Neutral Citation Number: [2005] EWHC 829 (Comm)

2003 Folio No. 764

IN THE HIGH COURT OF JUSTICE
QUEEN= S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 5 May 2005

Before:

MR RICHARD SIBERRY QC, sitting as a DEPUTY HIGH COURT JUDGE

---------------------
Between :

(1) R
(1) AMERICAN INTERNATIONAL MARINE AGENCY
OF NEW YORK INC.
(2) AMERICAN HOME ASSURANCE COMPANY
Claimants
- and -

CHRISTINE E. DANDRIDGE Defendant

(sued on her own behalf and on behalf of all
other underwriters subscribing to the contract of
insurance evidenced by SBJ cover note TT
2201870T)

---------------------

Mr Michael Collett (instructed by Waltons & Morse) for the Claimants

Mr Charles Kimmins (instructed by Clyde & Co) for the Defendant

Hearing date: 17th March 2005

---------------------
Judgment

1
 RICHARD SIBERRY QC

Introduction

1. This judgment follows a trial, on agreed facts, of the Claimants claim for US$225,000
(plus interest and costs) under a Total Loss Only (TLO) reinsurance (the
Reinsurance) subscribed to by the Defendant (sued as representative underwriter) and
other underwriters (together Reinsurers). Reinsurers thereby reinsured the Claimants
in respect of the Claimants participation in a hull and machinery (H&M) insurance
of the MV Avon (the Vessel), for a twelve month period commencing on 30 th March
2000. The Claimants had participated in this H&M insurance as following insurers, on
terms which included a widely-worded follow the leader clause (set out in para 12
below). The Vessel ran aground on 9 th September 2000, and was thereafter declared a
total loss.

2. The case raises issues as to the proper construction and effect of various terms of the
Reinsurance, in particular the provision whereby it was expressed to be

a reinsurance and subject to the same clauses and conditions and

against the same perils as in the original policy or policies but only
against the Risks of Total and/or Constructive Total and/or
Arranged Total and/or Compromised Total Loss of vessel,

and as to whether that provision was effective to incorporate the follow the leader
clause in question. If it was, further issues arise as to the effect, upon the Reinsurance,
of the expiry of the Vessels classification with Det Norske Veritas (DNV), and of the
agreement of the leading underwriter under the underlying H&M insurance, both to the
Vessels reclassification with INSB, and to a reduction in the Vessels insured value,
from US$2.5million to US$1.5million.

The Agreed Facts and Issues

3. It is convenient first to set out the agreed facts, which were recorded in Schedule 1 to
the Claimants Outline Submissions for the trial (the Agreed Facts). These were as
follows:
2
1. The mv AVON (the Vessel) was insured for 12 months
from 30 March 2000 under a hull and machinery policy
incorporating the Institute Time Clauses (Hulls) CL. 280
dated 1/10/83 (the Insurance).

2. It was a term of the Insurance that the Vessel was classed

with DNV and had a H&M value of US$2.5million.

3. The Vessel was originally classed with DNV.

4. The lead underwriters of the Insurance were Axa Global

Risks (Axa).

5. The First and/or Second Claimants (collectively the

Claimants) had a 15% participation in the Insurance.

6. The terms of the Claimants participation in the Insurance

are evidenced by the binder dated 18 April 2000 bearing
reference number 20734.

7. The Vessels Class with DNV expired on 31st August 2000.

The Vessel was reclassed with INSB as from 6th September
2000. The Vessel was out of Class between 31 st August
2000 and 6th September 2000.

8. Axa had orally agreed with the Owners (or their agents)
prior to the casualty to cover the vessel on the terms that its
class had been changed, and its value was reduced from
US$2.5million to US$1.5million.

9. On 13th September 2000, Axa agreed in writing (by an

endorsement no.10) to cover the Vessel on the terms that its
class had been changed, and its value was reduced from
US$2.5 million to US$1.5million.

10. The Claimants issued an endorsement no.7 to the Binder in

respect of the Vessels change in class and noted in writing
the change in the Vessels value.

11. Each of the changes referred to in paragraphs 8 to 9 above

(i) amounted to material changes to the terms of the
Insurance, and to the risk, (ii) were potentially prejudicial to
the rights and obligations of the Defendant, and (iii) were
never agreed to by the Defendant, nor would the Defendant
have agreed to the same if they [sic] had been asked to do
so at the time.

12. The Vessel ran aground on 9 September 2000 and was

thereafter declared a total loss.
3
13. At the time of the casualty, Axa and the Owners (or their
agents) were in the process of negotiating cover for a scrap
voyage. At the time of the casualty, the Vessel had not
embarked on the scrap voyage, and any cover for the scrap
voyage had not yet incepted.

14. By reason (in particular) of the facts and matters set out at
paragraph 8 above, the Vessel was covered by the insurance
provided by Axa at the time of the casualty and Axa was
legally obliged to pay the claim arising out of the casualty
(and did so).

15. The Claimants paid US$225,000 in respect of a claim for

constructive total loss of the Vessel.

16. When the Claimants settled the Owners claim under the
Insurance:

(1) the Claimants believed that they were liable to do

so; and

(2) the Claimants acted honestly and took all proper and
business like steps in making the settlement.

17. Various London reinsurers including the Defendant (the

Reinsurers) agreed to reinsure the Claimants participation
in the Insurance against risks of total loss (the
Reinsurance).

18. The terms of the Reinsurance are evidenced by cover note

no. TT201870T.

19. For the avoidance of doubt:

(1) The above paragraphs are without prejudice to the

following questions:

(a) whether the changes agreed by Axa in

paragraphs 8 to 9 above amounted to
amendments to an existing policy of
insurance, or to a new policy of insurance;
and

(b) whether Reinsurers were bound by Axas

decision to hold the Vessel covered despite
the change in Class in circumstances when
Axa did not agree to do so in writing before
the casualty.

