MetLife Insurance Ltd v RGA Reinsurance Company of Australia Ltd

Supreme Court of NSW|2016-07-15|Before: McDougall J

Solicitors: Turks Legal (Plaintiff) Clyde & Co Australia (Defendant) File Number(s): 2015/79770

Judgment

HIS HONOUR: The plaintiff (MetLife) as reinsured and the defendant (RGA) as reinsurer are parties to reinsurance arrangements (I shall return to the detail of what is covered by this deliberately vague description). Under those arrangements, RGA agreed to reinsure a proportion of MetLife's liabilities under group life insurance policies. One of the policies so reinsured was a "Blue Ribbon Policy" made by MetLife with FSS Trustee Corporation (FSS), under which MetLife provided death and total and permanent disablement (TPD) cover for members of the New South Wales Police Force.
There is a dispute between MetLife and RGA as to the latter's obligation to indemnify the former for some hundreds of TPD claims made by police officers. Although the issues raised are numerous and complex, there is one particular issue that divides the parties in respect of about 250 of those claims. That is whether what the parties called, and I shall call, the "Initial Event Sentence" has the effect that the claims in question are not reinsured. At the urging of the parties, I made orders under UCPR r 28.2 for two questions, relating to that issue, to be heard and decided separately from and before the decision of all other questions in the proceedings. I will not repeat the reasons that I gave for making that order (see [2016] NSWSC 416).

The questions for decision

The questions to be decided, pursuant to the order that I made, are (slightly reworded): [1] Does the Initial Event Sentence operate so as to limit the Plaintiff's entitlement to indemnity under the addendum to the reinsurance treaty referred to in paragraph 5 of the Amended Commercial List Statement ("Addendum Four") so that no such indemnity is available where the initial event leading or contributing, to an extent that is more than de minimis, to the disablement the subject of the claim against MetLife under the policy (referred to in paragraph 1 of the Amended Commercial List Statement) occurred prior to the inception of the treaty? For the purposes of the above question "Initial Event Sentence" means the sentence in Addendum Four: "For a claim to be eligible for consideration under the reinsurance arrangement the initial event leading to or contributing to the claim must occur after the date of effect of the treaty". [2] If the answer to question 1 is yes, does the Initial Event Sentence apply to deprive the Plaintiff of the ability to claim against the Defendant in respect of: (a) claim 27375; or (b) claim 35090?
"Addendum Four" is the specific "reinsurance arrangement", or contract of reinsurance, made between MetLife and RGA in respect of MetLife's liabilities to FSS under the Blue Ribbon Policy.

The insurance and the reinsurance arrangements

On 23 June 2003, MetLife (under its former name) and RGA made a reinsurance treaty (the treaty), which was agreed to have an effective date of 5 February 2003. Under that treaty (in which MetLife was referred to as "the Cedant"), RGA agreed to reinsure the liabilities of MetLife under group life insurance policies issued in a prescribed form set out in Appendix A to the treaty (Appendix A policies). The treaty provided also that MetLife could seek, and RGA could offer, reinsurance for group life policies in other forms.
In December 2005, MetLife and FSS entered into the Blue Ribbon Policy. The Blue Ribbon Policy was not in the form of Appendix A to, and thus was not automatically reinsured under, the treaty. That policy (in which FSS was described as "the Policyowner") had an agreed commencement date of 1 July 2005.
In December 2006, MetLife and RGA made an agreement which was described as "Addendum Number Four" to the treaty (Addendum Four). Under Addendum Four, and with effect from 1 July 2005, RGA agreed to reinsure, on the terms set out, the liabilities of MetLife to FSS under the Blue Ribbon Policy.
In August 2010, MetLife and RGA agreed to vary Addendum Four, by addenda known as "Four A" and "Four B". Nothing turns on those amendments.
The parties could not agree whether there was one contract of reinsurance between them, varied by Addendum Four (and, to the extent that it matters, addenda Four A and Four B), or whether the treaty was one contract and Addendum Four was a separate, stand-alone, contract. Since nothing turns on that dispute for the purposes of the separate questions, I shall leave it to one side. I should note that Mr Donaldson of Senior Counsel, who appeared with Mr Lawrance of Counsel for RGA, accepted that if, as he contended, there were two separate contracts of reinsurance, nonetheless the treaty formed part of the context which of necessity should be consulted for the purpose of ascertaining the meaning and effect of the Initial Event Sentence.
The parties further disagreed as to whether, in Addendum Four and for the purposes of the Initial Event Sentence, "the date of effect of the treaty" meant the effective date of the treaty - 5 February 2003 - or the effective date of Addendum Four - 1 July 2005. At one point, Mr Jackman of Senior Counsel, who appeared with Mr Duncan of Counsel for MetLife, suggested that this dispute should be dealt with as a further separate question. Since its decision is not necessary for the purpose of deciding the separate questions that are the subject of the order under r 28.2, and since (Mr Donaldson submitted) the resolution of that further dispute would require the production of further documents, Mr Jackman did not press his application. I might add that, had he done so, I would not have been inclined to favour it.

