Neutral Citation Number: [2005] EWHC 101 (Comm)

Case No: 2003 Folio 352

IN THE HIGH COURT OF JUSTICE
COMMERCIAL COURT
COMMERCIAL

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 04 February 2005

Before :

MR JUSTICE CHRISTOPHER CLARKE

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

Allianz Marine Aviation (France) Claimant

- and -
G E Frankona Reinsurance Limited London 1st Defendant
and
Alwen Hough Johnson Limited 2nd Defendant

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

Mark Howard QC and Michael Bools (instructed by Baker & Mckenzie) for the Claimant
Bernard Eder QC and Neil Hart (instructed by Barlow Lyde Gilbert) for the 1st Defendant
Richard Slade (instructed by Holman Fenwick & Willan) for the 2nd Defendant

Hearing dates: 17 to 19 January 2005

---------------------
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this
Judgment and that copies of this version as handed down may be treated as authentic.

.............................

MR JUSTICE CHRISTOPHER CLARKE

MR JUSTICE CHRISTOPHER CLARKE:

1. This case concerns the correct method of applying the excess in a

hull and machinery excess of loss reinsurance contract.

The facts
2. Treasure Bay is a floating casino. On 27 th September 2002 she
was moored at Biloxi, a city on the south coast of Mississippi, in an
area prone to hurricanes, when she was badly damaged by tropical
storm Isidore. She was insured for $18,750,000. One of those who
insured her was Allianz Marine and Aviation S.A. (Allianz), the
Claimants in this action. They wrote a 47.5% line which later signed
down to 45.238%. The claim that followed was settled for
$17,857,901.85.

3. Allianz had reinsured themselves with GE Frankona Reinsurance

Limited London (Frankona), the First Defendants. Allianzs brokers
were Alwen Hough Johnson Ltd (AHJ), the Second Defendants.
Frankona and Allianz agree that Frankona reinsured the whole of
Allianzs 45.238% share. AHJ say that Frankona reinsured 45.238%
of 70%. This is a trial of all the issues between Allianz and Frankona
and it is not, therefore, necessary for me to reach any decision as to
whether AHJ are correct in what they say.

4. The reinsurance came about in this way. In June 2001 Frankona

agreed with AHJ a facility the relevant terms of which were as
follows:

TYPE Excess Hull and Machinery

Reinsurance

FORM Mar 91 Slip Policy

REASSURED Various Insurance Companies and/or

Lloyds Syndicates as declared by
Alwen Hough Johnson Limited and/or
their agents

ORIGINAL ASSURED As declared

VESSELS As declared

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EXCESS OF Including New and/or Acquired and/or
Added as original

PERIOD Declarations attaching during 12

months at 1st July, 2001 and/or period
as original

INTEREST Hull and Machinery and everything

connected therewith

SUM REINSURED As per Original Policy, but limit

hereunder USD 10,000,000 any one
vessel, over all interests.

CONDITIONS To follow original settlements of the

Reassureds in all respects, being a
reinsurance subject to the same
clauses and conditions against the
same perils as in the original policy or
policies, but only to pay claims excess
of amount stated each declaration.

If extended to include Total Loss from

Ground-Up, to follow the settlements
of the Reassured in all respects,
subject to the same conditions and
clauses against the same perils as in
the original policy or policies, but
only in respect of Total and/or
Constructive Total Loss and/or
Arranged Total and/or Compromised
Loss of Vessel.

RATE As agreed per each declaration.

ORDER As declared

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Frankona stamped the facility beneath the words 100% of Orders.

5. The facility was what its name implies. It did not confer authority
on AHJ to bind Frankona. But it enabled AHJ to propose risks to
Frankona on the basic terms and conditions set out in the facility with
the variants applicable to each individual risk being as declared or
agreed. The advantage of such an arrangement is that it streamlines the
acceptance of risk and avoids the need for negotiation, in each case, of
terms other than those that must necessarily be specific to the
individual risk in question. It is of particular utility where the risks are
of a relatively small size, when it would be either uneconomic or
inefficient to draw up new terms on each occasion when reinsurance
was proposed.