4
4. The parties also agreed upon the following formulation of the issues for trial (the
Agreed Issues), as set out in Schedule 1 to the Claimants Outline Submissions:

Was the claim recognised and paid by the Claimants not within the
risks covered by the Reinsurance as a matter of law, which raises
the following issues:

(1) Without prejudice to sub-paragraph (2) below:

(a) whether any amendment to the Insurance in

respect of the Vessels class and/or insured value
was binding upon the Reinsurers by virtue of the
express terms of the Reinsurance.

(b) Whether the Claimants were in breach of

classification warranties in the Reinsurance, and if
so what is the effect thereof.

(c) Whether the Claimants were in breach of the

Reinsurance by virtue of the amendments to the
Insurance in respect of the Vessels class and/or
insured value, and if so what is the effect thereof.

(2) Whether:

(a) on a true construction of the Reinsurance, the

follow the leader provision . was incorporated
into and/or to be given effect in the Reinsurance
such that the Reinsurers were precluded from
contending that a claim recognised by the
Claimants did not fall within the risks covered by
the Reinsurance as a matter of law if the Claimants
were bound to pay the claim by virtue of the
operation of the follow the leader provision.

(b) by virtue of the operation of the follow the

leader provision the Claimants were bound by
Axas decisions on the change in the Vessels class
and the reduction in the insured value of the Vessel
and/or bound to pay the claim.

5. Schedule 1 further recorded the parties agreement that:

Unless the claim recognised and paid by the Claimants was not
within the risks covered by the Reinsurance as a matter of law on
the basis of one of the matters referred to in [the Agreed Issues], it
is common ground that the Reinsurers are liable to the Claimants.

5
 The evidence

6. The agreed trial bundles included, at Bundle B tabs 1-4, various contractual documents
which were incorporated by reference into Schedule 1, and to some of which it will be
necessary to refer by way of elaboration of the Agreed Facts as set out above. Bundle
B tab 5 contained various other contemporaneous documents which were made
available to the Court by way of background, but which were not intended by the
parties to form the basis for any additional findings of fact.

7. Because the trial was conducted on agreed facts, no witness evidence was led. The
parties supplemented their written Outline Submissions/Skeleton Arguments with oral
submissions, and the hearing was concluded within a day. However, following the
hearing I invited further submissions on the issue as to the proper construction of the
provision of the Reinsurance which I have set out in paragraph 2 above, and on related
matters. The parties responded by way of further written submissions, and following
service of the Claimants Reply Submissions, I was invited to proceed to judgment
without any further oral hearing.

The Insurance

8. The Agreed Facts state that the Vessel was insured under a H&M policy defined
therein as the Insurance (a definition which I adopt), of which the lead underwriters
were Axa, and in which the Claimants had a 15% participation evidenced by a binder
dated 18th April 2000 bearing reference number 207354 (paras 1, 4-6). In fact, no
single policy document appears to have been issued. A document entitled Insurance
Slip H-2131-00, and bearing the date 3rd April 2000, was issued by Cap-Marine
Assurances & Reassurances SA, evidencing the insurance of the Vessel, and of another
vessel, the LESZECK G, both managed by ASP Seascot Shipmanagement Ltd. of
Glasgow, in respect of H&M risks, for 12 months with effect from 30 th March 2000.
This document identified Axa as Rating and Claims Leader, and nominated Axa for
the purposes of claims handling. It included a security schedule setting out the
percentage lines written by Axa and by other French market underwriters, together
totalling 85%, and also recording that the balance of 15% was underwritten by the
First Claimants, American International Marine Agency (AIMA). However, the
6
 document expressly provided that it was FOR FRENCH MARKET USE ONLY,
and stated ORDER hereon: 85%. In view of its title I shall refer to this document as
the French Market Slip, although it appears to be more in the nature of a brokers
cover note.

9. The conditions to which the French Market Slip was subject included the Institute
Time Clauses Hulls CL. 280 dated 1 st October 1983 (the ITC), and a Hull
Classification Clause dated 1st January 1993 (the Classification Clause), which was
attached to the French Market Slip. A schedule of vessels, also attached, gave details
of the AVON and the LESZECK G, specified the insured value of each vessel as
US$2.5 million, and indicated that the AVON was classed with DNV (referred to in the
schedule as NV).

10. Clause 4 of the ITC provides, so far as material, as follows:

TERMINATION
This Clause 4 shall prevail notwithstanding any provision
whether written typed or printed in this insurance inconsistent
therewith.
Unless the Underwriters agree to the contrary in writing, this insurance shall
terminate automatically at the time of
4.1 change of the Classification Society of the Vessel, or
change, suspension, discontinuance, withdrawal or
expiry of her Class therein, provided that if the
Vessel is at sea such automatic termination shall be
deferred until arrival at her next port. However
where such change, suspension, discontinuance or
withdrawal of her Class has resulted from loss or
damage covered by Clause 6 of this insurance or
which would be covered by an insurance of the
Vessel subject to current Institute War and Strikes
Clauses Hulls-Time such automatic termination shall
only operate should the Vessel sail from her next
port without the prior approval of the Classification
Society.

A pro rata daily net return of premium shall be made.

11. The material terms of the Classification Clause were as follows:

1. Warranted that :

7
 1.1 The vessel is classed with Classification Society as
mentioned in the policy.
1.2 The class is not suspended, discontinued, or
withdrawn.
1.3 the existing rating class is maintained.

1.5 Any changes to the above warranties is subject to
prior agreement of Underwriters who are entitled to
cancel this insurance or to review the conditions of
the contract. But if the vessel is at sea, such
cancellation shall be deferred until arrival of her next
port of call.

Should the Assured and/or his Representative fail to

comply with any of the above warranties, then the
insurance cover is cancelled as from the date the
failure took place.

