GARD MARINE & ENERGY LTD V TUNNICLIFFE AND ORS

[2011] EWHC 1658 (Comm), Queen's Bench Division, Commercial Court, Mr Justice David Steel, 30 June 2011

Reinsurance - Energy risks - Calculation of deductible - Whether deductible to be scaled to reflect the proportion of the assured's interest in the total value of the insured subject matter - Misrepresentation

For the period 1 July 2003 to September 2006 Gard subscribed to a 12.5 per cent share of a policy issued to Devon Energy Corporation, an oil exploration and production company with interests in a number of wells and platforms in the Gulf of Mexico. The policy was subject to a combined single limit of US$400 million (for 100 per cent interest), any one accident or occurrence arising out of a "Named Windstorm" in the Gulf of Mexico. In the event that Devon's interests in a well were less than 100 per cent, the combined single limit of liability and the retention were to be reduced proportionately as against the full value of the well. Devon's interest was about 46 per cent. Gard reinsured its line, 7.5 per cent to Lloyd's Syndicates (including Advent) and 5 per cent with Glacier Re. The reinsurance was "subject to all terms, clauses, and conditions as Original and to follow the Original in every respect" and the "Sum Insured" clause stated: "To pay up to Original Package Policy limits/amounts/sums insured excess of USD250 million (100%) any one occurrence of losses to the original placement". Substantial losses were caused in September 2005 by Hurricane Rita. The claims were settled for US$365 million. Gard's 12.5 per cent share was US$45,625,000. A dispute arose between Gard and Advent as to the operation of the excess point in the "Sum Insured" clause. Gard asserted that the words "(100%)" meant it was necessary to "scale" the deductible to match Devon's actual interest in the insured subject matter. The total loss of assets was about US$912.5 million. Devon's interest was about 46 per cent, and so its loss was US$416 million. By scaling the deductible by the same percentage, it was reduced from US$250 million to US$114 million. Thus, on the total claim of US$365 million, the deductible was scaled down to US$114 million, giving a sum recoverable of US$251 million. Gard's 5 per cent share reinsured by Advent gave rise to a recovery of US$5,020,737. Advent's calculation of the loss was that the deductible was not to be scaled. Accordingly, the full US$250 million was to be deducted from the loss of US$365 million, giving a loss of US$115 million. 5 per cent of that sum reinsured with Advent came to US$2,300,000. David Steel J, relying upon market evidence and the need to construe the insurance and reinsurance back to back, held that Gard's interpretation was correct. David Steel J also rejected the suggestion that Gard's brokers had misrepresented the effect of the policy to the reinsurers.