Proper and business-like steps: Reinsured not required to “look under every stone” in claim investigation

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Summary: A recent decision of the High Court (Tokio Marine Europe Insurance Limited v Novae Corporate Underwriting Limited) held that taking proper and business-like steps did not require investigating aspects of a claim that would make no difference to the settlement.

A recent decision of the High Court (Tokio Marine Europe Insurance Limited v Novae Corporate Underwriting Limited) held that taking proper and business-like steps did not require investigating aspects of a claim that would make no difference to the settlement.

The Decision


This case arose out of damage caused over 32 days in 2011 by the Thailand floods to 212 of Tesco’s stores.

Tesco was insured with ACE globally under a Master Policy, with local policies issued in every jurisdiction in which Tesco had operations.

Although the Master Policy contained a clause deeming all loss, damage or destruction within 72 hours to have been caused by a single Occurrence, the term “Occurrence” was further defined to mean “any one Occurrence or any series of Occurrences consequent or attributable to one source or original cause”.

Tesco obtained a legal opinion to the effect that the claim attracted only one, rather than eleven, deductibles (£100,000 for the Master Policy/£2.5M for ACE’s Reinsurance).

ACE was reinsured by various reinsurers, including Tokio, who had retrocession cover from Novae which included a SCOR follow settlements clause.

ACE accepted a settlement offer of (net) £80 Million made by Tesco, subject to payment being within Tesco’s 2011/12 financial year. Otherwise, Tesco would have conducted a full stock audit which ACE’s loss adjusters estimated could give rise to a claim of at least £112M.

Novae argued that ACE had failed to take proper and business-like steps in respect of the claim because they failed to:

  1. obtain their own legal advice upon both the local and Master Policy and, particularly, the definition of “occurrence”;
  2. investigate the different causes of the flooding and heavy rainfall in Thailand;
  3. investigate whether the losses could be attributed to different sources or original causes (such as other tropical storms, mismanagement of dams or failure of flood defences).

This hearing was an application by Tokio for summary judgment against Novae on this particular defence only. All of Novae’s other defences had already failed by virtue of a previous determination of preliminary issues (subject to appeal).

Mr Justice Field dismissed Novae’s arguments as having no prospect of success and commented that the settlement of £80 Million was “undoubtedly a good settlement”.

Given the estimate by ACE’s loss adjusters for Tesco’s claim, he considered they were clearly entitled to conclude that there was nothing to be gained by the further investigation.

Comment


Reinsureds should take comfort in this decision. The investigations necessary to show that proper and business like steps were undertaken may be limited, provided a reinsured has evidence showing that it was reasonable, at the time, to conclude that further investigation could not have improved the settlement. This will be particularly persuasive where the settlement can be shown, on objective grounds, to have been a good one.

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