Turkish Insurance Contract
English Common Law and Insurance Law
Introduction
The Turkish insurance company is the insurer for the Orkinos farmer, who is the insured. There therefore exists a contract of insurance between these two parties. The Turkish insurance company has also set up a contract of Re-insurance with the London Insurance Company. As a result of non-disclosure by the Turkish insurance company of the reproduction rates of Orkinos fishes, which were supplied by the farmer, the London Insurance Company has refused to honour the re-insurance contract. The result is that the Turkish insurance company now refuses to pay under the insurance contract between themselves and the Turkish farmer. The farmer is therefore suing the Turkish insurance company and the applicable law is that of England and Wales.
The purpose of this case analysis will be to ascertain the applicable law that must be utilised in order to ascertain the nature of the liability of the Turkish insurance company to the Orkino fish farmer. Accurate ascertainment of the applicable law also requires a clear analysis of further information regarding the facts that will be required in order to reach the appropriate decision.
A The English Law of Reinsurance
1. Definition of the Reinsurance Contract
The current existence of various forms for reinsurance contracts means that a comprehensive description is difficult to achieve. A more accurate description is to be found in the case of Forsikringsaktieselskapet Vesta v Butcher (No 1) in which it was stated that:
Reinsurance is prima facie a contract of indemnity under which the reinsurer indemnifies the original insurer against the whole or against a specified amount or proportion of the risk which the latter has himself insured.
Within the wording of the Marine Insurance Act 1906 (MIA), no assistance is given to aid in the search for a definition other than under s 9(1) in which it is recognised that the insurer has an insurable interest under the contract of marine insurance and may therefore reinsure for the event that liability arises.
2. Key features of the reinsurance contract
There are two key features of the reinsurance contract that are relevant to this case.
(a) The indemnification purpose
Bigham J stated in South British Fire and Marine Insurance Company of New Zealand v Da Costa that the purpose of a reinsurance contract is for the indemnification of the reinsured in the event that a claim is made by the insured of the original insurance contract.
(b) No duty of the reinsurer to the insured
The contract of reinsurance is a wholly separate contract from that of the original indemnity. This therefore means that there is no duty of indemnification whatsoever between the re-insurer and the insured and this is also regulated under s 9(2) of the MIA. Further to this, in accordance with the Third Parties (Rights Against Insurers) Act 1930 the insured of a separate contract of insurance is not classified as a third party to which the reinsurer is to be obligated.
There is however one exception to this rule, which is that of fronting. This occurs where the original insurer is unable to accept the risk of insuring the subject matter under the insurance contract. In such instances, a separate insurer may act as front by establishing a contract of insurance with the insured and would then reinsure either all or part of the risk alongside the original insurer. Here a direct obligation would exist on the part of the reinsurer to the insured for indemnification in the event of a claim.
3. Types of Reinsurance Contracts
There are two main types of reinsurance contract, each of which have varying consequences for the right to avoid a contract on the basis of non-disclosure or misrepresentation. It is therefore essential that courts are aware of the type of reinsurance contract at hand.
The first type is that of the facultative reinsurance. This type is where there is freedom on the part of the reinsured and the insured to decide upon the particular risk that they are going to take. This therefore means that facultative reinsurance contracts carry a definite awareness of the type of risk being taken by the reinsurer, with the result that all possible precautions can be taken in order to ascertain the full potential of the risk. A variation of this type is the facultative obligatory reinsurance whereby the choice is made by the reinsured as to the types of risk that they are going to take and the reinsurer will usually declare that he is to be bound by these decisions.
The second type of reinsurance contract is the Treaty reinsurance. Here the agreement is that all risks of a class of business are reinsured. This therefore means that all incidents that are integral to a specific business are reinsured but there is far less certainty as to the types of risk being undertaken and there is no freedom of choice of risk for either the reinsured or the insured.
4. Consequences of non-disclosure for the various types of reinsurance contract
(i) Non-disclosure in general
In general, the duty to provide full disclosure under the reinsurance contract is identical to that which is required under the contract of insurance. In the recent case of HIH Casualty and General Ins. Co. Ltd v New Hampshire Ins Co it was maintained that it is a requirement for the reinsured to disclose all material facts in law that are either known or deemed to be known by the insurer, as well as all material facts that are not known or deemed to be known that are material to the risk and would be taken into consideration by any prudent insurer when assessing whether or not to insure, for how much and under what terms. As stated by D Steel. J:
non-disclosure or misrepresentation gives riseto rights of avoidance, rescission and rejection
(ii) Non-disclosure within the various types of reinsurance contracts
The significance of the different types of reinsurance contract is essential given the nature of the effects of material facts on either the facultative or treaty reinsurance contract. In the case of the former material facts are integral to the selection process of choosing which risk to take on. This therefore means that the duty of disclosure is exactly the same as it is for insurance contracts, with the result that non-disclosure prior to the agreement will entitle the reinsurer to avoid the contract. In the case of treaties, once the reinsurer is bound, the duty of utmost good faith extinguishes for obligatory contracts and material facts become irrelevant.
2. Application of the law to the facts- Is the contract between the Turkish insurance company and the London insurance company a contract of reinsurance?
The facts state that the Turkish insurance company reassured their interest in the fish. According to MacGillivray, reassurance and reinsurance carry the same meaning and while the former term is somewhat older than the latter, it is still in use by a number of contemporary judges. For this reason, it may be deduced that the hereto referred reinsured Orkino fish, have been made subject to a contract of reinsurance between the Turkish and London insurance companies.