Relevant terms of the Blue Ribbon Policy

Clause 1 of the Blue Ribbon Policy deals with the commencement of insurance cover under it. Since the parties referred to cl 1.2, I set it out: 1.2 Commencement of Cover - Policy Inception Eligible Members who were at work were performing Normal Duties on the Commencement Date are covered for the Benefits as Insured Members on and from the Commencement Date. Eligible members who were not at work and performing Normal Duties on the Commencement Date are cover [sic] for the Benefits as Insured Members on and from the Commencement Date unless named on a Suspense Listing provided by us to the Policyowner. An Eligible Member named on the Suspense Listing is only covered for the Benefits as an Insured Member if he/she returns to work and performs Normal Duties for a continuous period (excluding rest days and recurrent leave days) of 30 days. We may, at our absolute discretion and on such terms and conditions as we require, accept an Eligible Member who has not been accepted under this clause as an Insured Member.
An "Insured Member" is defined, with some degree of circularity, as "a Police Officer who is a member of the Scheme and who is insured under this Policy".
Clause 2 deals with the extent of cover available under the policy. I set out cl 2.1: 2.1 Insured Members are covered under this Policy for Death and TPD Benefits.
"TPD" is defined to mean "'Total and Permanent Disablement' as defined in the First Schedule". The first schedule defines that expression in cl 6: 6 TOTAL AND PERMANENT DISABLEMENT: While covered under this Policy Total and Permanent Disablement shall mean: 1. The Insured Member suffering the loss of use of two limbs or the sight of both eyes or the loss of use of one limb and the sight of one eye (where limb is defined as the whole hand or the whole foot), or 2. In the case of an Insured Member whose Normal Hours are 15 hours each week or more at the time of the Insured Event giving rise to the claim: The Insured Member having been absent from their Occupation with the Employer through injury or illness for six consecutive months and having provided proof to our satisfaction that the Insured Member has become incapacitated to such an extent as to render the Insured Member unlikely ever to engage in any gainful profession, trade or occupation for which the Insured Member is reasonably qualified by reason of education, training or experience. 1. In the case of an Insured Member whose Normal Hours are less than 15 hours each week at the time of the Insured Event giving rise to the claim: The Insured Member, because of injury or illness becomes permanently unable to perform the basic activities normally undertaken as part of everyday life. This will be evidence by being unable to undertake any two of the activities listed below: [it is not necessary to set out the specific activities listed.]

Relevant terms of the treaty

The treaty comprised some four recitals, five separate parts known as Parts A to E, and six schedules, schedules A to F, as well as Appendix A to which I have referred already.
Part A of the treaty sets out the basic agreement of the parties. Part B sets out the "automatic terms" - the terms on which RGA would automatically reinsure MetLife in respect of Appendix A policies. Part C sets out "facultative terms": the terms on which MetLife and RGA might agree for the latter to reinsure the former's liabilities under non Appendix A policies. Part D provides the terms of reinsurance, whether automatic (under Part B) or facultative (under Part C). Part E sets out general terms applicable to Parts B, C and D. The only present relevance of Part E is that it includes an interpretation clause, cl 34. I shall refer to such definitions as are necessary when setting out the terms of the treaty to which the parties drew attention.
Recital D states what it was that the parties hoped to achieve by the treaty: D. The parties wish in this Treaty to establish an arrangement for the Cedant to reinsure liabilities under Policies with RGA Australia and to set out the terms of that Reinsurance.
The word "Policies" is defined in cl 34 to mean "the contracts of group life insurance described in Schedule A". However, as will become apparent, the word "Policies" may also apply, where appropriate, to policies of facultative reinsurance made pursuant to Part C.
Clause 1 sets out the general application of the treaty: 1. APPLICATION This Part A sets out the arrangement for RGA Australia to reinsure the Cedant's liability under Policies.
Clause 4 deals with disclosure. The effect is that MetLife warrants that it has no other responsive reinsurance, and agrees not to reinsure with any other reinsurer without RGA's prior written consent. I set out cls 4.1 and 4.2: 4.1 The Cedant confirms that it has no other reinsurance on which it would be entitled to claim in respect of any liability reinsured under the Reinsurance. 4.2 The Cedant must not reinsure a Policy with any other reinsurer without RGA Australia's prior written consent.
That exclusive dealing scheme is reinforced by cl 5.2 (which appears in Part B), under which MetLife is obliged to offer each "Policy to RGA for reinsurance" and RGA is obliged to accept it, provided the policy is "within the Automatic Limits set out in Schedule B".
Clauses 7 and 10, which are found in Part C, set out the process for effecting facultative reinsurance and the consequence of MetLife's acceptance of RGA's offer to reinsure: 7. APPLICATION This Part C sets out the arrangement for: (a) the cedant to apply; (b) RGA Australia to make offers; and (c) the Cedant to notify any acceptance of such offers, in relation to the reinsurance of the Cedant's liability under Policies other than those reinsured in Part B. … 10.2 Once the Cedant communicates its acceptance of RGA Australia's offer to RGA Australia under Part C there is formed a facultative reinsurance (Facultative Reinsurance) between the parties the terms of which are in the Schedules and Parts C and D of this Treaty unless agreed otherwise by the parties.
Clause 11, in Part D, deals with the application of that part. It reads: 11. APPLICATION This Part D applies to: (a) each Automatic Reinsurance entered into in accordance with Part B; and (b) each Facultative Reinsurance entered into in accordance with Part C.
Clause 12.1 could be taken to indicate that the reinsurance is to be back to back with the reinsured policy: 12.1 Each Reinsurance is on the basis of the terms of the Reinsured Policy. Any variation to a Reinsured Policy must be reinsured separately.
I note that cl 34 defines the expression "Reinsured Policy" to mean "a Policy which is reinsured with RGA Australia subject to the terms of this Treaty". It follows that "Reinsured Policies" include both policies that are the subject of Part B automatic reinsurance and policies that are the subject of Part C facultative reinsurance. It follows, further, that in cl 12.1 (and elsewhere, from time to time) the word "Policy", and its plural form, must encompass policies other than Appendix A policies.
Little seems to follow from the position that the word "Policy" (either alone, in its plural form, or in a compound expression) may mean, variously, automatically reinsured policies, facultatively reinsured policies, or both. The initial words of cl 34.4 of the treaty (in which the definitions are found) make it clear that the defined expressions are to bear the meanings given "unless the context otherwise requires". Clearly, the context sometimes requires that the word "Policy" should refer to automatically covered policies the subject of Part B of the treaty, sometimes to facultatively reinsured policies the subject of Parts C and D, and sometimes to all reinsured policies.
Clause 13 deals with the mechanics of reinsurance. Although Mr Jackman referred to it in the course of his submissions, I do not think that there is any need to set it out in these reasons.
Clause 14 deals with the payment of premium. The same comments apply.
Clause 18.8 provides for claims handling limits: 18.8 For any Sum Insured above the Claim Handling Limit defined in Schedule F, the Cedant must before accepting liability for a claim under that Reinsured Policy, obtain RGA Australia's prior approval. This Article is subject to the other terms of this Treaty.
Schedule F specifies relevant claim handling limits as follows: 1. The Claim Handling Limits are as follows: Benefit Limit Life $500,000 TPD $250,000 Critical Illness $250,000 Income Protection $3,500 pm month
By cl 2 of Schedule F, RGA has the right to change those limits on 90 days' notice "if the claims management practice of the Cedant deteriorates below the standards acceptable to [RGA]".
Schedule A also deals with the concept of "Policy" (and "Policies"). I do not think that anything of present moment turns on it. Nor do I think that anything turns on Schedules B to D, or on the precise form of the policy document set out in Appendix A.

