Reinsurance: The meaning of "consequent on or attributable to one source or original cause" in a reinsurance contract
MMI insured the Port of Sunderland Authority against legal liability incurred as a harbour authority. The policy covered loss or damage arising during the period of insurance.
The policy was written on a continuing basis, subject to the payment of an annual premium. There was no limit of indemnity in any one year except for a limit of £5 million in respect of all compensation payable to any claimant or any number of claimants arising out of losses "consequent on or attributable to one source or original cause".
MMI reinsured the risk with the Defendant reinsurers under three facultative contracts. The reinsurance agreements were annual contracts running from June 1986 to June 1987, from June 1987 to June 1988, and from June 1988 to June 1989. Not all the Defendant reinsurers subscribed to all of the contracts and the shares of the participating reinsurers changed from year to year. The limit of indemnity and MMI's retention also varied over the three years.
In 1985, a company called Concorde, delivered two dragline excavators to the Port of Sunderland for storage. These were very large pieces of equipment used for open cast mining. The Port of Sunderland therefore became the bailee of the equipment and owed Concorde a duty of care.
Between March 1987 and September 1988 the equipment was very extensively damaged by theft and vandalism. It was estimated that a minimum of 300 man hours would have been necessary to carry out the thefts, which would have required the use of cutting equipment and a crane.
Concorde brought proceedings against the Port of Sunderland which resulted in a Judgment of approximately £3.1 million, including interest and costs. MMI agreed to indemnify the Port of Sunderland on the basis that there was a single claim and, thereafter, sought to recover under the reinsurance contracts.
The loss occurred over a period of 18 months, that is, the last three months of the first reinsurance contract, the entire 12 months of the second reinsurance contract and the first three months of the third reinsurance contract. MMI aggregated the various incidents of theft and vandalism into a single loss and claimed one-sixth from the first year reinsurers, two-thirds from the second year reinsurers, and one-sixth from the third year reinsurers.
The Defendant reinsurers rejected the aggregation and maintained that there had been a number of individual acts of theft and vandalism, none of which exceeded MMI's excess under the reinsurance contracts. On that basis, the Defendant reinsurers contended they had no liability.
At first instance, the Judge held that MMI was entitled to aggregate the various acts of theft and vandalism into one claim against the reinsurers because it was to be presumed that the reinsurance contracts were back-to-back with the underlying insurance. Moreover, as the evidence indicated that the losses occurred in the period covered by the second year reinsurers, it was held that MMI was able to recover its entire loss under the second reinsurance contract.
The Defendant reinsurers appealed.
Held:
MMI could aggregate the losses.
The two pieces of equipment had been stored at four locations within the Port. The damage to the equipment took place over an 18 month period and was the result of a whole succession of individual acts of theft and vandalism carried out by a number of individuals or groups of individuals, probably acting independently of one another.
Had the policy provided for the aggregation of losses on the basis of "any one event", the Defendant reinsurers would have been able to say that each act of theft or vandalism was a distinct event and should not therefore be aggregated.
In the present case, the insurance cover and the reinsurance contracts provided for the aggregation of losses "consequent on or attributable to one source or original cause".
In the House of Lords case of AXA v Field (Insurance and Reinsurance Bulletin Issue 28), Lord Mustill stated that the word "originating" opened up the widest possible search for a unifying factor in losses which it is sought to aggregate.
In the present case, the Court of Appeal held that the phrase "one source or original cause" was similar to the phrase "originating cause". On the facts, the unifying factor in the history of the losses was the want of care of the Port of Sunderland which allowed the theft and vandalism to occur. MMI was therefore entitled to aggregate its losses.
The Court of Appeal then had to determine how MMI's loss should be divided between the three reinsurance contracts.
It was held that the reinsurance contracts were not back-to-back with the underlying policy. The Port of Sunderland's cover effectively disregarded policy years, whereas MMI's reinsurance cover was placed annually, with each year being distinct and independent.
Accordingly, it was necessary to determine what loss or damage had arisen in each policy year and whether, when the losses in each year were aggregated, MMI's retention was exceeded.
Having reviewed the facts, the Court of Appeal found that, on a balance of probabilities, it was unlikely that loss and damage which occurred during the first and third reinsurance contracts exceeded MMI's retention. Most of the theft and vandalism occurred during the 12 month period of the second reinsurance contract, although it probably started before the period and continued after this period. On that basis, the Court of Appeal were prepared to find that two-thirds of the damage occurred during the second reinsurance contract.
Accordingly, MMI could recover two-thirds of its loss under the second reinsurance contract, after deduction of its policy excess.
Note:
This decision shows the courts adopting a common-sense approach to the perennial problem of the aggregation of losses. In each case, the outcome will depend upon (a) the underlying facts, and (b) the precise wording of the aggregation clause. It is clear that the use of the word "event" will make aggregation more difficult, whereas the phrases "one source or original cause" and "originating cause" are similar in effect and may (depending upon the underlying facts) permit the aggregation of losses on a much broader basis.
Although this case has important factual distinctions, it may impact upon outstanding policy disputes in other areas where aggregation is proving to be a significant issue (Municipal Mutual Insurance Limited v Sea Insurance Co Limited & Others, CA: Judgment 26th March 1998).
