International Law Update

After Fifth Circuit’s rehearing en banc on whether McCarran‑Ferguson Act authorizes state law to reverse‑preempt the Convention on the Recognition and Enforcement of Foreign Arbitral Awards or its implementing legislation, Court concludes that Act does not apply to Convention

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“Although it is not clear from this provision’s text that arbitration agreements are voided, Louisiana courts have held that such agreements are unenforceable because of this statute … The Louisiana statute, as so interpreted, conflicts with the U.S.’s commitments under the Convention. The Convention states that each signatory nation ‘shall recognize an agreement in writing under which the parties undertake to submit to arbitration’ their dispute ‘concerning a subject matter capable of settlement by arbitration.’… The Convention contemplates enforcement in a signatory nation’s courts, directing that courts ‘shall’ compel arbitration when requested by a party to an international arbitration agreement, subject to certain exceptions not at issue in the present case … [...]”

“LSAT contends that the [MFA] resolves this conflict in favor of the application of state law because the Louisiana statute regulates the business of insurance. The [MFA] provides that ‘Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.’” [719].

“We, … limit our analysis to whether Louisiana law overrides the Convention’s requirement that the present dispute be submitted to arbitration because we construe an act of Congress to invalidate, impair, or supersede state law. LSAT contends that the Convention was not self‑executing and could only have effect in the courts of this country when Congress passed enabling legislation. Accordingly, LSAT argues that the Convention’s enabling legislation is an ‘Act of Congress’ within the meaning of the [MFA] provision that ‘[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance ….’” [720‑1].

The Court considers it unreasonable to construe the term “Act of Congress” in the [MFA] as Congress’ intent to permit state law to preempt implemented, non‑self‑executing treaty provisions, but not to preempt self‑executing treaty provisions. The Court also notes that here it is a treaty (the Convention), not an act of Congress (the Convention Act), that the Court construes to supersede Louisiana law.

“ … [I]t is by reference to the Convention that we have a command ‑ a judicially enforceable remedy ‑ that we ‘supersede’ Louisiana law unless there are defenses set forth in the Convention that counteract that command. Because here the Convention, an implemented treaty, rather than the Convention Act, supersedes state law, the [MFA’s] provision that ‘no Act of Congress’ shall be construed to supersede state law regulating the business of insurance is inapplicable.” [725]

Congressional policy favoring arbitration of international commercial agreements further supports the Court’s finding that referral to arbitration is proper in this case. The Court concludes that the [MFA] does not cause the Louisiana statute Section 22:868 to reverse‑preempt the Convention in this case. Thus, the Court vacates the district court’s order denying the motion to compel arbitration and remands for further proceedings.

Citation: Safety National Casualty Corporation v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009).

Filed in: 2009 International Law Update, Issue 11

House of Lords panel reverses Court of Appeal, ruling that Illinois nonprofit international umbrella company is covered for default and collapse of Parmalat, Italian member company, under accountants’ indemnity policy specifically covering its ninety three member companies

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House of Lords panel reverses Court of Appeal, ruling that Illinois nonprofit international umbrella company is covered for default and collapse of Parmalat, Italian member company, under accountants’ indemnity policy specifically covering its ninety three member companies

This is an appeal by the insured from a decision in favor of the insurers on the interpretation of an extension to an accountants’ professional indemnity policy. The appellant is Grant Thornton International (GTI) a “not for profit”� umbrella corporation with its headquarters in Illinois. It is broadly responsible for managing and maintaining the worldwide organisation of Grant Thornton firms. The policy covered as the “Assured Firm”� listed 93 GTI member firms, not including GTI itself. Extension 3, however, did include GTI as an insured firm but “solely in respect of claims made against [GTI] arising from claims made against a member firm of [GTI] insured by the terms and conditions of the policy”�.

The financial collapse of Parmalat Finanziaria SpA , an Italian company, led Parmalat investors to file class action lawsuits in the United States against GTI’s Italian firm as auditors of Parmalat and against GTI as an entity in control of GT Italy. This followed the revelation that Bonlat Financing Corporation, its Cayman Island subsidiary, did not have the Euro 3.95 billion credit balance with Bank of America, New York branch, which had appeared in its, and the Parmalat group’s, accounts. GT Italy had audited these accounts, later known as Italaudit SpA in liquidation.

The insurers then avoided the policy for GT Italy’s alleged non disclosure and breach of warranty; they also notified GTI that, since they had avoided GT Italy’s insurance ab initio, GTI had lost any cover otherwise available to GTI. The insurers sued for a declaration that they had validly avoided the policy or were discharged from liability by reason of breach of warranty and obtained a default judgment against GT Italy. GTI obtained summary judgment in its favor on the ground that, even if the insurers succeeded against GT Italy, GTI would be entitled to an indemnity, since the claims made against it arose from claims made against GT Italy and were within Extension 3. The Court of Appeal upheld the insurers’ appeal.

The Court of Appeal agreed with the insurers’ case. Thus, it came down to these two issues: [1] whether the claim was one for which the policy did not cover GT Italy and [2] if so, whether GTI could still obtain coverage under it.

GTI argued that Extension 3 did cover it as an assured within the insuring clauses and that the wording of Extension 3 was merely a shorthand reference to the second insuring clause in that the phrase “insured by the terms and conditions of this policy”� was merely descriptive. Thus it did not amount to a positive requirement that either the claim or the member firm had to be validly covered.

Upon granting review, four members of the House of Lords unanimously agree with the reasoning in Lord Mance’s opinion and allow the appeal. The most telling consideration on the appeal was the hodgepodge nature of the coverage that would result from the insurers’ reading of the policy.

Lord Mance preferred GTI’s reading of Extension 3 because it gave GTI, as an assured firm, the protection of the second insuring clause without any need to show that the claim against GT Italy was itself one which was insured under either of the two insuring clauses. That meant that the phrase “insured by the terms and conditions of this policy”� did not relate to the earlier words “claims made”�, but rather to the words “a member firm of [GTI].”�

“The Court of Appeal took the view that the second insuring clause was likely only to be relevant in relation to International Work as defined in the policy. I am not persuaded by this. Question 18 in the proposal addresses the risk of liability arising from mere association in, or with, the [GTI] family. Allegations of vicarious or partnership liability of this nature, however tenuous they might appear to an English lawyer, are a foreseeable risk of such association.”�

“Indeed, in the present New York litigation, GTI is said to be liable “�as an entity … in control of [GT Italy]‘, i.e. simply because of the association between them within the Grant Thornton family or organisation. There is also a claim against GTI for violating United States securities laws, but GTI does not suggest that that this can be covered by the second insuring clause, read with Extension 3.”� [¶ 17]

“If individual member firms are, as between themselves, given full cover in respect of liability for such claims incurred by reason of their membership in [GTI], it would seem very odd that GTI itself should not enjoy similarly full cover in respect of claims holding it responsible on a vicarious or partnership for, or with, one of the insured member firms in its international family. The submission that this would not, because GTI is not, as the umbrella entity, itself a “�member’ of [GTI] and that it cannot therefore incur liability “�by reason of its membership in [GTI] is formalistic in the extreme; and anyway [it] ignores the different potential shades of meaning attaching to “�Grant Thornton International’.”�

“If insurers are right, then GTI, in respect of the acknowledged risk of claims (however tenuous) made against it, only achieved cover under this policy in two particular situations: [1] one where a member firm received a claim relating to International Work as defined, [2] the other where a member firm was itself the recipient of a claim that it was liable for another member firm on some vicarious or partnership basis by reason of its membership in [GTI]. [GTI] would then have cover if, “�arising from’ the claim made against a member firm, [GTI] itself also received a claim.”�

“This limited patchwork cover would mean, on insurers’ case, that [GTI] needed another policy insuring it for vicarious or partnership type claims arising in other circumstances, such as (it appears) the present [ones]. In the vacuum surrounding the present policy, all that can be said is that there is no indication of any relevant gap filling insurance, and that insurers’ construction appears on any view to postulate an unlikely allocation and splitting of insurance risks.”�

“In these circumstances, I have come to a different conclusion to the Court of Appeal. I consider that [GTI's] construction of Extension 3 is to be preferred. It gives to [GTI] as an Assured Firm the protection of the second insuring clause, without any need to show that the claim against GT Italy is itself one which is insured under either of the two insuring clauses. This means that the phrase “�insured by the terms and conditions of this policy’ do not relate to the earlier words “�claims made’, but rather to the words “�a member firm of Grant Thornton International’.”� [¶¶ 20 22]

Citation: Brit. Syndicates Ltd. v. Italaudit SpA. & Ors., [2008] U.K.H.L. 18; 2008 WL 576931(HL); [2008] All. E. R. 1140 (House of Lords).