6. The facility agreed in 2001 was a renewal of a previous facility in

similar terms for declarations attaching for 12 months from 1st July
2000, which itself was a renewal of a facility in respect of declarations
attaching between 27th June 1999 and 30th June 2000. That latter
facility replaced an earlier facility that had been set up by Mr Keith
Chambers, who was the broker at AHJ concerned in the placement of
the Treasure Bay risk, when he was at Windsor Insurance Brokers
Ltd. He moved to AHJ in December 1999, and the facility was
transferred to AHJ when he did so. When the facility was first
established the underwriters principally concerned at Frankona were
Mr Peter Sydenham, who was the Senior Hull Underwriter, and Mr
Jerry Carter, who was the Assistant or Deputy Hull Underwriter. They
left Frankona at the end of 2001 or the beginning of 2002 and the
facility then came to be operated by Mr Michael Southgate and Mr
Michael Thompson, both of whom gave evidence before me.

7. The reinsurance of Treasure Bay was agreed on 27 th May 2002

when Mr Thompson scratched two declarations prepared by AHJ.
There were two declarations because amendments to what was set out
in the declaration as originally drafted were put down on two different
copies of it. The final agreement was in the following terms, so far as
now material:

4
 REASSURED AGF MAT

ORIGINAL ASSURED TREASURE-BAY

CORPORATION

VESSEL(S)/VALUE(S) Treasure Bay

Value USD 18,750,000

PERIOD 1.6.2002 - 30.10.2002

SUM INSURED 47.50%

CONDITIONS To follow the original

settlements of the Reassureds in
all respects, being a reinsurance
subject to the same clauses and
conditions against the same
perils as in the Original Policy
or Policies, but only to pay
claims excess of USD
5,000,000 each vessel, each
accident.
..

RATE 0.75% on exposure

INFORMATION Warranted no known or

reported losses at 1st June 2002.

The issue
8. At issue in this case is the proper method of applying the excess of
$5,000,000. Allianz contend that you must apply the excess to the
settlement figure ($17,857.901- $5,000,000 = $12,857, 901) so that
they then receive their 45.238% share of that, being $5,816,657.74.
Frankona say that you should apply the excess to Allianzs share of the
settlement figure ($ 17,857,901 x 45.238% = $8,078,557 - $
5,000,000) making $3,078,557.

9. Before the Treasure Bay declaration there had been 80

declarations under the facility. These are contained in the fourth of the
trial bundles. The only significant claim in respect of these

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reinsurances was on the Treasure Bay. The declarations in this
bundle are the final contractual documents from Frankonas files. This
documentation was preceded by quotations. These documents are not
before the Court. Frankona sought discovery of such material but that
was refused upon the ground that, whilst the previous contracts
entered into pursuant to the facility were or might be relevant and
admissible material, the preceding quotations were not. It is, however,
necessary for me to say something about how AHJ went about placing
business with Frankona under the facility.

10. Matters would start by AHJ being asked by a client, an underwriter

under the original insurance, to see if they could secure reinsurance.
The client would give AHJ such details of the insurance as it was
prepared to give. AHJ would then go and see Frankona. They might
take with them information about the insurance in the form that their
client had given it to them, but very often they would prepare a
document in the form of the Treasure Bay declaration including
details of the relevant vessel(s), period, and interest, but usually not
the sum to be insured under the reinsurance. Frankona would quote a
rate and AHJ would then revert to their client to see if that rate was
acceptable. If it was they would come back to Frankona, one of whose
underwriters would scratch the now fully completed declaration, and
the contract of reinsurance would be made.

11. Sometimes AHJ would be able to acquire a new client along the
way. Thus, to take an example: in Declaration 12, the Reassured is
described as Lloyds and/or Companies and the sum reinsured is
10% (expressed as HEREON 10% of Exposed Amounts). The
vessel was an accommodation and work barge. AHJs original client
had been the Hiscox syndicate. Later on AHJ learnt that two other
syndicates were interested in reinsurance on the terms that could be
obtained for Hiscox, and the 10% line reinsured is, in fact, an
amalgam of the lines of all three syndicates. The declaration does not,
however, identify the three syndicates, nor is there any Frankona
documentation that indicates that Frankona ever learnt which they
were.

12. In some cases AHJ had no intention of seeking to secure further

orders, either because the order was merely a renewal of a previous
one, or because the circumstances of the order were somewhat special
and made the likelihood of further orders unrealistic or remote. Mr
Chambers identified 11 declarations in that category (Nos
3,12,19,27,28,39,43,54,60,78 and 80), although he stressed that that

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list was not exhaustive. Even in respect of some of these there was a
possibility of further orders, as is apparent from the fact that
declaration No 12 is one on his list.

13. The 81 declarations provide for different types of cover. Some of

them (about 30) only provide for cover against Total Loss from the
ground up i.e. without any excess. 9 of them are in respect of excess
of loss only and provide no total loss cover. Treasure Bay is one of
those 9. The rest are declarations where there is both excess of loss
cover and either cover against total loss from the ground up or an
option to take that cover. These declarations have been termed
hybrids.

