REINSURERS’ EXTRA-CONTRACTUAL LIABILITY

Ozlem Gurses

Insurers’ Extra-contractual Liability

United States implied duty of good faith: neither party will

do anything to injure the rights of the other in receiving the benefits of the agreement

Insurers’ Extra-contractual Liability

• This implied covenant requires a liability insurer to defend suits brought against the assured or settle the third party claim within policy limits when there is a substantial likelihood of recovery in excess of those limits

• If the insurer refuses to settle a third party claim within policy limits, without proper cause, in case a jury award exceeds the limits provided by the insurance policy, such conduct may give rise to a cause of action in tort against the insurer (exception:New York)

Shamblin v. Nationwide Mut. Ins. Co. 183 W.Va. 585 (W.Va.,1990) “…Can you honestly imagine a situation where an insurance company fails to settle within the policy limits, the policyholder gets stuck with an excess judgment, and this court does not require the insurance company to indemnify the policyholder? That will happen the same day the sun rises in the West! As far as I am concerned, even if the insurance company is run by angels, archangels, cherubim and seraphim, and the entire heavenly host sing of due diligence and reasonable care, I will never, under any circumstances, vote that a policyholder instead of an insurer pays the excess judgment when it was possible to settle a case within the coverage limits.”

English Law

• Groom v Crocker [1939] 1 K.B. 194: insurers’ liability in tort was rejected. certain implied boundaries and limitations to the

insurers’ right to have absolute control in negotiations with third parties that such a right should not be exercised arbitrarily

In the following cases although such boundaries were recognised, the remedy available for breach of such implied duties has not been clarified

Damages for late payment

• Sprung v Royal Insurance (UK) Ltd [1997] C.L.C. 70: no cause of action for late payment of policy moneys, for the reason that protection for delay in paying damages is provided by the discretionary remedy of interest.

• The English and Scottish Law Commissions:recommended a standalone duty set out in statute

Reinsurers’ extra-contractual liability

cases in which the reinsurers have rendered themselves liable to the assured by reason of their conduct as joint tortfeasors or as parties to a joint enterprise; and

cases in which the reinsurers are liable to indemnify the reinsured for the reinsured’s own liability to the assured.

Reinsurers’ Liability Arising Out of Reinsured’s Conduct

By definition extra-contractual liability is not reinsured

United StatesExtra-contractual liability (ECO) clauses: provide that the reinsurer will pay the reinsured’s liability for claims brought against it outside of the terms of underlying insurance contracts awards against the reinsured if an ECO clause is intended to cover defence costs incurred by reinsureds in an action by their assureds that should be expressly stated in the clause

Reinsurers’ Liability Arising Out of Reinsured’s Conduct

Liability insurance: a clause may be included in a reinsurance contract rendering the reinsurer the reinsured’s liability insurer

e.g. “...it is also agreed that should the Company become legally obligated to pay a loss in excess of its policy limits the Reinsurer agrees to assume seventy-five percent (75%) of that part of such loss (plus proportionate loss expense) which is in excess of the policy limit.”

Reinsurers’ Liability Arising by Their Own Conduct

Effect of claims provisions: Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd [1983] 1 Lloyd‘s Rep. 541

Reinsurers’ duty of good faith:Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd. 2001] Lloyd's Rep. I.R. 667; Eagle Star Insurance Co Ltd v Cresswell [2004] 1 C.L.C. 926.

Joint venture between reinsureds and reinsurers