Case No: 2002/570
[2003] EWHC 449(COMM)
[2003] EWHC 449 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 13th March 2003

Before:

THE HONOURABLE MU JUSTICE COOKE
Between:
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	North Atlantic Insurance Co Ltd	Claimant
	
	-and-		
	1. Nationwide General Insurance Co Ltd 
2. Zurich Agrippina Versicherungs Aktiengesellschaft
3. Wustenrot & Wurttembergische Aktiengesellschaft
4. AFG Insurances Ltd	

Defendant	

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Mr M Crane QC and Mr L Tamlyn (instructed by Richards Butler) for the Claimant.
Mr D Mildon QC and Mr G Davis (instructed by Charles Russell) for the Defendant No. 1.  The Second Defendant did not appeal and was not represented.
Mr J Hirst QC and Mr N Calver (instructed by Barlow Lyde & Gilbert) for Defendant No. 3
Mr A Zacaroli (instructed by Mayer Brown Rowe & Maw LLP) for Defendant No. 4

Hearing dates : 3rd March-6th March 2003
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JUDGMENT

Mr Justice Cooke:

Introduction

1.	In this matter a number of insurance companies seek direction fro the Court in relation to their participation in an underwriting Pool, known as the Rutty Pool, operated by ME Rutty Underwriting Agency in London (“the Rutty Agency”).  Maurice Rutty was the driving force of the underwriting agency which operated from 1st August 1962 until 31st December 1967.  During that period all the current parties to the action participated in the Pool as did FAI Insurances Ltd which is in liquidation but has agreed to be bound by the decisions made in this action.  Two of the existing parties are also the subject of formal insolvency proceedings namely the Claimant (NAIC) which is in provisional liquidation and the Fourth Defendant (AFG), which is in administration Australia.  Both were represented at he hearing and adopted essentially similar arguments.  Of the solvent Pool members, the First and Third defendants “Nationwide” and “Wustenrot” were separately represented.  The Second Defendants did not appear but also agreed to be bound by the result.  The disputes which have arisen are essentially concerned with the effect of the insolvency of one or more of the Pool members in the context of the re-insurance protections obtained by the Rutty Agency for members of the Rutty Pool.

2.	The affairs of NAIC were always linked with those of the Rutty Agency.  Mr Rutty himself used to work for NAIC as an underwriter until 1962, before leaving to set up the rutty Agency, NAIC was a member of the Rutty Pool and when that Pool ceased writing business, the rutty Agency continued to write business for NAIC until 1979.  In that year NAIC purchased the shares in the Rutty Agency, took on several of its key employees and handled the run-off of NAIC’s liabilities and those of the Rutty Pool.  The authority of the Rutty Agency to act on behalf of the Pool members in respect of the 1962 to 1966 years was cancelled in May 1996 and the authority to act for the 1967 year was cancelled in July 1997.  The Rutty Agency company was dissolved in 2000.

The Agency Agreements

3.	Each of the Pool members entered into an Agency agreement with the Rutty Agency in essentially similar terms, covering various years between 1962 and 1967 in which they participated.  There was one form of agreement for the years up to 1966 (the First Agency Agreement), with various addenda, save that Nationwide’s agreement took a slightly different form, as appears later in this judgment.  Nationwide was a member of the Pool between 1962 and 1966 alone, whereas the others signed a further agency agreement in 1967 (the Second Agency Agreement), which superseded their prior agreement in respect of the 1966 year and operated for the 1967 year also.  It will be apparent from the existence of this dispute that the business underwritten by the Rutty Agency was long tail in nature. 

4.	The First Agency Agreement made between the Rutty Agency and the members of the Pool, covering period between 1st August 1962 and 31st December 1996 was the subject of additional addenda.  The NAIC Agency Agreement, made on the 1st August 1962, which can be used for illustrative purposes, included the following terms:-

“Whereas the Agency has been incorporated in order to carry on the business of an underwriting agency .. and it has been agreed that it should enter into agreements with the Company and with the other Companies listed in the First Schedule hereto in the terms of this Agreement.”

“2. The Company hereby authorises the Agency to underwrite any Risk whatsoever on its behalf for an amount not exceeding 25% of the limits set out in the Second Schedule hereto and the Company binds itself to accept liability for its share of each risk accepted on its behalf…”

“4. The Agency may at is absolute discretion reinsure the whole or part of any Risks and/or Insurances such as reinsurances being effected for the common account of the Participating Companies and the Company shall bear its proportionate part of the premium paid and expenses incurred in respect of such reinsurances”.

The Participating Companies were defined as those companies listed in the first schedule to the Agreement which set out the names of the Pool members with their respective participations, each as an “initial fixed quota share”.

5.	The First Agency Agreement went on to set out a system of accounting.  All premium received in respect of risks written was to be credited to the Participating Companies after deduction of allowances, taxes and charges and quarterly accounts were to be rendered.  “Payment of the balance of such account”.  In those quarterly accounts, the Pool members were to be debited with 80% of the premiums received which were to be put into a Premium Reserve Fund which was first to be applied in meeting losses and balances and otherwise retained by the Rutty Agency for three years, (during which period the sums could be invested in any investment authorised by law for investment of trust monies), and only remitted to the Pool members one month after the expiry of the third year after making provision for outstanding losses.  Income earned on the investments of the Fund was to be paid by the Rutty Agency to the Pool members annually.  The Rutty Agency had the right to settle losses and all settlements made by it were to be unconditionally binding on the Pool members.  It had the right to take proceedings on behalf of the Pool members also.  There were provisions for commission to be payable to the Rutty Agency in accordance with a formula set out which referred to “net premiums less expenses in connection with reinsurance for joint agency account” and “net premiums less expenses in connection with reinsurance for joint agency account” and “claims paid less refunds and recoveries under reinsurance  for joint agency account”.  The Agency Agreement was terminable on 6 months notice or on lesser notice in certain specified circumstances.

6.	Clause 15 of the Agency Agreement provided as follows:-

“15. In the event of the Company going into liquidation becoming insolvent suspending payment entering into any arrangement with its creditors ceasing to carry on business or having a Receiver appointed or making any default hereunder or of notice being given in accordance with Clause 11 to terminate this Agreement no further payments under this Agreement or out of the Premium Reserve Fund shall be made by the Agency to the Company.  All sums due or which may thereafter become due from the Agency to the Company shall be retained and held in Trust for the purposes herein mentioned.  Thereafter any sums payable by the Company to the Agency in respect of losses or returns of premiums or otherwise shall be debited against and paid out of the Premium Reserve Fund and the balance (if any) of such Fund shall not be paid over to the Company until all its liabilities under this agreement shall have been ascertained and satisfied.  In the event of the Premium Reserve Fund proving insufficient to satisfy all such liabilities the amount remaining unsatisfied shall be paid by the Company to the Agency forthwith.

Furthermore it is hereby agreed (in additional to the above provisions and without limiting same) that if and so far as may be necessary to secure the Agency in the event of liquidation either voluntary or compulsory of the Company the Agency have prior charge and lien on the said Premium Reserve Fund and also upon any further money with which the Company may be entitled to be credited under the present Agreement and the Agency shall be secured creditors to that extent.”

7.	By Addendum number 1 signed by NAIC in October 1962, Clause 4 of the first Agency Agreement was amended to take the following form:-

“4(a).  The Agency may at its absolute discretion reinsure the whole or part of any Risks and/or Insurances such reinsurances being effected for t common account of the Participating Companies and the Company shall bear its proportionate part of the premium paid and expenses incurred in respect of such reinsurances.

(b)  It is understood and agreed that the Agency may at its absolute discretion underwrite Risks and/or Insurances in the names of two or more of the Participating Companies where it is deemed to be in the best interests of the Participating Companies so to do.  Provided always that the Agency shall effect the necessary apportionment of premium in respect of such risks and/or insurances over all companies in accordance with the proportions listed in the first schedule and that each Company shall bear its proportion in accordance with the First schedule of any loss or losses arising on such risks and/or insurances.”

8.	By a later addendum the definition of “net premium” which was to be put into the Premium Reserve Account was defined as the gross premium adjusted to include all additional premiums, return premiums and reinsurance premiums together with other items.  The addendum also provided for an amended Clause 7 under which premiums payable were to be credited to the Participating Companies when the same became due and payable and likewise all losses commissions and other payments by the Agency relating to such risks and insurance were to be debited to the Participating Companies when the same became due and payable.  The Clause 13 commission calculation was altered by various addenda but the references remained to “reinsurance for joint agency account”.

9.	By letter of 10th May 1963, it was agreed that he reference to underwriting risks or insurances in the name of two or more of the Participating Companies was to be altered to “one or more Participating Companies”.  Thus, whereas the First Agency Agreement did not contain any fronting provision, within a few months, fronting was allowed by two companies and within nine months, by one or more companies.  In practice this was to be the standard modus operandi of the Rutty Pool because of the licensing requirements for insurers in various parts of the World, particularly in the United States.  For the vast majority of risks underwritten by the Rutty Agency for the Rutty Pool, one or more of the Pool members was used as the company to front the risk, meaning that it would write 100% of the insurance or reinsurance to the original insured or reinsured, whilst internal arrangements ensured that the premium and losses were apportioned pro rata amongst the Pool members in accordance with the Agency Agreement, as were Reinsurance Premium and Reinsurance recoveries. 

10.	Between November 1965 and May 1966, the Pool members all entered into a Contribution Agreement with each other.  This agreement recited the background, referring to the Agency Agreements and addenda and referring specifically to the operation of the fronting mechanism.  The last recital and the substantive clause in the Agreement read as follows:-

“Whereas a situation may arise where one of the Participating Companies may be called upon by a policyholder or reinsured to pay a loss under the policy or insurance or contract of reinsurance, but subsequently discovers that one or more of the Participating Companies cannot pay its proportionate share of the loss under the quota share underwriting contract due to insolvency, so

Therefore in consideration of the mutual agreements of the parties and the exchange of these documents, each of the Participating Companies agrees that in the event that any on of the Participating Companies, which is a signatory to this agreement, is insolvent and unable to pay its share ion accordance with the provisions of the quota share underwriting contract, the remaining solvent Participating Companies will be liable for their proportionate share of the unpaid loss of the insolvent Participating Company, after all funds withheld by the Rutty Agency in the name of the insolvent Participating Company have been exhausted.”

11.	The clear intention of the Contribution Agreement, when combined with Clause 15 of the first Agency Agreement was that all sums recovered by the Rutty Agency on reinsurances entered into for the benefit of the Pool members, should be retained by the Rutty Agency and used to pay off the liabilities of the Pool, including the liabilities of any insolvent Pool member, but that any net deficit of the insolvent member would then be met by the Pool members who remained solvent, on a pro rata basis in accordance with their Pool membership share. 

