ARIAS (UK)

Equitas v R&Q Reinsurance Company

Commercial Court 11 November 2009

Report written by, and reproduced with kind permission of Ince & Co

In an eagerly awaited decision, Mr Justice Gross has found for Equitas in its dispute with company reinsurers concerning two antique catastrophes: (1) the loss of aircraft owned by the Kuwait Airways Corporation and British Airways during the first Gulf War and (2) certain claims caused by the grounding of the Exxon Valdez. The claims before Gross J were for retrocessional spiral losses presented by Equitas.

The background was unprecedented. For five years the LMX market had aggregated the 1990 KAC and BA losses before that was questioned in Hill v Mercantile. Seven years later, in Scott v Copenhagen, the Court of Appeal favoured disaggregation. Likewise, for many years the market had treated as properly recoverable certain Exxon Valdez claims, of even older vintage, before that conclusion was contradicted in King v Brandywine. These judicial interventions had solidified a partial logjam in the LMX market. The issue now was whether the exaggeration of the direct industry loss for these events precluded Equitas from collecting further recoverable losses if it did not first reconstruct the ultimate net loss for each syndicate as it ought to have been accumulated, untainted by these exaggerations. The parties agreed that such reconstruction was not possible.

The burden of proof

All the reinsurance contracts incorporated the 1/1/90 Joint Excess Loss Committee Clauses (JELC). Many also incorporated a “Settlements Clause” providing that settlements by the reinsured would be binding on 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 reinsurance.”  The relevant JELC clause corresponded with the first proviso in that Settlements Clause. R&Q argued that to fulfil this proviso Equitas had to prove that the further sums claimed were properly due and to do so it first had to show that properly aggregated prior losses would have reached the attachment point of each R&Q LMX contract being sued upon. That required proof of liability at every stage of the spiral. Equitas denied the first proviso required it to re‐compute correctly aggregated losses at every stage.

Gross J held that after the decision in Hill, Equitas was legally bound to satisfy both provisos in the Settlements Clause or fail in its recovery but it was not a requirement of law that it could only do so by proving a loss at every underlying stage of the LMX spiral.  How it satisfied the burden of proving its prior UNL was instead a question of fact or evidence. Equitas did not, therefore, fall at the first hurdle of the argument.

Actuarial modelling

Equitas put forward actuarial models to make good its case. These produced a discount to apply to the existing tainted UNL’s which, Equitas said, reliably eradicated the exaggeration. R&Q objected both in principle and in detail. Equitas accepted that the models did not recreate the actual spiral but argued that they provided reasonable representations of the relevant features for the purposes of demonstrating a minimum clean UNL on each contract at the end date of the models. Further claims could then be recovered, it argued, excess of the discounted figure. R&Q submitted that the models did not discharge the burden of proof, arguing the question was not “reasonableness” but whether the models proved that individual attachment points had been reached by valid claims. Gross J accepted that modelling was complex and imperfect and that it was, “..plainly necessary to proceed with caution”. However, after a lengthy analysis he found the models capable of providing a reasonable representation of reality, furnished a soundly‐based route to establishing the minimum untainted UNL on the civil burden of proof and, “..assist[ed] in doing practical justice in this case – a solution emphatically preferable to leaving the losses to lie crudely where they fall.

Comment

The LMX market on these losses was described as being in lockdown before this decision. It remains to be seen whether the judgment will liberate the spiral; Gross J expressed a hope that it would. However, he also pointed out that R&Q could have made a counterclaim on the same basis as Equitas but chose not to do so. Companies running off old LMX books may take a different view of that possibility. For those not directly affected, the importance of the case may lie in Equitas’ success in establishing a credible method of adjusting aggregations after settlements have taken place. The London market rebuilt its reputation by a swift response to catastrophes and any innovation which discourages an indecisive response to aggregation issues surely has to be welcome.

The information and commentary herein do not and are not intended to amount to legal advice to any person on a specific matter. They are furnished for information purposes only and free of charge. Every reasonable effort is made to keep them accurate and up to date but no responsibility for their accuracy or correctness, nor for any consequences of reliance on them, is assumed by the firm. Readers are firmly advised to obtain specific legal advice about any matter affecting them and are welcome to speak to their usual contact at the firm or to the author, Alan Weir. © Ince & Co 2009

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