Filed in: 2008 International Law Update, Issue9

Applying New York law, English Court of Appeal (Civil Division) dismisses Exxon’s appeal from adverse rulings on coverage of insurance policies having to do with Alaskan oil spill of 1989

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Applying New York law, English Court of Appeal (Civil Division) dismisses Exxon’s appeal from adverse rulings on coverage of insurance policies having to do with Alaskan oil spill of 1989

Early in the morning of March 24, 1989, the tanker Exxon Valdez ran aground on Bligh Reef in Prince William Sound, Alaska. The incident spilled some 11 million gallons of North Slope crude oil. At the time, Exxon Shipping Corp. (ESC), an Exxon subsidiary, owned the tanker while Exxon (plaintiff) had title to its cargo. By September, 1989, investigators had identified 790 miles of shoreline within Prince William Sound as having been “oiled” along with more than 2,400 miles of shoreline in Western Alaska.

ESC and Exxon took various steps to contain the spill, and to clean up the polluted shorelines. These included: the lightering of the Exxon Valdez; the skimming of oil from the surface of the water; the booming off of sensitive areas of shoreline; the burning of oil on the surface of the water; the washing of the shoreline, coupled with the skimming of oil washed off the shoreline into the sea; and the moving of rocks/pebbles etc. into the tidal zone to allow natural tidal flushing. Plaintiff also used “bioremediation” by adding compounds to the environment that amplified the natural process by which bacteria and other microorganisms transformed the organic molecules in oil into other substances; and the cleaning up of animals, including otters and birds. Exxon spent $1.25 billion and ESC spent $885 million on these remedies.

Not surprisingly, Exxon and ESC had a number of claims filed against them. Claims by the U.S. Government and the State of Alaska led to Exxon’s agreed payment of some $900 million in October 1991. Additionally, there were claims by commercial fishermen, Alaska Natives, seafood processors and their employees, and private landowners. Exxon settled some of these claims for about $267 million. The consolidated claims of 30,000 other plaintiffs went to trial, producing a jury award of $287 million in compensatory damages, and $4.5 billion in approved punitives.

Exxon and its affiliates had three primary policies, the largest of which was the Exxon Global Corporate Excess (GCE) Policy with its deductibles. The GCE Policy had three different sections: Section I respecting loss of, or damage to, property; Section IIIA dealing with Marine Liabilities; and Section IIIB having to do with Public and Third Party Liability.

Service-of-Suit clauses provided that, in the case of a dispute over payments, the insurers agreed to submit to the jurisdiction of any court of competent jurisdiction within the State of New York or (under Section IIIB) in the United States, all matters to be decided pursuant to the law and practice of the relevant court. Each of the three sections also contained an arbitration clause. Under Sections I and IIIA, the arbitrators could abstain from following the rules of law strictly. To the extent the arbitrators did follow them, however, they were to apply New York law. The arbitration clause under Section IIIB was otherwise the same as the preceding although it did not specify New York law.

Some relevant provisions of the policies were as follows. Art. VII, par. 4(b) of Section I (property damage) covered: “Removal of, or attempted removal of, debris or wreck of property and/or residual structure covered hereunder.” Section I, inter alia, provided that “Notwithstanding anything contained as above, there shall be no recovery hereon for liabilities as described under the insured’s Liabilities Policy(ies).”

In August 1993, Exxon sued insurers in a Texas court under Section IIIA of the policy. Three years later, the court awarded Exxon $238,473,752, plus interest of $161,106,406 and fees and costs of over $10 million. In March 1996, the parties settled all claims under the Section I policy for $300 million. Ten months later, the parties negotiated all of Exxon’s claims under the Sections IIIA and IIIB policies (including the claims in the Texas judgment) for $480 million. The agreement did not allocate the payment as between Section IIIA and Section IIIB.

Exxon’s insurers had reinsured their liabilities with the claimant reinsurers making the defendants the retrocessionaires of the claimants. It was common ground that, under the terms of the retrocessions, the claimants had to prove that the primary policies and the outward retrocessions covered the losses. All the retrocession contracts, except certain Lloyd’s policies, included the following language: “This contract excludes any loss arising from seepage, pollution or contamination on land unless such risks are insured solely on a sudden and accidental basis.” The exclusion did not apply to liability under the 1986 Offshore Pollution Liability Agreement.

In the English insurance litigation, one issue for the trial Court was whether Exxon had been entitled to recover under either Section I or Section IIIB. If they were not, claimants could not bring the payments under Section I into the calculation of the ultimate net loss in the retrocession agreement, nor could they apportion any part of the Section IIIA and Section IIIB settlement to Section IIIB for the purposes of computing the ultimate net loss as between the claimants and defendants. A further question was whether ESC could recover from the Section I primary insurers and, if so, whether there had been a settlement of the insurers’ liability to ESC. There was also an issue as to whether, on the proper construction of the retrocession, the defendants were entitled to rely upon exclusion of liability under the “Seepage and Pollution” clause.

Exxon appealed certain adverse rulings on these points. The English Court of Appeal (Civil Division), however, dismisses the appeal. In its view, New York law, not English law, governed the GCE. The arbitration and service-of-suit clauses indicated the parties’ agreement that New York law applied to the GCE. For purposes of interpretation, the Court recalls that the background of such agreements lies in pertinent international agreements and implementing statutes.

“If the arbitration and service-of-suit clauses are viewed as a whole, and in isolation …, it seems to be beyond doubt that they point to an inferred choice of New York law as the proper law of the GCE. Certainly, there is nothing in them which points to English law.”

“The question is whether there is enough in those clauses to displace the consequences of the major placement in the London market, the location there of the leading insurers and so forth. In our opinion, the key provision is that with which we started, i.e., the New York arbitration clause in Section IIIB. It is difficult, if not impossible, to infer a choice of English law as the law to govern a contract, a substantial part of which provides for any difference between the parties (if either requests it) necessarily to be determined by an arbitration to which the law of New York applies.”

“That view of the contract as a whole is consistent with the New York arbitration clauses in Sections IIIA, even though, in those sections, the agreement of both parties is required. It is also consistent with the service-of-suit clauses in those sections. Moreover, as we have already observed, it is not inconsistent with the service-of-suit clause in Section IIIB.” [¶ 47]

The Court then addresses whether the words “removal of debris” in Section I of the GCE covered clean up costs. “… [A]lthough foreign law is a question of fact, it is, in our view, rather different from other findings of fact. Indeed there is, as it seems to us, a special feature of a case such as the present.” [¶ 67]

“The New York court … would, particularly in the area of marine insurance, find decisions of the English Court persuasive. We further suspect that, although it may be possible to say that different courts in different states and indeed different courts in different parts of the world will enjoy different ranges of respect, most courts will ultimately be most influenced by the reasoning of ‘persuasive’ decisions which attract it most. If the position is that, under New York law, the decision of an English Court as a matter of English law on the terms of this policy would have some persuasive effect, it would seem unreal to ignore that decision in reaching a view as to what New York law would hold.”