14. The declarations have different descriptions of the Reassured. In 5

cases the Reassured is named (in one case, No 56, only in a covering
letter). These 5 include Treasure Bay where the words Lloyds
and/or companies have been crossed out and the letters AGF MAT,
signifying Allianz, have been added in ink against Mr Thompsons
scratch. In many cases the Reassured is described simply as Lloyds
and/or companies. In some cases (15 where there is excess of loss
cover, and 10 where there is TLO cover only) there is no reference to
the Reassured or the name of the Reassured is left blank.

15. In 17 cases, including Treasure Bay, the parties have used the
expression x% of Exposed Amounts to describe the amount of the
reinsurance. In those cases there is no further written explanation of
what that means. But in 12 cases the value of the Exposed Amount has
been calculated either in the body of the declaration or in a schedule.
Thus, to take Declaration 7 as an example, the excess figure was
$750,000. The first entry in the schedule is:

VESSEL VALUES EXPOSED AMOUNTS

1.ANTHONY US$ 5,000,000 US$ 4,250,000

and there are then 4 other vessels where the figure of $750,000 has
been deducted from the original value so as to produce the exposed
amount. Frankona accept that in 16 of the 17 cases where the meaning
of exposed amounts is not spelt out, the excess is to be deducted
from the original values. The exception is Treasure Bay.

16. Whether the Claimants are right in their contention depends,

amongst other things, on whether, when the conditions state that the
reinsurers are only to pay claims excess of US$ 5,000,000 each

7
vessel, each accident, the claims that are being referred to are the
claims of the original insured on its insurers, or the claims by the
reinsured on its reinsurers. Before I address that question it is
necessary to examine further the context in which it arises and the
immediate circumstances in which the contract in issue came to be
made.

17. It is common ground between the parties that in all the 80

declarations that preceded the Treasure Bay the excess must be
deducted from the figure at which the original underwriters have
settled the claim (being at the highest the value of the vessel under the
original insurance, less any deductible). In all these declarations the
expression claims excess of $x million must be treated as a
reference to the claims of the original assured on the reassured
insurers, and this is so regardless of whether or not the cover included
total loss cover (optional or otherwise). Allianz rely on that
circumstance as constituting either part of the factual matrix by
reference to which the Treasure Bay declaration is to be construed, or
an agreed understanding between the parties as to the meaning of
claims which is determinative of the proper construction of the
clause.

18. The reasons why, in respect of the previous 80 declarations, it is

accepted that Allianz are right in saying that the excess must be
deducted from the original values differ. Allianz claim that that is the
correct meaning in any event and that the matters to which I am about
to refer merely serve to confirm the position. Frankona, on the other
hand, point to a number of features of those 80 cases, which, as they
accept, show that the Allianz construction is right in all of those cases.
But, as they submit, those circumstances do not apply to Treasure
Bay, as a result of which a different conclusion must follow.

19. Firstly, Frankona accept that, where the declaration, or a schedule

to it, sets out the calculation of the Exposed Amount in such a way
as to show that the excess is to be deducted from the original values,
the contract must take effect accordingly. (I refer to original values
for the sake of convenience. Frankona would in fact pay the relevant
percentage of the settlement figure, which would take account of any
deductible).

20. Secondly, Frankona accept that Allianzs construction is to be

applied to hybrids, including hybrids where total loss was optional and
the option was not taken up. It is not apparent to me how the fact that

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Total Loss cover, or an option to take it, is included by way of
extension to the excess of loss cover, can affect the way in which the
excess is to be applied. Mr Southgate suggested in evidence that
where there is total loss cover, the focus is on the whole of the original
value, and that it would be anomalous for the excess to be applied to
anything else. I do not accept this. In respect of Total Loss cover there
is no excess to apply; the fact that it is included tells one nothing about
how, where there is an excess, it should be applied.

21. Thirdly, Frankona accept that where the reinsured was described as
Lloyds and/or companies Allianzs construction is correct.

22. Take, for example, Declaration No 12, to which I have already

referred. In that case there was no total loss cover, the Reassured was
described as Lloyds or companies, the original value was US$
8,500,000, the excess was US$ 3,000,000, and the reinsurance was for
10% of Exposed Values. So, if the excess was applied to 10% of
US$ 8,500,000 there would be no cover at all.

