Westport Insurance Corporation & Ors v Gordian Runoff Limited

Westport Insurance Corporation & Ors v Gordian Runoff Limited - [2009] NSWSC 245 - NSWSC 2009 case summary — Zoe

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50235/08 WESTPORT INSURANCE CORPORATION AND ORS v GORDIAN RUNOFF LIMITED JUDGMENT The application 1 There is before the court an application pursued by the plaintiff for leave to appeal pursuant to section 38 (4) (b) of the Commercial Arbitration Act 1984 [NSW] on questions of law arising out of an award. The approach taken by the Court has been to permit argument on the application for leave as well as, should leave be granted, on the actual appeal. Reasons for this case management regime [which in any event seemed to me to have been that laid down by the List Judge when case managing the proceedings] were given on the first day of the hearing. 2 Notwithstanding the case management regime it is important for the Court for obvious reasons to focus very carefully on the stringent leave requirements which have to be met in order a grant of leave. Background matters 3 The award was delivered on 13 October 2008 in an arbitration where the defendant was the claimant and the plaintiffs were the respondents. The arbitrators were the Hon. G E Fitzgerald AC QC, Mr F Hoffman and Mr I Brown. 4 The dispute which gave rise to the arbitration concerned the scope and operation of certain contracts of reinsurance issued by the plaintiffs and the entitlement of the defendant (as reinsured) to recovery from the plaintiffs in respect of claims made on the defendant by its original insured, FAI Insurances Limited (FAI). 5 The arbitration agreement contained in the contracts of reinsurance provided, consistently with s22(2) of the Commercial Arbitration Act 1984 (NSW), that the arbitrators may determine any question by reference to considerations of general justice and fairness. 6 At the arbitration, the plaintiffs were successful on all issues save for a question of law concerning the construction and application to the facts of s18B(1) of the Insurance Act 1902 (NSW) and the effect of s22(2) of the Commercial Arbitration Act 1984 (NSW). The principles which inform the courts jurisdiction to grant leave to appeal from an arbitral award 7 These principles are of long standing. Without being exhaustive the following may be said. 8 Section 38(5) of the Act provides:-