“The role of [a foreign law] expert, unless the court is concerned with special meanings, is to prove the rules of construction of the foreign law, and it is then for the court to interpret the contract in accordance with those rules. In other words the view of the expert as to the meaning which would be given to the word ‘debris’ is not admissible evidence unless he is saying that it has a special meaning under New York law.[Cite]. That again points to the Court of Appeal being entitled to review a question of construction simply being guided by the rules of construction of the foreign law including that court’s attitude to persuasive authorities.” [¶ 68]

” … [W]e find it difficult to accept that a New York court and [an] English Court would reach a different conclusion on the construction of a policy negotiated, as this one was, between organisations well versed in what they were seeking to cover and well versed in the risks that were likely to materialize from the business being carried on by the various assureds. Both systems of law are seeking to identify what the parties agreed, and both systems of law use similar pointers to ascertaining that intention. On the Judge’s findings … a New York court [would have been unlikely] to find that removal of debris in Section I was intended to cover the clean up costs of an oil spill, unless the Notwithstanding clauses excluded the same.” [¶ 116]

“We think furthermore that [the lower court's] view as to the proper construction of the Notwithstanding clauses primarily reinforced his view that ‘removal of debris’ in Section I was not intended to cover clean up costs…. Debris is not the natural way in which to describe ‘spilled oil’ or pollution from spilled oil, and it would need some significant feature or other provision of the policies if it was to have that meaning in this policy. … [D]uring the course of argument, Lord Justice Rix asked [counsel for claimants] how he would describe oil spilt onto a beach, he could not reply and absolutely properly could not reply, ‘debris’.” [¶ 117]

“Significantly, as there is more to clean up than ‘removal’, and where oil pollution is dealt with both in the Conventions which form the background and in the policy itself, the words which describe the clean up are not ‘removal of debris’. It follows that the starting point for consideration of the Notwithstanding clauses is that ‘removal of debris’ does not cover clean up costs for an oil spill, and, whatever difficulties there may be in construing the Notwithstanding clauses, no point can be made which points to ‘removal of debris’ acquiring some special meaning for the purposes of this policy.” [¶¶ 118-19]

“We accordingly would uphold the Judge’s construction of removal of debris simply on the basis that under neither New York law nor, if it be relevant, English law, do the words ‘removal of debris’ in Section I of the GCE cover clean up costs as described … above.” [¶ 121]

The Court summarizes its conclusions as follows. “The proper law of the GCE was New York law, although in the end our opinion on that question does not matter. As a matter of New York law and English law, Section I of the GCE on its true construction did not cover pollution clean up costs. The claimants cannot recover on the basis of ESC’s putative claim under Section I. As a matter of New York law and English law, Section III(B) of the GCE [also] provides no cover for pollution clean up cost. … The appeal must accordingly be dismissed.” [¶ 158]

Citation: King v. Brandywine Reinsurance Co., [2005] 1 Lloyd’s Rep. 655, [2005] 1 C.L.C. 283, [2005] Env. L. R. 33, [2005] 2 All E.R. (Comm) 1, [2005] E.W.C.A. Civ. 235 (Eng. Ct. App. Civ. Div.).

Filed in: 2005 International Law Update, Issue 10

English Court of Appeal (Civil Division) affirms declaration that reinsurers of Coca Cola company’s insurer had duty to defend insurers despite claimant’s failure to notify them of two class actions pending in Georgia federal courts within 72 hours of their knowledge of loss by Coke since no “loss” had yet taken place

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English Court of Appeal (Civil Division) affirms declaration that reinsurers of Coca Cola company’s insurer had duty to defend insurers despite claimant’s failure to notify them of two class actions pending in Georgia federal courts within 72 hours of their knowledge of loss by Coke since no “loss” had yet taken place

The brokers Marsh & McLennan arranged insurance for Coca Cola in the form of a Master Subscription Policy with a consortium (led by insurers known as Allianz) which included the claimants in the present proceedings, Royal and Sun Alliance Insurance Plc (RSA). RSA took a line of 21.5 percent. The claimant reinsured all of its part dealing with Coke’s “directors and officers” liability with the consortia who are the defendants in the present litigation.

The re insurance slip policy included a Standard Claims Control Clause (SCC). It declared in material part: “Notwithstanding anything herein contained to the contrary, it is a condition precedent to any liability under this policy that: The reinsured shall, upon knowledge of any loss or losses which may give rise to claim under this policy, advice (sic) the Underwriters thereof by cable within 72 hours.”

Investors in Coke stock later brought two similar class actions in the Georgia federal court making substantial claims against Coke and its named directors for inflating the value of its stock. The complaint alleged that defendants had made false statements about Cokes’s business which led investors to buy their shares at spuriously pumped up prices. The claimant here learned about those complaints at the latest by December 12, 2000, and received copies of them 18 days later.

The defendants below argued that within 72 hours of December 15, 2000, claimants should, pursuant to the SCC clause, have notified defendants about the potential losses that may befall Coke and the claimant. The claimant did not, however, convey its awareness of the complaints until January 19, 2001. The defendants submitted that claimant had acted too late and, therefore, that defendants were not liable to the claimant.

Next, the claimant filed proceedings in the English courts seeking a declaratory judgment that the defendants did have a duty to indemnify them with respect to any liability arising out of the Georgia lawsuits. The first instance judge identified the relevant loss under the SCC clause as the losses of the U.S. plaintiffs who had bought Coke shares at artificially inflated prices, rather than losses by Coca Cola in having to compensate the investors for their loss.

His basic reasoning was that the claimants should not have kept the defendants in ignorance once the claimant had found out that the complainants had suffered a loss. He further ruled that the claimant had to be affected by three elements before it had a duty to notify the defendants. First, there had to be an actual loss; second, the type of loss had to be one that might warrant a claim on the reinsurance; and third, the claimant had to have actual knowledge of that loss.

The first instance judge held that those requirements had not come into being before January 19, 2001, the date of the actual notice. At that date, all the claimant had been aware of was that there was a claim. There might have come a time, of course, when the claimant could have been assumed to have known that the American complainants had suffered a loss, but that time had not come by January 19, 2001. The trial judge, therefore, ruled in favor of the claimant. The defendants appealed that declaration. The Court of Appeal (Civil Division) dismisses the appeal.

In the lead opinion, the Court then explains its thinking about upholding the dismissal below. “A reinsurer of a reinsured’s liability to a third party is prima facie liable to the extent of his subscription once it is ascertained that the reinsured is liable to that third party. A condition precedent to the liability of the reinsurer operates as an exemption to that prima facie liability.”

“It is a well established and salutary principle that a party who relies on a clause exempting him from liability can only do so if the words of the clause are clear on a fair construction of the clause. [Cites]. In my view the terms of the [SCC] on which the Syndicates rely do not sufficiently clearly exempt them from liability.” [¶ 19]

“[Counsel] pointed out that RSA themselves must have assumed that their obligation was to give notice once they knew that a loss was being alleged since they in fact gave notice to reinsurers shortly after receiving copies of the Complaints on 30th December 2000, albeit more than 72 hours after receipt.”

“To my mind this shows no more than that RSA did not have the terms of their reinsurance policy in mind on 30th December 2000. If they had had them in mind, they would probably have given notice within 72 hours instead of 20 days later. But this consideration cannot affect the true construction of what is, on any view, an ill chosen clause. It is, moreover, significant that the Syndicates do not suggest that they have been in any way prejudiced by the late notification.” [¶ 20]

“Once one has concluded that loss means ‘actual’ loss rather than ‘alleged’ or ‘claimed’ loss, it must follow that RSA cannot have had knowledge of any loss. It was not known by anyone in December 2000 or January 2001 that the American claimants had suffered the loss which they claimed or, indeed, any loss. The question whether the claimants have suffered any loss is still in dispute.”

“It is, at this stage, worth pointing out how comparatively unusual the claim is which is brought against the Coca Cola directors. It is that their conduct caused the share price to be artificially high at the time when the complainants purchased their shares. … [T]he complainants say that they have paid more for their Coca Cola stock than they should have done. If that were a proved fact, there would then be an ‘actual loss’ which might give rise to an insurance claim. But when RSA received the complaints, it was not a proved fact; it is a possible conclusion which depends on establishing that Coca Cola stock would have had a lower value if the financial position of Coca Cola had been accurately stated. Until this is ‘known’ to be the case, there can be no ‘knowledge’ of any loss.”

“It might well be different if the claim had been that, as a result of something done by the directors of Coca Cola the value of the stock had fallen; particularly if the stock had been rendered valueless. Then it might be clear that there had been a loss and once RSA were notified of a claim for that loss, it could be said that they then had knowledge of a loss which might give rise to a claim under the reinsurance policy.”