23. That would seem reason enough for concluding that the parties
cannot have intended the excess to be applied in that way, but
Frankona submit that the, or an, important feature of a declaration
such as this is that the reinsurance was for the market as appears
from the generic description of the Reassured. So, it is submitted, the
only workable basis was for the excess to apply to the underlying risk.

24. The reason for that was said to be this. Suppose that a single vessel
was insured for US$10,000,000 by ten original insurers (A, B, C etc)
in different proportions (30%, 20%, 10% etc) with consequently
different exposures (US$3, US$2, and US$1 million respectively).
Suppose then that AHJ has an order from A, and Frankona quoted a
rate for US$ 2.7 million excess of US$ 300,000. That would
obviously make sense for A. But if AHJ then sought to interest B and
C, they could not do anything with that quote for B or C, whose
exposure does not reach US$ 2.7 million and for whom an excess of
the same percentage of their total exposure as in the quote for A would
amount to US$200,000 and US$100,000 respectively. So it would be
necessary to tailor the reinsurance terms to the individual cedant. By
contrast if the excess is applied to the original value(s) the quote can
be taken around the market. If, for instance, the excess of
US$1,000,000 and is applied to a US$ 10,000,000 original value, AHJ
can seek orders for any proportion of the cover of US$ 9,000,000.
Although the declarations in the fourth trial bundle record the

9
concluded contracts of reinsurance, they, or something like them,
started out life as quotations and their wording was fashioned so that it
could, if occasion arose, be taken round the market, without alteration,
in order to interest potential reinsureds other than the original client.

25. Declaration 12 is not the only declaration where the application of

the excess to Allianzs percentage of the original value insured would
either mean that there was no insurance against partial loss in respect
of some or all of the vessels covered by the declaration, or a level of
insurance so meagre that this result could not have been intended. I
take two further examples.

26. In Declaration No 10 two Reassureds were covered in respect of

three vessels valued at US$ 4,000,000, US$ 3,500,000 and US$
4,000,000 respectively. They were also covered in respect of total loss
from the ground up. In respect of the first Reassured the sum insured
was 10% and the excess was US$ 1,000,000. If the excess is applied
to 10% of the underlying loss, then, in order for there to be any
recovery in respect of partial loss, all three vessels would have to
suffer a loss exceeding US$10,000,000 in all (but with none of them
becoming an actual or constructive total loss) and then the recovery
would only be US$ 150,000 at most. In the case of Declaration 26 6
vessels were covered valued at either US$ 6,000,000 or US$
5,000,000 each. The sum insured was 15%. The excess was US$
2,000,000. If the excess is applied to 15% of those values, no cover
would be provided in respect of any partial loss since 15% of US$
6,000,000 is US$ 900,000.

27. There are many other examples to the same effect. Of the 81
declarations 34 were either total loss only covers, or renewals. I was
told that of the remaining 47, if the excess is deducted from the
insured percentage of the original value, then in 42 cases all or some
of the vessels would have no excess cover at all and the vessels which
would have no cover would have been 224 out of 274. Frankona
accept that in these cases the Claimants construction is correct.

28. In contrast, as Frankona submit, the Treasure Bay contract (a)

did not on its face, or in a schedule, contain any calculation deducting
the excess from the original value; (b) was not a hybrid; (c) involved
only one specified insured, no other one being contemplated; and (d)
produces, on Frankonas construction, a perfectly sensible level of
indemnity, albeit one markedly less than that which would result if the
Claimants are correct.

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The guideline

29. The facility provided that the limit under it was $10,000,000. In
addition there was an internal guideline that the maximum order
thereunder was not to exceed 20%. A notation to that effect was
written by Peter Sydenham on the cover sheet, giving details of the
facility, which was included with the declarations in the relevant
Frankona file. The guideline was usually followed, or only departed
from to a modest extent (5% or so). But it was what it was stated to
be, namely a guideline. On occasion a more substantial order was
accepted. The potential significance of the guideline lies in the fact
that, in respect of the Treasure Bay declaration, if the excess is
deducted from the original value, as Allianz claim, their recovery will
exceed 20%; if deducted from the Allianz proportion it will not.

30. There is an issue as to whether or not AHJ were made aware of the
guideline. As to that, there is no evidence that Mr Chambers, or
anyone else at AHJ, was shown the cover sheet or that he saw it at any
stage. The cover sheet was first filled in by Mr Carter, who I was told
may be unwell, and who made no note of the guideline on it. Mr
Sydenham, who made the note on the cover sheet, was not called,
although he is presently employed by Frankona. Presumably he
cannot, and in any event he did not, say that he ever discussed it with
AHJ. Mr Thompsons oral evidence to me was that he had no
conversation with Mr Chambers about a 20% underwriting guideline,
but that he had a vague recollection of talking to him about
individual declarations, although he could not recall exactly what he
said. Mr Southgates evidence was that he certainly mentioned the
guidelines to Mr Chambers before the Treasure Bay and that Mr
Chambers was well aware that, if he approached Frankona for cover, it
would be extremely unlikely that underwriters would accept shares in
excess of about 25% of original values exposed or $10,000,000 other
than in exceptional circumstances.