The contract is therefore not one of 'fronting' as this would have involved the London insurance company acting as the insurer and the Turkish company acting as the reinsurer. Had it been fronting, this would have meant that, in the absence of any express agreement to the contrary, the fault of non-disclosure would lie with the insured by not disclosing the reproduction rate of the fish to only the reinsurer and not the insurer.
The contract therefore represents either an obligatory or non-obligatory Treaty or Facultative reinsurance that is separate to the original indemnity. Here the events of non-disclosure that has taken place between the reinsured and the reinsurer is irrelevant to the validity of the original indemnity. This therefore means that, provided all obligations of the insured under the original contract of insurance were adhered to, the contract remains valid and refusal by the Turkish insurance company to indemnify the Orkino fish farmer constitutes a breach of the duties of the insurer under the contract of insurance. The applicable law and remedies will be explained below in part B.
At this juncture, it is therefore essential to ascertain whether the reinsurance contract is an obligatory Treaty or not. If it is, the disclosure of reproduction rates has no bearing on the right of the reinsurer to avoid the contract and this London firm will be in breach of contract.
If this is the case, the Turkish insurance company will have a right to sue the London insurance company for damages arising out of breach of the contract of insurance.
B. Recourse for the Orkino Farmer - Applicability of the Common Law of Contract
The above analysis reveals one key issue. The fact that the insurance and reinsurance contracts are wholly separate means that event of non-disclosure that has taken place between the reinsured and the reinsurer is irrelevant to the validity of the original indemnity between the Orkino fish farmer and the Turkish insurance company. The only true bearing that it has on this case is that it is certainly in the interests of the Turkish Insurance Company to honour the contract of insurance. If the contract for reinsurance does indeed turn out to be an obligatory Treaty contract, the Turkish insurance company therefore has a right to be indemnified by the London insurance company, but regardless of this, the obligation to indemnify the Orkino fish farmer is absolute. This therefore requires an analysis of the English law of Contract.
1. Requirement to analyse the English law of Breach of Contract
Provided all obligations of the insured under the original contract of insurance were adhered to, the contract remains valid. The consequences for this are explained below in the following explanation in relation to the nature of this type of breach and its classification within the law of England and Wales.
2. Types of contractual breaches
There are two types of contractual breach in the law of England, which are breach of condition and breach of warranty. The former is the breach that will give the injured party the right to terminate the contract and sue for damages. In the case of insurance it is more than obvious that such a breach results from refusal of the insurer to indemnify the insured as a result of wrongful repudiation of the contract.
3. Remedies
The immediate translation of the right to sue avoid a contract and sue for damages within the realm of the insurance contract, is either to seek enforcement of the contract or to render the repudiation as a breach that ends the contract and sue for the return of the premiums as damages. However, for a repudiation that has resulted following a claim, close attention must be paid to the concept of restitution, which is to place the plaintiff into the position that they would have been in had the breach not taken place. With this in mind, damages payable in accordance with English law would be to simply ensure indemnification of the insurance contract.
Conclusion
Analysis of the laws of reinsurance, insurance and contract have reveals three facts. The nature of insurance and reinsurance as separate contracts reveals that the interest of the insured are completely unaffected where the reinsurance contract is avoidable. In fact, as far as the insured is concerned, the only use that analysis of the reinsurance contract can reveal is the prospect of breach on the part of the reinsurer that would subsequently benefit the solvency of the insurer and their ability to indemnify the insured. The crucial point of analysis for the court in this case is far simpler and entails use of the English law of contract in order to ascertain the clear wrongful repudiation by the Turkish insurance company.
Bibliography
Legislation
Marine Insurance Act 1906
Case Law
Toomey v Eagle Star [1994] 1 Lloyd's Representatives 516
Skandia International Corp v NRG Victory Reins. Ltd [1998] Lloyd's Rep. I.R. 439
Forsikringsaktieselskapet Vesta v Butcher (No 1) [1989] A.C. 852
South British Fire and Marine Insurance Company of New Zealand v Da Costa [1906] 1 KB 456
British Dominions General Insurance Company Ltd v Duder [1915] 2 K.B. 394
Lincoln National Life Insurance Co v State Tax Commission 16 So 2d (1944) Miss) 369
Citadel Insurance Co v Atlatic Union Insurance Co [1982] 2 Lloyd's Rep 543 at p 545
HIH Casualty and General Ins. Co. Ltd v New Hampshire Ins Co [2001] Lloyd's Rep 378
C.C.R. Fishing v Timson, The La Pointe [1986] 2 Lloyd's Rep. 513
Phoenix General Ins Co of Greece v Halvanon Ins Co Ltd [1985] 2 Lloyd's Rep 599
Brewster v National Life Insurance Society (1892) 8 TLR 648
Text Book Publications
Merkin. R., 1997, Colinvaux's Law of Insurance, Sweet & Maxwell, 7th edition, London
MacGillivray, 2003, MacGillivray on Insurance Law, Sweet and Maxwell, 10th edition, London
McKendrick, E. 2002 Contract Law, Text Cases and Materials, University of Oxford Press, London
Article
Fuller LL & Perdue, 1936 W.R. The Reliance interest in Contract Damages, Yale L J 52, 53-62
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