Relevant terms of Addendum Four

By Addendum Four, MetLife and RGA agreed that the treaty "shall be amended in the manner set out in this addendum and that the changes will take effect from the 1st July 2005".
A clause numbered 1 provided that Schedule D to the treaty (which dealt with premium rates and expense allowances) should be amended with "the addition of" the terms "outlined" in a document attached to Addendum Four known as Section B. Otherwise, "[a]ll other terms and conditions remain the same as defined in the [treaty]".
It may be convenient at this point to note that although there was some variance between the reference details of the treaty stated on it and the reference details of the treaty stated in Addendum Four, nothing turns on this. Everyone agreed that the Addendum referred to, and according to its terms amended, the treaty that I have described.
Section B set out the "Facultative Terms" on which RGA agreed to reinsure MetLife's liabilities under the Blue Ribbon Policy. The relevant parts of Section B are those dealing with "Automatic Limits" and "Claims Handling Limits". I set them out: Automatic Limits: Every NSW police officer currently on active duty from 1 July 2005 will be covered automatically, providing the following conditions are met: Any officer not at work on the effective date of the reinsurance arrangement must return to work for a continuous period of not less than 3 months to be considered for participation in the scheme. Any officer that has not been at work performing their normal duties for one month prior to the commencement date of the scheme, but are at work completing normal duties on the commencement date, must return to work for a continuous period of not less than 1 month to be considered for participation in the scheme. Claims Handling Limits: With respect to the settlement of reinsured claims of below the claims handling limit, RGA will follow METLIFE's claims settlement decisions. For amounts in excess of this RGA must pre-approve all claim payments by METLIFE. For a claim to be eligible for consideration under the reinsurance arrangement the initial event leading to or contributing to that claim must occur after the date of effect of the treaty.

Approach to construction

There was very little difference between the parties as to the relevant principles. What differences there were, were more of emphasis rather than of deep principle. Accordingly, it is not necessary to set out in any great detail the authorities or the guidance that they give.

General principles

The starting point, as Mr Donaldson correctly submitted, is that for a reinsurer to be liable to the reinsured, the loss must fall within both the contract of reinsurance and the underlying contract of insurance. It is a necessary condition of the reinsurer's liability to the reinsured that the latter be liable, as insurer, to the insured under that underlying policy. But whether in fact the reinsurer is liable will depend on the proper construction of the contract of reinsurance and its application to the proved facts. See (by way of example only) the reasons of Kiefel J in Westport Insurance Corporation v Gordian Runoff Ltd (2011) 244 CLR 239 at [159].
The principles of construction applicable to commercial contracts generally apply to contracts of insurance: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; and thus to contracts of reinsurance. The general principles of construction have been stated many times. The High Court addressed them recently in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 and, even more recently, in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 89 ALJR 990.
The following points may be taken from those decisions (and the many others to which they refer): 1. the approach to construction is objective; 2. the meaning of the terms in dispute is to be determined by what a reasonable business person, possessed of the knowledge that the parties possessed, would have understood those terms to mean; 3. identification of the rights and liabilities of the parties under those terms requires consideration of their text, their context (which includes the whole text of the contract and other contracts, documents or statutory provisions referred to in it), and their purpose; 4. the process of interpretation requires the Court to pay attention to the language used by the parties, the surrounding circumstances known to them, and the commercial purpose to be secured by the contract (and by the relevant terms as a part of that contract); 5. an understanding of the commercial purpose may require attention to the genesis of the transaction, the background to it, and the context and the market in which the parties are dealing; 6. the Court should strive to give the contract and all its terms a reasonable and businesslike interpretation and, conversely, to avoid making it commercial nonsense; and 7. if the literal meaning of a term of a contract would result in absurdity, the Court may be justified in departing from that literal meaning.
The concept of "absurdity" requires some further comment. The first point is that, as Basten JA (with whom McColl JA and, relevantly, Campbell JA agreed) pointed out in Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297 at [13], the word "absurd", in the context presently under consideration, "is used to mean something opposed to reason, or irrational". As his Honour said, the concept "can form a basis for resolving internal inconsistencies in a contract or giving commercial sense to language which is otherwise in a practical sense meaningless".
The next point is that, as Basten JA also pointed out in Miwa (at [18], after a survey of the authorities), the test of absurdity is not easily satisfied. I would respectfully add to what his Honour said that the concept of absurdity, as with the concept of commercial inconvenience, is to be assessed by reference to the interests and duties of both (or all) parties under the contract; but all too often, submissions of absurdity or inconvenience reflect only the interests of the party complaining about the term in question. What is perfect sense to one party may appear, particularly with the benefit of hindsight and in the context of a dispute, to be nonsense to the other.
Finally, and again as Basten JA pointed out in Miwa at [18]: The Courts have no mandate to rewrite agreements, so as to depart from the language used by the parties, merely to give a provision an operation which, as it appears to the Court, might make more commercial sense… [his Honour's emphasis].
As I have noted already, the interpretation of a provision of a contract requires attention to, among other things, the whole text of the contract. Gibbs J pointed out in Australian Broadcasting Commission v Australasian Performing Wright Association Ltd (1973) 129 CLR 99 at 109 that the Court should strive to interpret the contract so that its provisions are harmonious, each working together with the others. The Court should also strive to give meaning to each of the terms that the parties have used to express their bargain. Conversely, a construction that leaves a particular term with no work to do is to be avoided if at all possible.

