A recent High Court decision in the on-going case between the Korean National Insurance Corporation (“KNIC”) and its reinsurers highlighted:
- The need for settlements between insurers to be evidenced in writing, particularly in large and/or complex disputes;
- A claimant is entitled to commence representative proceedings against a lead reinsurer as the only named defendant and does not need to go to the hassle and expense of serving all named (re)insurers subscribing to the policy, if the named defendant has the same interest as all the other parties which it represented.
- (Re)insurers should not agree to a currency conversion clause which is not linked to the open market rate and could have the effect of artificially inflating claims.
- (Re)insurers need to exercise caution before agreeing to law and jurisdiction clauses of states where a fair trial cannot be guaranteed.
The case followed the crash of a North Korean medical rescue helicopter which killed three crew members, three passengers and caused substantial damage to a warehouse and its contents. By the underlying contract of insurance covering the period 1 November 2004 to 31 October 2005, the claimant (an insurance company incorporated in the Democratic People’s Republic of Korea (“DPRK”)) insured Air Koryo (a North Korean airline based in Pyongyang) under an aviation hull and liability policy. The policy was expressly subject to the law and jurisdiction of DPRK. The contract of reinsurance covered the same period. The claimant was reinsured by the defendant which led a syndicate of reinsurers on the case (together “the Reinsurers”) under an aircraft third party liability reinsurance policy. When the defendant refused to indemnify the claimant, the claimant launched proceedings in the courts of DPRK against the defendant on its own behalf and on behalf of the other reinsurers in accordance with the DPRK jurisdiction clause in the policy. The judgment upheld the claimant’s claim and ordered the reinsurers to pay the sum of €43 million. The English case was brought to enforce the North Korean judgment in England.
The claimant brought an application for summary judgment in respect of the following three defences which the defendant reinsurers raised in their Defence and Counterclaim:
- The judgment of the North Korean court was defective because of the use of representative proceedings;
- The claimants committed a fraud on the North Korean court in having failed to inform it that the dispute had been settled in December 2005 and all rights and obligations under the policy were discharged by 8 March 2006 at the latest; and
- The North Korean court did not have jurisdiction to deal with the dispute because the dispute had been settled.
The claimant sought summary judgment on these defences on the grounds they had no realistic prospect of success and there being no other compelling reason why these issues should be exposed of in a trial. These defences represented more than 50% of the defendant’s case. The High Court Judge ruled in favour of the KNIC and held that the above defences had no realistic prospect of success and should be struck out.
The Reinsurers alleged that KNIC had accepted a settlement of €43 million paid in Korean Won rather than Euros, with an agreed exchange rate. By doing so, the reinsurers would see their payout reduced. However, the Judge found that no such deal had been agreed upon since there was no written proof. In particular, the Court held:
- The claimant was fully entitled to commence representative proceedings because the named defendant had the same interest as all the other parties which it represented. The following reinsurers did not need to be served but could be treated as parties to the action so that any judgment obtained against the defendant would bind all those represented. Commencing proceedings against a subscription market has historically tended to give rise to procedural and practical difficulties, because of the need to identify and serve each of the syndicates and companies participating on the risk. This decision may assist in saving time and costs in commencing proceedings.
- Given the size of the claim and the significance of the currency exchange clause, it was wholly improbable if not inconceivable that the claimant and reinsurers would reach (or be viewed as intending to reach) a settlement without a written record of the agreement, or at least a minute of the meeting in which the compromise was achieved. It is not just that the financial implications of the currency conversion clause was so great. The exchanges referred to in the Defence and Counterclaim was couched in fairly casual language. Yet the parties were highly suspicious of each other: indeed the underlying claim was set by the defendant to be fraudulent in whole or in part.
- It was impossible to reconcile the existence of any agreement on either party’s part to be bound by the terms of a settlement with the contemporary correspondence.
- The belief of the Reinsurers’ solicitor that such a settlement had been reached (as demonstrated by his Statement of Truth) was irrelevant. The assessment as to whether a concluded contract had been entered into was an entirely objective exercise. A finding that on any view a concluded settlement was not achieved involved no concurrent finding of lack of good faith on the part of the solicitor.
The case also highlights key points to consider when draft policy wordings:
- The policy in this case contained a “currency conversion clause” which stated that claims in Euros were to be paid in Euros and claims in local currency were to be paid in Euros at an exchange rate of NKW160 to Euros 1. This contractual rate of exchange of 1 Euro = NK160 was substantially different to the open market exchange rate at the relevant time which stood at 1 Euro = NKW 1,000 to 3,000 (and hence favourable to the claimant). The currency exchange clause, therefore, had the effect of artificially inflating the value of the claimant’s claim. This serves as a lesson to (re)insurers not to agree to currency exchange clauses which have the potential to inflate the value of a claim by obliging the (re)insurer to indemnify the (re)insured at a rate which is not related to the open market exchange rate.
- The policy was subject to the laws and jurisdiction of North Korea. One of the defences raised by the reinsurers was that the English courts should not enforce judgments of the courts of North Korea because its judiciary is partial and flawed. Although the claimant accepted that this defence was not appropriate to deal with at the summary judgment stage, it is a lesson to underwriters not to agree to abide by the law and jurisdiction of any state where a fair trial cannot be guaranteed.
Further reading:
Korea National Insurance Corporation v Allianz Global Corporate & Speciality AG [2007] EWHC 1744 (Comm).
