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English Court of Appeal (Civil Division) affirms declaration that reinsurers of Coca Cola company's insurer had duty to defend insurers despite claimant's failure to notify them of two class actions pending in Georgia federal courts within 72 hours of their knowledge of loss by Coke since no "loss" had yet taken place.

The brokers Marsh & McLennan arranged insurance for Coca-Cola in the form of a Master Subscription Policy with a consortium (led by insurers known as Allianz) which included the claimants in the present proceedings, Royal and Sun Alliance Insurance Plc (RSA). RSA took a line of 21.5 percent. The claimant reinsured all of its part dealing with Coke's "directors and officers" liability with the consortia who are the defendants in the present litigation.

The re-insurance slip policy included a Standard Claims Control Clause (SCC). It declared in material part: "Notwithstanding anything herein contained to the contrary, it is a condition precedent to any liability under this policy that: The reinsured shall, upon knowledge of any loss or losses which may give rise to claim under this policy, advice (sic) the Underwriters thereof by cable within 72 hours."

Investors in Coke stock later brought two similar class actions in the Georgia federal court making substantial claims against Coke and its named directors for inflating the value of its stock. The complaint alleged that defendants had made false statements about Cokes's business which led investors to buy their shares at spuriously pumped up prices. The claimant here learned about those complaints at the latest by December 12, 2000, and received copies of them 18 days later.

The defendants below argued that within 72 hours of December 15, 2000, claimants should, pursuant to the SCC clause, have notified defendants about the potential losses that may befall Coke and the claimant. The claimant did not, however, convey its awareness of the complaints until January 19, 2001. The defendants submitted that claimant had acted too late and, therefore, that defendants were not liable to the claimant.

Next, the claimant filed proceedings in the English courts seeking a declaratory judgment that the defendants did have a duty to indemnify them with respect to any liability arising out of the Georgia lawsuits. The first instance judge identified the relevant loss under the SCC clause as the losses of the U.S. plaintiffs who had bought Coke shares at artificially inflated prices, rather than losses by Coca Cola in having to compensate the investors for their loss.

His basic reasoning was that the claimants should not have kept the defendants in ignorance once the claimant had found out that the complainants had suffered a loss. He further ruled that the claimant had to be affected by three elements before it had a duty to notify the defendants. First, there had to be an actual loss; second, the type of loss had to be one that might warrant a claim on the reinsurance; and third, the claimant had to have actual knowledge of that loss.

The first instance judge held that those requirements had not come into being before January 19, 2001, the date of the actual notice. At that date, all the claimant had been aware of was that there was a claim. There might have come a time, of course, when the claimant could have been assumed to have known that the American complainants had suffered a loss, but that time had not come by January 19, 2001. The trial judge, therefore, ruled in favor of the claimant. The defendants appealed that declaration. The Court of Appeal (Civil Division) dismisses the appeal.

In the lead opinion, the Court then explains its thinking about upholding the dismissal below. "A reinsurer of a reinsured's liability to a third party is prima facie liable to the extent of his subscription once it is ascertained that the reinsured is liable to that third party. A condition precedent to the liability of the reinsurer operates as an exemption to that prima facie liability."

"It is a well-established and salutary principle that a party who relies on a clause exempting him from liability can only do so if the words of the clause are clear on a fair construction of the clause. [Cites]. In my view the terms of the [SCC] on which the Syndicates rely do not sufficiently clearly exempt them from liability." [ 19]

"[Counsel] pointed out that RSA themselves must have assumed that their obligation was to give notice once they knew that a loss was being alleged since they in fact gave notice to reinsurers shortly after receiving copies of the Complaints on 30th December 2000, albeit more than 72 hours after receipt."

"To my mind this shows no more than that RSA did not have the terms of their reinsurance policy in mind on 30th December 2000. If they had had them in mind, they would probably have given notice within 72 hours instead of 20 days later. But this consideration cannot affect the true construction of what is, on any view, an ill-chosen clause. It is, moreover, significant that the Syndicates do not suggest that they have been in any way prejudiced by the late notification." [ 20]

"Once one has concluded that loss means 'actual' loss rather than 'alleged' or 'claimed' loss, it must follow that RSA cannot have had knowledge of any loss. It was not known by anyone in December 2000 or January 2001 that the American claimants had suffered the loss which they claimed or, indeed, any loss. The question whether the claimants have suffered any loss is still in dispute."

"It is, at this stage, worth pointing out how comparatively unusual the claim is which is brought against the Coca-Cola directors. It is that their conduct caused the share price to be artificially high at the time when the complainants purchased their shares. ... [T]he complainants say that they have paid more for their Coca-Cola stock than they should have done. If that were a proved fact, there would then be an 'actual loss' which might give rise to an insurance claim. But when RSA received the complaints, it was not a proved fact; it is a possible conclusion which depends on establishing that Coca-Cola stock would have had a lower value if the financial position of Coca-Cola had been accurately stated. Until this is 'known' to be the case, there can be no 'knowledge' of any loss."

"It might well be different if the claim had been that, as a result of something done by the directors of Coca-Cola the value of the stock had fallen; particularly if the stock had been rendered valueless. Then it might be clear that there had been a loss and once RSA were notified of a claim for that loss, it could be said that they then had knowledge of a loss which might give rise to a claim under the reinsurance policy."

"[Counsel] did indeed seek to say that even in the present case there was a loss 'known' to RSA because the share price fell from its peak in July 1998 but that cannot of itself be a loss (rather than natural market fluctuation) until it is established that the price was artificially high at the point of purchase." [ 22-24]

"If it had mattered, I would have come to the same conclusion on this question as the judge for what I understand to have been the main reason which he gave. This was that, if the loss contemplated was Coca-Cola's loss, that was certainly a loss of which RSA could not have 'knowledge' at any time before there was a judgment or a settlement to which Coca-Cola was a party for the simple reason that Coca-Cola are disputing that they are under any liability at all. On Post Office v. Norwich Union [1967] 2 Q. B. 363 principles, it will only be when it is determined that Coca-Cola are indeed liable that it can be said that Coca-Cola have suffered a loss." [ 28]

"This would, indeed, render the second part of the clause otiose in practically every case in which it must be intended that it have some value. The same consequence does not by any means invariably follow if the loss contemplated is that of the third party claimant as I have attempted to show... above. For that reason, if it had been relevant, I would also have agreed with the judge on this aspect of his judgment. But since it is not determinative, I say no more about it." [ 29]

"In conclusion, I would, therefore, dismiss this appeal. The moral of this case is that 'knowledge' is (or can be) an elusive concept because in any given case a party to a contract may have difficulty in showing what another party 'knows'. It would, therefore, be better if 'knowledge' were not used as the trigger for any requirement of notification to a liability insurer or reinsurer." [ 30]

Citation: Royal and Sun Alliance Insurance plc v. Dornoch Ltd., [2005] E.W.C.A. CIV. 238, [2005] All E.R. (D) 160 (March 19) (Ct. App. [Civ. Div.]) (Approved judgment).
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Publication:International Law Update
Date:May 1, 2005
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