Reinsurance implications of the Enron collapse, The

reinsurance implications of the Enron collapse, The

Croly, Colin V

The Reinsurance Implications of the Enron Collapse



The past twelve months have been turbulent ones for the world’s reinsurers. The collapse of Enron followed only three months after the tragic events of September 11, and only weeks after the Toulouse disaster. Lori Iwan and Charles Watts have reviewed the circumstances that led to and surrounded Enron’s demise in their article.1

In large part, those circumstances were unique to Enron. It is clear, nevertheless, that at least in relation to the highly “aggressive” nature of its accounting practices, Enron was not alone, as subsequent developments at Xerox and WorldCom have shown. Consequently, the relevance of many of the issues that are discussed herein is unlikely to be limited to Enron.

Investigations into Enron’s business and dealings are ongoing. Given this and the enormous complexity of the factual matrix, the full range and extent of the potential exposures for direct insurers remains unclear and will remain so for some time.

Equally, as other authors have discussed, it is already certain that the targets for Enron– related claims will include the company’s directors and officers, Arthur Andersen, Enron’s lawyers as well as diverse investment banks involved in the structuring and financing of various special purpose entities (“SPEs”) and in marketing and dealing in Enron securities.2

1. D&O cover relating to the Directors and Officers of Enron;

2. E&O cover relating to Andersen; and

3. E&O cover relating to Enron’s legal and financial advisors.

In addition, significant claims have arisen under surety bonds issued by or in connection with transactions entered into by Enron (Enron Surety Bonds).

Undoubtedly, complex coverage and other issues have already arisen and will arise at direct level.3 These issues are likely to include whether proper disclosure was made to insurers on placement of the relevant policies and, hence, whether insurers are entitled to avoid certain covers. As and when these issues are resolved, insurers will, in turn, seek payment from their reinsurers. At that point a number of key reinsurance issues are likely to be brought into focus, including:

1. the extent to which, if at all, insurers/reinsureds can bind their reinsurers to follow4 any settlements or compromises concluded with insureds/claimants (Follow the Settlements Issues or, as they might be more commonly referred to in the United States, “Follow the Fortunes” issues);

2. linked to 1., the extent to which any failure on the part of insurers/reinsureds to involve their reinsurers in the settlement of underlying claims might affect their rights of recovery (Claims Co-operation Issues); and

3. the extent to which, if at all, insurers/reinsureds can aggregate claims relating to, or arising out of, the collapse of Enron for the purposes of presentation to reinsurers (Aggregation Issues).

It is impossible, at present, to say how these various issues might be resolved. In this article, however, I hope to provide an idea of some of the general principles that might be relevant to their resolution.

I should emphasize that my comments are made from an English law perspective. No doubt, many of the issues will also be considered under the laws of a particular States in the United States, and hence, by reference to different principles.7



As noted earlier, it is inevitable that coverage and other issues will arise at the direct insurance level. Bearing in mind the complexity of the factual context in which they will fall to be resolved, the resolution is unlikely to be straightforward although, in the ordinary way, many of those issues may ultimately be compromised or settled before they come before the courts or other tribunals.

As Commercial Union 12 demonstrates, the burden that the reinsured must discharge to satisfy these requirements is, potentially, an onerous one. A dispute arose between Commercial Union, as reinsured, and NRG Victory relating to the recoverability of claims associated with the loss of the Exxon Valdez. It was common ground in those proceedings that, in the absence of a “follow the settlements” or similar provision, NRG Victory could be bound only in respect of “settlements” that Commercial Union was liable to make under the relevant underlying contracts. NRG Victory argued, further, that Commercial Union could not so prove its liability, notwithstanding that it had settled proceedings brought by its insured in Texas on the basis of advice from counsel that the insured would have succeeded at trial. That argument was upheld.

The Court of Appeal made clear that: “[Commercial Union] were required to demonstrate liability to Exxon, and could only be entitled to recover on some wider basis if they could show some kind of `follow settlements’ clause binding the reinsurers to the plaintiffs’ settlement.”13

1. Types of provision

The precise wording of such provisions varies considerably, often depending on the nature of the reinsurance in question. Facultative reinsurances written in the London Market often contain, or incorporate provisions along the lines of the following: “[b]eing a reinsurance of and warranted same gross rate and conditions as and to follow the settlements of the [reinsured].” This is, perhaps, the classic formulation of a “follow the settlements” provision.

