The recent Malaysian Court of Appeal judgment in CHUBB INSURANCE MALAYSIA BERHAD (DAHULUNYA DIKENALI SEBAGAI ACE JERNEH INSURANCE BERHAD) v. ALLIANZ GENERAL INSURANCE COMPANY (MALAYSIA) BERHAD [2024] 4 MLRA 168 has provided critical clarity on the interplay between the ‘follow the settlements clause’ (FTSC) and the ‘claims co-operation clause’ (CCC) in reinsurance contracts.
The decision strongly affirms the primacy of the FTSC unless a claims co-operation clause is drafted in clear and unambiguous language that expressly limits the reinsured’s power to settle.
The Conflict of Clauses
The case stemmed from a facultative reinsurance contract between Allianz (the reinsured/lead insurer) and Chubb (the reinsurer).
Allianz settled a claim from Prai Power under a machinery breakdown policy, but Chubb refused to pay its 6% share, arguing that Allianz had breached the claims co-operation clause (CCC), thereby invalidating the settlement under the follow the settlements clause (FTSC).
The CCC contained an opening phrase: “Notwithstanding anything to the contrary contained in this Reinsurance, it is a condition of this Reinsurance that:…” However, unlike clauses in other judicial precedents, it did not explicitly require Allianz to obtain Chubb’s prior consent to settle, nor did it state the consequence of non-compliance.
The Legal Principle: Clear Wording is Paramount
The central legal principle established by the Court of Appeal is that to “emasculate the scope of the follow the settlements clause,” the limiting language in the claims co-operation clause must be “unequivocal and unambiguous.” The Court ruled that the CCC in question was not a condition precedent to Chubb’s liability for several reasons:
- Absence of Express Language: The clause “is not expressed to be a condition precedent, nor does it require Allianz to obtain the approval or consent of the reinsurers to settle Prai’s Claim.”
- Lack of Consequence: Crucially, the clause “does not spell out what is the consequence if Allianz fails to comply with its obligations under the claims co-operation clause.” It did not “expressly provide that the reinsurers shall not be liable to pay if Allianz breaches any of its obligations.”
- Purpose of Reinsurance: The Court emphasized that the interpretation must serve the true purpose of the reinsurance contract, which is to “give the reinsured protection from having to bear a large loss on its own.” Given that both parties were “seasoned players in the insurance and reinsurance industry,” a fundamental departure from the accepted practice “would demand clear and precise wordings.”
The Court thus concluded: “We thus reject Chubb’s submission that compliance with the claims co-operation clause was a condition precedent to any liability on its part under the policy to indemnify Allianz.”
Findings on Compliance and Good Faith
Furthermore, the Court of Appeal found that Allianz had, in fact, acted in good faith and in a proper, business-like manner, which satisfied the two requirements for invoking the FTSC.
- Compliance with CCC: The Court dismissed Chubb’s complaints regarding Allianz’s failure to disclose the Long-Term Service Agreement (LTSA) and the GLA Recovery Report, finding that Allianz “had valid reasons and was entitled to withhold disclosure of the documents on the basis of conflict of interest and confidentiality.” It also ruled that Allianz was not obligated to accept Chubb’s views on policy cover or work with Chubb’s adjuster.
- FTSC Requirements: By affirming the trial judge’s finding that Allianz had acted “in good faith and in a business-like manner in settling Prai’s Claim,” the Court necessarily found compliance with the core FTSC principle. Given the back-to-back coverage, the claim was deemed to fall within the reinsurance as a matter of law.
Conclusion
The Chubb v. Allianz case is a significant ruling that reinforces the fundamental principle underlying reinsurance: a reinsurer is bound to “follow the settlements” made by the reinsured, provided the reinsured has acted honestly and in a business-like manner. The core takeaway for the insurance industry is that while claims co-operation clauses are valid, they must contain unmistakable, express language if they are intended to operate as a condition precedent that overrides or limits the reinsured’s power to settle a claim.
Disclaimer: This post is for informational purposes only and does not constitute legal advice. Please consult a qualified Advocate & Solicitor for your specific legal needs.
