century, entered into a liability policy with its captive insurer. The liability policy provided that "the Policyholder [ie T&N] shall have full, exclusive and absolute authority, discretion and control, which shall be exercised in a businesslike manner in the spirit of good faith and fair dealing". On an "Insolvency Event" (which did subsequently take place) this authority, discretion and control, and the requirement to act in a businesslike etc manner, passed to the insurer. The insurer then transferred all its rights and powers under the liability policy to its reinsurers under a reinsurance contract.

The claimant was a trust (set up when T&N started Chapter 11 proceedings in the US) which assumed liability for all asbestos personal injury claims against T&N and which was, in effect, authorised to bring claims against the captive insurer on behalf of a very large number of personal injury claimants in the US. The trust established a mechanism for valuing these asbestos claims and argued that the value which it gave to the claims was considerably lower than a likely settlement or award should litigation be brought in the US tort system. It sought various declarations against the reinsurers to the effect that if the reinsurers used a different method to handle claims, that would cause the reinsured to breach its duty to T&N to act in a businesslike manner. Eder J held as follows:

1) Although the law on granting declaratory relief has "moved on" in the last 20 years, and this relief is discretionary (so not subject to rigid rules), it is not appropriate (save in exceptional circumstances) to grant this relief to a third party where the parties to the relevant contract (here, the reinsurance contract) are not themselves in dispute. To hold otherwise would be to open up potentially "remarkable consequences" which would allow third parties to intervene in the contractual relations of others by way of declaration. Nor did the terms of a power of attorney granted by T&N to the trust make any difference.

2) The judge held that, even if he was wrong on that point, he would not have granted relief in this case anyway. The terms of the reinsurance contract required the reinsurers to exercise "authority, discretion and control" in a businesslike manner and in good faith. Eder J agreed that this was only a "very loose constraint", excluding only courses of...

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