Gard Marine: Another UK Decision Reiterates the Importance of Choice of Law

Closely following on the heels of the House of Lords' Lexington opinion, another UK court has decided a reinsurance case on choice of law issues. On October 9th, the Commercial Court issued a decision in Gard Marine & Energy Ltd. v. Lloyd Tunnicliffe, Glacier Reinsurance AG, and Agnew Higgins Pickering & Co. Ltd., [2009] EWHC 2388 (Comm). The outcomes of both of these cases highlight the need for parties to focus their attention on choice of law issues impacting international reinsurance agreements.

Gard, a Bermuda company, instituted an action in English court against its reinsurers - London market underwriters and the Swiss-based Glacier Re. The Lloyd's broker that placed the reinsurance (Agnew Higgins Pickering, "AHP") was later added as a defendant, with Gard claiming damages against the broker in the event that the reinsurers' defenses proved to be successful.

Gard insured Devon Energy Corporation (a U.S. company) for property and business interruption risks up to $400 million for "any one accident or occurrence in respect of losses arising out of a Named Windstorm in the Gulf of Mexico." Gard reinsured this risk under two excess of loss reinsurance slips, with the reinsurers agreeing to "pay up to Original Package Policy limits/amounts/sums insured excess of USD250,000,000 (100%) any one occurrence of losses to the original placement."

In September 2005, Hurricane Rita caused damage to Devon Energy's insured interests in the Gulf of Mexico. Its insurance claim was ultimately settled for the global sum of $365 million, of which Gard bore 12.5%. Gard then sought reinsurance coverage, claiming that the $250 million deductible in the Sum Insured clause was "referable to 100% property values" and therefore should be "scaled" in order to reflect the fact that the claim was made in respect of property in which Devon had less than 100% interest. One of the London underwriters (Advent) and a Swiss reinsurer, Glacier Re, disputed this, with Glacier Re paying the sum it considered was due on the basis that the excess attachment point was $250 million.

Gard commenced this action in March 2007 in England, but it was stayed pending a parallel action that Glacier Re had commenced in Switzerland before it received notice of the English lawsuit. After the Swiss court dismissed Glacier Re's action for lack of jurisdiction (because Gard was not domiciled in Switzerland), the English Court lifted the stay and proceeded with this action. The issue before the Court was whether it had jurisdiction over the claim per a set of jurisdictional rules governing international civil or commercial legal disputes involving residents of a European Union member state (known as the "Lugano Convention").

Gard argued that the English court had jurisdiction under article 5(1) and/or article 6(1) of the Lugano Convention. Article 5(1) states that jurisdiction is appropriate in a Member ("Contracting") State "in matters relating to a contract, in the courts for the place of performance of the obligation in question," and article 6(1) states that jurisdiction is appropriate "in the courts for the place where any one of [the defendants] is domiciled." Accordingly, Gard argued there was English jurisdiction because (a) the relevant contractual obligation was to be performed in London pursuant to an alleged custom and practice of the London market, and (b) its claim against Glacier Re was intrinsically connected with the claim against the Lloyd's underwriter (Advent) and the Lloyd's broker (AHP).

At the outset, the Court determined that English law applied to the Glacier Re reinsurance contract, even in the absence of an express choice of law provision, because the circumstances of the placement, the use of a Lloyd's slip and policy, the incorporation of London market workings in the slip, and the use of certain wording in the slip all demonstrated that there was an implied choice of English law. The Court then rejected Gard's first argument that the parties intended for payments under the contract to be made in London (i.e., the place of performance of the obligation per the Lugano Convention). However, the Court determined that it did have jurisdiction under article 6(1) of the Lugano Convention because Gard's claims against Glacier Re, Advent, and AHP were so closely connected that it would be expedient to hear and determine them together to avoid the risk of conflicting judgments that might result from separate proceedings.

Specifically, the Court felt that Gard's claims against both reinsurers turned on the proper construction of the Sum Insured Clause in the contracts, which contained the same terms and which were part of a common reinsurance programme. The Court also determined that both claims involved the same "general factual matrix" and that it was unlikely that any differing issues of fact would have a major bearing on the resolution of the construction issue. Additionally, the Court found a common connection between the claims against the reinsurers and the contingent claim against the broker (re: the broker's alleged misrepresentations or improper disclosures), over which the court clearly had jurisdiction. Thus, the Court concluded that it was "overwhelmingly just, convenient and expedient that Gard's claims against Advent, Glacier Re and its consequent contingent claim against AHP be determined in one jurisdiction."

This case, like the Lexington case discussed in our August 3, 2009 client alert, is an example of the uncertain and potentially unforeseeable consequences of the failure to explicitly reference a specific choice of law in international reinsurance agreements. In Lexington, the House of Lords held that two London reinsurers were not bound by a U.S. court's interpretation of the ceded policy even though the reinsurers had issued follow form facultative reinsurance contracts that included an express follow the settlements clause. There, the underlying policy and the reinsurance slip did not contain express choice of law clauses (both parties accepted that the reinsurance was subject to English law, and the underlying policy only contained a standard service of suit provision). Accordingly, the Law Lords applied English law and ultimately determined that the reinsurers were not bound to indemnify the cedent for their portion of the underlying settlement (but rather, were bound to indemnify the cedent for that portion of the settlement that was directly related to damage occurring during the three-year reinsurance period). Both cases, thus, demonstrate how the absence of a choice of law clause in a reinsurance agreement can lead to results that might not have been anticipated by the parties, jurisdictionally or substantively. In order to avoid these consequences, cedents and reinsurers may wish to re-evaluate their agreements' choice of law provisions (or lack thereof).

You may find a copy of the Gard decision here.