12. The binder evidencing the terms of the Claimants participation in the Insurance, as
referred to in para 6 of the Agreed Facts (the Binder), was indeed dated 18 th April
2000, though it appears to have been signed on behalf of the Claimants 2 days later, on
20th April 2000. It recorded the Claimants 15% participation in the H&M insurance of
the AVON and the LESZECK G, each valued at US$2.5 million as stated in a schedule
of vessels attached thereto. This schedule (unlike its equivalent in the French Market
Slip) did not specify the Class of either vessel, though in the event nothing turns on
this. The Binder was subject to the same Conditions as the French Market Slip,
including the ITC, and a Classification Clause in identical terms to that in the French
Market Slip. In addition, the Binder contained the follow the leader clause referred
to in sub-paragraph (2)(a) of the Agreed Issues. This clause (the follow the leader
clause) was in the following terms:

Following French Market Leaders (Axa Global Risks) in all

respects, including rates and claims but excluding ex gratia (my
emphasis).

It was not in dispute that this was a widely-worded follow the leader clause, which,
potentially at least, gave Axa a more extensive role than that provided for in the
leading underwriter provisions in the French Market Slip (see para 8 above). As some
reliance was placed by Reinsurers on the position of this clause, I should record that it
was printed at the foot of the page on which the Terms and Conditions and Trading
Warranties were set out, but as a separate provision.
8
 The Reinsurance

13. Para 18 of the Agreed Facts records that the terms of the Reinsurance are evidenced by
a Cover Note No. TT 201870T. This was issued by the Claimants brokers SBJ
Limited (SBJ), and is dated 14th April 2000 4 days before the date of the Binder,
and 6 days before the Binder was signed on behalf of the Claimants. The Cover Note
is, of course, merely evidence of the Reinsurance. The reinsurance contract itself was,
at least originally, contained in a Mar. 91 Slip Policy on an SBJ printed form (the
Reinsurance Slip), with the policy number TT 201870T printed at the bottom of the
first page. It was subscribed to by the four Lloyds Syndicates and the one reinsurance
company who together comprise Reinsurers, during the period 10th 12th April 2000.
The percentage lines scratched by Reinsurers together totalled 15.5%.

14. The Reinsurance Slip contained the following material provisions:

TYPE: TLO Reinsurance

FORM: Mar. 91 Slip Policy
REASSURED:
ORIGINAL
ASSURED: SEASCOT SHIPMANAGEMENT
VESSEL: 1) AVON
2) LESZECK G
Including new and/or acquired and/or
added as original h/c [held covered the
abbreviation h/c was added in
manuscript].
PERIOD: 12 months at 30th March,
2000 and/or as original.
INTEREST: Hull, Machinery and everything connected therewith.
Valued at 1) US$2,500,000 2)
US$2,500,000 or as valued in original
policy or policies and/or Interest as
original.
SUM REINSURED:
CONDITIONS: Being a reinsurance and subject to the same
clauses and conditions and against the same
perils as in the original policy or policies but
only against the Risks of Total and/or
9
 Constructive Total and/or Arranged Total
and/or Compromised Total Loss of vessel.
To follow the settlements of original
Underwriters but only as far as applicable to
this Reinsurance.
No Claims in respect of Salvage, Salvage
charges or Sue and Labour.
Continuations and/or Deviations and/or
Extensions as original policy or policies
whether notice be given or not.
Valuation Clause as and/or if in original
policy.
Class Warranties if and/or as in original.
Trading and other Warranties as original but
half additional premiums or as Institute or
other scale, if paid on original.
..
Premium in full to be presented to LPSO
and/or LPC on or before 60 days of original
payment date.
RATE: 1) 1.50% C.R.O. [cancelling returns only]
2) 0.375% C.R.0.
U.S.
CLASSIFICATION: U.S. Reinsurance.

15. It will be noted that the Reassured was not identified, and that the Sum Reinsured was
left blank. It was not suggested that anything turned on either omission. As to the first,
it was common ground that the Reinsurance was a renewal, which may explain why
the Claimants were not identified in the Reinsurance Slip. The classification as US
Reinsurance is at least consistent with an intention to reinsure the Claimants. There
was in any event no issue as to the identity of the Reassured, and, as the Claimants
pointed out in their Reply Submissions, it was not suggested by Reinsurers that it was
of any relevance whether Reinsurers were aware of the identity of the Claimants at the
time that they wrote the risk. As to the second omission, in the absence of any separate
specification of the sum reinsured, it is clear that the percentage lines scratched by
subscribing underwriters, which as already mentioned totalled 15.5%, were intended
and would have been understood to be expressed as percentages of the insured values
as stated in the Interest Clause, not as percentages of the Reassureds participation.

16. SBJs instructions had been to obtain reinsurance of a 15% line on the underlying
H&M insurance. Accordingly, the Reinsurance was over-subscribed by %. What

10
 then appears to have happened is that someone at SBJ recalculated Reinsurers lines as
percentages of that 15% order, thereby at the same time writing down each original
line in accordance with market practice because the order had been oversubscribed.
The resultant percentages were noted down in manuscript on the Reinsurance Slip.
Thus, for example, Hiscox Syndicate No. 33s scratched 5% line was re-expressed as
32.258, that is, 32.258% of the 15% order, being (5/15.5) x 100%.

17. On 14th April 2000, SBJ issued its Cover Note No. TT 201870T in respect of the
reinsurance it had thereby placed on behalf of the Claimants. The material terms of this
Cover Note were, as one would expect, identical to those of the Reinsurance Slip, save
only that in the Cover Note, the First Claimant, AIMA, was identified as the
Reassured, the sum reinsured was stated as 15.00% of values, and the US
Classification was omitted. Reinsurers (written down) percentage shares of the risk
were expressed as percentages (together totalling 100%) of the 15.00% of values
reinsured. The stated percentages corresponded with those noted in manuscript on the
Reinsurance Slip.

18. In due course a closing off slip was prepared by SBJ for the Lloyds market. This
identified AIMA as Reassured, stated the sum reinsured to be 15.00% of values, and
recorded the signed lines percentages as in the Cover Note, but otherwise set out the
terms recorded in the original Reinsurance Slip. This closing off slip appears to have
been scratched by an underwriter at MED Syndicate No. 609 on 5th January 2001. It
was not suggested that any of the terms of the closing off slip bore a different meaning
from that of its counterpart in the Reinsurance Slip.