12.	Although it was not entirely common ground between all parties that the provisions in Clause 15 which purported to give an entitlement to the Rutty Agency to withhold sums due to an insolvent company, to hold them on trust for payment of the insolvent company’s liabilities and to create a charge and lien in respect of money due to the Rutty Agency from that insolvent Pool member, were void, it is clear that this is the position.  Notwithstanding Nationwide’s argument that a lien was created from the outset, it is clear that the provisions purported to operate in the event of insolvency and were contrary to law in giving rise to a form of preference, contrary to the pari passu principle and the decision of the House of Lords in British Eagle International Air Lines Ltd v Compagnie Nationale Air France [1978] 1 WLR 758.  The effect of this on the Contribution Agreement is that any withholding of reinsurance recoveries from an insolvent member could not be justified by reference to the agreement.

13.	The Nationwide version of the First Agency Agreement followed essentially the same format as the NAIC version but contained the following material difference:-

“4.  The Agency may at its absolute discretion reinsure the whole or part of any Risk and/or Insurances where it is deemed to be in the best interests of the Participating Companies, such reinsurances being effected for the common account of the Participating Companies, and the Company shall bear its proportionate part of the premium paid and expenses incurred in respect of such reinsurances and shall be credited with any recoveries resulting there from.  It is understood and agreed that the Agency may at its absolute discretion underwrite Risks and/or Insurances in the names of any one of the Participating Companies so to do, provided always that the Agency shall effect the necessary apportionment of premium in respect of such Risks and/or Insurances over all Companies in accordance with the proportions listed in the First Schedule and that each Company shall bear its proportion in accordance with the First Schedule of any loss or losses arising from such risks and/or Insurances.”

It was common ground between the parties that the slight differences in this clause and, in particular the reference to crediting the Pool member with reinsurance recoveries, merely expressed what was implicit in the First Agency Agreement, to which each of the other Pool members was party.

14.	On 6th January 1967, the Rutty Agency entered into a further agreement with NAIC and the other Pool members, save for Nationwide which continued to be liable for the 1966 year but in accordance with its earlier Second Agency Agreement and addenda.  The new agreement followed much t same format as the first Agency Agreement:-

“2.  The Company hereby authorises the Agency to underwrite in London… and the Company binds itself to accept liability for its proportionate share of each risk accepted on its behalf….

4.  The Agency has effected and may hereafter effect certain reinsurances for the whole or part of any risk and certain treaties for the common account of the Participating Companies…The overriding commission received on such reinsurances by the Agency will be proportionately credited to the Company.

8(a).  The Agency hereby undertakes to use its best endeavours to collect all amounts due to the Participating Companies under this Agreement.

(b)  it is mutually agreed between the parties hereto that any losses resulting from the failure of the Agency to collect such amounts due whether in respect of premiums or recoveries or reinsurance effected by the Agency pursuant to Clause 4 hereof or otherwise shall be borne by the Participating Companies to the extent of their respective proportionate shares…”

15.	There were equivalent provisions relating to quarterly accounting and the Premium Reserve Fund and its utilisation, with some slight changes, to the first Agency Agreement.  Clause 10(a) provided for the retention of a working cash balance by the Rutty Agency but, subject to that, for it to transfer “all funds held by it on behalf of the Participating Companies” (other than Nationwide) to separate bank accounts from which it could take sums of money for investment purposes. The Bank accounts were to have special joint signatory arrangements and investment was against permissible in any investment authorised by law for the investment of trust monies.  Once again the Agreement was terminable  upon notice, with an additional provision requiring the Rutty Agency to run off all current risks if over 50% of the Pool members agreed that it should do so.  Clause 18 of the contract provided as follows:-

“18.(a)  it is understood and agreed that the Agency may at its discretion underwrite Risks in the name of the Company or of any other Participating Company for a share in any one Risk exceeding the proportionate share stated in Clause 2 hereof but not exceeding however 100 per cent of the Groups Limit specified in the Second Schedule hereto PROVIDED ALWAYS that the Agency shall effect the necessary apportionment of premium only in respect of the Company’s proportionate share in such Risks as stated in Clause 2 hereof.

(b)  In the circumstances specified in sub-clause (a) of this Clause where on of the Participating Companies may be called upon by a policy holder or re-assured to pay a loss under the policy of insurance or contract of insurance but subsequently discovery is made that one or more of the Participating Companies cannot pay their proportionate share of the loss under this contract due to insolvency the Company hereby agrees with the Agency and the other Participating Companies that it will be liable to the fronting company for its proportionate share of the unpaid loss of the insolvent Participating Company or Companies after all funds retained by the Agency in the name of the insolvent Participating Company or Companies have been exhausted.

16.	Clause 19a and 19b contained equivalent provisions to those of Clause 15 in the First Agency Agreement.  It was agreed between those parties who had executed this form of Agreement that the British Eagle principle applied to invalidate any right of retention, trust or charge which purported to take effect on the insolvency of a Pool member.

The Reinsurance Contracts

17.	The parties selected three categories of reinsurance contracts to illustrate the different types of reinsurance obtained by the Rutty Agency.  The agreed evidence before the Court showed that it would have been common knowledge in the London insurance and reinsurance market that, whatever the form which the reinsurance took, the Rutty Agency was obtaining this reinsurance cover on behalf of the Rutty Pool, whether one or more or all members of it.  The evidence of Mr Wisby who had investigated the business of the Pool was that he had not encountered a risk where some form of fronting did not take place on the inward risk.  An underwriting card was completed in respect of all such risks which sometimes included the fronting details but sometimes did not.  Yet the reinsurance agreements used a variety of forms of words for which he could find no explanation.  He speculated, as seems likely, that the difference in wording reflected the use of different reinsurance brokers and the different wordings used by those brokers, probably without any real analysis of the situation.

18.	The Rutty Agency used a variety of reinsurance protections to reduce the gross liability written by the fronter or the Pool members.  In general terms the reinsurance protections were applied in the following order:-

	i)	Facultative reinsurances on individual risks.

ii)	Cessions to various proportional treaties, such as the first and second surplus treaties, after the application of any facultative reinsurances.

iii)	Specific class Excess of Loss covers protecting the net retention after the application of (i) and (ii) above.

iv)	General Excess of Loss covers operating after recoveries under (iii) above.  Sometimes these general excess of loss covers protected the net retention of the Rutty Pool members as well as the liability of cessions to the surplus treaty reinsurers. 

19.	Mr Wisby’s evidence was that he had not seen copies of all the facultative wordings or the broke produced facultative reinsurance placement slips but, on the basis of what he had seen, he considered that the facultative reinsurance would be in the name of the company originally writing the underlying insurance (the fronting company) or in the name of “Companies Underwritten for by ME Rutty.”

20.	So far as the three categories of reinsurance treaties are concerned, they can be summarised as follows:-

i)	Category 1: Two quota share treaties and one Excess of Loss treaty contain variant forms of wording but referred to the reinsured as “the Member Companies of the ME Rutty Underwriting Agency Limited”, “the Insurance Company and/or Companies in the Group as underwritten for by ME Rutty Underwriting Agency Limited” and “the Companies underwritten for by the ME Rutty Underwriting Agency Limited.  Each of these contract wordings, albeit using different terminology, identified the reinsured as a principal or principals of the Rutty Agency.
ii)	Category 2: Two surplus treaties, one a first surplus treaty and the other a second surplus treat, on top of the first, identify the reinsured as “the ME Rutty Underwriting Agency Limited”.  It was common ground between the parties that the Agency itself was not to be the reinsured, and that the reinsured was therefore an unidentified principal or unidentified principals. As the reinsurers would have well known.

iii)	Category 3:- a further quota share treaty was exhibited which was renewal of one of the quota share treaties referred to in Category 1. However contracts in this category named and reinsured as the particular fronting company, in this case “Nationwide General Insurance Company per ME Rutty Underwriting Agency Limited”.  In each case where an individual reinsured was specifically named, that company was also the fronting company on the inward risk.  Yet, although it was standard practice to use a fronting company or companies on the inward risk, there are a large number of situation where the reinsurance did not correspondingly use the fronter’s name but used another format instead.

21.	In addition to these contracts I was shown also, by way of illustration, some LMX covers, in the form of a cover note and working and a Stop Loss cover.  What was plain from these wordings (as well as those in Category 2) was that the aggregates and limits and retentions all referred to those of the Pool as a whole and not to those of any individual member of the Pool.  The slip, cover note and wording again used different formats such as “Companies underwritten for by ME Rutty Underwriting Agency Limited,” “the Companies underwritten for by the ME Rutty Underwriting Agency Limited” or named specific companies but added “and other Companies underwritten for by ME Rutty (Underwriting Agency) Limited.”

22.	Although these latter covers were not part of the evidence, they were used for illustrative purposes in argument.  They were of course not proportional treaty business.  It was suggested that different considerations could apply to them.  Nonetheless, so far as the proportional business was concerned, whether variable quota share or surplus treaty, wherever questions arose in relation to retention, or cessions of surplus by reference to the amount of retention or the line written, it is plain that the reference was always to figures for the Pool as a whole and not to any individual company within it, whether the fronting company or otherwise.  On the excess of loss business, again it was plain that the aggregates, the provisions for minimum and deposit premium and the ultimate net loss clauses all referred to the position of the Pool as a whole.  There was no distinction to be drawn between the various types of reinsurance cover in this respect. 

23.	None of this is in any way unexpected in circumstances where the underwriting authority to the Rutty Agency was to reinsure “for common account” and the Agency Agreement also refers to “reinsurance for joint agency account”.  The Rutty Agency was expected to obtain Reinsurance cover for the benefit of all the Pool members operating the Pool.

24.	As already mentioned, the accounting was done on a quarterly basis as between all Pool members on the footing of apportionment of all premiums received, reinsurance premiums paid, reinsurance recoveries and losses and expenses.  At all times, all accounting was done on a full net accounting basis.  Premiums and claims were allocated to the individual Pool members according to the proportions in which they had participated in the Rutty Pool for any given underwriting year and in addition the reinsurance would be “netted out”.  Until 1979, the Rutty Agency itself conducted the accounting in this way.  Between 1979 and 1987 NAIC, which acquired the Rutty Agency shares and took over its staff and systems, itself applied net accounting whilst funding the claims prior to recovery from reinsurers.  From the second quarter of 1987 onwards however NAIC refused to effect such funding and changed the basis of account so that, although it was still done on a net basis, reinsurance was only brought into the net account after receipt of sums from reinsurers.  Each Pool member thus had to pay to the Rutty Agency, run by NAIC, its Pool share of claims first, whilst reinsurance proceeds were credited to the Pool members when actually received.  Of course, long before this, the Rutty Agency funds had been exhausted and the run off consisted of paying inward claims and making such reinsurance recoveries as could be obtained.  No substitute for the Rutty Agency was ever appointed by all Pool members, a matter which had led to a dispute which was resolved by this Court in Home Insurance Co v ME Rutty Underwriting Agency & Others [1996] QB 415, where Mance J decided that although the Rutty Agency records were owned by the Pool members jointly, following termination of the Rutty Agency’s authority to act for the Pool members, each Pool member was responsible for the fun off of its own participation and could not be compelled to appoint or joint in the appointment of a substitute agency.