31. Mr Chambers written evidence was that he was not aware of any
20% guideline, either when the facility was established or when it was
renewed, and that to the best of his belief such a guideline was never
discussed in the course of negotiating individual declarations. But in
his oral evidence he accepted that from time to time Mr Southgate or
Mr Thompson would have told him, in relation to a particular risk

11
We cant take more than 20%, although he would not have been
able to say whether that was on account of a guideline or not.

32. I regard Mr Chambers evidence on this as convincing and in

accordance with the probabilities. I am not satisfied that Mr
Thompson and Mr Southgate made it clear to Mr Chambers that they
were bound by an underwriting guideline rather than indicating to
him, on occasions, that they could not go above 20%. That
circumstance does not, however, seem to me to cast much light on the
question at issue, not least because in October 2001 Frankona quoted
for a reinsurance of Treasure Bay which itself would exceed the
20% guideline. It is consistent with this conclusion (i) that, in his
written statement of 29th September 2004 Mr Thompson said that the
only given was that Frankonas exposure would never exceed $
10,000,000, each vessel, each accident, (ii) that no one at Frankona
appears to have suggested to Allianz that the 20% guideline had any
significant bearing on the construction of the cover until reference was
made to it in Mr Southgates statement of 7 th January 2005. Nor do I
think that the position would have been any different if Mr Chambers
had been told in terms that there was a 20% guideline.

The October 2001 quotations

33. The brokers to the original insurance of Treasure Bay were

Craven and Partners Ltd (Craven). The vessel was insured for a
period of 12 months from 1st November 2001. In October 2001 Mr
Hudson of Craven sought a quotation for reinsurance from Frankona.
On 19th October Mr Southgate of Frankona scratched a quote which
provided as follows:

$8.5.m X $ 1.5. (for AGF share)

@ 40% ONP
- 10% bkge
100%

This quotation made plain that the excess was to apply to the
Frankona share. On 31st October Mr Southgate gave another quotation
as follows:

XS $2m each acc (for 100%)

@ 0.65% cro
on exposed amts

12
 limit $16.75m
- 15%
100% of order (max 53% of whole)

This quotation made it plain, by the reference (for 100%), that the
excess was to apply to the original value.

34. No record of that quotation appears to have been retained by

Frankona. A copy of Cravens notes of the two quotations had to be
obtained by Frankona from them during the course of these
proceedings. In Allianzs record sheet in respect of the Treasure Bay
there is a note of what appears to be the second October quotation.
Neither of these quotations was accepted by Allianz.

35. Nothing material happened thereafter until May 2002. On 23rd

May 2002 two important events occurred. First, Frankona entered
into a contract of reinsurance, pursuant to the facility, whereby they
reinsured seven vessels belonging to Clearwater Fine Foods Inc. The
Reassured was described as Lloyds or Companies, although it was
in fact Allianz. The sum insured was for 25% of values, and the
excess was Can$ 5,000,000. There was no TLO cover. The rates were
put at various percentages of what must be exposure (although the
word is not used on the face of the declaration). A Schedule set out
details of the seven fishing vessels insured, their values in Canadian
dollars and the exposed value, which was calculated by deducting Can
$ 5,000,000 from the original value. The declaration was scratched by
Michael Thompson per MJS, indicating, as was the case, that Mr
Thompson had bound the risk but that Mr Southgate had negotiated
the business. The Allianz line that Mr Chambers had sought to place
was 45%. In the event he had to place the additional 20% with the
Goshawk syndicate, where Mr Sydenham was by now an underwriter.

36. In his witness statement Mr Chambers said that he was not clear,
from looking through his file, whether he produced the schedule at the
quotation stage;

however my presentation would have covered the risks involved

and the basis on which the excess was to apply, and, if the
schedule was not in that format originally, I would have drawn it
up to summarise the basis of my presentation. I definitely would
have presented a schedule of values. Before accepting the risk
Mike Thompson would also have considered the schedule himself

13
 and would not have initialled the slip unless he was confident that
his boss, Mike Southgate, was happy with it.