The Claimants submissions

19. The Claimants submitted that they were, by virtue of the wide ambit of the follow the
leader clause (the terms of which were if anything wider than those of the follow the
leader provisions discussed in cases such as Barlee Marine Corp. v. Mountain [1987]
1 Lloyds Rep. 471 and Roadworks (1952) Ltd. v. Charman [1994] 2 Lloyds Rep. 99),
bound by Axas agreement to continue the Vessels cover, notwithstanding the expiry
of its Class with DNV on 31st August 2000, on terms that it was classed with INSB as
from 6th September 2000, and also by Axas agreement to the reduction in the Vessels
11
 insured value, from US$2.5million to US$1.5million, with effect from the latter date.
They submitted that Axas oral and written agreement to these changes (the latter by
Endorsement No. 10 to the French Market Slip, which they submitted was an
agreement in writing compliant with clause 4 of the ITC) amounted to a waiver of any
breach of clause 1 of the Classification Clause and of the provision in clause 4 of the
ITC for automatic termination upon expiry of Class, such that insurers (including
themselves) would have been estopped from relying on those provisions. These
changes, they submitted, did not give rise to a new contract of insurance they took
effect as variations to the original H&M Insurance. They relied on Bremer
Handelsgesellschaft m.b.H. v. Finagrain, Compagnie Commerciale Agricole et
Financiere SA [1981] 2 Lloyds Rep. 259 for the proposition that estoppel could
operate to revive a contract which had terminated pursuant to an automatic
cancellation clause therein (see per Lord Denning MR at p. 263). The words in all
respects in the follow the leader clause were sufficiently wide to make Axas decisions
to agree to the Vessels change of Class and insured value, and to pay the claim,
binding upon the Claimants. Accordingly, so they submitted, they had been bound
under the Insurance to pay their proportion of the claim for a total loss, which,
following the reduction in the insured value of the Vessel, was US$225,000 (15% of
US$1.5 million).

20. The Claimants contended that I should approach the issue of whether the follow the
leader clause was incorporated in the Reinsurance, and if so with what effect, bearing
in mind that there is a presumption, in facultative reinsurance, that the parties intend
the scope and nature of the reinsurance cover to be back-to-back with that of the
underlying insurance see Groupama Navigation et Transports v. Catatumbo CA
Seguros [2000] 2 Lloyds Rep. 350, at paras 11-12, 17-21 and 28-30, HIH Casualty
and General Insurance Ltd. v. New Hampshire Insurance Co. [2001] 1 Lloyds Rep.
596 (Court of Appeal), at paras 166-169. In a case such as the present, where the
Reinsurance gave TLO cover only, they submitted that this presumption applied in
relation to the equivalent cover in the underlying insurance. They pointed out that as a
result of the follow the leader clause, they might have become bound by variations in
the Insurance agreed by Axa without their knowledge, and therefore without any
opportunity to obtain Reinsurers consent to such variations; and that if Reinsurers had

12
 good defences under the Reinsurance by reason of such variations, the resultant gap in
cover would be the antithesis of backto-back cover.

21. They submitted that the follow the leader clause in the Binder was incorporated into
the Reinsurance by virtue of the incorporating provision set out in paragraph 2 above:
they contended that the reference therein to the original policy or policies was to the
Binder, and not to the French Market Slip; that the follow the leader clause was self-
evidently a term of the Binder, and therefore a clause or condition thereof within
the meaning of that incorporating provision; and that it satisfied each of the four
criteria for incorporation identified and applied by both David Steel J and the Court of
Appeal in HIH Casualty and General Insurance Ltd. v. New Hampshire Insurance Co.
[2001] 1 Lloyds Rep. 378 (David Steel J), at paras 39-44, [2001] 1 Lloyds Rep. 596
(Court of Appeal), at paras 162-187, namely (1) whether it was germane to the
reinsurance, (2) whether it made sense in the context of the reinsurance, with or
without permissible manipulation, (3) whether it was consistent with the express terms
of the reinsurance, and (4) whether it was apposite for inclusion in the reinsurance.
They pointed out that it had not been suggested by Reinsurers that such a provision
was unusual.

22. As to their contention that the reference in the Reinsurance to the original policy or
policies was a reference to the Binder, the Claimants submitted that the word policy
was not to be construed as meaning a policy document in the full technical sense. It
was to be construed in a looser sense as meaning the underlying contract of insurance.
The underlying contract of insurance was, for these purposes, that evidenced by the
Binder - not the French Market Slip, to which the Claimants were not parties. The
reference to Policy No. H/2131/00 in Endorsement No. 10 to the latter, signed by
Axa on behalf of the French market, was not an indication that the French Market Slip
was the subject of the words original policy.

23. The Claimants reminded me that when each line on an insurance is subscribed, that
generally gives rise to a binding contract pro tanto between the underwriter and the
insured (subject to the possibility that, as here in the case of the Reinsurance, the line
may fall to be written down on closing if the insurance is over-subscribed) see
General Reinsurance Corp. V. Forsakringsaktiebolaget Fennia Patria [1983] 1 QB
13
 856, at 864C, 866H-867A, and 867G. It followed that insurers respective
participations could be on different terms - as was the case here, where the leading
underwriter provisions differed as between the French Market Slip and the Binder.

24. In support of their submissions on incorporation and the effect thereof, the Claimants
relied on the decision of the Court of Appeal in the HIH case (supra). In that case the
Court held that clause 8.1 of the insurance policy in question, whereby insurers agreed
that they would not seek or be entitled to avoid or rescind the policy on certain
specified grounds, including non-disclosure or misrepresentation, was incorporated
into the applicable reinsurance policy by a clause therein whereby the latter was
expressed to be subject to all terms, clauses and conditions as original. The Court
of Appeal held that clause 8.1 was incorporated in unmanipulated form, with the effect
that it operated in a back-to-back manner at the two different levels, such that for
example reinsurers could not seek to avoid the reinsurance in respect of a non-
disclosure which insurers could not have relied upon against their insured.