Analysis of the Pool Arrangements and the Reinsurance Arrangements

25.	It was common ground between the parties that there was no material distinction to be drawn between the different forms of wording used for the reinsurances in all three categories.  In each case the Rutty Agency was acting for an unidentified principal or principals. The parties differed as to the identity of the principal or principals reinsured.

i)	The insolvent Pool members, NAIC and AFG, contended that, in every reinsurance, the principals were all the Pool members, each for their several interest.  The analogy they drew was with the position of Names on Lloyds Syndicates.  In law each was entitled to recover for its several share on may reinsurances concluded on its behalf.

ii)	The solvent Pool members’ primary contention was that, in each case, the fronting company or companies were the reinsured.  On the reinsurance treaties, they accepted that all the Pool members were parties, but said that a treaty was a contract for reinsurance and this had to cover all possible cedants, whilst for each cession, the fronting company or companies alone, who were liable to the inwards insured/reinsured, were the only parties to the contract of reinsurance or retrocession of the ceded risk.

iii)	Alternatively, however, they contended that the reinsurance was a form of joint or collective reinsurance for the Rutty Pool, taken as a whole, which could only be enforced by or on behalf of the Pool as a whole.

iv)	On either view, the solvent Pool Members said that any recoveries made were made for the Pool as a whole and had to be distributed as a matter of contract in accordance with the terms set out in the Agency Agreements.  Moreover they maintained that all recoveries were held on trust to be dealt with on the terms of those Agreements.

v)	It was common ground that, if the Rutty Agency had continued in business and there had been no insolvency, the Pool would have continued to be administered by the Rutty Agency which would have exhausted the premium reserve fund, looked to the Pool members to pay any additional losses and, having made claims on reinsurers, would have used these to satisfy the inward losses, repay those Pool members who had paid any inward losses in account, and ensure that the liabilities of the Pool were apportioned upon the basis agreed in the relevant Agency Agreements.

vi)	In those circumstances the identify of the reinsured and the identity of those who could claim on the reinsurers, whether for themselves or on behalf of others, was of little significance: nor would there have been any issue as to the ownership of the proceeds of the reinsurance, since they would have been apportioned in accordance with the Agency Agreements, by the Rutty Agency who would have received the funds from Reinsurers or brokers.

26.	In an insolvency situation however, these matters assume significance.  On the insolvent Pool members’ contentions, each Pool member is entitled to sue the insurers in its own right for its proportionate part of the Reinsurance and to collect and retain the recoveries made.  Any claims against the insolvent Pool member by the Rutty Agency under the Agency Agreements or by other Pool members on the basis of a multilateral contract between them, or on an internal Pool Quota Share, would, if value, give rise to a proof in the liquidation and rank for a pari passu dividend in the insolvency.  By contrast, the primary contention of the solvent Pool members gives rise to an entitlement on the part of the fronting companies to reinsurance recoveries which are then used for onward distribution to original insured/reinsureds on the inward business, or for recoupment of the fronting companies for losses already paid, or to other Pool members in account where they have already been debited with their proportionate share of the loss covered by the Reinsurance in question.  All that the insolvent companies were entitled to, it was argued, was the net sum due on quarterly accounting.  On their alternative argument, since the reinsurance was a form of joint or collective reinsurance, either all the Pool members had to join in the claim or any Pool member who made a claim on reinsurers was bound to do so on behalf of the Pool as a whole, and the proceeds or reinsurance recovered would be held, on the basis of the Agency Agreements for all the Pool members in accordance with their pro rata shares.

27.	As already pointed out, by the terms of the Agency Agreements, it was the Rutty Agency which was authorised to obtain reinsurances on behalf of the Pool Members.  In circumstances where all parties agree that there is no question of the Rutty Agency obtaining reinsurance covers for itself but always for a principal or principals and that there is no differentiation to be drawn between categories 1, 2 or 3 of the reinsurance covers, it is necessary to identify the principal or principals, not just be reference to the wording used in the reinsurance wordings but by reference to the matrix of the reinsurance contracts.  In Reardon Smith Line Limited v Yngvar Hansen-Tangen [1976] 1 WLR 989 at pages 995 to 996, Prenn v Simmonds [1971] 1 WLR 1381 and ICS Limited v West Bromwich Building Society [1998] 1 WLR 896 at pages 912-913, the House of Lords has made it plain that the surrounding circumstances of a contract must be taken into account in construing it.  In a commercial contract the court must look at the commercial purpose of the contract and in order to do this it must examine the genesis of the transaction and, objectively, the aim or object of it.  In the now well known passage at pages 912-913 of the ICS decision, Lord Hoffman stated that “interpretation is the ascertainment of the meaning which the documents would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.  The background “includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man” and “the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean”.  The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even to conclude that the parties must, for whatever reasons, have used the wrong words or syntax.  Moreover, when regard is had to the decision in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, to which Lord Hoffman referred, where a details semantic and syntactical analysis of words in a commercial contract leads to a conclusion that flouts business common sense, it should be made to yield to business common sense.

28.	Evidence of the subjective intention of one or other of the parties to the reinsurance contract is not in itself admissible as an aid to construction of the contract but, where it is necessary to ascertain the identify of a principal, with whom the other party knows it is dealing but who remains unidentified on the face of the contract, resort can be had, and indeed must be had, to the intention of the agent when making the contract, to ascertain those on whose behalf he was then acting.  In National Oil Well (UK) Limited v Davy Offshore Limited [1993] 2 LLR 582 at 596, Colman J summarised the result of the authorities in the following way, when referring to one insured party contracting for another, as well as for itself:-

“1.  Where at the time when the contract of insurance was made, the principal assured or other contracting party had express or implied actual authority to enter that contract so as to bind some other party as co-assured and intended so to bind that party, the latter may sue on the policy as the undisclosed principal and co-assured, regardless of whether the policy described a class of co-assured of which he was or became a member.

3.  Evidence as to whether in any particular case the principal assured or other party did have the requisite intention may be provided by the terms of the policy itself, by the terms of any contract between the principal assured or other contracting  party and the alleged co-assured or by any other admissible material showing what was subjectively intended by the principal assured.”

29.	The starting point in the present case, given the lack of assistance to be gained from the wording of the reinsurance contract themselves, must be the Agency Agreements.  The key phrases in these agreements appear in the clauses which gave the Rutty Agency authority to reinsure.  In each case, the authority was to enter into reinsurances “for the common account of the Participating Companies” who were to bear their proportionate part of the premium paid and expenses incurred in respect of that reinsurance and, in the Second Agency Agreement to receive their proportionate part of the Reinsurance over rider.  The Second Agency Agreement also provided for the inward risks to be written by the Rutty Agency and for each Pool member to agree to be bound for is proportionate share of each risk accepted on its behalf, as well as for the Rutty Agency to seek to collect all amount due to the Participating Companies, including reinsurance recoveries. In the agency commission clauses in the earlier agreements and addenda, there is reference to “reinsurance for joint agency account”.

30.	The parties were unable to find much authority to assist in relation to the use of these terms but, in my judgment, it is not hard to ascertain the intention which underlies these words, in the context of a Pool Agency Agreement.  The use of the word “Pool” when describing the “Companies underwritten for by ME Rutty Underwriting Agency Limited”, as a matter of common parlance, is not without significance.   It is an apt description of the basis of the Agency Agreements and Addenda.  The basic underlying philosophy of the Agreements involved the appointment of an underwriting agent, the Rutty Agency which would write inward business, collect premium, obtain reinsurances, pay claims, make recovery from reinsurers, invest funds, incur expenditure and take commission on business which inured for the benefit of the Pool as a whole.  The whole point of the exercise was for the individual members to act together through the agency of their appointed agent, the Rutty Agency.  Their rights and liabilities were “Pooled” together for this purpose so that those dealing with them treated them as a single block entity, represented by the Rutty Agency.  That basic philosophy is demonstrated by the First Agency Agreement, before any question of fronting arose.  When fronting was introduced, this did not destroy the basic philosophy, but merely provided a mechanism for writing more business which was then “Pooled” internally between the Pool members.  The fronting company or fronting companies were alone liable on the inwards business because that was the only basis upon which the business could be obtained, since only those companies were licensed to write the business in question or were acceptable to the original insured, or reinsured, as the case might be.  Although not formally accepted by all parties, it is clear that the structure adopted when fronting was employed was that the fronting company wrote the inward business and was alone liable to the insured in respect of it, but internally ceded a Quota Share reinsurance to the other Pool members who each took a proportionate share in accordance with the Agency Agreement which each had signed.

31.	The very notion of “reinsurance for common account” or “reinsurance for joint agency account” connotes a unified or block interest in the reinsurances.  The reinsurances are for “common account” because those in account with the reinsurers are to be treated as an entity.  Similarly, “reinsurance for joint agency account” connotes the agent acting for a number of different principals whose account is to be treated by the reinsurers as unitary, through the agent.

32.	In an unreported decision of Hobhouse J in 1991, Trinity Insurance Company Limited v Singapore Aviation & General Insurance, passing comment was made about terminology of this kind.  The judge referred to a provision in the treaty “for common account of joint account reinsurance”.  The relevant article in the treaty provided that the reinsured should been entitled to “reinsure, for joint account of themselves and the reinsurers, the whole or any part of any risk” and that the reinsurers should bear their proportionate share of the cost of such reinsurance.  The judge went on to refer to “common interest reinsurance or common account reinsurance or joint account reinsurance” in the same breath as if they amounted to much the same thing.  In my judgment, in the context of reinsurance of a Pool, with an underwriting agent, these terms do convey the same meaning.  When regard is had to the assessment of retention, to aggregation, to limits and surplus sessions, it is clear that it is the Pool’s figures as a whole which are being referred to.  The reinsurances cannot operate on any other basis.  They are therefore reinsurances which protect the Pool, when taken as a block entity and not the interests of any individual Pool member of limited members alone, such as the fronting company or fronting companies.

33.	It is in this context that regard must be had to the decisions of Moore-Bick J in Kingscroft Insurance Co Limited v Nissan Fire and Marine Insurance Co Limited [2000] 1 All ER (Comm) 272 and Hirst J (as he then was) in Pan Atlantic v Pine Top [1988] 2 LLR 505.  In the former, companies in a Pool which had issued insurances claimed against their external reinsurers who alleged that there was a breach of the retention provisions in the cover, inasmuch as those issuing companies had, as part of the Pooling arrangements, ceded to non issuing companies within the Pool.  The overall retention of the Pool was 50% but the net lines of the issuing companies were less than 50% of their gross line, because of the proportionate sharing between all Pool members. The parallel with the current case is evident, the issuing companies being the fronting companies in the Weavers Pool and the non issuing companies being those for whom the fronting took place, in similar circumstances to those which obtained in the Rutty Pool.  Notwithstanding the identification of the “reinsured” in the reinsurance wordings as one identified company “and other companies underwritten by HS Weavers” and the reference to the reinsured as “issuing contracts of insurance or reinsurance”, the judge construed the treaties in a way which properly reflected the commercial object which both parties had in mind and the commercial context in which they were made.  He held that the expression “Companies underwritten for by Weavers” was to be construed as including the non-issuing companies who had reinsured the issuing companies, by reason of the internal Pool arrangements, as well as covering the issuing companies themselves.  The retention in the reinsurance therefore referred to retention by the Pool as a whole.  For the purposes of his decision, that was all that was necessary since no point was taken by the reinsurers as to the identity of the companies pursuing the claim, who were the issuing companies only.

