A Biter Bit

It is three years old now, but the decision in Dornoch Ltd & ors v Royal & Sun Alliance Insurance Plc(which I will call "the Coca Cola case") by the London Court of appeal is interesting for at least five reasons. (Hat-tip yet again to both Davies Laveryand Cameron McKenna).

First, it involved a dispute between a well-known insurance company and its own re-insurers.

Second, the dispute demonstrated that even an insurance company can nearly "come a cropper" in one of the many traps for the unwary in every contract of insurance.

Third, the dispute highlighted the difficulties that gave rise to the Contract Certainty project.

Fourth, it involved Coca Cola.

Fifth, it arose from one of those peculiarly American class actions by discontented shareholders unhappy at a loss in the value of their shares.

The insurer Royal Sun Alliance (RSA) provided cover to the Coca Cola Group in respect inter alia of claims that its directors or officers had misled investors. In turn, RSA re-insured its potential liability with Dornoch. The notification term ("NT")in RSA's contract with Dornoch required it to notify it by cable within 72 hours of "any loss or losses which may give rise to a claim". (Note that this language is unusual for a liability policy, which is what was involved here. More usual would be a reference to "circumstances which might give rise" or similar.) Compliance with this term was agreed to be a condition precedent to liability: in layman's language, the claim would not be payable if notification was late.

In October/November 2000, actions were commenced against Coca Cola and three of its directors in the U.S.. It was alleged that Coca Cola's financial well-being had been exaggerated, which had had the usual effect of pushing up its share price. Consequently, the claimant investors claimed to have bought their stock at inflated prices and that they suffered loss when the price fell again. The two actions were notified to RSA on 12 December 2000. On 19 January 2001 RSA informed the Reinsurers of the claims.

That looks pretty late, no ? Just imagine how a lay policyholder would struggle to get out of that one !

The reinsurers unsurprisingly - but incorrectly, as it turned out - believed that they had no liability. RSA disagreed and among the issues that were raised were:

* whose loss was relevant - that of the Coca Cola shareholders, of Coca Cola itself, or RSA's ?

* Had a loss actually occurred before January 19 2001 ?

* If not, did the possibility of a loss trigger the obligation to notify ?

* If it had occurred, when did the loss occur ?

(If you find these questions mind-numbingly boring, insurance coverage law may not be for you ! I find them fascinating, but then I have personal experience of how such issues can have real-world effects.)

Briefly, the result of the trial and appeal was a decision that there had been no notifiable loss, and that the effect of the NT wording quoted above was that there was no obligation on RSA to notify anything less than an actual established loss. Until the aggrieved shareholders proved their case, there was no actual loss established by anyone.

The re-insurers, not unreasonably, protested that to read the NT in this way was contrary to the purpose of such provisions, which is to give early warning of adverse developments. The Appeal Court per Longmore L.J. dealt briskly with this: It was not part of the Court's function to go out of its way to give a purposive construction to allow one party to take advantage of the draconian consequences of a clause where, if the parties had taken appropriate care with its wording, would probably have had very different requirements. Further, it is a well established principle that a party who relies on a clause exempting liability can only do so if the words are clear.

It was also significant, Longmore J. said, that the Reinsurers did not suggest that they had been prejudiced by the late notification. ( I may return to the implications of this observation in another post).

Once again, I recommend that you read the judgment itself - this one is relatively short and well-expressed.