25. In the light of this decision, the Claimants contended that the follow the leader clause
was incorporated into the Reinsurance in unmanipulated form, with the effect that
Reinsurers were precluded from contending that a claim recognised by the Claimants
did not fall within the risks covered by the reinsurance as a matter of law, if the
Claimants themselves had been bound to pay the claim by virtue of the operation of the
follow the leader clause, as they said they had been (see para 19 above). They
submitted that it satisfied all four criteria for incorporation: (1) it was germane to the
Reinsurance, because it affected the risks being run by the Claimants, and was a form
of follow the settlements clause, albeit with a wider effect; (2) it made sense in the
context of the reinsurance, without manipulation, if given effect to as described above;
(3) it was consistent with the express terms of the reinsurance; and (4) it was apposite
for inclusion in the reinsurance.

26. It followed, so they submitted, that Reinsurers could not take the defences (1) that the
expiry of the Vessels classification with DNV resulted in the automatic termination of
the Reinsurance under the ITC Clauses as incorporated in the Reinsurance, or (2) that
such expiry of class, or the subsequent change of class, were breaches of warranty
under the Classification Clause as incorporated therein, or (3) that the material
14
 alterations in the terms of the underlying insurance comprised by Axas agreement to
the change in Class and to the reduction in the Vessels insured value were breaches of
the common law warranty that there should be no variation of the underlying
insurance without the consent of the reinsurer (see further para 30 below).

27. Accordingly, so the Claimants submitted, Reinsurers were, notwithstanding the expiry
and change of Class and the alteration in insured value, liable to indemnify them in
respect of their payment of their 15% share of the reduced insured value of the Vessel.

28. In their written Outline Submissions the Claimants advanced an alternative argument to
the effect that by virtue of the Interest clause in the Reinsurance, and the references
in the Conditions thereof to Class Warranties if and/or as in original, if the provisions
as to the Vessels insured value and Class in the Claimants participation in the
Insurance were amended, the Reinsurance was likewise amended, with the result that
Reinsurers could not complain of a breach of the common law warranty that there
should be no variation of the underlying insurance without the consent of the reinsurer.
This argument was not developed in the course of oral submissions.

Reinsurers submissions

29. The starting point for Reinsurers submissions was the proposition that, absent the
incorporating provisions relied on by the Claimants and the follow the leader clause,
the expiry of the Vessels Class with DNV, the change of Class to INSB, and the
change in the Vessels insured value, were each matters which would have discharged
Reinsurers, because each occurred without the consent of Reinsurers, whether prior or
subsequent, written or oral. This proposition was not disputed by the Claimants.

30. Thus, absent the provisions relied upon, it was common ground that: (1) pursuant to
clause 4 of the ITC Clauses as incorporated into the Reinsurance, the Reinsurance
would automatically have terminated upon the expiry of the Vessels Class with DNV,
without Reinsurers prior written agreement to the contrary; (2) the expiry of Class
with DNV, and the change of Class to INSB, without the prior consent of Reinsurers,
also constituted breaches of the warranties contained in the Classification Clause as
incorporated therein, which would automatically have discharged Reinsurers from the
date of breach see the express terms of clause 1.5 thereof, and Bank of Nova Scotia
15
 v. Hellenic Mutual War Risks Association (Bermuda) Ltd. (The Good Luck) [1992]
AC 233, at pp. 262-263; and (3) the change in the Vessels insured value, likewise
without the consent of Reinsurers, was a material variation of the underlying insurance,
which would have discharged Reinsurers at common law see Norwich Union Fire
Insurance Society Ltd. v. Colonial Mutual Fire Insurance Co. Ltd. [1922] 2 KB 461,
in which McCardie J held that a reduction in the agreed value of the insured vessel
under an insurance policy discharged reinsurers under the reinsurance policy, declaring,
at p. 469: The only sound rule seems to me to be that the head policy cannot be
altered save with the consent of the re-insurer; see also the HIH case, supra, per Rix
LJ at para 109. The question of whether this common law principle only applies to
material variations to the underlying insurance (to which Rix LJ referred in passing at
para 111) does not arise in the present case, having regard to the parties agreement
that each of the changes in question amounted to material changes to the terms of the
Insurance, and to the risk, and was potentially prejudicial to the rights and obligations
of the Defendant, who would not have agreed to the same if asked to do so at the time
(see para 11 of the Agreed Facts).

31. Reinsurers contended that if they were to be deprived of the right to be consulted
before the Insurance was varied, then clear words to that effect in the Reinsurance
were needed and that there were no such clear words. They emphasised that, with
respect to the reduction in the Vessels value, there was no identity of interest between
Insurers and Reinsurers. On the contrary, any reduction in value made it more likely
that a casualty would be declared a constructive total loss, so as potentially to involve
the liability of Reinsurers under their TLO cover.

32. It was Reinsurers case that pursuant to the express terms of the Reinsurance, only a
limited number of changes to the Insurance would bind Reinsurers: new vessels added
to the Insurance after inception would, if notice of the additions were given, be held
covered by Reinsurers pending agreement on terms between the Claimants and
Reinsurers; the only changes that would bind Reinsurers whether notice be given or
not were Continuations and/or Deviations and/or Extensions, in respect of which
they submitted that, pursuant to the Trading Warranties clause, half of any additional
premium agreed between the assured and Insurers was to go to Reinsurers. Neither the
Continuations and/or Deviations and/or Extensions provision nor the Trading
16
 Warranties clause applied to the separate provisions regarding Class. And the provision
Class Warranties if and/or as original simply meant, so they submitted, that the
classification provisions of the Insurance were incorporated into the Reinsurance.

33. As to the Interest clause in the Reinsurance Slip, which provided:

Hull, Machinery and everything connected therewith.