	In his judgment, the Judge referred to third parties “who dealt with the Pool as a single underwriting entity”.

34.	No express reference was made in this decision to the earlier decision of Hirst J in the Pan Atlantic case.  In that case, the reinsured were described as “Pan Atlantic Group Reinsurance Syndicate Members and Contract Issuing Company(ies) as underwritten for by Pan Atlantic Group Inc., its subsidiaries and affiliates and/or Quota Share Reinsurers” in one year’s contract, whilst the following year’s contract referred to “Pan Atlantic Reinsurance Group and its Quota Share Participants as underwritten for by Pan Atlantic Group Inc., its subsidiaries and affiliates” … as Contract-Issuing Companies for the Group”.  The issue in that case was as to the validity of a representative action commenced by Pan Atlantic Insurance Co Limited.  The Judge held that the Claimants could pursue a representative action on behalf of all those who were in the group or syndicate including the fronting companies who had issued the original insurances and the non-fronting companies to whom internal reinsurances had been ceded.  In doing, he stated the following:-

“The essential question is whether the plaintiffs collectively have a common interest under the two contracts vis-à-vis the defendants.  For this purpose it seems to me that the intermediate retrocession’s between the contract issuing companies and the individual syndicate members are immaterial.  At the end of the day, all of them (i.e. each contract issuing company and each syndicate member) together reinsured their own respective retrocession liabilities in combination under t terms of the 1980 and 1981 contracts.  While of course each individual reinsured was put in direct contractual relations with each insurer with a separate and distinct insurable interest (The Zephyr [1984] 1 LLR 58 at page 71) they all shared an interest in each of the contracts under which, vis-à-vis the defendants, “liability arising under all policies and/or contracts and/or binders of reinsurance” of all the reinsured was covered without differentiation or individual allocation.  They were thus all insured together on the same terms, and they all had a common interest in the defendants performing their obligations. The attack on the intrinsic validity of the representative proceedings thus fails.”

35.	As was accepted in argument, a reinsurance of a Pool, whether using the Pan Atlantic form of wording or not, it akin to the reinsurance cover obtained for a named Reinsured “and/or its Quota Share Reinsurers”.  Thought not conceded here by some Defendants, it is clear that when a fronting company wrote an inward risk there was an automatic internal Reinsurance to the other Pool members for their Pool proportionate shares.

36.	It is said by all sides that the wording of the reinsurance does not aptly fit the other parties’ contentions.  Thus the reinsurances are expressed to cover the subject matter of the inwards insurance written by the fronting company or companies.  By way of example, the description of the reinsurance cover might refer to excess of loss reinsurance written by the fronting company which, say the solvent companies, is inappropriate if this is intended to reinsure the internal quota share reinsurances of the fronter by the Pool members in respect of the fronter’s excess of loss business.  That however is a difficulty that is more apparent than real as Moore-Bick J found, since the true subject matter of the cover is the excess of loss business, just as if the reinsured was expressed to be “X and/or its Quota Share Reinsurers” in respect of such excess of loss covers.  A greater difficulty presents itself for the fronting companies’ arguments, because none of the limits, aggregates or retentions relate to the fronting companies’ position but plainly relate to the Pool, when taken as a whole.  To reinsure the fronting company or companies alone could not be seen as reinsurance “for common account” nor “reinsurance for joint agency account”.  Once this conclusion is reached as found in the previous authorities, the only business like construction of such wording which does justice to the parties’ intentions and which is known to law, is a composite reinsurance cover of the Pool members individual several liabilities, reinsured in combination, by reference to the overall figures when treating the Pool as a common account, whether with regard to premium, retention, aggregate, limits or surplus cessions. 

37.	The Reinsurance obtained for the Pool as a whole cannot be a joint insurance because of the different interests of the Pool members.  (See General Accident, Fire and Life v Midland Bank [1940] 2KB 388).  The interests differ as between fronting companies and internal Quota Share reinsurers and as to their proportionate liabilities.  The analogy with Names on a Lloyds Syndicate or Corporations forming a Syndicate as in Tyser v The Shipowners Syndicate [1896] 1 QB 135 and General Insurance Company Ltd of Trieste v Miller, Leo Steamship Company v Corderoy [1896] Com Cas 379 is well taken.  The identity of Pool member is distinct, in respect of the original insurances.  Even though the fronting company is liable for 100% as the other Pool members are reinsured also, it is the separate proportions of each Pool member that are reinsured.  That is why the reinsurance is “common account” – the Poll is regarded as a whole.  The reinsurances are composite reinsurances, effected by each Pool member, in combination with the other Pool members, for their respective Pool proportions of liability, through the joint agency of the Rutty Agency.

38.	In my judgment, it is clear from the background evidence that these reinsurances were indeed concluded “for the common account” of the Pool members.  They were for their common interest and common benefit but this could only work for the several individual interest or individual benefit of each.  All were intended to benefit in accordance with the Agency Agreement made between each one and the Rutty Agency.

39.	Furthermore, the plaintiff in the Pan Atlantic action claimed not only as a representative of the Pool as a whole, but also claimed to recover 100% of the loss as fiduciary/trustee on behalf of all the syndicate members.  The judge upheld the submission that it was entitled to do so.  He held that “since the relevant plaintiff (the contract issuing companies) and those on whose behalf they have brought proceedings (the other syndicate members) all share in an aggregated claim for losses sustained by each of them under the same reinsurance contract, I can see no reason why the former should not be entitled to recover as trustees on behalf of the latter …. Where, as here their liability is reinsured collectively…”

40.	It may be that, as the fronting companies are 100% liable on the inwards business, they would be treated as having sufficient title to sue on the external reinsurances for 100% of the reinsurance cover.  In the ordinary way, if the Rutty Agency was in place, the Rutty Agency would, in accordance with the Agency Agreement, take the necessary action to commence litigation in the name of one or more or all of the Pool members.  Any title to sue would be entirely technical in such circumstances.  If however the fronting company or fronting companies were named as claimants in proceedings, because of their 100% interest, prior to internal Quota Share Reinsurances, they might be able to recover the totality but could only hold the proceeds in the manner set out by Hirst J as fiduciaries/trustees, because they put themselves in the position where they were claiming for the several interests of the other Pool members, as would be the case of “X” when suing on a reinsurance, which named “X and/or its Quota Share Reinsurers” as the reinsured.  On a proper analysis of the Pool reinsurance covers, the reinsurers owe contractual obligations to each of the Pool members for their respective several interests which, in the case of the non-fronting companies means their liability to the fronter and, in respect of the fronting company, means the balance of the inward risk which has not been ceded to the other Pool members. 

The Contract between the Pool Members and its Effect

41.	In a series of decisions in litigation between Wustenrot and Home Insurance Company concerning these self same Rutty Pool arrangements, where Home Insurance reinsured four of the Pool members for their run-off, Evans J and  Waller J as they then were, separately found that it would not be difficult to imply a contract between the Pool members on the same terms as the Agency Agreement operating at the time.  HH Judge Kershaw QC, sitting as a Judge of the Commercial Court found that there was such an agreement on the terms of the Second Agency Agreement and in particular Clause 18(b), whilst the Court of Appeal in upholding his decision, again said it would not be difficult to imply such an agreement between Pool members. 

42.	The basis of such an agreement is the decision of the House of Lords in the Satanita [1896] AC 59.  Each of the Pool members anticipated that others would sign an agreement in the same form with the Rutty Agency, so that there would be net accounting for the Pool, as between the Agent and each member.  As between themselves therefore, it can properly be said that they agreed to the administration by the Rutty Agency of the Pool in accordance with the Agency Agreement which each signed. They each agreed to receive, not the reinsurance proceeds direct from external reinsurers, but a net quarterly figure, struck after taking account of all debits and credits accruing to each member of the Rutty Agency in respect of all Rutty Agency business in which they were involved under the Agency Agreements in question, including any element of the Premium Reserve Fund which could property be released in accordance with its terms.

43.	That “Satanita Contract”, in giving rise to contract rights between the Pool members, entitled them to enforce their rights against those other members as well as the Rutty Agency.  There was no room in such an agreement, as long as the Rutty Agency remained in charge of the business under the Agency Agreements, for any individual Pool member to call on reinsurers to pay to it its several share of reinsurance recoveries, because this had been entrusted to the Rutty Agency along with all underwriting and accounting responsibilities.  To pursue external reinsurers on an individual basis would amount to a breach of the Agency Agreement in question and an equivalent breach of the “Satanita Contract” also.  The Rutty Agency was authorised to underwrite inwards business by Clause 2 and to effect reinsurances for common account by Clause 4.  Although not express in the First Agency Agreement, (save in the case of the Nationwide Agreement Clause 4), implied into that Agreement must be the same term as appears in Clause 8 of the Second Agency Agreement.  Under Clause 8 (a) of that agreement, the Rutty Agency undertook to use its best endeavours to collect all amount due to the Participating Companies under the Agreement and Clause 8 (b) made it plain that this included reinsurance recoveries.

44.	As between each Pool member and the Rutty Agency therefore, it is rightly said that the Pool members’ only entitlement was to the balance of an account on a quarterly basis including any release from the Premium Reserve Fund (after three years or more) and annual investment income.  As between each Pool member, the same position applied so that, as long as the Rutty Agency remained in being as the Pool agent, it would be a breach of the “Satanita Contract” for one Pool member to sue external reinsurers for its several interest.  The position would equally be the same if one Pool member sought to sue another Pool member in respect of business covered by their respective Agency Agreements with the Rutty Agency.  The intention was that the terms of the Agency Agreements should govern all dealings between the Pool members inter se as well as with the Rutty Agency itself.

45.	In such circumstances, if a Pool member sought to pursue its independent claim against reinsurers, it would amount to a breach of contract which would sound in damages, if any were sustained.  In practice the damages would amount to the sums necessary to bring about payment of the amounts which were properly payable in accordance with the Agency Agreement entered into by all the Pool m embers and the “Satanita Contract” between them.  It is conceivable that, if a Pool member sought to “break ranks” and pursue a claim against an external reinsurer, the Rutty Agency or the other Pool members could have sought an injunction to prevent such action but it would of course have been necessary to show that damages were an inadequate remedy and to meet the other criteria for demonstrating that an injunction was required. 