“[Counsel] did indeed seek to say that even in the present case there was a loss ‘known’ to RSA because the share price fell from its peak in July 1998 but that cannot of itself be a loss (rather than natural market fluctuation) until it is established that the price was artificially high at the point of purchase.” [¶¶ 22-24]

“If it had mattered, I would have come to the same conclusion on this question as the judge for what I understand to have been the main reason which he gave. This was that, if the loss contemplated was Coca Cola’s loss, that was certainly a loss of which RSA could not have ‘knowledge’ at any time before there was a judgment or a settlement to which Coca Cola was a party for the simple reason that Coca Cola are disputing that they are under any liability at all. On Post Office v. Norwich Union [1967] 2 Q. B. 363 principles, it will only be when it is determined that Coca Cola are indeed liable that it can be said that Coca Cola have suffered a loss.” [¶ 28]

“This would, indeed, render the second part of the clause otiose in practically every case in which it must be intended that it have some value. The same consequence does not by any means invariably follow if the loss contemplated is that of the third party claimant as I have attempted to show… above. For that reason, if it had been relevant, I would also have agreed with the judge on this aspect of his judgment. But since it is not determinative, I say no more about it.” [¶ 29]

“In conclusion, I would, therefore, dismiss this appeal. The moral of this case is that ‘knowledge’ is (or can be) an elusive concept because in any given case a party to a contract may have difficulty in showing what another party ‘knows’. It would, therefore, be better if ‘knowledge’ were not used as the trigger for any requirement of notification to a liability insurer or reinsurer.” [¶ 30]

Citation: Royal and Sun Alliance Insurance plc v. Dornoch Ltd., [2005] E.W.C.A. CIV. 238, [2005] All E.R. (D) 160 (March 19) (Ct. App. [Civ. Div.]) (Approved judgment).

Filed in: 2005 International Law Update, Issue 5

Ontario Court of Appeal rules that, as distinguished from duty to indemnify, duty of Canadian insurer to defend insured in U.S. trademark litigation against insured turns primarily on allegations in plaintiff’s U.S. complaint rather than on its underlying facts

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Ontario Court of Appeal rules that, as distinguished from duty to indemnify, duty of Canadian insurer to defend insured in U.S. trademark litigation against insured turns primarily on allegations in plaintiff’s U.S. complaint rather than on its underlying facts

In December 1999, Gucci America, Inc. (Gucci) filed a federal suit for trademark infringement and unfair competition in the Southern District of New York. The defendants are Innopex, Ltd., Aaron Wagschel, its owner, and an employee, Joshua Frankel (collectively, Innopex). The suit alleged that Innopex marketed in the United States, without Gucci’s consent, various relatively inexpensive watches marked with what confusingly appears to be the true Gucci trademark.

Gucci has registered its marks in the U.S. Patent and Trademark Office (PTO). Seeking injunctive and financial relief, it invoked the U.S. Trademark Act of 1946 (or Lanham Act), 13 U.S. C. Sections 1015 et seq. plus New York statutory and common law.

A dispute then arose between Innopex and its insurer, the Halifax Insurance Co. of Canada; Halifax claimed that, under their policy, they had no duty to defend Innopex in the American lawsuit. After preliminary interchanges, Halifax filed the instant case in the Ontario Courts seeking a judgment against Innopex declaring that it had no obligation to mount a defense for Innopex in the New York case.

The Halifax-Innopex insurance policy has the following relevant language: 1a. “The Insurer will pay those sums that the insured becomes legally obligated to pay as compensatory damages because [of] … ‘advertising liability’ to which this insurance applies.” This coverage applies only “b. if caused by an offence … (3) Arising out of advertising done by, or for, the Named Insured in the normal course of the Named Insured’s business.”

Under Section 2, this policy does not apply to advertising liability that arises out of “(5)(b) infringement of trademark, service mark or trade name, other than titles or slogans, by use thereof on, or in connection with, goods, products, or services sold, offered for sale or advertised.” [emphasis added by Court]. [¶ 13]

Section V, sub 2 defines “Advertising liability” as referring to: ” … injury arising out of an offence committed during the Policy Period occurring in the course of the Named Insured’s advertising activities, if such injury arises out of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan [emphasis added by Court].” [¶ 14] The Ontario trial judge ruled that Halifax did not have a duty to defend based on the complaint, the policy terms and “the known facts” voluminously presented to her by way of extrinsic evidence. Innopex filed an appeal. The Ontario Court of Appeal allows the appeal.

Mark Lichty, a well-known author and insurance attorney hired by Halifax, reported that, based solely on the language of Gucci’s complaint and of the policy, Halifax would have great difficulty prevailing on the duty to defend issue.

“However, Mr. Lichty was of the opinion that the ‘known facts’ appeared to differ from the allegations in Gucci’s complaint. He stated that these facts indicated that there was no marketing or advertising involved in the ‘Gucci watch transactions’. … He added that, in his experience, ‘the costs of defending U.S. trademark, patent and copyright actions is potentially extraordinary’.” [¶¶ 19, 20]

In the Court’s view, Mr. Lichty’s analysis of Gucci’s complaint strongly suggested that he believed the allegations gave rise to a duty to defend. He specifically referred to allegations that Innopex had distributed, sold and marketed watches to which it had “affixed, applied or used … false descriptions and representations which tend falsely to describe or represent that the goods and services offered by [Innopex] are sponsored by, authorized by, or connected with, plaintiff Gucci”.

As well, he referred to Gucci’s reliance on Section 35( c) of the Lanham Trademark Act. It forbids any entity from falsely designating the origin of goods or falsely describing or representing its goods as the product of another.

Based on a review of American caselaw, Mr. Lichty had stated: “An overwhelming majority of U.S. Courts have found that trademark infringement falls within the ‘infringement of title or slogan offence’.”

Although Innopex challenged the admissibility of the extrinsic evidence generated by the summary judgment motions, the motion judge applied that evidence in making findings of fact relative to the underlying Gucci claim. This was contrary to the procedure generally followed on [an] application to determine a duty to defend issue. An inquiry into whether the insured had in fact engaged in the conduct complained of in the underlying action should not be part of the inquiry on a duty to defend application.

Occasionally, counsel has not framed the pleadings with enough precision to determine whether a policy does cover the claims. If, on a reasonable reading of the pleadings, a court can infer that a claim lies within coverage, this will trigger an obligation to defend. This principle squares with the contra proferentem rule, and the principle that courts should interpret coverage provisions broadly, while they should narrowly read exclusion clauses.

Whether an insurer is bound to provide defence coverage in an action taken against the insured arises as a preliminary matter. After trial, of course, it may turn out that the insurer has no liability and thus, there is no duty to indemnify. But that is not the issue when deciding the duty to defend.

Thus, the Court cannot favor an approach that will turn the duty to defend application into “a trial within a trial”. On the other hand, on a duty to defend application the court may take account of documents alluded to in the pleadings where it may assist in determining the substance and true nature of that claim.

As long as the facts as pleaded “come within the coverage in the policy, the insurer is under a duty to defend even though the actual facts may differ from the pleading. That is why extrinsic evidence going to the truth of the allegations pleaded, as occurred in this case, is not receivable. Moreover, the court must avoid findings that would compromise or affect the underlying litigation. … As in this case, expert evidence is often helpful to the court in the interpretation of the insurance coverage and, on occasion, in interpreting technical language in the underlying claim.” [¶ 37]

“What [Halifax] did in this case, … was to turn a duty to defend application into a duty to indemnify application by introducing extrinsic evidence pertaining to what it termed ‘the true facts’. It is well recognized that the insurer’s duty to defend is broader than its duty to indemnify. The time to determine the insurer’s duty to indemnify, if at all, is at the conclusion of the underlying litigation.” [¶ 38]

“More importantly, … it is alleged that Innopex marketed, distributed and sold goods that were imitations of the plaintiff’s product, all for the purpose of causing confusion and mistakes. … Mr. Lichty points out that a number of courts have held that the term ‘marketing’ encompasses advertising activity.”

“In my view, implicit in any allegation of trademark infringement is the fact that the offences were committed in the course of advertising because infringement does not take place until the insured promotes its products to its customers: American Employers’ Ins. Co. v. Delorme Publishing Co., 39 F. Supp. 2d 64, 74 (D. Me. 1999).”

“Moreover, as Mr. Lichty states, citing Delorme and other cases, the pleading of a violation of Sections 43(a) and 35(a) of the Lanham Act, as Gucci has pleaded, raises the possibility that the impugned activity involved advertising. Although, should Gucci succeed in its suit against Innopex these allegations, without more, may not be sufficient for indemnity purposes, they are sufficient for duty to defend purposes.”