The "back to back" presumption

Mr Jackman submitted that there was a principle of construction, applicable to contracts of proportional reinsurance (such as the treaty and Addendum Four), that the reinsurance is "back to back" with the underlying policy. He referred, among others, to the decisions of the House of Lords in Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852 and Wasa International Insurance Co Ltd v Lexington Insurance Co [2010] 1 AC 180.
In the Vesta case, Lord Templeman (with whom Lord Bridge of Harwich and Lord Ackner agreed) made this point at 892. Lord Griffiths, with whom also Lord Bridge agreed, made the point more forcefully at 895: In the ordinary course of business reinsurance is referred to as "back-to-back" with the insurance, which means that the reinsurer agrees that if the insurer is liable under the policy the reinsurer will accept liability to pay whatever percentage of the claim he has agreed to reinsure. A reinsurer could, of course, make a special contract with an insurer and agree only to reinsure some of the risks covered by the policy of insurance, leaving the insurer to bear the full cost of other risks. Such a contract would I believe be wholly exceptional, a departure from the normal understanding of the back-to-back nature of reinsurance and would require to be spelt out in clear terms. I doubt if there is any market for such a reinsurance.
I should interpose to note that Mr Jackman laid particular stress on his Lordship's observations as to the marketability of reinsurance that was not back to back with the underlying insurance. However, there was no evidence that this was so. With the very greatest of respect to Lord Griffiths (and to Lord Bridge, who expressly concurred with his Lordship's observations on this point), I do not think that what he said can be taken as applicable without question (let alone, without the need for proof) in the present case.
The leading judgments in Wasa were given by Lord Mance and Lord Collins of Mapesbury (although Lord Brown of Eaton-under-Heywood gave brief reasons of his own).
It is convenient to start with the reasons of Lord Collins (and I should note that Lord Mance, although giving separate reasons, said at [54] that he agreed with Lord Collins' reasons). Lord Collins started at [55] by identifying the elements of a contract of proportional facultative reinsurance. He said: The reinsurer takes a proportional share of the premium and bears the risk of the same share of any losses. Consequently, the starting point is that normally reinsurance of that kind is back-to-back with the insurance, and that the reinsurer and the original insurer enter into a bargain that if the insurer is liable under the insurance contract, the reinsurer will be liable to pay the proportion which it has agreed to reinsure. In the usual case, any loss within the coverage of the insurance will be within the coverage of the reinsurance. This is so, whether or not (as is often the case [sic]) the reinsurance is put in place before the insurance is put in place or written.
Lord Collins made a similar point at [58]: In principle the relevant terms in a proportional facultative reinsurance - and in particular those relating to the risk - should be construed so as to be consistent with the terms of the insurance contract on the basis that the normal commercial intention is that they should be back-to-back.
His Lordship repeated this proposition, in somewhat different words, at [60]. At [62], his Lordship referred to the speech of Lord Griffiths in the Vesta case: in particular, to the passage that I have set out at [47] above.
However, as Lord Brown pointed out at [16], the presumption that a contract of reinsurance should be back to back with the underlying contract of insurance is a presumption, or rule, of construction, but not a rule of law. His Lordship noted that the decision in Vesta was authority for the existence of the presumption, but said that it and other cases "do not warrant its application in all circumstances".
Lord Mance made a similar point. First of all, as he observed at [32], "a reinsurance is a separate contract, which may contain its own independent terms requiring to be satisfied before insurers can claim indemnity under it". I take that to be consistent with the position in Australia (see at [39] above).
Then, having considered the Vesta case and others, Lord Mance said at [44] that "the issue is one of construction of the particular reinsurance contract against its relevant background and surrounding circumstances". I take his Lordship to have meant by that that if it were clear, on the proper construction of the reinsurance contract, that it was not back to back with the underlying contract, then the presumption could not dictate otherwise.
That conclusion is in my view supported by an earlier decision of the English Court of Appeal: Municipal Mutual Insurance Limited v Sea Insurance Company Ltd [1998] Lloyd's Rep 421. In that case, Hobhouse LJ (with whom Brooke LJ and Sir John Vinelott agreed) emphasised at 435 that if a contract of reinsurance had a different character to the underlying contract of insurance: It [would be] wrong in principle to distort or disregard the terms of the reinsurance contracts in order to make them fit in with what may be a different position under the original cover. The words "conditions as underlying" [in the reinsurance policy] cannot contradict either the period or limit provisions of the individual reinsurance contracts.
In short, as I understand the authorities, if the language chosen by the parties shows that the contract of reinsurance was not to be back to back with the underlying insurance, then the Court must give effect to the language of the parties, not to some contrary presumption. That is of some significance in this case because, as Mr Jackman recognised, Addendum Four was not in all respects back to back with the underlying Blue Ribbon Policy.
I add that in Axa Reinsurance (UK) plc v Field [1996] 3 All ER 517, Lord Mustill (with whom the other members of the House of Lords agreed) said at 527 that if it were intended that liability should be back to back, the obvious course is for the parties to say that in the contract of reinsurance: If the syndicate had wished to secure identical measures of loss for its inward and outward contracts it could have negotiated with the reinsurers to that end, and taken the obvious course of using the same words in each. They chose not to do so, and thereby accepted the possibility that although in some combinations of facts the outcomes might be the same, in others they might not. What reasons there might be for choosing this course I cannot speculate, in the abstract, but reasons there might certainly be. At all events, I believe that the only safe course is to fall back on the words actually used, and to read them as they stand.

