Follow the Market clauses – helpful clarification?

In the recent case of San Evans Maritime Inc and Others v Aigaion Insurance Co SA the Commercial Court considered whether the lead market could bind the following market by a settlement agreement reached by the lead market with the insureds on a separate policy. It was held that the follow clause bound the defendant, Aigaion, to follow the lead market in settling claims notwithstanding that the settlement agreement concluded between the lead market and the insureds expressly stated that it did not bind other insurers.

The case concerned marine hull and machinery insurance cover but the decision may also be relevant to facultative reinsurance contracts where “follow” shorthand may be used rather than full follow settlements clause wording. The moral, as always, is to check wordings carefully.

Background

The claimants owned and managed a vessel that was insured 50% by Lloyd’s syndicates (the “Lloyd’s Policy”) and 30% by Greek insurer, Aigaion, (the “Aigaion Policy”). The remaining 20% was uninsured.

In July 2010 the vessel ran aground and suffered a generator breakdown. A claim was made under both insurance policies.

The Lloyd’s syndicates were provided with a copy of the Aigaion Policy in 2011, which contained a follow clause stating: “Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex-gratia payments”.

In 2012, the claim against the Lloyd’s syndicates was settled for an aggregate sum of US$779,500 with each syndicate being liable for its respective share of the claim. The settlement agreement contained the following clause 7: “The settlement and release pursuant to the terms of this Agreement is made by each Underwriter for their respective participations in the Policy only and none of the Underwriters that are party to this Agreement participate in the capacity of a Leading Underwriter under the Policy and do not bind any other insurer providing hull and machinery cover in respect of the St. Efrem”.

The preliminary issues

The insureds asserted that Aigaion was obliged to follow the settlement pursuant to the Aigaion Policy, which would entitle the insureds to US$450,000 being 30% of an “agreed loss” of US$1.5 million. Aigaion denied that it was obliged to follow the settlement giving rise to three preliminary issues:

1. On a proper construction, did the follow clause in the Aigaion Policy (a) require the defendant under the Aigaion Policy to follow any settlement made by the Lloyd’s syndicates under the Lloyd’s Policy (as the insureds contended); or (b) merely authorise the Lloyd’s syndicates to act on Aigaion’s behalf in negotiating and/or agreeing the settlement of disputed claims with the claimants (as Aigaion contended)?

2. If Aigaion was required to follow any settlement made by the Lloyd’s syndicates, was the follow clause triggered by the settlement agreement?

3. Did the claimants agree by signing the settlement agreement that it would not be binding on Aigaion and, if so, was Aigaion entitled to rely on the Contracts (Rights of Third Parties) Act 1999 to enforce that term?

The follow clause (preliminary issue 1)

The Court stated that follow clauses come in different forms and made clear that the manner in which each follow clause is intended to work must depend on an examination of the terms of the follow clause in question. This particular follow clause related to “claims” and the Court found that there could be no doubt that must include the settlement of claims. The Court commented on the brevity of the follow clause and the fact that the only exclusion to it was ex-gratia payments. In light of this, the Court found that the follow clause could reasonably be understood to mean that Aigaion agreed with the insureds to follow any settlement made by the Lloyd’s syndicates in relation to the vessel.

Whilst the Court accepted that the case law is ambiguous and the authorities do not seek to resolve it, the Judge rejected Aigaion’s argument that the follow clause was an authorisation to the Lloyd’s syndicates to act on Aigaion’s behalf. Instead he found that the follow clause acted as an agreement between Aigaion and the insureds, to which the Lloyd’s syndicates were not a party. Introducing a concept of agency where there was no agreement between Aigaion and the Lloyd’s syndicates unnecessarily complicated the operation of the clause.

Aigaion’s ability to rely on the settlement agreement (preliminary issue 3)

The Court accepted Aigaion’s submission that the Lloyd’s syndicates did not purport or intend to bind any other insurer (including Aigaion) to the settlement agreement; the fact that the Lloyd’s syndicates were aware of the Aigaion Policy was the only plausible explanation for the inclusion of clause 7 in the settlement agreement.

However, in agreeing clause 7, the Court found that the Lloyd’s syndicates were not intending to confer a benefit on Aigaion, rather to protect themselves from any possible liability to Aigaion. Given this, Aigaion was not entitled to rely on the Contracts (Rights of Third Parties) Act 1999 to enforce clause 7.

In any event, the Court found that clause 7 would not assist Aigaion because the insureds had only agreed that the Lloyd’s syndicates were not purporting to bind any other insurer and had not agreed to give up their right to rely on the follow clause as against Aigaion.

Triggering of the follow clause by the settlement agreement (preliminary issue 2)

The Court found that the follow clause was triggered by the settlement agreement. While the lead market might wish to protect itself by stating that it was only settling a claim on its own behalf, this did not countermand a follow clause requiring the following market to follow any settlement made by the lead market regardless of whether or not the lead market purported to act as an agent for the following market.

Comment

In reaching its judgment, the Court was clearly seeking to effect the commercial intent of follow clauses, i.e. to simplify the claims process. In doing so, the Court recognised the conflicting authorities on follow clauses but, looking at the terms of the follow clause in this case, rejected Aigaion’s argument that the clause had the effect of making the lead market agent for the following market. Instead the Court accepted the insureds’ argument that the settlement agreement operated as a trigger for the following market’s obligations.

However, lead and following markets should not forget that the Court was keen to stress that follow clauses manifest in a variety of forms and must, therefore, be examined individually when considering how they are intended to operate. The importance of the issue for lead markets is that, if acting as the agent of the following insurers, the lead will owe fiduciary duties to its principal, the following market.

We understand that the Court’s decision is going to be appealed.

Further reading: San Evans Maritime Inc and Others v Aigaion Insurance Co SA [2014] EWHC 163 (Comm)