Latest court ruling in the continuing saga of the Exxon Valdez spill

United Kingdom

On Monday 10th May 2004 the London Commercial Court (Mr Justice Colman) made a ruling in the first round of litigation arising from the long running dispute relating to the recoverability of the Exxon Valdez settlements in the LMX Spiral. These issues were held in CU v. NRG Victory (1997) to be arguable. The proceedings were brought by Equitas Limited on behalf of various Lloyd's syndicates in order to obtain a ruling on whether the various settlements made in relation to the Exxon Valdez oil spill fall within the terms and conditions of Exxon's primary policy (the "GCE Policy") and are therefore recoverable under the JELC market standard excess of loss wording used in the LMX Spiral.

When the Exxon Valdez ran aground in March 1989, it caused what remains today as one of the world's worst ecological disasters. Following the grounding, large amounts were incurred in cleaning up the spill. Immediately after the oil made contact with the water, it turned into sludge and the residual debris of the oil contaminated hundreds of miles of Prince William Sound, Alaska, and the seashore. Exxon Shipping Company ("ESC") - the owner of the Exxon Valdez – spent over USD850 million to clean up the spilled oil from Prince William Sound and the Alaskan shoreline (not to mention from many hundreds of seals, otters and other wildlife that are native to Alaska). After ESC became insolvent, Exxon Corporation – the cargo owner - took over the clean up and spent a further USD1.2billion.

At the time of the loss, the Exxon Valdez was insured under a Global Corporate Excess Policy (the "GCE Policy"). The judgments and settlements set out above led to Exxon making claims under the GCE Policy. Section I covered, amongst other things, removal of debris costs, Section IIIA covered marine liability and Section IIIB covered third party liability.

Following the oil spill, Exxon asserted claims on all three sections of the GCE Policy, (which provided coverage of US$850m). Exxon brought proceedings against the GCE primary insurers in court proceedings in Texas (in relation to Sections I and IIIA) and in arbitration in New York (in relation to Section IIIB). The Section I claims settled for USD300 million in March 1996. This was followed by a final judgment in Texas for USD410 million in relation to Section IIIA. In January 1997, Exxon entered into a global settlement with the GCE policy primary insurers for USD480 million in full and final settlement of the Section IIIA and IIIB claims.

Once the claims had settled on the primary GCE policy, some of the primary insurers sought to recover from their reinsurers. Some of the reinsurers questioned whether they were liable under the reinsurances. This led to the 1997 CU v. NRG Victory proceedings in which some of the primary insurers sued their reinsurers for their share of the settlement. The case concerned reinsurances on the JELC wording. Clause 1.3 of the JELC wording states that it is a condition precedent to liability under the contract that settlement by the reinsured shall be in accordance with the terms and conditions of the original policies or contracts. The reinsurers argued that the insurers were not liable to Exxon under the primary policy and deployed some of the defences that insurers had raised in the Texas proceedings against Exxon. The insurers sought to argue that the settlements were reasonable and businesslike and therefore reinsurers were liable under the follow the settlements clause. However, as we have seen above, this clause also required the reinsurer to prove that the settlement fell within the terms of the underlying direct policy as well as the reinsurance.

The Court of Appeal determined that this provision required the reinsured to prove that they were under a legal liability under the primary policy. The insurers put forward evidence from the Texan lawyers saying, in effect, that although there were arguable coverage issues under the primary policy, the fact that the case was to be heard by a Texas Jury, which is often unfavourable to insurers and biased against them when insurers are arguing for a limitation of cover, meant that underwriters would lose. The lawyers had therefore recommended settlement.

The Court of Appeal did not accept that this was sufficient to show that the insurers were legally liable under the policy, as the recommendation to settle appeared to based on the lawyers' prediction of human behaviour (i.e. the Texas jury) rather than any legal ground. As a result, the Court refused permission for summary judgment and directed that the matter had to go to a full trial where, in effect, the issues relating to the construction and coverage under the policy would effectively be re-argued in order to show that the insurers were under a legal liability to the insured. Although the insurers settled with Exxon, the dispute switched to being one between the insurers and their reinsurers.

Following the Court of Appeal's decision in CU v. NRG Victory, a significant body of reinsurers contested whether the GCE policy primary insurers were under a legal liability to Exxon under the terms of the GCE policy for the costs and expenses of cleaning up the oil spill. The effect of this was that the retrocession market stopped processing Exxon claims collections. This was despite the fact that the GCE policy primary insurers had settled Exxon's claims under the GCE policy and that in the case of Section IIIA, there had been a judgment.

This ruling by Colman J is surprising because he refused to follow the views expressed by the court in CU V. NRG Victory for two reasons:

i) The GCE policy was governed by English law rather than New York law, and under English law settlements would not be recoverable; and

ii) the Seepage and Pollution Liability Exclusion in the JELC wording excluded liability for pollution on land. In CU v. NRG Victory, the court's view was that the exclusion was applicable to pollution on land not emanating from a vessel, so the claims were recoverable.

The Court found that if New York law applied, the USD480 million Section IIIA and IIIB settlement would be recoverable in full (the Defendant had admitted that USD410 million of this settlement, representing liability under Section IIIA, was recoverable). The effect of today's decision is that even applying English law, taking into account other related insurance claims arising from the Exxon Valdez spill, there is a covered market loss in excess of USD850 million.

Although the judgment is a step towards resolving the uncertainty that exists in relation to whether the Exxon settlements were recoverable from reinsurers in the LMX spiral, it is surprising that Colman J disagreed with the court's earlier views in CU v. NRG Victory. Permission to appeal to the Court of Appeal was granted by Colman J.

For further information contact Andrew Symons by e-mail at [email protected] or by telephone on +44 (0)20 7367 3044 or Richard Tosh by e-mail at [email protected] or by telephone on +44 (0)20 7367 2884.