Valued at 1) US$2,500,000 2) US$2,500,000 or as valued in
original policy or policies and/or Interest as original (emphasis
added),

Reinsurers submitted, in reliance on the Norwich Union case (supra), that this did not
mean that Reinsurers agreed to cover the Vessel for their respective proportions of its
value as amended from time to time by and between Insurers and the assured. In that
case, the equivalent words were valued at 313,050 or valued as original policy or
policies.subject to valuation clause as and if in original. McCardie J held (following
the decision of the Court of Appeal in Lower Rhine and Wurtemburg Insurance
Association v. Sedgwick [1899] 1 QB 179) that by reason of the reduction in the
insured value of the vessel in question to 225,000, by way of variation of the original
policy, it cannot possibly be said that the policy as altered was the same as the original
policy (p. 467), and that as this variation was made without the consent of the
defendant reinsurers, the reinsurers were discharged.

34. That left the general incorporating provision set out at para. 2 above. Reinsurers
contended that the reference therein to the original policy or policies did not refer to
the Binder, which, as they pointed out, postdated the conclusion of the Reinsurance
contract. They submitted that it was a reference to the original contract which the
Claimants wrote, that the indications in the documents were that the Claimants had
written their line before the Binder was issued, and that there was no evidence that
when they originally wrote their line, it was subject to the follow the leader clause.

35. Alternatively, they submitted that if these words did indeed refer to the Binder, they
were not sufficiently wide to incorporate the follow the leader clause (in part, because
there was no evidence that Reinsurers knew the Claimants were a following market,
and in part because of the position of that clause in the Binder). They further submitted

17
 that the clause did not satisfy any of the four criteria for incorporation identified in the
HIH case (supra): it was, so they submitted, neither germane nor apposite to the
Reinsurance, because such a clause regulates the relationship between the leading
underwriter and the following market, and is collateral to the reinsurance; it was
inherently unlikely that reinsurers would delegate underwriting authority to the leader
of the underlying insurance, with whom they had no contractual relationship; and to
hold that the clause was incorporated with the effect that Reinsurers were bound by all
changes agreed between the lead underwriter and the assured would be inconsistent
with the express terms of, and would make no sense in the context of, the Reinsurance,
for example because the Reinsurance contained a comprehensive code of changes that
would bind Reinsurers, some with and some without notice (see para 32 above).

36. It was submitted by Reinsurers that if the Claimants arguments were correct, it would
follow, having regard to the common law principle referred to in para 30 above, that a
reinsurer who reinsured all subscribing insurers by the same reinsurance contract
would be discharged as against the leading underwriter, but not as against the
following market, in the event of material variations to the underlying insurance agreed
to by the former. This would, it was submitted, be commercially absurd - though the
Claimants riposted that there was nothing uncommercial about this, as it was always
open to the leader to seek reinsurers consent to changes.

37. If, contrary to their primary submissions, the follow the leader clause was incorporated
in the Reinsurance, Reinsurers contended that the changes in Class still did not bind
them, because, so they contended, on the express wording of clause 4 of the ITC
Clauses, the Reinsurance was automatically terminated on expiry of the Vessels Class
with DNV, and accordingly was no longer in existence when Axa agreed, first orally
and later in writing, to cover the Vessel on terms that it was classed with INSB. They
submitted that that agreement had resulted in a new contract of insurance between the
assured and Axa, not merely a variation of the original Insurance. But even if it was a
variation, not a new contract, Reinsurers were only bound by variations made in
accordance with the terms of the Insurance: they were not bound by Axas oral
agreement made before the change in Class, or its agreement in writing made
thereafter. For similar reasons Reinsurers contended that the Claimants were not bound

18
 by Axas agreement to the change in Class, so that the Claimants case failed at the first
hurdle.

Discussion

38. The first and, as it seems to me, the central question is whether the general words of
incorporation in the Reinsurance, subject to the same clauses and conditions and
against the same perils as in the original policy or policies (the general
incorporation provision) are sufficiently wide, and are apposite, on their true
construction, to incorporate the follow the leader clause in the Binder. It was this
question upon which I invited and received further submissions after the conclusion of
the hearing. It is necessary to determine this question before (if appropriate) addressing
the separate question of whether the follow the leader clause satisfies the four criteria
for incorporation identified in the HIH case (supra) see Pine Top Insurance Co. Ltd.
v. Unione Italiana Anglo Saxon Reinsurance Co. Ltd. [1987] 1 Lloyds Rep. 476.

39. This central question in turn raises the issue as to the meaning of the words, the
original policy or policies as they appear in the general incorporation provision. It is
only if those words are apt to refer to the Binder, or at least to all the terms of the
Claimants participation in the Reinsurance as recorded in the Binder, including the
follow the leader clause, that the general incorporation provision would be capable of
incorporating the follow the leader clause, subject to compliance of that clause with
the criteria for incorporation.

40. In approaching this question, I bear in mind that there is indeed a presumption, in the
case of facultative reinsurance, that in the absence of clear words to the contrary, the
scope and nature of the cover afforded is the same as the cover afforded by the
underlying insurance - see the cases cited at para 20 above. I consider that this
presumption is capable of application, with modification, to a case such as the present,
where the insurance was for both total and partial loss but the reinsurance was on TLO
terms it can be applied in relation to the total loss cover under both insurance and
reinsurance. I also bear in mind that wherever an issue of incorporation arises, the
underlying question is whether the parties intended the particular clause in question to

19
 be incorporated, and that this will depend on the construction of the reinsurance as a
whole and on the surrounding circumstances.

41. The first problem for the Claimants is that the Binder postdates Reinsurers
subscriptions to the Reinsurance Slip by between 2 and 4 days and the Claimants
signature of the Binder postdates those subscriptions by a further 2 days. Thus on the
face of it at least, the Claimants did not become parties and bound to the Insurance,
whether on the terms of the follow the leader clause or otherwise, until several days
after the contract of reinsurance had been concluded. That poses an obvious difficulty
for the Claimants contention that references in the Reinsurance to the original policy
or policies were references to the Binder.