46.	The solvent companies contended that it made no difference whether or not the Rutty Agency remained as the agent under the Agency Agreements, nor whether it continued to exist.  They said that the agent could always be replaced or the Court could appoint a Receiver, if necessary.   They said that the “Satanita Contract” could only be terminated by all Pool members, not by one party alone, that it survived the demise of the Rutty Agency, but also argued that the agent’s authority was irrevocable.  They maintained that the clear intention of the Agency Agreements and the “Satanita Contract” was to protect the Pool as a whole and that it was not legitimate for a Pool member to “break ranks” in the way that NAIC wished to do, by claiming on the external reinsurers independently.

47.	They also said that all sums recovered by the Rutty Agency from reinsurers, or indeed by any Pool member, would all be held on trust, in accordance with the terms of the Agency Agreements, a matter to which I will come in a moment.

48.	So far as the “Satanita Contract” is concerned, in my judgment, it centres on the Rutty Agency. Leaving aside the Contribution Agreement and clause 18(b) of the Second Agency Agreement which make express provision for an agreement between Poll members which is unrelated to the Rutty Agency, it is not possible to read the mutual agreement between the Pool members in any way other than an agreement for each to user the Rutty Agency for the purpose of underwriting the business, obtaining reinsurances and doing all the necessary accounting.  That was the key point of the agreement, so far as each of them was concerned.  They pooled their interests and gave their pen (gave their authority) to the Rutty Agency, in whom they had confidence.

49.	Under the terms of all the Agency Agreements, whether the First Agency Agreement, the Nationwide Agreement or the Second Agency Agreement, and including all endorsements thereto, a Pool member could terminate on giving notice.  There is no material difference between any of the Agency Agreements in this respect.  Moreover the effect of that termination would be, in the absence of the exercise by the majority of the Participating Companies of their right to compel the Rutty Agency to run off all the current risks at the date of termination without further remuneration (under the Second Agency Agreement), that the Rutty Agency’s responsibility for that Pool member’s business would come to an end when the notice expired. This point was made clear in the decision of Mance J in Home Insurance Co v ME Rutty Underwriting Agency Ltd [1996] QB 415, in particular at pages 422-423 and 425. The member was entitled to terminate and then to conduct the run-off of its own share in the Pool, if it so wished, or to appoint its own agent.

50.	In such circumstances, the “Satanita Contract” cannot continue beyond the demise of the Rutty Agency as the agent under the Agency Agreements, whether or not it continues to exist and a fortiori when it is dissolved.  It is not possible to imply net mutual accounting between the Pool members without reference to the underwriting agent with whom they were in account, rather than in mutual account with one another.  There is therefore no basis for a continuation of any form of “Satanita Contract” between the Pool members once each has terminated the Agency Agreements with the Rutty Agency, save as provided by clause 18(b) of the Second Agency Agreement which mirrored the earlier Contribution Agreement.

Trust and Proprietary Interests

51.	There was considerable argument as to the imposition of a trust of some kind by the Agency Agreements.  Such a trust was, it was said, to be imposed on the Rutty Agency in respect of all sums received by them in their capacity as agents for the Pool, on the fronting companies should they receive any sums in respect of Pool business and on any individual Pool member, should reinsurance recoveries come into its possession.  Such a trust would obtain, whoever had the cause of action to pursue reinsurers.  If the cause of action could only be pursued jointly, then all recoveries would be held on the terms of the Agency Agreements and if the claim could be made by the fronting companies, in accordance with the decision of Hirst J a fiduciary trusteeship would again apply in accordance with the Agency Agreements.  The solvent Pool members suggested that this trust was in the nature of a “Quistclose” trust, namely a trust for a purpose.  The nature of such trusts has been analysed recently in the decision of the House of Lords in Twinsectra Limited v Yardley [2002] AC 164.  The proper analysis of a situation where an identified sum of money is put in the hands of someone else to apply it for a specific purpose is that of a resulting trust in favour of the person delivering the money, with a power in the recipient to use it for the express purpose for which it was provided (see paragraphs 81 and 100 in the speech of Lord Millett).  Such an analysis is not easily applied to situation other than those where a lender proves money for a specific purpose, but here it could be applied to any money coming into the possession of the Rutty Agency in connection with Pool business.  Such monies could be held on trust for the Pool members in accordance with their proportionate entitlement under the relevant Agency Agreement, but subject to the power to use it for the purposes set out in the relevant Agency Agreement.

52.	It is trite law that, in a commercial relationship, trusts are not easily to be spelt out.  Likewise, in an agency context, whilst there may be more reason to look for a trust relationship, this is not a usual concomitant of it. I was referred to Napier v Hunter [1993] AC 713 at p744, to Henry v Hammond [1913] 2 KB 515 and to Re Andrabell [1984] 3 AER 407.  The normal relationship of an agent to his principal is that of debtor/creditor.  This does not of itself create or debar the existence of a simultaneous trust relationship or a fiduciary relationship of a less onerous nature where the contract between them requires it.  As it is put in Bowstead & Reynolds on Agency 17th Edition at paragraph 6-040, the question is whether or not the trust relationship is appropriate to the commercial relationship in which the parties find themselves and whether it is appropriate that money should be held separately or whether it was contemplated that the agency should use the money, property, or proceeds of the property as part of its normal cash flow in such a way that the relationship of debtor and creditor is more appropriate.  A key indication of a trust relationship is the requirement to segregate funds from other funds of the agent.  The grant of credit or the maintaining of a running account militates against anything other than a debtor/creditor relationship.

53.	An examination of the Agency Agreements reveals that there are limited references to segregation of monies or to any suggestion of a trust.  In the First Agency Agreement, clause 8 sets out the requirement of quarterly accounting, specifically referring to a debtor/creditor relationship.  There is however provision for the Premium Reserve Fund, constituting 80% of the inward premium (less reinsurance premium, in accordance with Addendum No.2) to be a segregated fund which can be invested “in any investments authorised by law for the investment of trust monies”.  The income from such investment is to be paid to the Pool members annually.  It would appear therefore that, by the terms of the First Agency Agreement, the Rutty Agency constituted itself as trustee of the Premium Reserve Fund, with the Pool members as the beneficiaries for their proportionate shares, with the power in the Rutty Agency to pay losses first of all and to make provision for outstanding losses, before any remittance to the Pool members.  Addendum no 5 to the Nationwide Agreement reinforces this.  Outside the Premium Reserve fund, before any Pool member goes into liquidation, there is no indication of any trust at all in relation to any other funds, including the other 20% of premium received or any reinsurance recoveries.

54.	Clause 15 of the First Agency Agreement and its equivalent in the Nationwide Agency Agreement provide that in the event of a Pool member going into liquidation or becoming solvent, no further payments under the agreement or out of the Premium Reserve Fund should be made by the Rutty Agency and that all sums due to the Pool member should be retained and held on trust for the purposes of the Agency Agreement.  Furthermore, an additional provision gave the Rutty Agency a prior charge and lien on the Premium Reserve Fund in respect of the security it needed in respect of sums due to it.  It was undisputed by all parties save Nationwide that these provision were void as a matter of law.  What is significant however is that express provisions were made for a trust and a charge in those circumstances (insolvency and the like), without any such provision for the situation where the Agency Agreement were otherwise being operated in accordance with their terms. 

55.	So far as the Second Agency Agreement is concerned, clause 9 once again provided for the debtor/creditor relationship in relation to quarterly accounts and the creation of the Premium Reserve Fund, out of which monies were to be applied first in meeting losses, then in making provision for outstanding losses and then for remittance to the Pool members. Clause 10(a) provided for the retention of a working cash balance by the Rutty Agency but that thereafter the agency should transfer “all funds” held by it on behalf of the Participating Companies to separate bank accounts, which required special signatory operation, and empowered the Rutty Agency to invest such funds, once again “in any investments authorised by law for the investment of trust monies”.  Income from investments was again to be distributed on a proportionate basis to reach of the Pool members annually.  Under this clause, it appears that all funds received in respect of the Pool business (which include the reinsurance recoveries which the Rutty Agency undertook to collect) would be held on such trusts, once received, subject to the retention of a working cash balance.  

56.	Whereas the Premium Reserve Fund was expressly to be applied in meeting losses and then in making provision for outstanding losses, there is no such provision in relation to the other funds held by the Rutty Agency on behalf of the Participating Companies.  Any trust of these amounts was therefore, on the face of the Second Agency Agreement, unqualified in favour of the Pool in accordance with their settled shares in the Pool.  If reinsurance recoveries are included in the “all funds” which, on the face of the document, they appear to be, this is for investment purposes only and the ultimate benefit of the Pool members, without any separate expressed purpose for use in paying off inward losses. The reason for this appears from the first words of clause 10(a) which provides for the “retention of a working cash balance” for the Rutty Agency, which would of necessity include such balances as were required to pay the inwards claims.  Yet no trust was imposed in respect of such cash balances or reinsurance recoveries as such.  The intention of the Second Agency Agreement was that net premiums should go into the Premium Reserve Fund, consisting of inwards premium less reinsurance premium paid, which could be utilised to pay losses.  Additionally however reinsurance recoveries would be used to pay losses, once received, as required by the Rutty Agency as “working cash balances” and any other funds surplus to immediate cash requirements were then to be put into the investment funds.  Nonetheless, there would inevitably have come a point where the Premium Reserve Fund was exhausted and other funds held would have to be used to satisfy Pool liabilities, if not already paid out on quarterly accounting.  By implication, the Pool members must have authorised this, and in practice this is doubtless what happened to an element of reinsurance recoveries, even if put into a separate fund for a while until utilised to pay losses.  The point arrived where the Rutty Agency was left with no funds in hand at all, having accounted on a quarterly basis with all debits and credits.

57.	In the current circumstances, there are no funds in the hands of the Rutty Agency upon which any trusts could be impressed and the Rutty Agency had no authority to collect reinsurance recoveries from 1996/1997 onwards, quite apart from its dissolution in the year 2000.  As I have already held, the “Satanita Contract” between the Pool members cannot outlast the agency of the Rutty Agency for Pool business.  There is therefore no basis upon which a trust could be imposed on any Pool member who now made recovery in respect of the external reinsurances.  There is no extant agreement between the Pool members for mutual net accounting without the Rutty Agency and no substitute agency has been put in place in the same terms, although authority has been given by most of the Pool members to AIS (UK) to collect reinsurance balances, at least until current dispute has been resolved by the Court’s decision. 

58.	In circumstances where I have already held that the external reinsurers to the Pool reinsure each and every Pool member for its several liability, the issue is whether there is anything in the Agency Agreements or the commercial background on the relationship between the parties which has the effect of creating a trust of the reinsurance claim or proceeds, charging the reinsurance claim or proceeds or assigning or transferring the benefit of the claim or proceeds in favour of other Pool members.  In the absence of the Rutty Agency as the Pool manager, fulfilling its agency function, there can be no applicable agreement or trust and there is nothing to support the idea of any charge in the Agency Agreements, short of the attempt to create it in an insolvency situation, which is recognised to be invalid.