37. Mr Bernard Eder, Q.C., submitted to me that this evidence

indicated that Mr Chambers perceived the need to explain that the
excess would apply in the manner argued for by the Claimants, and
that he did so, whereas this was something that he did not do in the
case of the Treasure Bay.

38. I do not think that Mr Chambers was saying anything more than
that the effect of his presentation of the risk, including whatever
schedule he presented, would have been such as to make clear how the
excess was to be applied. Mr Chambers told me that he thought it
unlikely that the schedule which he presented when he sought a quote
was in the form in which it appears in the fourth bundle, and that that
schedule was produced later. He believed that what he would have
produced would have been a copy of the original placing, which
would not have referred to an excess.

39. When I questioned him on what, if anything, he recalled saying, he

told me that he thought that he would have said nothing at all about
the application of the excess, assuming that it would apply in the usual
way, and this seems to me to be likely to be so.

40. On the same day Mr Thompson gave a quote to AHJ by writing on

the second page of a copy of the original insurance for Treasure Bay
the following:

12m 1/11/02
XS $ 5m
@ 1% on exposed.

Neither Mr Thompson nor Mr Chambers had any recollection of

discussing how the excess was to be applied or what the exposure
was to be, and I conclude that there was none.

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41. Thus it was that on the same day reinsurance was bound under the
facility which indicated that the exposed value was the original value
less the excess, and a quote was give for Treasure Bay where the
sum insured was 25% of values which, as appears from the
schedule that is attached to Frankonas copy of the declaration,
referred to exposed values, being the original values less the excess.
Allianz submit that the reference to exposed or exposure must
mean the same in each case. Frankona say that there is a critical
difference in that the meaning of exposed was shown in the schedule
to the Clearwater declaration but not in the Treasure Bay quote or
declaration.

42. Mr Chambers evidence was that in May 2002 he was unaware that
Frankona had previously given Craven & Partners a quote for excess
hull and machinery cover on the Treasure Bay, and that Allianz had
not told him. Mr Thompsons evidence was that, when Mr Chambers
first approached him for a quote, he said words to the effect that
Michael Southgate had previously quoted for this risk for Craven but
he, Mr Chambers, was AGF (i.e. Allianz)s preferred broker. Mr
Thompson told me that he remembered this because it seemed
incredibly self important.

43. I think that the likelihood is that Mr Chambers did make some
reference to Michael Southgate having previously quoted and did so in
terms which indicated that he was now the broker through whom
Allianz wanted to act. I do not believe that Mr Thompson is entirely
wrong in his recollection of what Mr Chambers said. His recollection
of the self importance of the statement seemed to me to have the ring
of truth about it, and that impression was reinforced by Mr Chambers
acceptance that it was the sort of statement that he would make in jest,
although he could not imagine that he made it on this occasion.
Further, when cross examined by Mr Eder, Mr Chambers accepted that
it was quite likely that Mr Hensman of Allianz told him that they had
tried to get reinsurance earlier in the year, and that what he would
expect Mr Hensman to have done was not to prejudice the possibility
of getting a better quote by telling him the terms of the quote
previously obtained.

44. But I do not accept that, contrary to his evidence to me, Mr

Chambers was aware of the terms of the October quotations, or that it
was Craven who had obtained them, or, which is of greater
importance, that the May quote was discussed by reference to the

15
October quotation. I reach that conclusion for a number of reasons.
Firstly, Mr Thompsons evidence, insofar as it was to the contrary, was
of the vaguest kind (Keith Chambers was obviously aware of the
terms of the quotation(sic) provided by Michael Southgate to CP in
October 2001 and made reference to them during our discussions for
the cover eventually provided). That vagueness is consistent with the
fact that Frankona had no documentary record of the October quote,
which had not been given by Mr Thompson. Secondly, I found Mr
Chambers convincing when he told me that, when he brokered
Treasure Bay, he was not aware of the terms of the October quotes
or that Craven had been involved. If he had been I would expect him
to have made a note of them. He did not. Thirdly, if in May 2002 there
had been discussion of the Treasure Bay reinsurance by reference to
the October quotes, I would expect Mr Thompson and Mr Chambers
to be able to tell me what the nature of that discussion was, and that
there would have come into existence some note to the effect that the
excess was, despite the use of the usual wording, to apply to
Frankonas share.

45. The Treasure Bay declaration was scratched by Mr Thompson

on 27th May. It is common ground that nothing was then said about the
operation of the excess.