42. Reinsurers contended that it was some time before 28th March 2000 that the Claimants
agreed to provide insurance to the assured by taking a 15% line. They invited me to
infer this from the fact that (as appeared from a document in bundle B tab 5) the
Claimants requested SBJ to obtain a TLO reinsurance quote on 28 th March 2000, and
from the inclusion of a 15% line from AIMA in the security schedule attached to the
French Market Slip though, as mentioned above, this Slip provided that it was FOR
FRENCH MARKET USE ONLY. However, there was, as the Claimants pointed out
in their written Reply Submissions, no agreed fact as to when the Claimants agreed
their participation in the Insurance, and it is not unusual for a reinsurance to come into
existence before the insurance is written. In the absence of any such agreed fact, I
must, as it seems to me, proceed on the basis that it was not until they signed the
Binder that the Claimants became bound to their 15% participation in the Insurance.

43. Another strong indication that references in the Reinsurance to the original policy or
policies were not references to the Binder, which recorded the terms only of the
Claimants participation in the Insurance, is that, as mentioned above, the lines
subscribed by the respective Reinsurers were scratched as percentages of the full
insured values, not merely of the Claimants 15% participation. The original policy in
respect of which (for example) Hiscox Syndicate No. 33 scratched a 5% reinsurance
line cannot have been the Binder, or any other agreement, containing or evidencing
only the Claimants 15% participation. The Claimants suggested that I could infer that
it was explained to Reinsurers that the Claimants had only insured 15% of the
20
 underlying risk. But even if it was, it does not alter the fact that Reinsurers scratched
their lines as percentages of 100%, not of 15%, of the underlying risk. In the light of
this, the natural interpretation of the words the original policy or policies is that they
refer to the Insurance as a whole, and not to any particular terms in this instance the
follow the leader clause - unique to the participation of particular insurers, even though
it was on behalf of such insurers only that the Reinsurance was obtained.

44. It is not without significance that the Agreed Facts record that the Vessel was insured
under a H&M policy (singular), defined therein as the Insurance (singular), of which
Axa were lead underwriters, and in which the Claimants had a 15% participation. I
accept that, as the Claimants contended in their Further Written Submissions, the
parties cannot have intended, in the Agreed Facts, to use the word policy in the strict
sense of a document entitled policy of insurance signed on behalf of all insurers; and
that similarly the words original policy or policies in the Reinsurance should not be
narrowly construed to refer only to such a document which did not exist but rather
that the word policy should be understood in the looser sense of the underlying
contract of insurance. The commercial reality was that there was indeed a single
underlying Insurance of the Vessel, of which Axa were the leading underwriters and
in which the Claimants had a 15% participation - albeit that the French market, and the
Claimants, bound themselves to their respective participations in different contractual
documents, and that the terms of the respective participations of the French following
market and the Claimants differed as regards the role of Axa as leading underwriter.

45. In my judgment neither the fact that the Reinsurance was classified as US
Reinsurance, nor the fact that it was a renewal, has any bearing on the interpretation
of the general incorporating provision indeed, the contrary was not suggested. There
was no Agreed Fact, and no evidence, as to the terms of any prior year insurance by
the Claimants.

46. Accordingly, I have concluded that the words the original policy or policies in the
general incorporation provision (and indeed elsewhere in the Reinsurance) refer to the
Insurance as a whole, and not to the Binder, and therefore that that provision was not
apt to incorporate the follow the leader clause in the Binder. If the Claimants had
wished to bind Reinsurers to any variation of the original Insurance agreed to by Axa,
21
 and to which the Claimants themselves might become bound as a result of having
signed up to the follow the leader clause, they should have sought and obtained
Reinsurers specific agreement to be bound by any such variation, contrary to the
position that obtains at common law.

47. In the circumstances, it is not strictly necessary to consider whether, if contrary to the
above conclusion the general incorporation provision did indeed refer to the clauses
and conditions of the Binder, the follow the leader clause would have satisfied the four
criteria for incorporation. As this issue was fully argued, however, I shall briefly
express my conclusions thereon. For convenience I repeat the clause, which provided
as follows:

Following French Market Leaders (Axa Global Risks) in all respects,

including rates and claims but excluding ex gratia .

48. In my judgment this clause does not satisfy any of the four criteria. It is neither
germane nor apposite to the Reinsurance, it does not make sense (and cannot be made
to make sense) in the context of the Reinsurance, and it is inconsistent with the express
terms thereof. Whatever the correct legal analysis of the effect of a follow the leader
clause in a contract of insurance (see the differing views of HH Judge Kershaw QC and
Rix J in, respectively Roadworks (1952) Ltd v. Charman (supra) at pp. 105-106, and
Mander v. Commercial Union Assurance PLC [1998] Lloyds Rep. (I & R) 93, at pp.
143-144, albeit in the different contexts of an facultative slip and an open cover
respectively), such a clause concerns the relationship between the leading underwriter
and the following market, as well as that between the following market and the
insured. The leading underwriter and the following market generally have mutual
interests, but the same is not true of the leading underwriter and the following market
on the one hand, and reinsurers on the other. The present case provides a good
illustration of this: the reduction in insured value agreed by Axa, presumably because it
was thought to be in, or at least not contrary to, the interests of Insurers, would, if it
had bound Reinsurers who had insured on TLO terms, have been potentially very
prejudicial to their interests. This also illustrates why it is inherently unlikely that
Reinsurers would have agreed, with respect to variations, to give their underwriting
pen to Axa, with whom they had no contractual or other relationship. A follow the
leader clause is not analogous to a follow the settlements clause in a reinsurance
22
 contract as Mance J observed in Roar Marine Ltd v. Bimeh Iran Insurance Co
[1998] 1 Lloyds Rep 423 at p. 430, the context is quite different. For these reasons it
seems to me that the follow the leader clause is neither germane nor apposite to the
Reinsurance.