The wording to be found in a London Market non-proportional treaty might be somewhat different, although its effect may be broadly similar. A typical example might read: “[a]ll loss settlements by the reinsured shall be binding upon reinsurers provided that such settlements are within the terms and conditions of the original policies and within the terms and conditions of this policy. “17

Finally, a proportional treaty, such as a quota share, may contain a more general formulation that may require the reinsured to “follow the fortunes of the reinsured in all respects.” While there has been no decided case on the meaning of “follow the fortunes” wording under English law, other formulations have been considered in some detail by the English courts. These will be discussed subsequently. It is likely that “follow the fortunes” provisions would be construed in broadly the same way.

2. “Follow the settlements”

In the interim, ATC had commenced proceedings in Liberia against ICA. ICA had no real defense other than their reinsurers were refusing to pay the claim. At the trial, ICA did no more than to put ATC to proof of their claim. Not surprisingly, they were adjudged liable to indemnify ATC for their loss, and had to pay $600,000 by way of additional damages and $58,000 by way of legal costs. ICA then commenced proceedings in the Commercial Court in London against Scor for the whole of the amount of the Liberian judgement.

Scor defended the proceedings on a number of grounds. They pleaded that the underlying claim was invalid by reason of arson and fraud. They contended further that the local loss adjuster was incompetent. Justice Leggatt, the judge at first instance, held that neither of these allegations was made out and held that Scor must follow the settlement made by ICA.

Although the case involved a judgment rather than a settlement, and on that basis the insurer had proved its loss and was able to recover from the reinsurers, the Court of Appeal, nevertheless, gave its views on the general effect of follow the settlements clauses. The judgment most often quoted is that of Lord Justice Robert Goff, who explained the principles that apply in connection with a follow the settlements clause in the following passage:

In my judgment, the effect of a clause binding reinsurers to follow settlements of the insurers, is that the reinsurers agree to indemnify insurers in the event that they settle the claim by their assured, i.e., when they dispose, or bind themselves to dispose, of a claim, whether by reason of admission or compromise, provided that the claim so recognized by them falls within the risks covered by the policy of reinsurance as a matter of law, and provided also that in settling the claim the insurers have acted honestly and have taken all proper and businesslike steps to make the settlement.19

The result, therefore, is that where a follow the settlements clause appears, the reinsured can recover from the reinsurer in respect of a settlement reached with the reinsured provided that:

(a) the reinsured has acted in a bona fide and businesslike fashion; and

(b) as a matter of law, the claim falls within the risks covered by the reinsurance agreement.

Rather, the key question becomes whether the loss “as a matter of law” falls within the risks covered by the reinsurance policy. This is usually a straightforward matter of the interpretation of the relevant reinsurance policy, although the position may well be more complicated, particularly at retrocessional levels, if issues of aggregation arise.20

3. “Loss Settlements Binding”

“Loss settlements binding” provisions do not give rise to any fundamental differences of principle. In general, the comments of Lord Justice Goff in SCOR with respect to “follow the settlements” wording are equally applicable. Nevertheless, the wording of clauses may vary and each clause must, therefore, be individually construed albeit, perhaps, with those principles in mind.21

The form of loss settlements provision set out above22 was considered by the House of Lords in Hill v Mercantile & General Reinsurance Co. 23 Lord Mustill considered that “the crucial words are `within the terms and conditions’ of the original policies and of the reinsurance”24 which, in his view, “draw a distinction between the facts which generate claims under the two contracts and the legal extent of the respective covers.”25

straightforward since, fundamentally, the distinction between facts and their legal implications may be difficult if not impossible to draw. Further, it is worth emphasizing again that each clause needs to be considered individually. For example, many wordings, particularly the more recent ones, expressly provide that reinsurers are bound by the reinsured’s settlements including settlements of coverage issues. Where such wording appears, the distinction between facts and their legal implications, at least in relation to the risks underlying the reinsurance in question, may be largely irrelevant.

In those circumstances the key questions, again, relate to the manner in which and basis upon which the reinsured reached the underlying settlement. This assumes that no claims co-operation or control clause appears that might affect matters. This will be discussed subsequently.

4. Burden of Proof

In this regard, the sole requirement is for the reinsured to have acted in a bona fide and businesslike fashion. It was held in Charman v. Guardian Royal Exchange Assurance PIC” that the burden of proof is borne by the reinsurer to demonstrate that the reinsured has not acted in a bona fide and businesslike fashion. The reinsurer is entitled, however, to receive information from the reinsured as to how the settlement was reached and, if appropriate, may use that information to argue that a settlement was not concluded in a bona fide and businesslike manner.