Construction

46. I have set out the history at some length because, in deciding what
meaning is to be attached to the contract of reinsurance for the
Treasure Bay, it is necessary to know its genesis and context, the
market in which it was made, any other circumstance of which the
parties to it were or could reasonably be expected to have been aware
and, in Lord Hoffmans words anything which would have affected
the way in which the language of the document would have been
understood by a reasonable man, with the exception of previous
negotiations and declarations of subjective intention.

47. Mr Mark Howard, Q.C., for Allianz, submits that the key to the
true construction of the declaration is to be found in the fact that the
excess provision is contained, not in the description of the sum
insured, but in the follow the settlements clause. In Insce Co of Africa
v SCOR [1985] 1 Lloyds Rep 312, Goff, L.J., as he then was, after
an exhaustive review of previous authority, said:

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 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 a claim by their
assured, i.e. when they dispose, or bind themselves to dispose,
of a claim, whether by reason of admission or compromise
(italics added)

So, in the present case, he submitted, there has been a claim by the
original assured, which has been settled by the reassured. The
reinsurer agrees to follow the reassured in his settlement of that claim
but only to pay claims in excess of US$ 5,000,000. In that context
claims must mean claims on the original insurer. If the parties had
wanted to make the excess applicable to the insured percentage of the
original value they could readily have done so by other means,
including simply omitting the word claims from the follow
settlements clause.

48. Mr Eder submitted that use of the word claims in a contract of

insurance or reinsurance naturally refers to the claim of the assured in
the former, and of the reassured in the latter case; and that the passage
in Lord Goffs judgment took the matter no further. Claims could
mean either claims of the assured or the reassured and, in the context
in which Lord Goff was using, it had plainly to relate to the former.
(Indeed he was referring to a claim against that insurer with whom the
claimant had a contract of insurance). That did not mean that the word
meant the same in the present context. At any rate the word claims
was ambiguous and, since the wording of the facility was provided by
Allianzs brokers, the ambiguity should be resolved against Allianz .

49. Whilst I see the force of Mr Eders submission, I accept the

submission of Mr Howard that the inclusion of the excess wording in
the follow the settlements clause is apt to shift the focus of attention to
the claim of the original insured, which the insurers will settle, and to
limit the amount, in respect of which the reinsurers are to follow the
insurers settlements, to settlements by him of claims on him insofar
as they exceed $5,000,000 each vessel, each accident.

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50. If the declaration stood alone, and there was no facility, that is a
conclusion that I would reach with some hesitation. But I do not have
to construe the declaration as if it stood alone, nor should I do so. It
has to be seen in the context of the facility and the 80 declarations that
preceded it. That is of significance in at least two ways. The first is
that the purpose of the facility was that AHJ should make declarations
of the type that were in fact made, including in particular, modest
reinsured lines, such as 10% or less, with relatively large excesses. As
has already been pointed out, many of these declarations would be
meaningless unless the Claimants construction is adopted because the
apparent cover for partial loss would thereby be rendered illusory.
That itself would point powerfully to the correctness of their
construction.

51. The second is that one of the purposes of a facility such as this is
that certain terms will be standard for each declaration. The
understanding of the relevant parties, i.e. AHJ as broker and Frankona
as reinsurer under the facility, must be that the standard terms will
mean the same thing in each case, unless there is some agreement that
they will not. Otherwise they would cease to be standard. Here, as is
common ground, in all the previous 80 declarations (save those where
the question does not arise because the cover was in respect of total
loss only) the parties recognised and accepted that the reference to
claims meant the original claim, and that the excess was to be
deducted from that. Against that background, known to both, the
reasonable man in their position would understand that, in the absence
of agreement to the contrary, the same words would mean the same
thing in the 81st declaration. Unless there is some characteristic of the
reinsurance of the Treasure Bay that makes all the difference, the
context in which the 81st declaration was made compels that
conclusion.

52. In The Karen Oltmann [1976] 2 Lloyds Rep 708, 712, Kerr, J,
as he then was, stated the following principle which he derived from
the cases:

If a contract contains words which, in their context, are fairly

capable of bearing more than one meaning, and if it is alleged
that the parties have in effect negotiated on an agreed basis that
the words bore only one of the two possible meanings, then it is
permissible for the Court to examine the extrinsic evidence
relied upon to see whether the parties have in fact used the
question in one sense only, so that they have in effect given

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 their own dictionary meaning to the words as a result of their
common intention. Such cases would not support a claim for
rectification of the contract, because the choice of words in the
contract would not result from any mistake. The words used in
the contract would ex hypothesi reflect the meaning which both
parties intended.