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27 The $10m xs $10m layer replaced an earlier $10 million in excess of $10 million excess of loss reinsurance treaty written in part by the first and second plaintiffs for the defendant (the Expiring Treaty). 28 Set out below are key events relevant to the writing of the Expiring Treaty, the FAI Policy, the $10m xs $10m layer and the $5m xs $5m and $3m xs $2m layers. The writing of the Expiring Treaty 29 On 31 December 1997 Ms Margot Rathbone (nee Beyersdorf) of the first plaintiff faxed a placing slip for the Expiring Treaty to Mr Rob Porter of Fleming Insurance Brokers Limited (then reinsurance brokers for the defendant). The placing slip had been stamped by the first and second plaintiffs among others. The Expiring Treaty incepted on 1 January 1998 and was to expire on 31 December 1998. 30 On 28 October 1998 Ms Rathbone signed the treaty wording for the Expiring Treaty on behalf of the first plaintiff. The writing of the FAI Policy 31 On 23 September 1998 Mr Rodney Adler of FAI notified the Australian Stock Exchange that the Adler family had sold 45 million FAI shares to HIH Winterthur International Holdings Limited (HIH) with a view to HIH acquiring all of the share capital of FAI. 32 On 28 October 1998 Mr Ewen McKay of FAI wrote to Mr James Walker of Aon Professional Services (Aon) asking him, in light of the likely takeover of FAI by HIH, to investigate the options available to the Board of Directors of FAI for ongoing D&O liability run off cover, including the option of a multi-year deal. 33 On 30 October 1998 Ms Karen Ware of Aon wrote to Mr Malcolm Fletcher of the defendant asking him for preliminary comments following FAI's proposed sale and their D&O liability insurance being placed into run-off. 34 On 4 November Mr Walker of Aon wrote to Mr McKay of FAI, stating: "…we have had initial discussions with the current underwriter who had agreed in principle that a "run-off" program for a five year period can be negotiated." 35 On 12 November 1998 and 13 November 1998 correspondence passed between Mr Walker of Aon and Mr Fletcher of the defendant in relation to a proposed 5-year D&O liability run off cover to be written by the defendant for FAI. 36 On 19 November 1998 Mr Fletcher of the defendant faxed to Mr Walker of Aon two proposed placing slips - one for 5-year D&O liability run off policy and one for an annual D&O liability run off policy for 5 years. 37 On 11 December 1998 Mr McKay of FAI wrote to Mr Walker of Aon, stating: "…I can advise that you are instructed to proceed with the placement of Option 1 (i.e. 5 year policy with current insurers)." 38 On 14 December 1998 Mr Walker of Aon sent a copy of Mr McKay's fax to Mr Fletcher of the defendant. 39 On 23 December 1998 Mr Walker of Aon wrote to Mr Fletcher of the defendant in relation to a proposed 7-year D&O liability run off cover to be written by the defendant for FAI. 40 Also on 23 December 1998 Mr Fletcher of the defendant faxed to Mr Walker of Aon a placing slip stamped on behalf of the defendant for the FAI Policy, which was to be for a 7-year period. 41 On 23 February 2000 the policy wording for the FAI Policy was signed on behalf of the defendant. The FAI Policy incepted on 31 May 1999 and was to expire on 31 May 2006. The writing of the $10m xs $10m layer 42 On 15 December 1998 Mr Fletcher of the defendant wrote to Mr Peter Harmer of Aon Re Worldwide (Aon Re) in relation to the renewal of the Expiring Treaty. 43 On 19 December 1998 Ms Rathbone of the first plaintiff had a discussion with Mr Giles Fox of Aon Re in relation to the renewal of the Expiring Treaty. 44 On 21 December 1998 Mr Fox of Aon Re faxed a copy of Mr Fletcher's letter of 15 December 1998 to Ms Rathbone of the first plaintiff. 45 Also on 21 December 1998 Ms Rathbone of the first plaintiff had a discussion with Mr Peter Backe-Hansen of the first plaintiff in relation to the renewal of the Expiring Treaty. 46 On 22 December 1998 Ms Rathbone faxed a quote for the renewal of the Expiring Treaty to Mr Fox of Aon Re. The quote stated: "Original contracts: Up to three years is acceptable. PINA clause to be amended … Look forward to receiving slip for our signature." 47 Also on 22 December 1998 Mr Fox of Aon Re wrote to Mr Fletcher of the defendant attaching a draft slip. 48 On 23 December 1998 the first plaintiff stamped a placing slip for the $10m xs $10m layer along with a copy of Mr Fletcher's letter of 15 December 1998. The $10m xs $10m layer incepted 1 January 1999 and was to expire on 31 March 2000. 49 Also on 23 December 1998 the second plaintiff stamped a placing slip for the $10m xs $10m layer along with a copy of Mr Fletcher's letter of 15 December 1998 and Ms Rathbone's letter of 22 December 1998. 50 On 29 December 1998 the third plaintiff and on 31 December 1998 the fourth plaintiff stamped the placing slip for the $10m xs $10m layer along with a copy of Mr Fletcher's letter of 15 December 1998. 51 On 14 January 1999 Aon Re sent a cover note to Mr Fletcher of the defendant in relation to the $10m xs $10m layer. 52 On 10 February 1999 Mr Fletcher of the defendant wrote to Mr Fox of Aon Re, stating: "I note that there is no limitations concerning the period of insurance policies issued by GIO and ask that you confirm that we will be covered for policies that are issued for terms in excess of 12 months…" 53 On 15 February 1999 Mr Fox of Aon Re wrote to Mr Fletcher of the defendant, stating: "…I confirm reinsurers have noted and agreed to your request … with regard your need to write original policy periods of 2 or 3 years…" 54 On 16 February 1999 in an internal memorandum Mr Fletcher of the defendant stated: "Treaty coverage is as expiring except that we now have protection for long term policies up to 3 years…" 55 On 18 February 1999 Mr Fletcher of the defendant wrote to Mr Fox of Aon Re, stating: "…if we issue a policy for a 2 or 3 year period … but at the end of the first year, we are asked to "roll forward" the term for another year so as to preserve the concept of a 2 or 3 year period, what cover do we have under the current treaty for the "roll forward" period? 56 On 19 April 1999 Mr Fox of Aon Re wrote to Mr Fletcher of the defendant, stating: "…I can confirm that your treaties provide reinsurance to cover original policy periods of up to three years." The writing of the $5m xs $5m and $3m xs $2m layers 57 On 1 June 1999, 4 June 1999 and 21 June 1999 correspondence passed between Mr Peter Burtenshaw of the defendant (who had replaced Mr Fletcher) and Mr Paul Clarke and Mr Michael Ward of Benfield Grieg (Australia) Pty Limited (Benfield) in relation to the possibility of expanding the defendant's excess of loss reinsurance coverage. 58 On 29 June 1999 Mr Backe-Hansen of the first plaintiff had a discussion with Mr Clarke and Mr Ward of Benfield in relation to the possibility of the first plaintiff providing excess of loss reinsurance coverage to the defendant below the existing $10m xs $10m layer. 59 On 5 July 1999 Mr Backe-Hansen of the first plaintiff sent a quote to Mr Ward of Benfield for a number of proposed layers of reinsurance for the defendant below the existing $10m xs $10m layer. 60 On 16 August 1999 placing slips for 80% of the $5m xs $5m and $3m xs $2m layers were stamped on behalf of the first, second and sixth plaintiffs. The $5m xs $5m and $3m xs $2m layers incepted on 1 January 1999 and were to expire on 31 March 2000. 61 On 21 September 1999 Benfield sent cover notes to the defendant in relation to the $5m xs $5m and $3m xs $2m layers. 62 On 23 December 1999 Mr Ward of Benfield wrote to Mr Backe-Hansen of the first plaintiff in relation to a concern raised by the defendant with the exclusion list under the $5m xs $5m and $3m xs $2m layers. 63 On 1 March 2000 placing slips for the remaining 20% of the $5m xs $5m and $3m xs $2m layers were stamped on behalf of the fifth plaintiff. 64 On 2 March 2000 Benfield sent revised cover notes to the defendant in relation to the $5m xs $5m and $3m xs $2m layers. The plaintiffs' case 65 The plaintiffs' central proposition is that the broad error of law in the Award is that, having found in favour of the plaintiffs on the existence of the agreement that was the central issue at the hearing, the reasoning and conclusion in relation to Section 18B(1) of the Insurance Act have the effect of inverting the obvious purpose of that section and produce an unreasonable result. Section 18 (B) of the Insurance Act 1902 66 This section is in the following terms: 18B Limitation on exclusion clauses

