INSURANCE CO OF THE STATE OF PENNSYLVANIA v. GRAND UNION INSURANCE CO LTD

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JUDGMENT

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Hunter, JA :

1. This is an appeal from a judgment of Godfrey J given on 27th October 1989 whereby he granted the plaintiff insurers leave to sign final judgment against the defendant reinsurers under O14. The sole issue raised before the judge and before this court was the effect in law of the plaintiffs' failure to comply with what is described in the policy as a condition.

2. The policy is a Lloyd's policy contained in a slip dated 16th August 1984. The subject matter was contractors all risks and arose in relation to the construction of a steel works in Egypt by Alexandria National Iron and Steel Company, the original assured. The plaintiffs, the original insurers, reinsured with the defendants, the sole name on the slip, to the extent therein specified. For present purposes the only material portion of the slip reads : -

                "CONDITIONS :

3. A claim arose under the original policy and was discharged by the plaintiffs by a payment of US$124,999.51 on 16th February 1989 and of US$220,859.33 on 10th May 1989. By this action the plaintiffs seek recovery of US$228,000 the maximum sum payable in respect of any one occurence under the reinsurance policy. It is not suggested that the loss is not within the policy limits.

4. A survey report put in evidence by the plaintiffs on 16 October 1989 shows that on a date unknown the original policy was altered. From a print of the first page of this policy (the whole was not produced) it can be seen that the policy included amongst "Special Exclusion to section 1" : -

By endorsement No 3 to this policy the following was substituted : -

5. The defendants assert that they were never informed of this alteration, and only learnt about it upon reading the survey report. They have not purported to formulate any damages claim but alleged, in an affidavit of their Vice-President, that : -

They assert a right to repudiate. Whilst not accepting want of notification as a fact, the plaintiffs had been content to argue the case upon the factual basis asserted by the defendants. The plaintiffs also wish to assert that the policy variation made no difference to the claim, an assertion which cannot be investigated at this stage.

6. Godfrey J concluded that a construction of condition 3 which afforded the defendants any right to repudiate was "impossible". He thus held that breach of the condition sounded only in damages which he accepted could be substantial. But no such claim was formulated. He held that this was a claim which the defendants were free hereafter to pursue if they wished, but such a claim would not justify a stay of execution or (it would seem) give rise to any set-off. The defendants had thus no arguable defence.

7. We do not see this case as clearly as did the judge. We consider that the construction and effect of condition 3 gives rise to questions of some nicety and importance, which merit more careful investigation and research than is possible or permissible under O14. Thus we acknowledge the force of the argument, accepted by the judge, that the first part of this condition dispenses with any need for reinsurers' consent to a variation, and that a failure to notify of itself would not restore any right to object. But although reinsurers may thus be able to impose the variation, we question whether it necessarily follows that the right of imposition is unconditional, and in no way dependent upon the provision of information.

8. We are also concerned by the limitations and difficulties implicit in any right in damages. Any assessment of the loss of the opportunity of retroceding would be quite unreal, and savour of a post-result racing "forecast". If this approach is too speculative to be acceptable, are there other more acceptable choices? One must be nominal damages, but if lack of convincing proof inevitably reduces the damages to nominal, does this deprive the condition of effective content from the reinsurers' view point? Alternatively could damages properly be measured by the difference between a claim calculated under the original and one calculated under the amended policy? These are some of the questions it is easier to pose than to answer.

9. We suspect this condition to constitute a fairly typical reinsurance term that may well have been in use for some years in the United Kingdom and perhaps also in the USA. We are indebted to counsel on both sides for the clarity of their submissions, but neither was able to refer us to any authority that was directly relevant or helpful by way of analogy. We find it difficult to exclude the possibility that such authority may exist upon a condition of this nature. We find it even more difficult to exclude the possible need to consider the practice and understanding of the market in relation to this type of policy and to this condition when seeking to read it in its context and objectively to determine the intentions of the parties.

10. In these circumstances we feel that the judge ought to have granted the defendants unconditional leave to defend. We accordingly allow the appeal; substitute that order for the one made below; and make an order nisi that the plaintiffs pay the defendants costs of this appeal. The cost below should be costs in the cause.