First question: the proper construction of the Initial Event Sentence

The parties' submissions

Counsel provided detailed written submissions in chief and in reply, and spoke to those submissions in the course of the hearing. I shall set out the arguments of each party only to the extent necessary to give content to the question, and context for my decision on it.
Mr Jackman submitted that the Initial Event Sentence was not an exclusion clause (nor a condition of liability). He submitted that if it were to be so construed, it would be a "seminal and profound … carve out" that would "effectively [define] the entire nature and extent of the reinsurance…", and create "a massive schism in the extent to which the reinsurance… provides any measure of back to back coverage with the Blue Ribbon Policy".
Mr Jackman did not rely simply on the presumption that reinsurance and underlying insurance should be back to back. He referred to cl 12.1 of the treaty, read against the background of cls 1 and 7; and he noted that cl 4 of the treaty suggested that MetLife would have no other ability to reinsure its liabilities under the Blue Ribbon Policy.
Turning to the context, Mr Jackman pointed out that Addendum Four contained a section - the one headed "Automatic Limits" - that dealt expressly with restrictions on cover under the reinsurance that it effected. He submitted that if the Initial Event Sentence were intended to provide an additional restriction on the extent of cover, it would have been located within that section of Addendum Four. Conversely, he submitted, the actual location of the Initial Event Sentence - within a section dealing with "Claims Handling Limits" - suggested that it was not intended to operate as a condition of or exclusion from cover under the reinsurance contract.
On Mr Jackman's written submissions, the Initial Event Sentence appeared to serve no useful purpose. When asked, in the course of oral submissions, to identify that purpose, Mr Jackman responded (T12.4-.24): JACKMAN: Well, the practical point of it is we submit to give RGA the ability to say whether or not a claim should be approved in circumstances where the factual cause of the claim has straddled the pre and post inception periods and what it means read in a commercially sensible way is that the reinsurance arrangement which is following Metlife's claims settlement decisions will apply where the initial event occurs after the date of effect of the treaty but it won't apply, that is, RGA are not bound to follow Metlife's claim settlement decisions where there's a factual cause which precedes the date of effect of the treaty. HIS HONOUR: Just repeat that for me if you would. Or paraphrase it if you wish. JACKMAN: What it means is that RGA must follow Metlife's claim settlement decisions up to the monetary limits where all the factual elements of causation of the claim occur after the date of effect of the treaty because that is the consideration under the reinsurance arrangement. The following of Metlife's claims settlement decisions whereas if there is a factual causal element for the claim which straddles the two periods, before and after, then RGA is not bound to follow Metlife's claim settlement decisions. That is, they do get the ability to scrutinise the claim irrespective of monetary limits where the facts straddle the two periods.
Mr Donaldson submitted that the wording of the Initial Event Sentence was clear, and that there was no justification for departing from the language chosen by the parties. He submitted that the presumption could not help, in circumstances where on any view the reinsurance effected by Addendum Four was not wholly back to back with the underlying Blue Ribbon Policy. Further, Mr Donaldson submitted, the very words of the Initial Event Sentence themselves indicated another respect in which the two were not back to back. If I may say so, this is something of a bootstraps argument, where the question of the proper meaning of those words is the issue with which this question is concerned.
Mr Donaldson submitted that the location of the Initial Event Sentence might be inelegant or inappropriate, but that this could not warrant the excision or reading down of the words that the parties used. He noted, with some force, that the drafting of Addendum Four appeared to be somewhat informal, and lacking the apparent precision to be found in the drafting of the treaty.
I shall refer as necessary to other particular submissions in the course of my decision on the first question.