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The reinsurers' basic case in opposition to the application of s18B(1) was that: · "Section 18B is concerned with the operation of the scope of cover, namely with limitations or exclusions affecting the operation of the insuring clause. It operates where the cover is prima facie available, but where that cover is limited or excluded on the happening of certain events or the existence of certain circumstances. .. · This language implies a central requirement that there be a prima facie liability to indemnify. This is further reinforced by the words which follow paragraph (b), namely that "the insured shall not be disentitled to be indemnified". Disentitle means to deprive of a title or right. A disentitlement implies an initial entitlement to be indemnified which is excluded or limited by reason of some event or circumstance, thereby resulting in a deprivation of right. · In this case there is simply no liability to indemnify in the first place. The scope of cover or the area of indemnity did not include the policy issued by the [Gordian] to FAI. It never did. It was the wrong sort of policy. .. " 90. We do not agree with the reinsurers' central contention that the FAI D&O policy "was the wrong sort of policy." By the reinsurance treaties, the reinsurers agreed to indemnify Gordian in respect of losses under D&O policies underwritten by Gordian. However, cover was limited to D&O policies which required that claims be made and notified to Gordian within 3 years from inception. D&O policies which did not require that claims be made and notified to Gordian within 3 years from inception were not covered. The reason why the reinsurance treaties did not cover D&O policies which did not require that claims be made and notified to Gordian within 3 years from inception was that such D&O policies were excluded or because the D&O policies which were covered by the reinsurance treaties were limited. As has been noted, the reinsurers put their contention in different ways at different times. In 2001, they sought to have the wording changed to add an exclusion of "policies issued for periods longer than 36 months." The rectification claimed in their submissions was the addition of "a term that, absent special acceptance, the class of business covered was limited to underlying policies having a term not exceeding three years". The formulation they initially proposed was an exclusion, the latter a limitation.

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Consistently with the remedial character of ss18B(1) and in compliance with the obligation to construe its language so as to give the most complete remedy which is consistent with the actual language employed and to which the words are fairly open, we have concluded that the exclusion and/or limitation on the " liability of the [reinsurers] to indemnify [Gordian]" in respect of the 3-year claims made under the FAI D&O run-off policy is based " on the existence of [the] particular circumstance" that the FAI D&O run-off policy covered claims which were made and notified to Gordian more than 3 years from the inception of the FAI D&O run-off policy. If at large, "considerations of general justice and fairness" would produce the same result. First & second errors - characterisation 77 The findings in the Award at [79], [80] and [81] are foundational in relation to the application of Section 18B(1) to the facts. Their effect is that the parties' agreement was that the reinsurance treaty did not cover the FAI policy in the first place. As a consequence, reinsurers were not contractually bound to indemnify the reinsured (Gordian) in respect of any claims arising under the FAI policy. 78 The Arbitrators held at [90] that the parties' agreement as to cover constituted an "exclusion" or "limitation" for the purposes of Section 18B(1). The difference of characterisation between the scope of cover, and exclusions or limitations detracting from that scope of cover, is a well recognised one [Burton Lommers Contractors Pty Ltd v Manufacturers Mutual InsuranceI Ltd (1990) 6 ANZ Ins Cas ¶61-000 at 76,682; QBE Insurance (International) Ltd v Commercial Union Insurance of Australia Ltd (1988) 5 ANZ Ins Cas ¶60-839 at 72,252]. That issue of characterisation is a primary source of error in the Award. Class of business 79 Before examining those authorities it is pertinent to stand back in order to focus upon the significance of ascertaining the relevant class of business. The following propositions are pervasive:

