AIG clashes with reinsurer

AIG Europe (Ireland) v Faraday Capital

(Court of Appeal - 22 November 2007)

Faraday Capital reinsured part of AIG's insurance of the errors and omissions liability of US company Smartforce. The claims cooperation clause required timely notification by AIG to Faraday "upon knowledge of any loss or losses that may give rise to a claim."

In November 2002, Smartforce announced its intention to rewrite its accounts because of irregularities. Its share price promptly fell by a third and led to class actions for damages by shareholders, which the firm notified to AIG as claims in December 2002. AIG, however, did not inform Faraday until settlement of the underlying claims in March 2004. AIG relied on RSA v Dornoch Ltd (2005), where in similar circumstances the Court of Appeal had held that no 'loss' would be 'known' until settlement of the claim.

The Court of Appeal took a different view on this occasion: since the fall in the share price had been admittedly caused by the Smartforce announcement, a loss had occurred at that juncture on any view. In addition, since AIG had known as early as December 2002 that claims had been made it was in breach of the clause (a condition precedent) and could not recover under the reinsurance policy.

COMMENT

This decision is not easy to reconcile with that in RSA v Dornoch and further litigation in this field may be anticipated. As the court pointed out, the difficulty arises at least in part because reinsurers persist in using language - 'loss' as opposed to 'claim' - which is apt for property damage insurance but inapt for liability reinsurance. Philip Vallance, BLM London