Decision

In my view, the Initial Event Sentence is to be read as a condition of or exclusion from the reinsurance cover otherwise provided by Addendum Four. My reasons for coming to that conclusion may be stated as follows.
First, the Initial Event Sentence is, as Mr Donaldson submitted, directed to eligibility for "consideration under the reinsurance arrangement". The words "the reinsurance arrangement" must refer to the cover provided by Addendum Four, read (as it says it is) as an amendment to the treaty. It may be noted that when the parties to Addendum Four wished to refer specifically to the treaty (as they did in their statement of agreement, and as they did in the section dealing with Claims Handling Limits), they did so. Presumably, they intended the words "the reinsurance arrangement" (which are found not only in the Claims Handling Limits section but also in the preceding Automatic Limits section) to indicate something different. That could only be Addendum Four, considered (as I have said) as an amendment to the treaty.
Next, the Initial Event Sentence is concerned in its terms with "eligibility": specifically, with eligibility to be "considered" under the reinsurance arrangement. In terms, it seems to me, the sentence is an indication, separate to that provided in the preceding section dealing with Automatic Limits, that not all claims made under the Blue Ribbon Policy are to be treated as reinsured under Addendum Four.
There was some dispute as to the meaning of the word "consideration" in the context of the Initial Event Sentence. Mr Jackman submitted that it referred to consideration of acceptance of the claim. Mr Donaldson submitted that it referred to eligibility, in the sense of "able to be reinsured". I think that Mr Donaldson's submission is correct (see at [74] to [79] below), but for the following reasons, it would make no substantive difference even if Mr Jackman's submission were correct.
Where reinsured claims fall below the relevant claims handling limit, RGA has neither right nor obligation to consider them; it is obliged to follow MetLife's decisions. It is only where claims are above the relevant limit that RGA must consider them, for the purpose (should it see fit to do so) of pre-approving them. Since we are concerned only with TPD claims based on "mental illness related" causes, the effect is that RGA is to consider, for the purpose of deciding whether to pre-approve, all settlement decisions on those claims.
Thus, the Initial Event Sentence has the effect that RGA has no obligation to consider any such claim unless the initial event leading to or contributing to it occurs after the date of effect of the treaty. On that analysis, the sentence must operate as a condition of or exclusion from cover, because (by hypothesis, in the circumstances of present relevance) RGA has no obligation to follow MetLife's settlement decision.
So read, the location of the Initial Event Sentence in a section of Addendum Four dealing with claims handling limits is not entirely irrational. In any event, I think, there is much force in Mr Donaldson's submission that the drafting of Addendum Four appears to be informal and lacking in rigour. Further, and noting that Addendum Four is to be read in conjunction with the treaty (as Mr Jackman submitted), cl 34.1(a) of the treaty provides that "the heading to a clause is for convenience of reference only and does not affect its interpretation". On orthodox principles of construction, that should be taken to apply to amending agreements made under and by reference to the treaty.
There is another linguistic consideration that suggests that the Initial Event Sentence is a condition of or exclusion from liability. That consideration is based on the concluding words of the Automatic Limits section of the Addendum Four: …considered for participation in the scheme.
The Automatic Limits section of Addendum Four sets out the conditions on which police officers are covered by "the scheme". There is to be automatic coverage for every police officer on active duty from 1 July 2005, subject to the two conditions stated. The second of those conditions deals with officers who had not been at work performing their normal duties for a month prior to the commencement of the scheme, but who were at work performing normal duties on that date. If they were to qualify for cover, they "must return to work for a continuous period of not less than 1 month to be considered for participation in the scheme".
In that context, the words "considered for participation…" clearly denote eligibility, or qualification. A police officer who had not been at work performing normal duties for a month prior to the commencement date could only participate in the scheme if he or she were at work completing normal duties on that date, and continued to do so for at least a month.
Returning to the Initial Event Sentence, it talks of the circumstances in which a claim may be "eligible for consideration". If the parties had used the words "[f]or a claim to be considered…", the parity of drafting between the Initial Event Sentence and the second condition of the Automatic Limits section of Addendum Four would make it reasonably clear, in my view, that the Initial Event Sentence, just like the concluding words of the second condition of the Automatic Limits section, was dealing with eligibility or qualification.
The parties did not use the same form of words. Instead, they talked of eligibility for consideration. On the view that I take, the introduction of the concept of eligibility may be surplussage or tautological. Nonetheless, when the Initial Event Sentence is read as a whole and in context, it is clear that "consideration" is used to denote eligibility or qualification: that is to say, that the Initial Event Sentence should be read as indicating a condition of cover under Addendum Four. Reading it in that way would make it entirely congruent with the second condition - specifically its concluding words - under the Automatic Limits section of Addendum Four.
To my mind, these linguistic considerations reinforce the view that the Initial Event Sentence is concerned with qualification for cover under Addendum Four, and (despite its location in the section dealings with Claims Handling Limit) is not merely directed at the mechanics of assessment of a claim.
I do not think that the back to back presumption has any significance in the context of this case. Obviously enough, the policies are not back to back in one important respect. Perhaps more fundamentally, the presumption could only be applied if the language of Addendum Four permitted it. To adopt and paraphrase what Hobhouse LJ said in Municipal Insurance (see at [57] above), the language of the contract should not be distorted or disregarded so as to give effect to the presumption.
Clause 12 of the treaty (and other language used in it) certainly presupposes that the reinsurance will be back to back with the underlying insurance. But where an amendment to the treaty breaks that nexus (as on any view Addendum Four does), the force of cl 12 (and that other language) is diminished.
As I have noted at [60] above, Mr Jackman submitted that to adopt the construction of the Initial Event Sentence which, I have said, I accept would have an extremely significant effect on the extent of cover available under Addendum Four. He submitted also that "the result would be profoundly uncommercial". I do not accept those submissions.
First, the only evidence of the extent of any carve-out is that about 250 claims are affected. Whether the number or value of those claims is significant, compared to the total number of TPD claims based on "mental illness related" causes, is unilluminated by any evidence. Second, and to adopt and paraphrase the observations of Lord Mustill in Axa Reinsurance, it is not for the Court to speculate on the parties' reasons, "but reasons there might certainly be". Third, there is no evidence of the asserted uncommerciality.
Mr Jackman placed great emphasis on the observations of Lord Griffiths as to the uncommerciality of proportional reinsurance contracts that were otherwise than back to back with the underlying contracts. There is no evidence that his Lordship's observations as to the market in England in 1989 should be taken to represent the state of affairs in this country in 2005. I do not feel justified in relying on even so eminent an authority in the absence of evidence.
Mr Jackman put a submission based on the last sentence of the Claims Handling Limits section: the reservation of a right to change the stated limits. He submitted that this meant that RGA could change anything in that section, subject to giving 90 days' notice. I do not agree.
In the sentence in question, the words "the above limits" must refer to the monetary limits specified in the preceding table. That table picks up (although with some modification) Schedule F to the treaty. In cl 2 of Schedule F, the reservation of a right to change the limits can only refer to the claims handling limits specified in the Schedule itself. The same words, when used in Addendum Four, should not be read as referring to anything other than the same subject: the specified monetary limits. If RGA had wished to reserve some unilateral right to vary a term of the reinsurance cover (as opposed to a machinery provision within the ambit of that cover), it should have chosen far clearer language.
I turn to Mr Jackman's submission as to the function of the Initial Event Sentence. The suggested purpose was, in summary, that RGA should have the ability to scrutinise TPD claims above the claims handling limits (that is to say, relevantly, all "mental illness related" TPD claims) where the events leading or contributing to that claim straddled "the date of effect of the treaty". (I add that although it might be thought to follow from what I have said earlier that "the date of effect of the treaty" means 5 February 2003, I should not be taken to have decided this point. As I have noted, it was not among the questions the subject of the order under r 28.2. I have heard no submissions on the point.)
The first point is that this construction is inconsistent with what I have said at [72] above. But in any event, as it seems to me, the suggested function is illusory. On Mr Jackman's analysis, "consideration" of a claim must refer to its "consideration" for the purpose of deciding whether to pre-approve the claim and authorise settlement. Further, Mr Jackman's analysis means that the "consideration" of a claim (more accurately, the duty to "consider" it) is bifurcated. Where a claim falls below the claims handling limit, the only "consideration" of it is that given by MetLife. RGA is bound to follow MetLife's settlement decision. So much may be accepted.
However, on Mr Jackman's analysis, where a claim is above the claims handling limit, the relevant consideration is that to be given to it by RGA. Effectively, in the case of TPD claims that are "mental illness related", that means that RGA is obliged to consider all such claims. But RGA's obligation to "consider" (in the sense stated above) claims follows in any event from the second sentence of the Claims Handling Limits section of Addendum Four. Of necessity, if RGA is required to "pre-approve" claims for settlement, it must consider them (in good faith, as everyone agreed) for the purpose of deciding whether to grant such approval. If the Initial Event Sentence did nothing more than require RGA to "consider" (in the requisite sense) claims falling above the claims handling limits, it would be entirely superfluous. As I have said, that function would be illusory.
In any event, I do not understand why the "consideration" of which the Initial Event Sentence speaks should be bifurcated in this way. The immediately preceding sentence makes it clear that for claims in excess of the claims handling limit, RGA is required to pre-approve any payments made. That must mean that RGA is required to consider the claims - no doubt, in good faith - to decide whether they fall within the terms of the Blue Ribbon Policy. However, as I have said, since RGA can only be obliged to do so where the causal conditions stipulated in the Initial Event Sentence are satisfied, the argument seems to me to go nowhere.
More importantly, however, if the Initial Event Sentence means what Mr Jackman said it means, it must apply to all "consideration" of a claim for the purpose of deciding whether to approve and settle it. It must apply whether the "consideration" is that given by MetLife (where the claim lies below the relevant claims handling limit) or by RGA (where the claim lies above that limit). If that is so, then the causal condition is one that must be satisfied in both cases. On this analysis, it seems to me, the suggested function of the Initial Event Sentence for which Mr Jackman contended is more than illusory; it is destructive of his client's primary position.
For those reasons, the first question must be answered "yes".