Justice Webster, in Charman, set out some useful guidelines regarding the requirements of bona fide and businesslike behavior. In this case Lloyd’s underwriters, as reinsureds, appointed a loss adjuster to investigate the insured’s loss and then settled the loss for the sum recommended in the adjuster’s report. Justice Webster determined that in order to satisfy the Scor test, underwriters were obliged, as was the case on the facts before him:

1. when appointing a loss adjuster to act in a businesslike fashion in making the appointment, making sure that the adjuster is regarded as reasonably competent; and

2. before accepting the adjusters report, to ensure that it has been made in a businesslike fashion; and

3. having received the report, to negotiate with the insured in a businesslike fashion in the light of the report.

an arguable defense that has not been taken, it is possible that the reinsured cannot be said to have acted in a bona fide and businesslike fashion vis-a-vis the reinsurer in settling the claim.

Each case needs to be examined in the light of its specific facts and legal considerations, for it may be that the defense is weak or that the factual basis for it cannot be made out. Provided that the reinsured has considered the prospects of success of the defense, it is likely to be difficult for the reinsurer to prove that the reinsured’s conduct is not bona fide and businesslike. However, it should be emphasized that the phrase “bona fide and businesslike” does not refer to the reinsured’s general commercial interests, which may indicate a need to settle in disregard of any possible defenses.



A. Significance of Claims Co-operation Issues

My earlier caveat regarding the presence of claims co-operation/control clauses is an important one. As the Court of Appeal’s recent decision in Gan Insurance Co. v. Tai Ping Insurance Co.,28 has emphasized, the question of whether a reinsured can bind its reinsurer to follow its settlements can be fundamentally affected by the presence of provisions that require the reinsured to involve the reinsurer in the claims settlement process.

Again, the implications of a given clause will depend upon its specific wording. However, the effect of such provisions, or rather of a failure to comply with them, can be dramatic. That is because they can have the effect of either emasculating any “follow the settlements” provision29 or, worse, as in Gan, precluding the reinsured from effecting any recovery at all when, properly construed, compliance with the relevant requirements is a condition precedent to the reinsured’s right of recovery.30

B. Gan v. Tai Ping

The insurer, Tai Ping placed a facultative slip policy with Gan as one of its reinsurers in respect of its participation in an Erection All Risks insurance policy relating to the production and installation of machinery at a Taiwanese factory. Following a fire at the factory, Tai Ping settled its share of liability under the original policy. Gan resisted Tai Ping’s claim for payment under the reinsurance, alleging that in compromising its insureds claim, Tai Ping had breached the terms of the “Scor form” of claims co-operation clause (“CCC”) contained in the reinsurance policy. This provided as follows:

Notwithstanding anything contained in the reinsurance agreement and/or policy wording to the contrary, it is a condition precedent to any liability under this policy that:

(a) the reinsured shall, upon any knowledge of any circumstances which may give rise to a claim against them, advise the reinsurers immediately, and in any event, not later than 30 days.

(b) The reinsured shall co-operate with the reinsurers and/or their appointed representatives subscribing to this policy in the investigation and assessment of any loss and/or circumstances giving rise to a loss.

(c) No settlement and/or compromise shall be made and liability admitted without the prior approval of the reinsurers.31

The Court of Appeal affirmed the Commercial Court’s decision that compliance with the terms of the CCC was a condition precedent to Gan’s liability, as the CCC expressly stated this to be the case. The court also held that non-compliance meant the reinsured could not recover, even if it could prove that it was liable to the insured.32 This aspect of the judgment has harsh consequences for cedants in breach of their obligations under similarly worded CCCs.

The court also determined there was a breach of sub-paragraph (c) of the CCC if the reinsured either settled or admitted liability without the prior approval of the reinsurer. This reversed the Commercial Court’s interpretation that there must be both settlement and an admission of liability for there to be a breach of the CCC. The Court of Appeal said this interpretation was improbable and lacking in business sense.

1. The key issue – withholding approval

The Court of Appeal rejected this reasoning but emphasized that the right of reinsurers to withhold approval of a settlement was not unqualified. Rather, reinsurers must act in good faith after considering the facts giving rise to the particular claim and not act “arbitrarily” or withhold their consent to a settlement for “extraneous reasons.”

2. Relevance to the Enron Situation

The relevance of this in the context of Enron will be obvious. Under contracts governed by English law, insureds/reinsureds cannot simply take account of “follow the settlements” provisions. Careful consideration of all of the provisions of any given contract is essential. When these include provisions dealing with the reporting/control of claims and settlements, insureds/reinsureds should tread with care. IV.