53. It seems to me that that principle applies here. The parties have, in
effect, negotiated and concluded a long series of contracts of
reinsurance, under the umbrella of the facility, upon the basis that in
the facility, and the declarations thereunder, the reference to claims
is a reference to the claims of original insureds and that the reference
to exposed amounts or exposure is to original values less the
excess. Mr Eder was disposed to accept that the sequence of contracts
could be relied on in construing the Treasure Bay contract if they
evidenced an agreement that the word claims should mean original
claims whenever they appeared. In my view when brokers arrange a
facility with underwriters, which contains standard or, as it is
sometimes said, boiler plate terms, and then execute declarations
under that facility incorporating those terms, they impliedly agree that
the terms shall mean the same whenever they appear. So, in the
present case it does not seem to me to matter whether one speaks of
interpreting the contract in its factual matrix or an agreed
understanding. The matrix and the agreed understanding are one. In
any given case the parties may, of course, agree that the standard terms
shall have a different meaning; or the terms that they have specifically
agreed may mean that they must do so.

54. I turn then to consider whether there was some feature of the
Treasure Bay declaration, or the circumstances surrounding it, that
showed that, in that case, the word claims now meant something
different, or that the excess should be differently applied. In my view
there is no such indication. It is true (a) that the Treasure Bay
contract was one for excess of loss only; (b) that it was made between
Frankona and a reinsured, who was named and identified at the time
of contracting; and (c) that it was made about half way through the
period of the underlying insurance in circumstances where it was most
unlikely that there would be anyone else interested in such
reinsurance. It was also for a larger percentage of the total value than
was usual under the facility. None of these considerations strike me as
differences which show that in this contract the word claims must
have changed its meaning. In my judgement AHJ were entitled to

19
assume that it had not, unless either they were told that the facility was
to operate differently on this occasion, or circumstances of which they
were or ought reasonably to have been aware meant that that must be
so. That was not the case.

55. The fact that, in the case of the Treasure Bay, a specific
reinsured was identified does not seem to me to be material for present
purposes. In previous declarations there had been either (a) a
specified reassured, or (b) a blank against the word Reassured, or (c)
a generic description of the reassured that was consistent with there
being either one or several of them. In the latter case there had, on
occasions, in fact been only one reinsured. In some of those cases the
cover had been for excess of loss only. In respect of all these
declarations, whether in category (a), (b) or (c), Frankona accept that
the excess applies to original values.

56. Reliance is, also, placed on the fact that in respect of Treasure
Bay there was no Total Loss cover; but, as I have said, that does not
seem to me to have any effect on the construction of the excess.

57. Lastly, it was suggested that this was a distressed risk and that
that circumstance should influence the approach to construction. I do
not agree. It is true that the hurricane season was approaching, as it
does every year, and that it would occupy a substantial part of the
period of insurance. But, on the Claimants construction, the cover
was less (because of the excess) and the rate of premium greater than
would have been the case under the October quotations. That
probably reflects the changed circumstances in which the cover was
taken up; but it cannot affect the meaning of the terms. Nor can the
size of the sum insured, which, subject to signing down, was the same
as in October.

58. In addition I do not regard the cover as distressed if by that is

meant that Allianz was desperate for reinsurance. Allianz had, in the
person of Mr Bishop, its then underwriter, regarded the reinsurance
terms offered in October as unacceptable. Mr Bishop then left and Mr
Graham Hensman, his deputy revisited the question of reinsurance and
sought to obtain it through Mr Chambers. I accept his evidence that
this was neither in desperation nor panic.

59. If Mr Chambers had been aware of the October quotations, the

position would not, I think, have been any different. There were two
quotations in October, offering a measure of indemnity at that stage in

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the region of US $ 7 - 8,000,000 for a 47.5% line. One offer was on
the basis that the excess was now to be deducted from the Claimants
reinsured portion; the other was on the basis that it was, as in all
previous cases, to be deducted from the original value. If Frankona
intended to secure the result for which they now contend, they would
have, in my view, to have told AHJ that, although using the wording of
the facility, they intended the method of calculation embodied in their
quotation of 19th October.

60. Allianz also put their case, in the alternative, on the basis of
rectification or estoppel by convention. In the light of my conclusions
it is not necessary to say much more than that I reject both. As to the
former, the declaration recorded, with complete accuracy, the terms
upon which the parties intended to contract. There was no mistake. As
to the latter, the parties did not proceed, once the contract was made,
upon a conventional basis, in relation to this contract, from which it
would not be fair for one of them to resile.

61. Accordingly I give judgment for the Claimants.

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