“The policy contains an exclusion for trademark infringement. However there is an exception for infringement of title. A majority of U.S. Courts have found that infringement of title clearly encompasses claims for trademark infringement. Bluntly, the inclusion of the exception impedes Halifax’s ability to rely on the trademark exclusion.”

“Most courts have adopted the meaning of ‘title’ that is set out in Black’s Law Dictionary, i.e., ‘a mark, style or designation; a distinctive appellation; the name by which anything is known.’ This seems to be the better view. There would seem no reason in logic or policy to exclude personal names from the definition of title, particularly when those names are registered [U.S.] trademarks.” [¶ 51]

“Moreover, it is very disturbing that Halifax followed this procedure in what appears to be a deliberate attempt to divert the court from deciding the real issue of whether it had a duty to defend, a result which its own expert believed to be virtually inevitable. When an insured person is sued for a claim that may fall within a risk that is insured, it is essential that he or she know at a very early stage whether or not the claim falls within the coverage, thereby creating a duty to defend, as it is necessary that prompt steps be taken to defend the lawsuit and to forestall default judgment. …”

“The insurer’s procedure in this case did not result in either an early, or an economical, resolution of the issue. Indeed, it has now been more than four years since Halifax commenced its action claiming a declaration that it was not under a duty to defend.”

“In addition, I should say a brief word about my reliance on American authorities. In Zurich Insurance v. 686234 Ontario Ltd. (2002), 62 O.R. (3d) 447,. 461 (C.A.), this court stated that where there is little or no Canadian authority interpreting language commonly used in Canada and the United States in standard form insurance contracts, resort is had to American authorities to ensure uniformity in the construction of insurance contracts in use in both countries.” [¶ 56]

Citation: Halifax Insurance Co. of Canada v. Innopex Ltd., 2004 A.C.W.S.J. 14093; 134 A.C.W.S. (3d) 501 (Ont. Ct. App. Oct. 15, 2004).

Filed in: 2004 International Law Update, Issue12

In suit claiming that liability policy covered racial discrimination claims brought by journalist Carl Rowan against Chicago Sun Times, Ontario Court of Appeal reads policy in light of “fortuity principle” and concludes that it did not provide coverage for alleged intentional discrimination

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In suit claiming that liability policy covered racial discrimination claims brought by journalist Carl Rowan against Chicago Sun Times, Ontario Court of Appeal reads policy in light of “fortuity principle” and concludes that it did not provide coverage for alleged intentional discrimination

Liberty Mutual Insurance Company (Liberty) is a Canadian company with its headquarters in Toronto. In that Province, it issued a comprehensive general liability insurance policy to Hollinger Inc. of Ontario applicable to the insured’s business activities worldwide.

Carl Rowan, a respected African-American journalist highly supportive of civil rights, was writing three columns per week for The Chicago Sun Times, a recently-acquired Hollinger subsidiary. Mr. Rowan later sued the Times and Hollinger (presumably in District of Columbia federal court), in major part alleging age and racial discrimination in violation of the District of Columbia and U.S. civil rights statutes. According to his complaint, after Hollinger had taken control of the Sun Times, the paper decided to increase its appeal to a “white” readership. The upshot was that it willfully sought to terminate Mr. Rowan’s employment contract.

Hollinger notified Liberty about Mr. Rowan’s claim, retained counsel and eventually settled the discrimination case. Hollinger then tendered the claim to Liberty, requesting a contribution to the cost of defense and indemnity with respect to the discrimination claims. Liberty declined and sought a declaratory judgment from an Ontario court that it owed no duty to defend Hollinger.

The relevant personal injury items the policy covered included: “False arrest, detention or imprisonment, malicious prosecution, libel, slander, defamation of character, invasion of privacy, wrongful eviction or wrongful entry sustained by any person or organization during the policy period.” The policy, however, expressly ruled out coverage for: “The wilful violation of a penal statute or ordinance committed by or with the knowledge or consent of any Insured.”

The trial judge held that the policy did require Liberty to furnish Hollinger with a defense and dismissed the application.

Noting that Mr. Rowan had cast his discrimination claims as wilful, the trial judge found that there was still coverage because the claims did not rest upon “a penal statute.” She conceded that both the D.C. Human Rights Act and the U.S. Civil Rights Act did contain enforcement provisions providing for fines and imprisonment. Nevertheless, Mr. Rowan had formulated his claims for compensatory and punitive damages under sections creating private rights of action against a wrongdoer.

The judge also cited both Canadian and American authority classifying human rights legislation as “remedial” rather than “penal.” Additionally, she relied on the principle of insurance law that if there is a “mere possibility” that the allegations as pleaded lie within the policy coverage, the insurer has to provide a defense because a court has to resolve any uncertainty on the issue of coverage in favor of the insured.

The insurer filed the present appeal. The Ontario Court of Appeal agrees with Liberty’s position and unanimously allows the appeal. The parties agree that the law of Ontario controls, since Hollinger resides in that province and the parties had executed the policy there.

Liberty made three arguments to show that the policy does not cover acts of intentional discrimination. First, the policy bars claims based on a “wilful violation of a penal statute.”

Second, a basic economic principle of insurance law makes policies applicable only to the insured’s “fortuitous” or nonintentional acts. Finally, it would be unsound public policy to extend insurance coverage to intentional acts of discrimination.

As to the first point, the Court of Appeal agrees with the trial judge that Mr. Rowan’s suit asked only for compensatory damages rather than the enforcement of a penalty. Of course, the statutes he invoked did have both civil and criminal aspects. Nevertheless, both Canadian and U.S. courts treat statutes as “remedial” when a plaintiff seeks only civil remedies. Mr. Rowan clearly based his action on the civil aspects of the D.C. and U.S. statutes.

Next, the Court considers Liberty’s argument that the Policy does not cover claims of intentional discrimination. “Apart from the exclusion clause, there are certain features of the Policy that would appear, on their face, to allow for coverage for claims of intentional discrimination. Claims of discrimination in Article 9 are but one aspect of a broader category of claims for ‘personal injury’ and several of the itemized categories falling within that general category involve intentional wrongdoing. For example, coverage is provided for claims for false arrest, detention or imprisonment, and malicious prosecution. These causes of action are intentional torts and ordinarily require a high level of intentional conduct.” [¶ 15]

“However, I agree with Liberty that this language must be read and interpreted in light of a general principle of insurance law that arises from the very nature and purpose of insurance, namely, that ordinarily only fortuitous or contingent losses are covered by a liability policy. Where an insured intends to cause the very harm that gives rise to the claim, the insured cannot look to a liability policy for indemnity. [Cite]”

“It is important to keep in mind the underlying economic rationale for insurance,”the Court stresses. “C. Brown and J. Menezes, Insurance Law in Canada (2nd ed. 1991), state this point well at pp. 125 26: ‘Insurance is a mechanism for transferring fortuitous contingent risks. Losses that are neither fortuitous nor contingent cannot economically be transferred because the premium would have to be greater than the value of the subject matter in order to provide for marketing and adjusting costs and a profit for the insurer.”

“It follows, therefore, that even where the literal working of a policy might appear to cover certain losses, it does not, in fact, do so if (1) the loss is from the inherent nature of the subject matter being insured, or (2) it results from the intentional actions of the insured. In other words, insurance usually makes economic sense only where the losses covered are unforeseen or accidental: The assumptions on which insurance is based are undermined if successful claims arise out of loss which is not fortuitous.’” [¶ 16]

Liberty’s public policy contention is then taken up. “[The] economic rationale takes on a public policy flavour where, as here, the acts for which the insured is seeking coverage are socially harmful. It may be undesirable to encourage people to injure others intentionally by indemnifying them from the civil consequences. On the other hand, denying coverage has the undesirable effect of precluding recovery against a judgment proof defendant, thus perhaps discouraging … victims from bringing claims.” [Id.] Clearly, the Court observes, these two policies may potentially conflict since the former looks to narrow the scope of coverage while the latter would broaden it.

