Reinsurance claims can be difficult, as two recent disputes show. Fred Isherwood and Chris Davis discuss the legal complexities
Although the insurance industry strives to ensure claims settlement is a continuous, streamlined process, on occasion the procedure can become contentious and complex. Particularly when the disputed claim is between insurer and reinsurer.
As in all matters where litigation is likely to be involved, lawyers are called upon when absolutely necessary and not before - in general terms those who advise the reinsurance industry are a distress purchase.
Usually, reinsurers do not instruct lawyers in contentious matters unless the areas of contention are with their own cedant.
A series of recent cases involving GAN Insurance Company and Tai Ping Insurance Company (see box below) highlight how disputes between insurers and reinsurers can arise.
While a reinsurer's right to withhold approval of a settlement is not unqualified, the only limitations are that its right should be exercised in good faith, after considering the claim as a whole and by reference to the facts giving rise to the particular claim. For example, if an insurer knew of a high value claim but did not notify the reinsurer until such time as a cheque was required to be written, then the reinsurer may be entitled to withhold payment.
Complex expensive cases are inevitably those in which reinsurers become involved and therefore, perhaps quite unjustifiably, they are associated with cases that have taken some time to resolve. However, even when the relevant parties have agreed the question of liability, it may not be possible to settle the action until several years later.
Lengthy processes
This is particularly so in cases involving brain damage suffered by young children. Often medical experts will say it is unsafe to assess the full extent of the child's disability and thus the care regime that needs to be put in place until the child has attained a certain age. It is in these cases that headlines are seen about claims taking up to 13 years to settle. There is no scientific way of telling how long a case will take to reach settlement. While the Woolf reforms have enforced more rigid timescales, they cater mainly for smaller claims.
Another reform that has had a major impact on reinsurance claims is the judgment in Wells v Wells (1998) and the discount rate now set at 2.5% by the Lord Chancellor in the Damages (Personal Injury) Order 2001 (see box above).
The Wells judgment refers to claimants who had suffered severe personal injury, which was to have catastrophic effect upon the rest of their lives. It was thought lump sum payments made for future pecuniary loss might prove to be too little or too much.
The purpose of awarding lump sum damages was to put claimants in the same financial position as if the injury had not occurred. Courts had to ensure the award kept its value in real terms, despite inflation.
The conventional approach was to assess damages, assuming the claimant would protect the value of the award by investing in a mixed portfolio of equities and gilts. But the Index Linked Government Securities (ILGS) is a risk-free investment method, which fully protects against inflation.
If reinsurance claims are considered lengthy and complex now, the claims from 11 September will add a new dimension.
It will not be until the claims arrive that insurers and reinsurers will be able to gauge the effect. If insurers are presently unable to understand that effect, it will be even longer before their lawyers fully appreciate it. n
Fred Isherwood and Chris Davis aresolicitors at Putsman.wlc Solicitors
Case study: reinsurers' right to withhold consent to settlement
The Taiwanese Tai Ping Insurance Company insured a plant erection project in Taiwan, which was damaged by fire. Upon a claim being made, Tai attempted first to withdraw the policy for an alleged breach, but then settled.
Reinsurer GAN began proceedings against Tai for a declaration it was entitled to rescind the policy because Tai was in breach of conditions. Tai denied English courts had authority as the contract was purely for Taiwanese risks and used clauses from the Taiwanese contract between Tai and its insured.
The English courts decided the reinsurance contract had been placed in London and the terms indicated a choice of English Law. The references to the original contract only served to limit the scope of the reinsurer's liability. Therefore, it was found English Law should determine the issues.
The judgment then reaffirmed reinsurance policies contain an implied term that a reinsurer can withhold its consent to a settlement, but not unreasonably.
How to calculate claims
Before Wells, the courts traditionally awarded 4.5% net discount rate. Afterwards, in accordance with Index Linked Government Securities, it fell to 3%. Initially, it was estimated that this added an extra 16% to the claim across the board. The loss of a further 0.5%, to 2.5%, has further inflated the cost.