Second question: application of the Initial Event Sentence to claims 27375 and 35090

The parties' submissions

Mr Jackman submitted that if the Court were to conclude that the Initial Event Sentence did operate as a condition of or exclusion from liability, the words "the initial event leading to or contributing to that claim" (that is to say, the claim, the eligibility for consideration of which was in question) should be read as referring to the immediate cause of the claim: death or TPD. He submitted that the words should not be taken to refer (in the case of TPD) to the underlying injury or illness (or combination of injuries and illnesses) that led to the officer's becoming totalling and permanently disabled within the definition contained in the Blue Ribbon Policy.
Mr Donaldson submitted that the Initial Event Sentence was directed to the contract of reinsurance, not to the underlying Blue Ribbon Policy. It was clear, he submitted, that "initial event" was not used synonymously with the term "Insured Event" used in the Blue Ribbon Policy.
Further, Mr Donaldson submitted, the drafting of the Initial Event Sentence was entirely inappropriate if it were intended to refer only to final, or ultimate, cause. That construction, he submitted, would not give effect to the causal words "leading to or contributing to".
The submissions on factual causation followed the different approaches to construction that I have outlined.

Decision on construction point

The language of the Initial Event Sentence, on this point at least, is clear. If the claim is to be eligible for consideration, the initial event leading to it or contributing to it must occur after the specified date. Even if the words "leading to" were to be taken as referring to the last, or most proximate, cause, those words must not be read in isolation. They are followed immediately, and disjunctively, by the words "or contributing to". Presumably, the parties intended that compound causal expression to mean something. The words "or contributing to" would naturally encompass some cause which, although not the immediate or temporally most proximate cause of the claim, nonetheless contributed, at least in some way that was not, as the parties put it in the statement of agreed facts, de minimis, to the occurrence of the condition that led to the making of the claim.
On that view, the resolution of the second question follows very simply. That is because of the facts agreed in respect of each claim.

Application to claim 27375

The claimant commenced duties as a police officer on 3 June 1983. On 31 May 2001, whilst on duty, the claimant was involved in pursuit of a car. The pursuit ended when the offending vehicle rammed the claimant's car. The claimant thought that he was going to die. He sustained an injury to his back. The driver of the other car died at the scene of the accident.
The claimant had two weeks off work following the accident. He then returned to his usual duties.
The claimant began to experience significant psychological symptoms in 2003. He was treated for depression in January 2004. In September 2004, he was diagnosed with either post-traumatic stress disorder (PTSD) or anxiety disorder. In December 2004, he was certified as unfit to work, for a closed period, by reason of PTSD. The claimant had further periods off work, due to PTSD, during 2005. The diagnosis of PTSD was confirmed more than once during that year.
In 2006, after a further period of leave due to PTSD, the claimant returned to work on full time hours but with limited duties. He continued so employed until July 2007, when he was certified again as unfit for work by reason of PTSD. On 29 October 2011, he was medically discharged from the police force, as a result of TPD caused by PTSD.
The statement of agreement facts records the following in respect of the claimant, at [62] to [66]: 62. Between 31 May 2001 and 23 December 2004, the Claimant was employed by the NSW Police Force to perform over 15 hours of work per week. 63. From no later than 31 January 2003 onwards, the Claimant was suffering from PTSD. 64. The incident on 31 May 2001 was the most significant cause of that PTSD. 65. The Claimant's PTSD caused the Claimant to be absent from his employment with the NSW Police Force for over six consecutive months commencing from 3 July 2007. 66. The Claimant's PTSD caused the Claimant to become, by 5 September 2009 (and thereafter), incapacitated to such an extent as to render him unlikely ever to engage in any gainful profession, trade or occupation for which he was reasonably qualified by reason of his education, training and experience.
Mr Jackman appeared to accept, on the basis of the agreed facts (and the statement goes into far more detail than I have set out) that on any common sense view, the incident of 31 May 2001 was an initial event that contributed to the officer's TPD. However, he submitted, it did not of itself lead or contribute to the claim. That submission depended on acceptance of Mr Jackman's submissions as to construction, summarised at [93] above.
On the view that I have set out as to the proper construction of the words "the initial event leading to or contributing to [the] claim", the facts as I have summarised them - specifically, the facts agreed at [62] to [66] (see at [103] above) make it clear that the second question must be answered "yes" in respect of claim 27375.