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The short answer to all of the submissions advanced by the applicant is that if it wished to have insurance cover for common law claims beyond New South Wales it should have so stated in its proposal, rather than stating that it wished for cover in respect of the performance of its business "within New South Wales". Returning to section 18B(1) and the instant Arbitration Award 92 The grammatical, as well as the natural, sense of Section 18B(1), read as a whole, is that it is concerned with policy exclusions or limitations, which are triggered by a particular event or circumstance, where the loss claimed is causally unrelated to that event or circumstance. The section could not be concerned with the underlying scope of cover. That is because the scope of cover does not depend on the happening of an event or the occurrence of a circumstance. Nor is the scope of cover "triggered" by anything. It is qualitatively different from a policy exclusion or limitation which cuts back cover when triggered by the happening of an event or the existence of a circumstance. 93 Hence the Arbitrators found that, by their agreement, the parties defined the agreed scope of cover. They agreed on what was to be covered, namely D & O policies with periods of insurance up to three years. The definition of cover was an exercise in inclusion. Indeed, it was an agreement to extend, at Gordian's express request, the prior existing scope of cover under the expiring treaty for 1998 [Award [78] - [81]]. A scope of cover for a reinsurance treaty, defined by reference to the period of underlying policies to be issued by the reinsured, is no different to a scope of cover defined by any other criterion. 94 The reasoning in the Award was incorrect. It has led the Arbitrators to characterise the parties' agreement on the scope of cover as one which contains the elements required by Section 18B(1), namely: i. the definition of the circumstances in which the insurer is bound to indemnify the insured so as to exclude or limit the liability of the insurer;

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(b) has the effect of excluding or limiting the liability of the reinsurer to indemnify the insurer on happening of those events or circumstances. 102 Further, the heading to Section 18B ('Limitation on exclusion clauses') is consistent with the view that the section does not apply to clauses defining the cover. Section headings are not part of a statute: Section 35 Interpretation Act 1987 (NSW). But Section 33 of the Interpretation Act requires a purposive approach to interpretation; and section headings may be used as an extraneous aid to assist in the interpretation of an Act that is obscure or ambiguous or that, given its ordinary meaning, might lead to an absurd or unreasonable result: Section 34(2)(a) Interpretation Act. 103 For those reasons, a primary error of law in the Award is the failure to recognise that an agreement made at Gordian's request to extend cover for D & O policies to include those issued for up to three years, is not a "limitation" or "exclusion" in the sense contemplated by Section 18B(1). The defendants submissions 104 Amongst their many submissions the defendant contended that the so-called first and second alleged errors were no more than submissions that the Court ought to construe section 18B differently to the Arbitrators. The defendant contended that the plaintiff had not demonstrated that the Arbitrators were obviously wrong, especially given the fact that section 18 B is remedial legislation requiring to be construed beneficially: [Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622 at 638 (Mason, Brennan, Deane & Dawson JJ) and 640 (Murphy J)]. 105 I cannot accept this submission. For the reasons already given, the Arbitrators were clearly wrong in their approach to the proper construction and application of section 18B. Other alleged errors 106 For these reasons it is unnecessary to deal with so-called errors 3 to 6 relied upon by the plaintiffs in the alternative. Remedy 107 The Court having upheld the plaintiffs submissions as to the primary construction of section 18B, the only appropriate remedy is that the Award be set aside. In short the defendant is seen to have failed on all of its primary grounds agitated before the Arbitrators, as well as the only ground upon which the Arbitrators founded that the Award found in the defendant's favour. The types of error made by the Arbitrators are such as to make a remitter inappropriate. Contested application to file amended commercial list statement 108 The plaintiffs [in contentions paragraph 8] applied to amend their commercial list statement to plead that the arbitrators assumed that section 18B(1) of the Insurance Act 1902 applied to a contract of reinsurance and the plaintiffs did not make a submission to the contrary at the arbitration hearing. The plaintiffs sought now to contend that it was an error of law for the arbitrators to apply section 18B(1) to a contract of reinsurance. 109 The same application was later made [in contentions paragraph 9 (g)] under the heading "Error of Law". 110 The Court disallows those applications for leave to amend the commercial list statement. ************

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Judgment (92 paragraphs)

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