If it is certain that coverage and allocation issues will arise at the direct level, it is equally certain that there will be scope for healthy debate at the reinsurance level regarding the extent to which losses relating to the collapse of Enron can be aggregated.33

A. Aggregation Generally

Loosely defined, aggregation is concerned with regulating the way in which the (re)insured can treat several losses as a single claim for the purposes of its (re)insurance recoveries. Therefore, depending on the terms of the aggregation clause, a (re)insured can take a number of unrelated losses, or losses only related by an agreed connecting factor, and treat them as a single loss for the purposes of making a claim. The way in which losses can be aggregated is entirely a matter of negotiation between the parties. Consequently the starting point must always be the terms of the contract where the intentions of the parties are recorded.

B. Forms of Wording

1. event;

2. occurence; and

3. cause.

C. “Event” Based Wordings

In recent years, a substantial body of English case law has developed concerning the interpretation of “event” and “occurrence” based wordings. Further, many of the cases have focused on the liability sphere in which the application of the concepts of “event” and “occurrence” is less clear than it might be, for example, in the context of losses caused by natural catastrophes.

“Event” based language has historically formed the basis of aggregation clauses in the London Market Excess of Loss wordings. Here, it is common to see a clause that provides cover within limits for “each and every loss” suffered by the insured. “Each and every loss” is then typically defined as: “Each and every loss and/or occurrence and/or catastrophe and/or disaster and/or calamity and/or series of losses and/or occurrences and/or catastrophes and/or disasters and/or calamities arising out of one event.”34

The first significant case on the meaning of “one event” was Caudle v Sharp” in which it was held by the Court of Appeal that the key phrase “arising out of one event” had three elements to it which needed to be satisfied before losses could be aggregated.

1. There needs to be a linking factor between the losses that can properly be described as an event.

More recently, in Scott v Copenhagen Reinsurance,38 Justice Langley, considering the extent to which certain losses arising out of the Iraqi invasion of Kuwait in August 1990 were capable of being aggregated, emphasized39 that the term “event” connotes (and demands) unity of:

(a) cause,

(b) locality,

(c) time; and

(d) (where relevant) the intentions of the human agents involved.

2. The losses to be aggregated must “arise out of ‘ the event. In other words, the event that links the various losses must cause the losses.

In American Centennial Insurance Co. v INSCO Ltd.,40 fourteen directors were implicated in the collapse of a savings and loan association. The E&O insurers tried to aggregate the fourteen separate claims that they had paid on the grounds that the collapse of the association was one event. The court agreed that the collapse of the association could be an event but held that it did not cause the losses. Even if the association had not collapsed, the directors would still have been liable for negligence.

3. The losses must not be too remote from the event out of which they arise.

In Caudle v. Sharp41 the court held that even if the underwriter’s blind spot could be counted as an event, which it could not, the reinsured’s claim to aggregate still failed as the subsequent contracts were too remote to be regarded as “arising out of” the event. There were simply too many intervening factors between having a blind spot for a certain type of risk and actually writing each contract.

D. “Occurrence” Based Wordings

This case arose out of the capture of Kuwait airport and seizure of fifteen aircraft owned by Kuwait Airways that were on the airfield following the Iraqi invasion of the country. Although Iraq was subsequently forced to withdraw from Kuwait, the aircraft had already been flown out of the country into Iraqi territory. Consequently, Kuwait Airways put in a claim for the loss of its fleet. The airline’s insurance provided an aggregate limit for recovery of $300 million for all ground losses “arising out of the same occurrence.” The issue was whether the loss of each aircraft was an occurrence or whether the occurrence was earlier than that. On the facts, the court held that the occurrence was the seizure of the airport and the loss of each aircraft arose out of that.

The case law on “occurrence” was supplemented by the decision in Mann v Lexington Insurance Co.43 In that case, a number of shops owned by the same company were damaged in the Indonesian riots of May 1998. The shops were located over a wide area and the damage occurred over a two-day period of rioting. The relevant clause provided a limit of $5 million “per occurrence,” and retrocessionaires argued that the relevant occurrence for this purpose was the coordinated provocation and orchestration of the rioting by the Indonesian government to achieve its own purposes. On a preliminary issue, the Court of Appeal held that even if the government orchestrated the riots, and it expressly declined to decide this issue, it would still be incorrect to aggregate the losses on this basis. The court stressed that the term “occurrence” requires a unity of time and location that was not found in the Indonesian riots. The riots all took place in different places and over a two-day period. Consequently, the retrocessionaires had to treat the loss of each shop as a separate occurrence and as a separate claim.