“The fortuity principle does not [however] exclude coverage for all claims that arise from intentional acts. An intentional act may have unintended consequences. If the unintended consequence falls within the terms of the policy, it will be covered even if it was caused by the intentional act of the insured. This distinction is reflected by the terms of Section 118 of the Insurance Act, which provides that the ‘contravention of any criminal or other law … does not, by that fact alone, render unenforceable a claim for indemnity under a contract of insurance except where the contravention is committed by the insured … with intent to bring about loss or damage.’” [¶ 18]

“In my view, Rowan’s claims of discrimination cannot be described as claims for accidental or fortuitous loss nor can they be qualified as claims for the unintended consequence of an intentional act. They are, rather, claims of intentional wrongdoing and arise from allegations that Hollinger intended to inflict the very wrong of which Rowan complains. It follows that Rowan’s claims fall outside the terms of the Policy and that Liberty is not required to provide Hollinger with a defence.” [¶ 19]

The Canadian courts have seemingly not considered the issue of whether insurance coverage for discrimination claims is contrary to public policy. There is, however, an extensive body of American authority on this point. Most American courts which have addressed the question have barred insurance coverage for claims of intentional discrimination.

“On the other hand, the American courts have, for the most part, distinguished intentional or ‘disparate treatment’ discrimination from unintended or ‘disparate impact’ claims and allowed liability insurance coverage for the latter. For example, in Solo Cup Company v. Federal Insurance Company 619 F.2d 1178 (7th Cir. 1980), the … Court of Appeals held that insurance coverage of disparate impact liability is not contrary to the public interest against employment discrimination as embodied in Title VII. The court held that allowing insurance coverage for disparate impact liability would not injure the public good, and indeed might promote the objects of the legislation as insurers would likely encourage and facilitate the evaluation of employment standards.” [¶¶ 23-24]

Finally, the Court of Appeal refers to a 1999 opinion of the Canadian Supreme Court that seems to undermine the applicability in Canada of a public policy analysis based upon indirect (disparate impact) discrimination. “However, … for the purposes of insurance law, there is a well recognized distinction to be drawn between fortuitous or accidental harm and harm that is caused intentionally. I do not consider that distinction to be affected by the holding in [British Columbia (Public Service Employee Relations Commission) v. B.C.G.S.E.U., [1999] 3 S.C.R. 3], even in relation to discrimination claims. I would, therefore, decide this appeal on the basis of the fortuity principle and leave the broader public policy issue of insurance coverage for claims of discrimination for another day.” [¶ 25]

Citation: Liberty Mutual Insurance Co. v. Hollinger Inc., 2004 A.C.W.S.J. 2016; 128 A.C.W.S. (3d) 1182 (Ont. Ct. App. Feb. 13).

Filed in: 2004 International Law Update, Issue4

In litigation over interpretation of high risk insurance policies to cover cinematic loans made by J.P. Morgan Chase, House of Lords decides as matter of law that policies in question would exempt Chase from liability for its brokers’ negligent misrepresentations but not for their fraudulent non-disclosures

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In litigation over interpretation of high risk insurance policies to cover cinematic loans made by J.P. Morgan Chase, House of Lords decides as matter of law that policies in question would exempt Chase from liability for its brokers’ negligent misrepresentations but not for their fraudulent non-disclosures

J.P. Morgan Chase (formerly Chase Manhattan Bank) (Chase) lent substantial amounts of money to finance the making of films. It also took out policies of insurance with certain insurers, HIH Casualty and General Insurance Ltd. and others (claimants). Heath North America and Special Risks Ltd and Heath Insurance Broking Ltd. (collectively Heaths) brokered the policies as Chase’s agent.

Lord Hoffman sets forth the context of this dispute. “My Lords, this appeal is concerned with a new high risk, high premium insurance product used in financing film production. The risk insured against is that a party who has advanced money for the production of a film against the security of a defined share of future revenue will fail to recoup his advance within a specified period.”

“It is high risk, first, because the commercial success of a film is notoriously difficult to predict and, secondly, because a good deal will turn upon how the lender’s revenue entitlement is defined. If all expenses have first to be paid, the lender will be subject to unpredictable cost overruns. Fees, commissions, royalties, overriding payments to director and stars and similar skimmings may also deplete the lender’s share of gross revenue. And in an industry where possession of the money tends to be nine tenths of the law, much will depend upon who banks the money and keeps the books. It is a form of insurance in which the players need to have their wits about them.” [¶ 25]

Each of the present policies contained a “truth-of-statement clause.” The clauses provided, in relevant part that: “[6] the Insured [Chase] will not have any duty or obligation to make any representation, warranty or disclosure of any nature, express or implied (such duty and obligation being expressly waived by the insurers) and [7] shall have no liability of any nature to the insurers for any information provided by any other parties and [8] any such information provided by, or nondisclosure by, other parties . . . shall not be a ground or grounds for avoidance of the insurers’ obligations under the Policy or the cancellation thereof.” The policies also made English law applicable to contract-related disputes and chose the English court system as the proper forum.

There turned out to be substantial shortfalls in the revenue assigned to Chase by way of security and it made claims under the policies. The claimant-insurers, however, denied liability on the grounds of misrepresentation and non disclosure, either fraudulent or negligent, on the part of Heaths as broker. Both sides went to court over the matter.

Chase claimed that, on a proper interpretation of the policies, the claimants were not as a matter of law entitled to disavow liability or to seek damages against it even if all the claimants’ allegations against Heaths were proven true. The first instance court thus had to decide preliminarily whether clauses [6] – [8] entitled the claimants (a) to avoid and/or rescind the policies and (b) to obtain damages from Chase for misrepresentation.

The trial judge and the Court of Appeal (Civil Division) gave different answers to these questions. The claimants then obtained review in the House of Lords. Chase cross appealed. The five Lords of Appeal agree to reverse the Court of Appeal in part based on the following legal analysis, one Lord dissenting in part.

The Lords first assume the truth of what the pleadings allege as against what the evidence might show at the trial. The panel initially invoked the Marine Insurance Act of 1906, as setting forth generally accepted principles of English insurance law. A central notion is that a contract of insurance demands the utmost in good faith. As a result, if either party falls short of meeting this standard, the other party may avoid the contract.

Of course, the parties may, within broad limits, write an insurance policy that modifies common law principles. First of all, Phrase [6] makes clear that the insurers did not intend to waive altogether the disclosure of material information. Instead, they were bent on relieving Chase of its disclosure obligations. This language, however, in no way exempts Heaths from its disclosure duties.

The effect of Phrase [7] was not to deny Heaths’ authority to speak for Chase. There was nothing in the phrase which could reasonably be understood as denying or restricting Heaths’ implied and apparent authority. Moreover, the language of the phrase had to bar liability for damages on Chase’s part under Section 2(1) of the Misrepresentation Act of 1967 for any negligent misrepresentation by Heaths and also for any right of the insurers to avoid the policy on that ground.

The Lords “find nothing commercially surprising in this interpretation, from the viewpoint of Chase or the insurers. In a complex transaction of this kind, the possibility that Heaths as agent might make, and fail to correct, a representation which was later held to be both untrue and negligent would be very real. Chase, distanced from the transaction, would have little knowledge of what was represented and little opportunity to correct it. It could reasonably seek protection against loss or diminution of its security on such a ground. The insurers for their part might reasonably accept this chink in their armour, recognising that their rights against Heaths in such an eventuality would remain unimpaired.” [¶ 13]

On the other hand, the Lords do not read Phrase [7] to shield Chase against liability if the deceit of its agent had induced the policy.”For, … fraud is a thing apart. This is not a mere slogan. It reflects an old legal rule that fraud unravels all: fraus omnia corrumpit. It also reflects the practical basis of commercial intercourse. Once fraud is proved, ‘it vitiates judgments, contracts and all transactions whatsoever.’ [Cite]”

“Parties entering into a commercial contract will no doubt recognise and accept the risk of errors and omissions in the preceding negotiations, even negligent errors and omissions. But each party will assume the honesty and good faith of the other; absent such an assumption they would not deal. What is true of the principal is true of the agent, not least in a situation where, as here, the agent, if not the sire of the transaction, plays the role of a very active midwife.”[¶ 15]

Suppose, however, that a party to a written contract really does want to bar the ordinary consequences of its inducement by its agent’s fraudulent or dishonest misrepresentation or deceit. To bring this about, the Lords stress, the face of the contract would have to set forth this intention in clear and unmistakable terms. By that test, the terms of Phrase [7] fall well short.

