Lloyd's Maritime and Commercial Law Quarterly
INSURANCE CONTRACTS: CONSTRUCTION OF THE POLICY AND THE POLICY OF CONSTRUCTION
Charter Re v. Fagan
The way out
Traditionally, the court with the task of construction must do it within the confines of the contract: it is locked in by the parol evidence rule. If the court wants to go outside and beyond the written contract, such as an insurance policy, it must use one of the proper exits. The first is the technical exit. The key is that, although the words appear clear, they have a technical meaning that is not apparent without extrinsic evidence. The second exit is ambiguity. The key is that, the words being ambiguous, the ambiguity must be resolved by taking a wider view. The third is absurdity. The key is that a literal reading is not just unreasonable but, worse, unworkable or absurd and that that must be avoided by taking a wider view. The proper exit to the world outside the confines of the policy was one of the issues raised by Charter Reinsurance Co. Ltd v. Fagan.1 On first reading it looks as if the judges in the lower courts ignored the proper exits and broke the bounds of parol evidence.
The plaintiff reinsured, Charter Re, sought to recover from its reinsurers large sums for which it was liable but which, being insolvent, it had not actually paid to the insured. The case turned on construction of words commonly used in reinsurance contracts. Under the Liability Clause, the reinsurers were “only liable if and when the Ultimate Nett Loss sustained” by the reinsured exceeded a stated figure; and, according to the Ultimate Nett Loss (UNL) Clause, the term Nett Loss meant “the sum actually paid by the Reinsured in settlement of losses or liability.”2
Not surprisingly, the reinsurers argued that, taking the ordinary and primary meaning of the words, the meaning of the UNL Clause was clear: the reinsurers were not liable to the reinsured until the reinsured had made actual payment. Against this strong argument, however, the reinsured argued successfully that, in the words of Mance, J., at first instance, “construction should never be a wholly abstract or literal exercise, divorced from any consideration of context or practical implications”3; and that, in that light, the words did not after all require actual payment as a precondition of the liability of the reinsurers. The
1. [1995] C.L.C. 1345; aff’d [19961 2 W.L.R. 726; [1996] 1 Lloyd’s Rep. 261 (C.A.) and [1996] 2 W.L.R. 726; [1996] 2 Lloyd’s Rep. 113 (H.L.).
2. Emphasis added.
3. [1995] C.L.C. 1345.
433