49. Moreover this follow the leader clause clearly does not make sense in the context of
the Reinsurance in unmanipulated form: Axa were not the leaders, let alone the
French Market Leaders, of the Reinsurance, and it was obviously not the intention of
the parties to the Reinsurance that Reinsurers should follow Axa in respect of rates,
whether in respect of the original insured values or of any alteration thereto -
Reinsurers (or at least the leading Reinsurers) made up their own minds as to the
appropriate rates for the TLO cover they wrote.

50. The Claimants response to these obvious problems was to submit that the clause was
incorporated in unmanipulated form but with the same general effect as that achieved,
as the Court of Appeal concluded, in the HIH case (supra) in short, that reinsurers
could not take a defence not open to insurers by virtue of the clause held to have been
incorporated (see paras 24-25 above). Contrary to the Claimants submission,
however, I do not think an analogy can properly be drawn with the HIH case. In that
case, not only was there no issue as to the meaning of the words as original in the
incorporation clause in the reinsurance policy: they clearly referred to the policy of
insurance containing the clause, clause 8.1, about which the issue of incorporation
arose. Unlike the follow the leader clause, clause 8.1 was a term which directly
regulated the relationship between insurer and insured. The reasoning which led the
Court of Appeal to its conclusion is not, as it seems to me, applicable to a follow the
leader clause, which does not directly regulate that relationship, though it may have an
indirect effect thereon.

51. It was not suggested by the Claimants that the follow the leader clause could be
incorporated in a manipulated form, and it is difficult to envisage any manipulation that
would make any sense in the context of the Reinsurance. None was suggested.

52. Moreover the clause would, if incorporated with the effect contended for by the
Claimants, have been inconsistent with other provisions of the Reinsurance. Thus, for
23
 example, the Reinsurance provided that the vessels were valued at US$2.5 million each
or as valued in original policy or policies. As the decision in the Norwich Union case
(supra) makes clear (see para 33 above), such language refers to the valuation in the
original policy in respect of which the reinsurance was obtained: it does not mean as
valued in the original policy as amended from time to time. But if the follow the
leader clause was incorporated, it would, as the Claimants contended, follow that the
applicable valuation was that set out in the original policy or any amendment thereto
agreed by Axa. Further, the Reinsurance expressly provided that certain categories of
variation to the original policy (Continuations and/or Deviations and/or Extensions)
would bind Reinsurers whether notice be given or not, and therefore necessarily
without their agreement. I agree with Reinsurers that there is no room alongside this
term, and the other provisions of the Reinsurance, for the incorporation of a term
which would have had the effect that Reinsurers would have been bound by all
variations to the Insurance by Axa, with or without notice to Reinsurers or their
reinsured.

53. In the light of the foregoing, it is unnecessary for me to decide what the position would
have been if the follow the leader clause had been incorporated into the Reinsurance
with the general effect contended for by the Claimants, and in particular to decide
whether Reinsurers would nonetheless have been discharged under clause 4 of the
ITC, as they contended, on the grounds that both the Insurance and the Reinsurance
terminated automatically upon the expiry of the Vessels Class with DNV, and that
Axas agreement to insure the Vessel on terms that it was classed with INSB resulted
in a new contract of insurance, rather than a variation of the original Insurance. Nor is
it necessary for me to reach a decision on whether the Claimants were themselves
bound by Axas agreement, having regard to the terms of clause 4 of the ITC and the
follow the leader clause.

54. Suffice it to say that I saw considerable force in the Claimants argument that, although
as a matter of strict analysis the Insurance may have terminated automatically on 31 st
August 2000 when the vessels Class with DNV expired, Axa would by virtue of their
oral agreement before the casualty (but apparently after the vessels reclassification
with INSB on 6th September 2000, as para 8 of the Agreed Facts indicates), and by
their subsequent written agreement as recorded in endorsement No. 10 to the French
24
 Market Slip, have been estopped from contending as against the insured that the
Insurance had expired; and that the Claimants would by virtue of the follow the leader
clause (and also by their issue of Endorsement No. 7 to the Binder see para 10 of the
Agreed Facts) have been similarly precluded from taking the point that the Insurance
had expired. If that is right, the Claimants were indeed bound by Axas agreement to
the changes.

Conclusions

55. Accordingly, I answer the questions posed in the Agreed Issues as follows:

Was the claim recognised and paid by the Claimants not within the
risks covered by the Reinsurance as a matter of law? Answer: the
claim was not within the risks covered by the Reinsurance as a
matter of law.

1 (a) Was any amendment to the Insurance in respect of the

Vessels class and/or insured value binding upon the
Reinsurers by virtue of the express terms of the
Reinsurance? Answer: the amendments in question were
not binding upon Reinsurers.

(b) Were the Claimants in breach of classification warranties

in the Reinsurance, and if so what is the effect thereof?
Answer: Yes, with the result that Reinsurers were
discharged from liability under the Reinsurance.

(c) Were the Claimants in breach of the Reinsurance by

virtue of the amendments to the Insurance in respect of
the Vessels class and/or insured value, and if so what is
the effect thereof? Answer: Yes, with the result that
Reinsurers were discharged from liability under the
Reinsurance.

(2) (a) On a true construction of the Reinsurance, was the follow

the leader provision incorporated into and/or to be given
effect in the Reinsurance such that the Reinsurers were
precluded from contending that a claim recognised by the
Claimants did not fall within the risks covered by the
Reinsurance as a mater of law if the Claimants were bound
to pay the claim by virtue of the operation of the follow
the leader provision? Answer: No.

(b) By virtue of the operation of the follow the leader

provision, were the Claimants bound by Axas decisions on
the change in the Vessels class and the reduction in the
25
 insured value of the Vessel and/or bound to pay the claim?
Answer: In view of my conclusions in respect of the
Reinsurance, it is not necessary to answer this question.

56. It follows that the Claimants claim fails and must be dismissed.

26