59.	Since it is common ground, in accordance with well established Court of Appeal authority, that a cause of action on a reinsurance vests in the reinsured at the point where its liability to its insured is ascertained, each Pool member acquires a several right to pursue the external reinsurers in respect of reinsurances concluded by the Rutty Agency on the Pool’s behalf at the moment when the fronting company’s liability is ascertained and its own internal quota share liability is automatically established.  The right to claim against reinsurers vests in each Pool member at that point and nothing operates to deprive the Pool member of it.

60.	Whilst, during the subsistence of the Rutty Agency, as the Agent for the Pool, an action for breach of contract would lie for the benefit of the Rutty Agency and the other Pool members, if a particular Pool member sought to recover separately on its reinsurances, ignoring the mutual accounting provisions which operated through the Rutty Agency, once the Rutty Agency ceased so to act, there was nothing to prevent that Pool member from making its own claim in individual pursuit of its reinsurers.  The “Satanita Contract” was terminated with the Rutty Agency’s termination as Pool agent and any trust obligations which rested on the Rutty Agency when administrating the Pool did not devolve on anyone else.  What had always been aright in the individual Pool member to claim against its reinsurers, which was originally trammelled by its obligations to the Rutty Agency and to other Pool members not to pursue such a claim, became an untrammelled right when the Rutty Agency was no longer in a position to pursue such claims against external reinsurers on its behalf. 

61.	Up until the point of termination of the Rutty Agency’s position, the Pool member’s rights were restricted in the manner outlined above the net accounting provisions would operate, through the Rutty Agency, with the application of reinsurance recoveries to losses on the inward insurances. The accrued rights of the member vis-à-vis the Rutty Agency, but subject to this, a clean start had to be made after such termination in respect of the application  of reinsurance recoveries and the payment of losses on the inwards business.  In the absence of an appointment of a substitute agency on the same terms as the Agency Agreements, each Pool member can pursue its individual entitlement against external reinsurers. 

62.	The fronting companies would of course remain liable for 100% of the losses on the incoming business, but the internal Pool reinsurance arrangements would remain in force in respect of each risk written, notwithstanding the termination of the Rutty Agency.  These arrangements came into being at the time of the writing of the inward business and constituted valid contracts between the Pool members through the agency of the Rutty Agency and remained binding on the Pool members.  These contracts gave rise to accrued rights to indemnity which outlived the mutual net accounting through the Rutty Agency which died with it.  The Pool members could thus pursue one another in respect of their internal quota share reinsurances but it was open to each to claim on the external reinsurances for its several share. 

Unjust Enrichment/Subrogation

63.	The solvent Pool members argued that, on principles of subrogation, the fronting companies were entitled to the insolvent companies’ reinsurance rights, upon payment of an inwards claim on the insurances written for the Pool by the Rutty Agency.  This makes no sense.  The fronter discharges its own liability for 100%of the inward risk and then claims from its internal Poll Quota Share Reinsurers – it does not discharge any liability of the non fronting companies, only its own, for which it is entitled to indemnity, which it can pursue.

64.	The non-fronting companies, under the terms of the separate Contribution Agreement or under the terms of Clause 18(b) of the Second Agency Agreement were, as a matter of contract between them, obliged to pay a proportionate part of the insolvent company’s unpaid Pool share.  This would be a compulsory discharge of the liability of the insolvent Pool member as surety and would give rise to a subrogated right, but the subrogated right is that of the fronting company, as it would be the fronting company which was paid by the solvent reinsurers (see s 5 of the Mercantile Law Amendment Act 1856). 

65.	There is, therefore, an ordinary principles of subrogation applicable to insurance and suretyship, no subrogation to the rights of the insolvent company against the external reinsurers, as the solvent companies were ultimately disposed to accept in argument.  Nonetheless they sought to maintain a claim based on the principles enunciated in Banque Financiere v Parc (Battersea) ltd [1999] AC 221 on the basis of the speeches of Lords Hoffmann, Clyde and Hutton at pages 234, 237 and 245 and on the footing that subrogation was simply a mechanism for giving a remedy in the case of unjust enrichment.  This fails at the first hurdle if there is no unjust enrichment.  There is none here, since the Pool members are entitled, following the demise of the Rutty Agency as Pool agent to pursue the external reinsurers for their several interests.  The insolent Pool members remain liable under the internal quota share reinsurances, but that liability does not create an unjust enrichment when the reinsurance proceeds are recovered, which represent their entitlement once their inward liability is ascertained. 

66.	Absent subrogation, there is no basis for any equitable lien or charge to operate in accordance with the principles set out in Napier v Hunter [1994] AC 713.  In these circumstances each Pool member can recover form its external reinsurers without having to account to other Pool members as a trustee and there is no proprietary lien or charge of any kind over the proceeds in favour of the other Pool members.

The effect of insolvency – the British Eagle principle

67.	In British Eagle Air Lines Ltd v Compagnie Internationale Air France [1975] 1 WLR 758, the House of Lords applied the principles of s 302 of the Companies Act 1948 which required pari passu distribution of the assets of a company in liquidation, subject to those debts which were recognised in law as preferential.  A legitimate clearing house scheme, entered into for good business reasons was declared to be void as contrary to public policy in an insolvency situation, because it would, if effective, have deprived the general body of creditors of the insolvent company of assets which should have been available for distribution pari passu, whilst favouring a limited body of creditors within the clearing house scheme who had an overall netting of cross liabilities through the clearing house agent IATA.  Despite efforts to distinguish this decision, in my judgment, it is directly applicable to the present case.  Under the Agency Agreements, in a similar way to the IATA scheme, the Pool members contractually agreed to forgo their several rights to pursue external reinsurers, replacing such rights with net accounting rights between themselves and the Rutty Agency.  It was accepted by all except Nationwide that the clauses in the Agency Agreement which provided for trusts and charges to arise on insolvency did fall foul of the principle.  In addition however, I find that the whole scheme intrinsic to the Agency Agreements offends against the principle, once an insolvency occurs, so that, if the Rutty Agency had remained as Pool managers when a Pool member went into liquidation, the Pool arrangements would not have prevented the insolvent Pool member “breaking rank” and suing those who owed it money as reinsurers, whether external or internal Pool Reinsurers, with set off limited only to what it owed those individual reinsurers. 

68.	Whereas, as long as the Rutty Agency remained as manager and there was no insolvency, the Rutty Agency could have sued for damages for breach of the Agency Agreement and a Pool member could have sued on the “Satanita Contract” and possibly sought an injunction, if another Pool member had pursued its several claim against an external reinsurer, that ceased to be the position on the winding up of the Pool member in question.  Since the Rutty Agency’s role as agent has been terminated anyway by all Pool members, the point does not in fact arise, since there would be no “Satanita Contract” to breach in relation to agency net accounting, but the British Eagle principle would also present an absolute defence to the insolvent company…

The Questions upon which the Court’s direction was sought

69.	A series of 26 questions were raised by the parties on which answers were sought, although, by the time of the hearing, most of them were agreed between the parties.  Where these answers were agreed between the parties, I have nonetheless considered the matters afresh and concluded that the parties’ assessment was indeed correct.

70.	(i)	Claims by Pool Members against NAIC, where NAIC has not fronted the risks.

1.	Where Fronted Risks have been written solely by a Fronting Company or Fronting Companies (other than NAIC), and the Pool Members (or some of them) other than NAIC and the Fronting Company or Fronting Companies themselves (“the Contributing Members”) have paid their full share of the liability underwritten by the Fronting Company or Fronting Companies in respect of which NAIC was liable pursuant to either clause 18(b) of the Second Agency Agreements or pursuant to the Contribution Agreement:

(a)	does each of the Contributing Members have a claim against NAIC in a sum representing the proportion of the liability originally owed by NAIC to the Fronting Company or Fronting Companies to the extent that the liability ahs been paid by the Contributing Member;

(b)	does the Fronting Company or do the Fronting Companies have a claim against NAIC in  sum representing the extent of the liability originally owed by NAIC to the Fronting Company or the Fronting Companies to the extent that that liability has not been paid by the Contributing Members ; or

(c)	does the Fronting Company or do the Fronting Companies alone have a claim against NAIC representing the entire proportion of the liability originally owed by NAIC to the Fronting Company or Companies; or

(d)	do neither the Contributing Members not the Fronting Company or Fronting Companies have any claim against NAIC; or 

(e)	none of the above.

Agreed Answer:  Where Fronted Risks have been written solely by a Fronting Company or Fronting Companies (other than NAIC), and the Pool Members (or some of them) other than NAIC and the Fronting Company or Fronting Companies themselves (“the Contributing Members”) have paid their full share of the liability underwritten by the Fronting Company or Fronting Companies in respect of which NAIC was liable pursuant to either clause 18(b) of the Second Agency Agreements or pursuant to the Contribution Agreement, then:
(a)  each of the Contributing Members ahs a claim against NAIC in a sum representing the proportion of the liability originally owed by NAIC to the Fronting Company or Fronting Companies to the extent that the liability has been paid by the Contributing Member; and
(b)	the Fronting Company or Fronting Companies have a claim against NAIC in a sum representing the extent of the liability originally owed by NAIC to the Fronting Company or the Fronting Companies to the extent that that liability has not been paid by the Contributing Members.

2.	If the answer to issue 1 is 1(a) and/or 1(b), what is the nature of the claims of the Contributing Members and/or Fronting Companies?

	To this there was no fully agreed answer but, as follows from my earlier findings, the claim of the fronting company is based on the internal Quota Share Pool reinsurance contract and the claims of the Contributing members are based on the principles of subrogation as they apply to sureties and on restitutionary principles applicable where one party, under compulsion, discharges the liability of another.

(ii)	The right to Claim under the Reinsurance Contracts

3.	Separately in respect of the Category 1 Contracts of Reinsurance, Category 2 Contracts of Reinsurance and the Category 3 Contracts of Reinsurance, who has the right to claim under those contracts of reinsurance?

	As I have already held, each individual Pool member is entitled to claim for its several proportionate Pool share of liability on the inwards insurance or reinsurance contracts.  It may be that the fronting companies could claim foe 100% of the Pool entitlement, but if so, any claimant would hold the proceeds as fiduciary/trustee for the Pool members for their several entitlements. 

4.	Separately in respect of the Category 1 Contracts of Reinsurance, the Category 2 Contracts of Reinsurance and the Category 3 Contracts of Reinsurance, who has the right to deal with the relevant reinsurer, to negotiate claims and commute policies. 

	As to this there was no agreed answer, but as I have already held, each Pool member can deal with reinsurers in respect of its several proportionate Pool share of liability but it may authorise another to do so, so on its behalf.

5.	If the answer to issues 3 and/or 4 includes Pool Members other than the Fronting Company or Fronting Companies (or in the case of the Category 3 Contracts of Reinsurance, the specifically named companies) do such Pool Members’ rights to claim from and/or right to deal with the reinsurers arise only:

5.1	after such Pool Members have actually made payment to the Fronting Company or Fronting Companies of their share under clause 2 of the Original Agency Agreements or clause 2 and Schedule 1 of the Second Agency Agreements? And/or

5.2	after such Pool Members have actually made payment to the Fronting Company or Fronting Companies of their liability under the Contribution Agreement and/or clause 18(b) of the Second Agency Agreements? and/or

5.3	at any other time.

