Lexington concerned a reinsurance of Multinacional, one of Venezuela's largest insurers, which provided property and business interruption cover to a local insured. The insured suffered a loss in April 1998. The reinsurance contracts contained a claims co-operation clause which made it a condition precedent to liability that the reinsured would advise the reinsurers of any claim and co-operate with its settlement.
In early 2000, reinsurers informed Multinacional that its failure to cooperate discharged reinsurers from any liability under the reinsurance. At the same time, reinsurers continued to co-operate with Multinacional on a without prejudice basis to reach a negotiated settlement of the claim. No settlement was reached and then, in May 2001, reinsurers informed Multinacional that the three-year limitation period for a claim by the Venezuelan insured against Multinacional had expired. Reinsurers and Multinacional agreed that Multinacional would invoke the time-bar against the insured in accordance with a strategy to be agreed. Reinsurers then contended that in subsequent communications with the insured, Multinacional had waived the timebar defence and thereby (again) breached the claims co-operation obligations. The case came before the Commercial Court in the form of preliminary issues: (1) had reinsurers prospectively waived any future breach of condition precedent by repudiating liability for the claim in early 2000? (2) was renunciation of the time bar defence a breach of condition precedent?
The Commercial Court decision
The Court found in favour of reinsurers. The findings of most interest were:
- If reinsurers were right to contend that Multinacional
was in breach of condition precedent they were automatically
discharged from liability. If they were wrong, they were not.
It followed that the reinsurers had not, by their letter in
early 2000, elected not to rely on any future breach of the
claims co-operation obligations - they had not made any
choice between mutually inconsistent rights. Raising a
defence, although it might involve a choice, was not a
contractual election which amounted to a waiver of any breach
of condition precedent. On this point, the Court followed the
decision in Kosmar Villa Holidays.
- It was acceptable for the reinsurers to maintain a
position that they had been discharged from liability, while
also actively co-operating with the adjustment and settlement
of the claim on a without prejudice basis. The judge
suggested that reaching any different conclusion could be
disadvantageous: reinsurers often have to rely on more than
one defence to a claim and some defences have to be asserted
at an early stage (else they might be lost), but it is in the
interests of both parties that adjustment and settlement
continue without prejudice to the earlier contention that
reinsurers may be relieved from liability.
- The renunciation of the time-bar defence was a breach of
condition precedent. Even if this had not been the case,
Multinacional would still have breached the condition
precedent as reinsurers had not received the cooperation to
which they were entitled.
Lexington and Kosmar confirm the longstanding rule that breach of a condition precedent will automatically discharge (re)insurers from liability for a claim. In addition, the cases also suggest that the assertion of a defence by a (re)insurer will not usually amount to waiver of a breach of a condition precedent - it will not constitute a choice between mutually inconsistent rights. Reinsurers are entitled to assert breach of condition precedent, but co-operate in adjustment of the claim on a without prejudice basis, without necessarily waiving their rights. (Re)insurers should be mindful of this possibility when dealing with their (re)insureds on disputed claims. (Re)insurers should, however, bear in mind that they can still lose their rights to rely on a breach of condition precedent if they unequivocally represent that they intend to pay and their (re)insured relies on that statement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