More recently still, Justice Langley in Scott v. Copenhagen Reinsurance,44 referring to Kuwait Airways commented that: “In [Kuwait Airways], Rix J addressed the effect of the provision that the ground limit of loss was (as he held) subject to the qualification `any one occurrence’… He said that ‘occurrence’ and ‘event’ may well be synonyms. I agree and think they usually are so.”

Bearing these comments in mind, and taking account of the similar views expressed in Mann v. Lexington Insurance, it appears now that in the absence of any indication to the contrary, the English courts will treat the concepts of “event” and “occurrence” as being identical.

E. “Cause” Based Wordings

could aggregate claims that arose from the same “originating cause.”

It is clear, from Cox v Banks ide and from the related case of Axa v. Field, that the term “cause” has a much wider meaning than the previous terms discussed. In particular, a cause does not require an incident that takes place in a particular location at a particular time but rather can include a continuing state of affairs or the absence of something happening.

F. Application in the context of Enron

There are many ways in which claims can be aggregated. The discussion above shows some of the possibilities as the English courts have considered them.

1. The Collapse of Enron as an “Event,” “Occurrence” or “Cause”

It is impossible at this stage to offer any particular views as to how particular wordings might operate in the context of the Enron claims. However, given the general requirement that the “event,” “occurrence” or “cause” be causative in some sense of the losses sought to be aggregated, it is most unlikely that as a matter of English law the collapse of Enron would be capable of forming the basis of an aggregate presentation of “liability” based losses/claims.46 This is so under any of the wordings discussed above.47

Without pre-empting any issues that might arise at direct level, it will usually be the case with liability claims that the collapse, whether that be of a building, a company or a S&L, will arise out of or be “caused” by the individual acts or omissions complained of. In other words, “events” of this nature are consequences rather than causes of the losses sought to be aggregated. As such, they are unlikely to be capable of amounting to “events” for reinsurance purposes under standard wordings.

2. Other possibilities

Since the collapse of Enron is unlikely to constitute a relevant “event” or “occurrence,” the questions of aggregation at the reinsurance level are likely to focus, instead, on more specific circumstances. These will pre-date the dates on which relevant causes of action accrued and which are potentially common to a more limited range of claims/losses.

agents” almost certainly will give rise to real complexities given the range of individuals and organizations and, hence, the range of possible motivations/intentions potentially involved.

These general comments aside, the diversity of the claims likely to be made and of the coverages potentially exposed render any attempt to offer more specific views on questions of aggregation fruitless at this point.



That the Enron affair will give rise to significant issues for reinsurers across a range of markets is certain. At this early stage, it is impossible to offer even preliminary views as to the manner in which those issues, many of which are likely to be contract-specific,48 might be resolved.

Clint V. Croly

Colin Croly is the head of Barlow Lyde & Gilbert’s Reinsurance & International Risk team. He acts for many of the leading specialist reinsurance companies, Lloyds Syndicates, direct insurers and others involved in reinsurance and international risk. His representation includes litigation in the Commercial Court in London, arbitrations and other forms of dispute resolution both in London and, acting in conjunction with a network of overseas correspondent lawyers and expert market representatives, elsewhere in the world, particularly in the USA. Colin is a prolific writer of reinsurance articles and is joint editor of REINSURANCE PRACTICE & THE LAW, on acclaimed looseleaf textbook on Reinsurance Law,

authored by the Reinsurance cYc International Risk team at Barlow Lyde & Gilbert, published by LLP He speaks regularly at conferences throughout the world on reinsurance issues. Colin is Secretary General of AIDA (Association International de Droits des Assurances), founding Chairman of the AIDA Reinsurance Working Party, and a Board Member of the FDCC. As such, he also chairs the Reinsurance Section and co-chairs the International Activities Committee. He is also an active member of the British Insurance Law Association (BILA) and the Defense Research Institute. Colin read Economics and Law at Cape Town University, followed by a Masters Degree in International Law at London University. He qualified as an attorney in South Africa in 1971, joining Barlow Lyde & Gilbert in London in 1976 He has been a partner since 1980 and has headed the Reinsurance & International Risk team since its inception. With more than forty-seven legal staff, it is the largest dedicated team of Reinsurance Lawyers in Europe.

Copyright Federation of Defense & Corporate Counsel, Inc. Fall 2002

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