Agreed Answer: The rights of Pool Members other than the Fronting Company, Fronting Companies or specifically named companies to claim from and/or deal with reinsurers do not arise only:

5.1	after such Pool Members have made payment to the Fronting Company or Fronting Companies of their share under clause 2 of the Original Agency Agreement or clause 2 and Schedule 1 of the Second Agency Agreements; nor

5.2	after such Pool Members have actually made payment to the Fronting Company or Fronting Companies of their liability under the Contribution Agreement and/or clause 18(b) of the Second Agency Agreements.	

(iii)	Ownership of Reinsurance Rights

6.	In respect of the Category 1 Contracts of Reinsurance in respect of Fronted Risks referred to in paragraph 1 above (being Fronted Risks where NAIC is not a Fronting Company), are the rights to receive and/or the proceeds of the reinsurance held on trust by the persons identified in answer to issue 3 above (“the Claimant Companies”), and if so, for which of the following categories of persons:

(a)	the Fronting Company or Fronting Companies alone? or

(b)	each of the Pool Members (including NAIC and the Fronting Company or Fronting Companies) in the proportions set out in clause 2 of the Original Agency Agreements or clause 2 and Schedule 1 of the Second Agency Agreements? or

(c)	each of the Pool Members (excluding NAIC) in the proportions which each of the Pool Members (excluding NAIC) are liable to pay in respect of the claim, taking into account their liabilities under (a) Clause 2 of the Original Agency Agreements or Clause 2 and Schedule 1 of the Second Agency Agreements; and (b) Clause 18(b) of the Second Agency Agreements or the Contribution Agreement (and in the case of the Fronting Company itself or the Fronting Companies themselves, to the extent of the loss on the risk which they are ultimately liable to bear after taking into account any payments due from the other Pool Members pursuant to their obligations under (a) Clause 2 of the Original Agency Agreements or Clause 2 and Schedule 1 of the Second Agency Agreements; and (b) Clause 18(b) of the Second Agency Agreements or the Contribution Agreement)? or 

(d)	none of the above.
	(Provided that, in respect of each of issues 6, 7 and 8, where the Claimant Companies would be entitled to the beneficial interest under any such trust, it is understood that the Claimant Companies would be the sole owners of the proceeds at law and in equity, and hence no such trust would arise)

To this there was no agreed answer, but as I have already held, each individual Pool member could claim for its own several interest and would not hold any such rights, recoveries or proceeds attributable to that interest on any form of trust.  If any claimant recovers more than is applicable to its several share it will hold the sum recovered as fiduciary/trustee for the Pool members in accordance with their several Pool shares.

7.	In respect of the Category 2 Contracts of Reinsurance in respect of Fronted Risks referred to in paragraph 1 above being Fronted Risks where NAIC is not  Fronting Company), are the rights to receive and/or the proceeds of the reinsurance held on trust by the Claimant Companies, and if so, for which of the following categories of persons:

(a)	the Fronting Company or Fronting Companies alone? or

(b)	each of the Pool Members (including NAIC and the Fronting Company or Fronting Companies) in the proportions set out in clause 2 and Schedule 1 of the Original Agency Agreements or clause 2 and Schedule 1 of the Second Agency Agreements or

(c)	each of the Pool Members (excluding NAIC) in the proportions which each of the Pool Members (excluding NAIC) are liable to pay in respect of the claim, taking into account their liabilities under (a) Clause 2 of the Original Agency Agreements or Clause 2 and Schedule 1 of the Second Agency Agreements; and (b) Clause 18(b) of the Second Agency Agreements or the Contribution Agreement (and in the case of the Fronting Company itself or the Fronting Companies themselves, to the extent of the loss on the risk which they are ultimately liable to bear after taking into account any payments due from the other Pool Members pursuant to their obligations under (a) Clause 2 of the Original Agency Agreements or Clause 2 and Schedule 1 of the Second Agency Agreements; and (b) clause 18(b) of the Second Agency Agreements or the Contribution Agreement)? or

(d)	none of the above.

The same answer applies as for question 6

9.	If the answer to issues 6, 7 or 8 includes in any case (b), does the vesting of a beneficial interest in either the rights to reinsurance, or the reinsurance proceeds themselves, depend upon whether the individual Pool Members have made payment (as opposed to being under an obligation to pay) pursuant to their obligation to indemnify the Fronting Company or Fronting Companies.

To this there was no agreed answer.  The answer to questions 6-8 is repeated.  The interests and rights do not depend on payment, since the cause of action on the external reinsurances arises when the Pool members’ liability in respect of the inwards cover is established, which happens automatically upon ascertainment (by judgment, award or
Agreement) of the liability of the fronting company to the inward insured or reinsured as the case may be. 

10.	If the answer to issues 6, 7 or 8 includes in any case (c):

(i)	does the beneficial interest of the Pool Member in either the rights to reinsurance, or the reinsurance proceeds themselves, arise only when the Pool Member has in fact made payment pursuant to its obligation under (a) clause 2 of the Original Agency Agreements or clause 2 and Schedule 1 of the Second Agency Agreements; and/or (b) clause 18(b) of the Second Agency Agreements or the Contribution Agreement;

(ii)	is a Pool Member who has made payment in discharge of its obligation under (a) clause 2 of the Original Agency Agreements or clause 2 and Schedule 1 of the Second Agency Agreements; or (b) those clauses and clause 18(b) of the Second Agency Agreements and the Contribution Agreement, but has now itself become insolvent, beneficially entitle to either the rights to reinsurance or the reinsurance proceeds themselves.

To this there was no agreed answer.  The answer to questions 6-8 is repeated.  The interest and rights to not depend on payment, since the cause of action on the external reinsurances arises when the Pool members’ liability in respect of the inwards cover is established, which happens automatically upon ascertainment (by judgment, award or agreement) of the liability of the fronting company to the inward insured or reinsured as the case may be. 

11.	If the answer to issues 6, 7 and 8 is that the reinsurance receipts are not held on trust at all, are the Claimant Companies under any other obligation to account to any of the categories of persons identified under issues 6, 7 or 8 above, and if so, what is the nature of the obligation to account, and do any of the said categories of persons have any proprietary interest in the reinsurance receipts?

To this there was no agreed answer.  The answer to questions 6-8 is repeated

(iv)	Miscellaneous Consequential Issues

12.	If the answer to issue 3 is “the Fronting Company or Fronting Companies” (in respect of the Category 1 Contracts of Reinsurance and the Category 2 Contracts or Reinsurance) and “the specifically named companies” (in respect of the Category 3 Contracts of Reinsurance), and the answer to issues 6, 7 or 8 is in any case 6(a) or 7(a) or 8(a), in any such case are the Fronting Company or Companies (in the case of 6(a) or 7(a)) or the specifically named companies (in the case of 8(a)) entitled to claim from the other Pool Members under clause 18(b) of the Second Agency Agreements and/or the Contribution Agreement:

(a)	only after giving credit to those other Pool Members in respect of sums recovered by the specifically named companies or the Fronting Company or the Fronting Companies under the reinsurance; and/or

(b)	only after giving credit to those other Pool Members in respect of sums payable by the reinsurers to the specifically named companies or the Fronting Company or the Fronting Companies (but not actually paid);

(c)	leaving out of account any sums:

	(i)	recovered; and/or

	(ii)	recoverable

	by the specifically named companies or the Fronting Company or the Fronting Companies under the reinsurance? Or

(d)	none of the above.

This does not arise in my judgment, as this is not the answer to question 3, but on the hypothesis given, the Agreed Answer was: The parties are agreed that if the answer to Former Issue 3 is “the Fronting Company or Fronting Companies” (in respect of the Category 1 Contracts of Reinsurance and the Category 2 Contracts of Reinsurance) and “the specifically named companies” (in respect of the Category 3 Contracts of Reinsurance), and if the answer to Former Issues 6, 7 or 8 is in any case 6(a) or 7(a) or 8(a) (all of which issues remain in dispute), then it is agreed that in any such case the Fronting Company or Fronting Companies (in the case of 6(a) or 7(a)) or the specifically named companies (in the case of 8(a)) are entitled to claim from the other Pool Members under clause 18(b) of the Second Agency Agreements and/or the Contribution Agreement only after giving credit to those other Pool Members in respect of sums recovered by the specifically named companies or the Fronting Company or Fronting Companies under the reinsurance, and do not have to give credit to those other Pool Members in respect of sums payable by the reinsurers to the specifically named companies or the Fronting Company or the Fronting Companies (but not actually paid).

(v)	Valuation of Claims Against NAIC

13.	In the event that the answer to issue 1 above is 1(a), is the liability of NAIC to the Contributing Members:

(a)	to be valued after taking into account any reinsurance receipts which have been recovered by the Contributing Members;

(b)	to be valued after taking into account any amounts in respect of which the reinsurers are liable to the Contributing Members; or

(c)	to be valued leaving out of account any such sums? Or

(d)	none of the above.

Agreed Answer:  It being agreed that the answer to Former Issue 1 includes 1(a), it is further agreed that the liability of NAIC to the Contributing Members is to be valued after taking into account any reinsurance receipts which have been recovered by the Contributing Members, but leaving out of account any amounts in respect of which the reinsurers are liable to the Contributing Members.

14.	In the event that the answer to issue 1 is 1(b), is the liability of NAIC to the Fronting Company or Fronting Companies:

(a)	to be valued after taking into account any reinsurance receipts which have been recovered by the Fronting Company or Fronting Companies;

(b)	to be valued after taking into account any amount sin respect of which the reinsurers are liable to the Fronting Company or Fronting Companies; or

(c)	to be valued leaving out of account any such sums? or

(d)	none of the above.

Agreed Answer: It being agreed that the answer to Former Issue 1 includes 1(b), it is further agreed that the liability of NAIC to the Fronting Company or Fronting Companies is to be valued after taking into account any reinsurance receipts which have been recovered by the Fronting Company or Fronting companies, but leaving out of account any amounts in respect of which the reinsurers are liable to the Fronting Company or Fronting Companies.

15.	In the event that the answer to issue 1 is 1(c), is the liability of NAIC to the Fronting Company or Fronting Companies:

(a)	to be valued after taking into account any reinsurance receipts which have been recovered by the Fronting Company or Fronting Companies; and/or

(b)	to be valued after taking into account any amounts in respect of which the reinsurers are liable to the Fronting Company or Fronting Companies; or

(c)	to be valued leaving out of account any such sums? or

(d)	none of the above.

Agreed Answer:  The parties are agreed that the answer to issue 1 is not 1(c), and hence this issue does not arise.