Finally, Phrase [8] made it plain that Heaths’ innocent or negligent non disclosure was not to give the insurers a right to avoid the policy. The bench and bar generally admit that the English law on non disclosure is very strict. Any other interpretation would weaken Chase’s security to a degree that would not have been acceptable to it. This phrase, however, did not rule out the insurers’ right to nullify the contract of insurance where the breach of Heaths’ independent duty of disclosure came about through its deliberate concealment of material facts.

Since an agent to insure is subject to an independent duty of disclosure, proof that the agent had deliberately withheld from the insurer information which the agent knew, or believed, to be material to the risk, if done dishonestly or recklessly, might well make out a fraudulent misrepresentation. Assume arguendo that, in the present case, the claimants could later persuade the fact-finder that Heaths had engaged in that sort of non disclosure. In that case, nothing in the truth-of-statement clause would take away the claimants’ traditional right to avoid the policy and to recover damages against both Chase and Heaths.

A majority of the Lords of Appeal concludes that the insurers might be able to show at trial that they were entitled in law to either or both of the following two forms of relief. One would be to avoid and/or rescind the policies on the grounds, but only on the grounds, of Heaths’ fraudulent misrepresentation or fraudulent non disclosure. The other would be to obtain damages from Chase for, but only for, fraudulent misrepresentation by Heaths and fraudulent non disclosure by Heaths if, but only if, Heaths’ fraudulent non disclosure amounted to fraudulent misrepresentation.

Citation: H.I.H. Casualty and General Insurance Ltd. et al. v. Chase Manhattan Bank et al., [2003] U.K.H.L. 6, [2003] 1 All E.R. (Comm.) 349, [2003] Lloyd’s Rep. I.R. 230 (House of Lords, February 20).

Filed in: 2003 International Law Update, Issue7

In death and injury actions, Supreme Court of Canada holds that, despite Ontario statute barring pecuniary recovery for motor vehicle negligence in Canada and United States, concurrence of two forms of negligence as equal causes of injuries triggered coverage by both auto negligence and work site insurance policies

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In death and injury actions, Supreme Court of Canada holds that, despite Ontario statute barring pecuniary recovery for motor vehicle negligence in Canada and United States, concurrence of two forms of negligence as equal causes of injuries triggered coverage by both auto negligence and work site insurance policies

Insurer No. 1 insured Roy’s Electric (a.k.a. 539938 Ontario Limited), the defendant contractor under an automobile policy. For the purposes of a building project involving a laying of cable, defendant also held a commercial general liability policy (CGL) from insurer No. 2. (There was an additional excess coverage or “umbrella” policy from insurer No. 3 designed to cover any shortfall under the first two policies.) The CGL Policy excluded coverage for bodily injury or property damage arising out of the ownership, use or operation of an automobile, and for bodily injury or property damage with respect to which an automobile policy was “in effect.”

On December 5, 1994, adverse weather conditions suddenly arose at the work site so Douglas Zub, a defendant’s shareholder and employee, did a rapid clean up so as to leave the site early. He stowed a sign and its shaft inside the truck but left the steel base plate lying unsecured on the tow bar of a compressor connected to the rear of the truck. As Mr. Zub was driving along the highway, the plate flew off the bar into an oncoming school bus, killing one child and seriously injuring three others.

The representatives of the deceased and injured children filed civil damage suits in the Ontario courts against Roy’s Electric as contractor and Zub as owner and driver of the truck. The suits alleged that the contractor-defendant through its employee had been careless at the work site as well as in operating the truck on the highway.

The Insurance Act, R.S.O. 1990, c. I.8, s. 267.1 barred the plaintiffs from claiming pecuniary loss in relation to negligent operation of the vehicle. It provides in pertinent part that “[d]espite any other Act and subject to subsections (2) and (6), the owner of an automobile, the occupants of an automobile and any person present at the incident are not liable in a proceeding in Ontario for loss or damage from bodily injury or death arising directly or indirectly from the use or operation of the automobile in Canada, the United States of America or any other country designated in the Statutory Accident Benefits Schedule.” The plaintiffs can, however, claim against the contractor for pecuniary loss caused by the negligence of its employees at the work site, this being an action distinct from that of motor vehicle negligence.

On plaintiffs’ motion to determine insurance coverage, the motions judge found that there were two concurrent causes of the accident: (1) the negligent clean up of the work site and (2) the careless operation of the vehicle. He also concluded that the CGL policy covered pecuniary and non pecuniary losses that were not auto related, while policy No. 1 covered non pecuniary losses that were auto related. Thus, all three policies provided coverage. Insurer No. 2 sought review of the decision of the Ontario Court of Appeal affirming the ruling. The Supreme Court of Canada granted review but dismisses the appeal.

In the Court’s view, the motions judge properly found that there were two concurrent causes, neither being dominant, where the accident would not have occurred but for both causes. “The cause of the accident was not solely the ‘use or operation’ of the automobile. The work site negligence cannot be characterized as being part of the loading of the automobile. Nor was the use of the automobile the ‘proximate cause’ of the accident. His conclusion in respect of causation is reasonable and supported by the law and by the agreed statement of fact, and should not be interfered with.” [para. 40] In the absence of express exclusion of coverage where the use of a vehicle was involved in part, the second of CGL insurer was liable in respect of the aspects of the loss which its policy did not expressly rule out. The loss which was not recoverable under the automobile policy was not one for which the policy could be found to be in effect.

“It is a given that there is a motor vehicle policy ‘in effect.’ This does not automatically mean that there is no coverage under the CGL policy. The extent to which the motor vehicle policy is ‘in effect’ must be determined within the context of the Insurance Act and in accordance with the principle that exclusion clauses are to be given a narrow interpretation.”

“As found by the courts below, the Insurance Act allows plaintiffs to exercise an unfettered right to sue defendant owners, drivers and persons present at the scene of an accident for negligence other than that excluded by s. 267.1. Therefore, where both auto related negligence and non auto related negligence of the same person contributed to the same bodily injury, there must be a percentage apportionment of fault to each type of negligence, just as there would be an apportionment if the injury were caused by two different people.”

“In these circumstances, the automobile policy cannot be said to be ‘in effect’ with respect to pecuniary or non pecuniary loss attributable to non auto related negligence. Thus, clause (e)(2) does not totally exclude coverage under the CGL policy. Rather, only that portion of the loss that is attributable to auto related negligence is excluded by clause (e)(2).” [paras. 64-66]

Citation: Darken v. 539938 Ontario Ltd., 2001 A.C.W.S.J. 232078; 108 A.C.W.S. (3d) 893 (Can. Sup. Ct. October 19).

Filed in: 2001 International Law Update, Issue11

In action by international insurance companies against State of Florida, Eleventh Circuit holds that Florida’s Holocaust Victims Insurance Act violates Due Process because it requires insurers who had corporate affiliates in Europe during Holocaust to report information even though the affiliates lacked any other contacts with Florida

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In action by international insurance companies against State of Florida, Eleventh Circuit holds that Florida’s Holocaust Victims Insurance Act violates Due Process because it requires insurers who had corporate affiliates in Europe during Holocaust to report information even though the affiliates lacked any other contacts with Florida

The plaintiffs in the following case are international insurance companies doing business in Florida that may have issued insurance policies to Holocaust victims prior to 1945. The plaintiffs are affiliated with two German insurance companies that issued insurance policies in Germany between 1920 and 1945, Gerling-Konzern Lebensversicherungs-AG, and Gerling-Konzern Allgemeine Versicherungs-AG. There are, however, no indications at this point of any unpaid claims remaining from the Holocaust era involving these companies.

The Insurance Commissioner of Florida issued broad subpoenas to the plaintiffs, requesting virtually all documents of the European affiliates dealing with the 25-year period specified in Florida’s Holocaust Victims Insurance Act (Fla. Stat. ch. 626.9543). The Act seeks to ensure the payment of insurance claims to identified Holocaust victims. To this end, it requires that all insurers doing business in Florida report any relationship they may have had with international insurers that issued policies to Holocaust victims between 1920 and 1945, and disclose any paid and unpaid claims. Moreover, the Act creates a private cause of action for individuals harmed by a violation of the Act, providing for treble damages, attorneys’ fees and costs.

The plaintiffs sued in federal court to challenge the Act’s constitutionality. The district court agreed that, in trying to regulate matters with an insufficient connection with Florida, the Act violated the Due Process Clause. It accordingly gave summary judgment to the plaintiffs. The Florida Insurance Commissioner appealed. The U.S. Court of Appeals for the Eleventh Circuit, however, affirms.