Application to claim 35090

The claimant commenced work as a police officer in August 2002. He was discharged as medically unfit (amounting to TPD) in June 2012, having not performed duty since January 2011.
During his service as a police officer, the claimant was exposed to a number of horrendous traumatic incidents. One was a motor vehicle accident in October 2002. Another was a boating accident in February 2007. A third was a motor vehicle accident, involving a petrol tanker and another vehicle, in 2009. The details need not be recited.
In 2009, the claimant began to suffer "trauma related sequelae". He reported to a psychiatrist in that year, that he suffered flashbacks to the 2009 petrol tanker accident and the two previous accidents.
In January 2011, the plaintiff's treating doctor made a diagnosis of PTSD and certified him unfit for work by reason of that condition. That was said to have been a result of cumulative work stress. The diagnosis was confirmed by other practitioners in the course of 2011.
Medical reports suggest that the PTSD condition did not commence, or emerge, until May 2009. Nonetheless, the medical evidence, as it is summarised in the statement of agreed facts, makes it reasonably clear that the condition resulted from all the incidents to which I have referred. The parties have agreed that the 2002 accident, whilst not the immediate cause of the claimant's PTSD, nonetheless contributed to it to an extent that was more than de minimis. The PTSD in turn was the cause of the officer's TPD.
Paragraphs 46 to 50 of the agreed facts relating to this claim record: 46. Between 30 August 2002 and 17 January 2011 (with the exception of the period 21 May 2010 to 18 November 2010), the Claimant was employed by the NSW Police Force to perform over 15 hours of work per week. 47. From no later than 17 January 2011 onwards, the Claimant was suffering from PTSD. 48. The 2002 [motor vehicle accident] was not the immediate cause of that PTSD but contributed to that PTSD to an extent that was more than de minimis. 49. The Claimant's PTSD caused the Claimant to be absent from his employment with the NSW Police Force for over six consecutive months commencing from 17 January 2011. 50. The Claimant's PTSD caused the Claimant to become, by 7 June 2012 (and thereafter) incapacitated to such an extent as to render him unlikely ever to engage in any gainful profession, trade or occupation for which he was reasonably qualified by reason of his education, training and experience.
Mr Jackman submitted that, since the claimant's PTSD had not manifested itself or been diagnosed until 2009, the "initial event leading to or contributing to the claim" occurred no earlier than the date of diagnosis. Again, that submission depends on acceptance of Mr Jackman's submissions as to the construction of the Initial Event Sentence. Again, on my view of the proper construction of that sentence, the answer in respect of this claim flows inevitably from the agreed facts.
It may be accepted that it was the accumulation of horrendous incidents to which the claimant was exposed, combined with the other matters recorded in his medical history that I have not found it necessary to set out, that triggered the PTSD that was diagnosed in 2009. However, the agreement in respect of the 2002 motor vehicle accident makes it clear that, as Mr Jackman accepted, it was an initial event that contributed to the condition that in turn was the trigger for, or occasion of, the claim under the Blue Ribbon Policy.
Accordingly, question two should be answered "yes" in respect of this claim also.

Conclusion and orders

The parties should have some time to consider these reasons, and the course to be followed. Accordingly, I propose to stand the matter over to the directions list in three weeks' time from the publication of these reasons. The parties will need to be able to inform the List Judge on that date of what they propose should be done.
As to costs, it seems to me that the hearing of the separate questions constitutes an "event" for the purposes of UCPR r 42.1, and that costs should follow the event. Any party who contends for a different order should make application, in the way to be described, within 14 days of the publication of these reasons.
I make the following orders: 1. direct that the separate questions the subject of the Court's order made on 8 April 2016 be reworded in the manner set out at [4] above. 2. Answer those questions, so reworded, as follows: Question 1: Does the Initial Event Sentence operate so as to limit the Plaintiff's entitlement to indemnity under the addendum to the reinsurance treaty referred to in paragraph 5 of the Amended Commercial List Statement ("Addendum Four") so that no such indemnity is available where the initial event leading or contributing, to an extent that is more than de minimis, to the disablement the subject of the claim against MetLife under the policy (referred to in paragraph 1 of the Amended Commercial List Statement) occurred prior to the inception of the treaty? (For the purposes of the above question "Initial Event Sentence" means the sentence in Addendum Four: "For a claim to be eligible for consideration under the reinsurance arrangement the initial event leading to or contributing to the claim must occur after the date of effect of the treaty".) Answer: Yes. Question 2: If the answer to question 1 is yes, does the Initial Event Sentence apply to deprive the Plaintiff of the ability to claim against the Defendant in: (a) claim 27375? Answer: Yes (b) claim 35090? Answer: Yes 1. Stand proceedings over to directions list on 5 August 2016. 2. Order the plaintiff to pay the defendant's costs of the separate questions, and direct that those costs may be assessed forthwith. 3. Direct that any party seeking to discharge or vary order 4 should notify the other party and my Associate, within 14 days of the date of publication of these orders, of the further or other costs orders that it seeks and, in brief, the reasons why those orders are sought. 4. Reserve further consideration of costs in the event that any application is made under order 5. 5. Direct that the exhibits on the separate questions be handed out.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 July 2016

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