(vi)	Rights of Set-Off

16.	In the event that the answer to issue 1 is 1(a), upon a winding-up order being made in respect of NAIC or NAIC entering voluntary liquidation, will a Contribution Member be entitled to a set-off under rule 4.90 of the Insolvency Rules 1986 in respect of any sums due from NAIC to the Contributing Member within the meaning of rule 4.90(2) of the Insolvency Rules 1986?

	Agreed Answer:  The parties are agreed that the answer to issue 1 is 1(a) (as well as 1 (b)), and the parties are further agreed that upon a winding-up order being made in respect of NAIC or NAIC entering voluntary liquidation, a Contributing Member will be entitled to a set-off under rule 4.90 of the Insolvency Rules 1986 in respect of any sums due from NAIC to the Contributing Member within the meaning of rule 4.90(2) of the Insolvency Rules 1986?

17.	In the event that the answer to issue 1 is 1(b), upon a winding-up order being made in respect of NAIC or NAIC entering voluntary liquidation, will a Fronting Company be entitled to a set-off under rule 4.90 of the Insolvency Rules 1986 in respect of any sums due from NAIC to the Fronting Company within the meaning of rule 4.90(2) of the Insolvency Rules 1986?

	Agreed Answer: The parties are agreed that the answer to issue 1 is 1(b) (as well as 1 (a)), and the parties are further agreed that upon a winding-up order being made in respect of NAIC or NAIC entering voluntary liquidation, a Fronting Company or each of the Fronting Companies be entitled to a set-off under rule 4.90 of the Insolvency Rules 1986 in respect of any sums due from NAIC to the Fronting Company or Fronting Companies within the meaning of rule 4.90(2) of the Insolvency Rules 1986?

18.	In the event that the answer to issue 1 is 1(c), upon a winding-up order being made in respect of NAIC or NAIC entering voluntary liquidation, will the Fronting Company or each of the Fronting Companies be entitled to a set-off under rule 4.90 of the Insolvency Rules 1986 in respect of any sums due from NAIC to the Fronting Company or Fronting Companies within the meaning of rule 4.90(2) of the Insolvency Rules 1986?

	Agreed Answer: The parties are agreed that the answer to issue 1 is not 1(c), and hence this issue does not arise.

19.	If the answer to any of questions 16, 17 or 18 above is yes, is the Contributing member or the Fronting Company (as the case may be) entitled to set-off, against any sums due from NAIC to it, a liability due from the Contributing Member/Fronting Company to NAIC under the IAIA Pool in addition to a liability due from the Contributing Member/Fronting Company under the Rutty Pool?

Agreed Answer: Further to the agreed answers to issues 4 and 5 above, the Contributing Member or the Fronting Company (as the case may be) is entitled to set-off, against any sums due from NAIC to it, a liability due from the Contributing Member/Fronting Company to NAIC under the IAIA Pool in addition to a liability due from the Contributing Member/Fronting Company under the Rutty Pool.

(vii)	Rights of Set-Off: Continent Claims

20.	If the answer to issue 1 is 1(a), then in the event that NAIC enters compulsory or voluntary liquidation, and at the time that a Fronting Company proves in the liquidation of NAIC, a Pool Member other than NAIC is obliged to make payment to the Fronting Company under the Contribution Agreement and/or clause 18(b) of the Second Agency Agreement, but has not at that time made such payment (“the unpaid share”):

(a)	does the Fronting Company have a right to prove in the liquidation of NAIC in respect of the unpaid share?

(b)	if the answer is “Yes”, does the Pool Member who has failed to pay the unpaid share have a right to prove in the liquidation of NAIC as a contingent creditor in respect of the unpaid share?	

(c)	if the answer to (a) is “Yes”, and (b) is “No”, and if the Fronting Company renounces its right of proof in respect of the unpaid share, does the Pool Member who has failed to pay the unpaid share have a right to prove in the liquidation of NAIC as a contingent creditor in respect of the unpaid share?	

Agreed Answer: It being argued that the answer to issue 1 includes 1(a), it is agreed that in the event that NAIC enters compulsory or voluntary liquidation, and at the time that Fronting Company proves in the liquidation of NAIC, a Pool Member other than NAIC is obliged to make payment to the Fronting Company under the Contribution Agreement and/or clause 18(b) of the Second Agency Agreement, but has not at that time made such payment (“the unpaid share”), then:

(a)	the Fronting Company has a right to prove in the liquidation of NAIC in respect of the unpaid share:

(b)	the Pool Member who has failed to pay the unpaid share has no right to prove in the liquidation of NAIC as a contingent creditor in respect of the unpaid share, by reason of the rule against double proof;

(c)	if the Fronting Company renounces its right  of proof in respect of the unpaid share, the Pool Member who has failed to pay the unpaid share then has a right to prove in the liquidation of NACI as a contingent creditor in respect of the unpaid share, since then the rule against double proof no longer applies. 

21.	If the answer to issue 20(a) is “Yes”, to issue 20(b) is “No”, and issue 20(c) does not arise, and the relevant Pool Member makes payment of the unpaid share to the Fronting Company after the Fronting Company has proved in respect of the unpaid share:

(a)	is the relevant Pool Member subrogated to the proof of the Fronting Company in so far as it relates to the unpaid share? and/or 

(b)	is the relevant Pool Member entitled to prove directly in the liquidation of NAIC in respect of the unpaid share and to require the Fronting Company’s proof to be reduced to the extent that it represents the unpaid share?

(c)	if the Fronting Company has at the time of the payment of the unpaid share by the relevant Pool Member received a dividend in respect of its proof in respect of the unpaid share, is the liability of the relevant Pool Member to the Fronting Company reduced by the amount of such dividend? or 

(d)	none of the above.

Agreed Answer: It being agreed that the answer to Former Issue 20(a) is “yes”, and to 20(b) is “no”, then if issue 20(c) does not arise (ie the Fronting Company does not renounce its right of proof), it is agreed that if the relevant Pool Member makes payment of the unpaid share to the Fronting Company after the Fronting Company has proved in respect of the unpaid share, then:

(a)	the relevant Pool Member is subrogated to the proof of the Fronting Company in so far as it relates to the unpaid share;

(b)	the relevant Pool Member is entitled to prove directly in the liquidation of NAIC in respect of the unpaid share and to require the Fronting Company’s proof to be reduced to the extent that it represents the unpaid share;

(c)	if the Fronting Company has at the time of payment of the unpaid share by the relevant Pool Member received a dividend in respect of its proof in respect of the unpaid share, the liability of the relevant Pool Member to the Fronting Company is reduced by the amount of the dividend.

22.	If the answer to issue 20 is 20(a), and the Fronting Company has a right to and does prove in respect of the unpaid share and further has a right of set-off under rule 4.90 of the Insolvency Rules 1986 in respect of a liability owed by the Fronting Company to NAIC, then is the amount due from the relevant Pool Member to the Fronting Company reduced by the amount of the set-off to which the Fronting Company is entitled in the liquidation of NAIC?

	Agreed Answer:  It being agreed between the parties that a Fronting Company has a right to prove in the liquidation of NAIC in respect of the unpaid shares in the circumstances set out in Former Issue 20, then when the Fronting Company does prove in respect of the unpaid share and further has a right of set-off under rule 4.90 of the Insolvency Rules 1986 in respect of a liability owed by the Fronting Company to NAIC, the parties agree that the amount due from the relevant Pool Member to the Fronting Company is reduced by the amount of the set-off to which the Fronting Company is entitled in the liquidation of NAIC.

(vii)	Rights where NAIC is a Fronting Company

23.	In respect of Fronted Risks where NAIC is the Fronting Company or one of the Fronting Companies, are the Pool Members liable to indemnify NAIC in the proportions set out in clause 2 of the Original Agency Agreements and/or clause 2 and Schedule 1 of the Second Agency Agreements, where NAIC has not actually paid its liability in respect of the Fronted Risk to the insured or reinsured on the risk, and notwithstanding the fact that NAIC will not actually pay in full such liability?

	Agreed Answer: In respect of Fronted Risks where NAIC is the Fronting Company or one of the Fronting Companies, the Pool Members are liable to indemnify NAIC in the proportions set out in clause 2 of the Original Agency Agreements and/or clause 2 and Schedule 1 of the Second Agency Agreements, where NAIC has not actually paid its liability in respect of the Fronted Risk to the insured or reinsured on the risk, and notwithstanding the fact that NAIC will not actually pay in full such liability.

24.	In any case where NAIC is the Fronting Company, or one of the Fronting Companies, and the answer to issues 3 and 4 includes Pool Members other than NAIC and any other Fronting Company or Fronting Companies (or in the case of the category 3 Contracts of Reinsurance, the specifically named companies), do such Pool Members’ rights to claim from and/or rights to deal with the reinsurers arise only after such Pool Members have actually made payment to NAIC and any other Fronting Company or Fronting Companies of their share under clause 2 of the Original Agency Agreements or clause 2 and Schedule 1 of the Second Agency Agreements?

	Agreed Answer: In any case where NAIC is the Fronting Company, or one of the Fronting Companies, and the answer to Former Issues 3 and 4 includes Pool Members other than NAIC and any other Fronting Company or Fronting Companies (or in the case of the category 3 Contracts of Reinsurance, the specifically named companies), the parties agree that the rights of such Pool members to claim from and/or deal with the reinsurers do not arise only after such Pool Members have actually made payment to NAIC and any other Fronting Company or Fronting Companies of their share under clause 2 of the Original Agency Agreements or clause 2 and Schedule 1 of the Second Agency Agreements.

25.	In respect of, respectively, the Category 1, 2 or3 Contracts of Reinsurance where NAIC is a Fronting Company, are the rights to receive, and (upon receipt of the proceeds of the reinsurance by the Claimant Companies), are those receipts held on trust by the Claimant Companies, and if so, for which of the following categories of persons:

(a)	NAIC and any other Fronting Company or Fronting Companies alone? or

(b)	each of the Pool Members (including NAIC and the Fronting Company or Fronting Companies) in the proportions set out in [clause 2 of the Original Agency Agreements or clause 2 and Schedule 1 of the Second Agency Agreements]? or

(c)	none of the above.

To this there was no agreed answer.  The answer to questions 6-8 is repeated. It makes no difference whether a fronting company is insolvent or not.  Each Pool member can claim and recover his severable share of the external reinsurances. If it recovers more than is attributable to its own proportionate share, the sum is held as fiduciary/trustee for all the Pool members in accordance with their proportionate several Pool shares.

26.	Would the answer to each of the above issues be the same in respect of any of the Pool members in the event that they were subject to insolvency proceedings governed by English law and/or English law is otherwise the law applicable to the issue?

	Agreed Answer: It is agreed that the answer to each of the above issues, and those issues that remain in dispute, would be the same in respect of any of the Pool Members in the event that they were subject to insolvency proceedings governed by English law and/or English law is otherwise the law applicable to the issue.

Conclusion

71.	On the points which were still in dispute at the hearing, NAIC and AFG, the insolvent companies, have succeeded. I will hear any argument about the form of declarations or orders to be made on the basis of this judgment and any consequential orders or relief sought, to the extent that this cannot be agreed between the parties.