The Court reviews not only the contacts between the regulated party and the State, but also the contacts between the State and the regulated subject matter. It agrees with the plaintiffs’ narrow argument that the Act’s reporting requirement, as applied to the plaintiffs, violated legislative Due Process constraints.

“While there may be a connection between the State of Florida and that subject to the extent it relates directly to the activities of Florida insurers, there is virtually no connection between the State of Florida and that subject to the extent it concerns insurance transactions involving Plaintiffs’ German affiliates that took place years ago in Germany, among German residents, under German law, relating to persons, property, and events in Germany. Significantly, the reporting provisions are not on their face limited to information regarding policies that allegedly may be payable to current Florida residents.”

“Nor is there any dispute that Plaintiffs’ German affiliates do not conduct business in Florida and have not otherwise purposefully availed themselves of benefits provided by Florida. … The reporting provisions pertain to, and as a practical matter unquestionably seek to regulate, a subject matter – the German affiliates’ payment or non-payment of Holocaust-era policy claims – with no jurisdictionally-significant relationship to Florida. The reporting provisions violate Due Process to that extent, regardless of whether there are minimum contacts between the State of Florida and these particular Plaintiffs, the (nominally) regulated parties.” [Slip op. 27-28]

The Court, however, does not address the broader issue of whether the whole scheme of the Act is unconstitutional. Nor does it decide whether the Insurance Commissioner might be able to obtain this information based on other Florida insurance laws.

Citation: Gerling Global Reinsurance Corp. v. Gallagher, No. 00-16542 (11th Cir. October 2, 2001).

Filed in: Issue10

In aftermath of dismissed “Benzodiazepine Litigation” against U.K. drug company in Great Britain and Ireland, English Court of Appeal upholds company’s claims for payment of litigation costs by insurance carriers where New York law governs some policies and English law governs others

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In aftermath of dismissed “Benzodiazepine Litigation” against U.K. drug company in Great Britain and Ireland, English Court of Appeal upholds company’s claims for payment of litigation costs by insurance carriers where New York law governs some policies and English law governs others

In the so-called “Benzodiazepine Litigation,” up to 11,000 users of drugs such as Ativan and Serenid sued John Wyeth & Brothers Ltd. (Wyeth) in the courts of England, Scotland, Wales and Ireland in the late 1980s. The English courts ultimately struck out all their claims after the withdrawal of legal aid. The actions pending in the other jurisdictions remain dormant and without much prospect of getting to a judgment against Wyeth. The current situation, therefore, is that plaintiffs have not proven any claims against Wyeth nor has it paid any claims.

Nevertheless, Wyeth’s litigation costs in England added up to about BP 17.34 million plus an additional $2.44 million in the United States. According to Wyeth, several of its insurers or their predecessors have a duty to pay both under the policies governed by the law of New York state and under the policies governed by English law. The companies contended that the New York policies did not bind them to pay any, or a proportion, of these litigation expenses.

From May 1972 to October 1977, there was a two-layered insurance structure. The Guardian Royal Exchange (GRE) provided for the first layer and two AFIA companies furnished coverage for the second layer. St. Paul Mercury Insurance Company (St. Paul) coverage was in effect from May 1972 to July 1975 and Aetna Insurance Company (Aetna) coverage applied between July 1975 and October 1977. From November 1977 to 1980, there was also two-layered coverage where an AFIA company, Home Insurance Company (the Home) did the primary layer and Aetna the secondary level.

In Wyeth’s suit against the insurance carriers, it was common ground that English law governed the Home policy in the primary layer while New York law governed the issues arising under the second layer, the excess policies. From January 1984 onwards, the Cigna Group had taken over AFIA. Other defendant companies assumed the interests and liabilities of St. Paul, Aetna and the Home, hereinafter referred to collectively as Cigna.

Under the GRE primary layer policies for the period May 1972 to October 1977, GRE had a right to “buy-out” by annually paying 200,000 of Wyeth’s litigation expenses during their coverage period. GRE did exercise the right by making substantial payments to Wyeth in 1990 and 1991, thus ending its liability. According to Wyeth, AFIA is bound to pay 100% of its coverage until March 1994.

Wyeth filed this insurance litigation in the English Commercial Court in May 1996. This is an appeal from two decisions of that court. By a judgment dated April 18, 2000 (the main judgment), the judge applied New York law to various issues surrounding the construction of policies issued by members of the AFIA group of companies in whose shoes now stand one or another of the defendants. In the second, delivered on November 13, 2000, the lower court again ruled on two issues dealt with in its main judgment, this time involving the application of English law to the interpretation of an AFIA policy.

Wyeth’s position was that, as of March 18, 1994, it became clear that Cigna should cover 31.49% under the New York policies and 29.56% under the Home policies. Wyeth contended that Cigna was liable for 100% of the litigation costs incurred between the date of GRE’s buy out and March 18, 1994. The Commercial Court ruled essentially for Wyeth and the insurers appealed. The Court of Appeal (Civil Division) dismisses the appeals from both judgments.

The Court holds that the “efficacy clause” does not preclude insurance coverage for the claims in the benzodiazepine litigation either under the New York policies or under the Home policy. “It is obvious that, in most cases, it will not be clear whether the litigation is going to succeed or not when a primary insurer may want to consider tendering its limits whether under a buy out provision or otherwise. It would be quite illogical for it to be a breach of the maintenance warranty either to enter into a buy out arrangement or to exercise it only if it turned out eventually that the claim was defeated on liability.” [para. 37] No merit is found in the insurers’ suggestions that GRE had acted in bad faith or at least had violated the “maintenance clause” in the policy by making substantial payments to Wyeth for its litigation costs.

The Court next turns to the question of liability to reimburse a defendant for costs where the substantive claims against it do not prevail. There are two major types of litigation insurance under New York law. Under one type, the duty to pay litigation expenses arises only when coupled with a duty to indemnify for substantive claims actually adjudged against the insured. There is also a type of policy where the obligation to defend or to pay for a defense arises as of the start of the litigation. “Whether that obligation is to pay costs as they are incurred for litigation relating to claims which might fall within the cover (as per the duty-to-defend obligation), or simply to fund until it is known whether the claims are within the cover, or whether the obligation is simply to indemnify once liability has been established, will depend on the proper construction of the policy.” [para. 33]

The Court then outlines its approach to interpretation. “Ultimately, it is for the English court assisted by the rules of construction under New York law and looking at the matter as best it can as if it were a New York court, to make up its mind what these particular clauses meant. [para. 43]

“… In the circumstances of this case where the policy might be primary or excess, I do not see how, when it is excess, that could alter the meaning of the words in any radical way. What it seems that it might do is to alter the time at which the obligation to defend and thus the commencement of the obligation to pay might arise. … The guiding principle is that the insured, having purchased both primary and excess coverage, cannot be abandoned by his insurer.” [paras. 46, 47] [emphasis supplied] The Court thus answers the issues relating to the New York policies in the same way as the judge below and dismisses the appeal from the main judgment of April 18, 2000.

As to the Home policy, Wyeth sought declaratory relief not only as to costs incurred that reasonably pertained to claims that its products caused injury or disease but also to claims asserting a worsening of those injuries or disease during uninsured years. With reference to these latter claims, Cigna had argued that the Court should limit its coverage to only a portion of the costs.

The Court, however, disagrees with Cigna. “It seems to [the Court] that, if the starting point is that the costs do reasonably relate to the defence of claims falling within the policy period, the contractual right of Wyeth is to be paid those costs. … [O]nce that threshold has been reached [the Court does not see] that there is any room for saying that simply because the costs may also relate to an increase in the injury during some period outside the cover, the obligation on Cigna is cut down in some way. ” [para. 56] The Court, therefore, dismisses the appeal from the judgment of November 13, 2000. It also denies leave to appeal further to the House of Lords.

Citation: John Wyeth & Bros., Ltd. v. Cigna Insurance Co. of Europe S.A., 2001 WL 239739 C.A.), [2001] E.W.C.A. Civ. 175 (Ct. App. [Civ. Div.] Feb. 9) (Smith Bernal Transcript).

Filed in: 2001 International Law Update, Issue4