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IN THE HIGH COURT OF SOUTH AFRICA

(WITWATERSRAND LOCAL DIVISION)

CASE NO: 06/11263

In the matter between:

GUARDRISK INSURANCE COMPANY LIMITED Plaintiff/Excipient

and

RONALD NAPIER N.O. Defendant

J U D G M E N T

BLIEDEN, J:

[1] The plaintiff is a short-term insurer. It has issued summons against the defendant in his capacity as the nominated representative of Lloyds of London Underwriters and particularly Euclidian Underwriting Limited (Euclidian) in respect of a re-insurance policy which is Annexure “C” to the plaintiff’s particulars of claim.

[2] The plaintiff’s claim is for an order declaring the defendant liable to indemnify it for all amounts up to R5 million which it has paid and which it is obliged to pay on behalf of the Transitional Local Council for Middelburg (the municipality). In terms of the reinsurance policy Euclidian undertook to indemnify the plaintiff in the event of it having to settle any claim made against the municipality.

[3] The defendant in his capacity as mentioned above, has pleaded to the plaintiff’s particulars of claim and it is against the defendant’s first special plea that the present exception has been taken.

[4] Before dealing with the pleadings in any detail the following facts, which arise from such pleadings and the annexures to them, and which are not in dispute, are relevant.

[5] I n terms of the relevant policies of insurance:

1. if the municipality negligently caused someone to sustain personal injuries, the municipality would become liable to compensate that person for the damages suffered in consequence thereof;

2. the plaintiff, in turn, would become obliged to indemnify the municipality against its aforesaid liability;

3. the plaintiff could, in its own turn, and under the reinsurance policy, seek an indemnity from the defendant against its own liability to the municipality.

[6] The following facts must be accepted as correct for the purposes of the present exception:

1. On 2 June 2000, one Van Rensburg was involved in an accident and sustained serious bodily injuries.

2. The accident was caused as a result of the municipality’s negligence.

3. On 27 June 2000, Van Rensburg’s attorneys wrote the letter which is Annexure “D” to the plaintiff’s particulars of claim to the municipality. In that letter, the municipality was advised:

1. of the fact of the accident;

2. that Van Rensburg was a minor;

3. that Van Rensburg had sustained serious bodily injuries;

4. that the accident was caused by the negligence of the municipality;

5. that a claim was going to be submitted against the municipality;

6. that Van Rensburg was, some 25 days after the accident still in a coma; and

7. it was impossible, at that stage, to formulate the quantum of Van Rensburg’s claim.

4. On, or shortly after, 27 June 2000 that letter was forwarded to the plaintiff. It would have accordingly acquired the same knowledge as the municipality at that point in time.

5. On 29 August 2000, a Mr Botha of Alexander Forbes, duly representing the plaintiff, produced the email transmission which is Annexure “P1” to the defendant’s plea. In that email, Mr Botha recommended that an estimate of at least R1 million be reserved. He further stated that, “in view of the potentially large claim” loss adjustors be appointed.

6. On or about 5 October 2000, the plaintiff received a written report from those loss adjustors, estimating the quantum of Van Rensburg’s claim to be in the region of R5 million.

6.7 The defendant received notice from the plaintiff of Van Rensburg’s potential claim on or about 12 October 2000. This was more than 30 days after either 27 June 2000 or 29 August 2000, but within 30 days of the report of the loss adjustors.

6.8 On or about 14 January 2002, action was instituted on behalf of Van Rensburg against the municipality, in which action the total amount of R3 187 764,95 was claimed.

6.9 The municipality settled that action by agreeing to pay Van Rensburg the sum of R4 637 412,00 plus his taxed costs and other qualifying fees.

6.10 On 28 September 2005 the plaintiff indemnified the municipality and made payment inter alia to Van Rensburg of the sum of R4 637 412,00.

[7] The reinsurance policy upon which the plaintiff’s claim is based contains a “Claims Co-operation Clause” which provides as follows:

“Notwithstanding anything contained in the reinsurance policy wording to the contrary for all claims more than R1,000,000 per event, it is a condition precedent to any liability under the reinsurance policy that:-

1. Guardrisk [the plaintiff] shall upon knowledge of the amount and circumstances which may give rise to such a claim under the reinsurance policy, advise reinsurers [the defendant] thereof immediately and in any event not later than thirty (30) days from the date Guardrisk are advised of such claim;

2. …

3. Guardrisk shall have the right to appoint loss adjustors in accordance with the panel of adjustors approved by the insurers from time to time. Reinsurers shall have the right to appoint a representative acting on their behalf to control all negotiations, adjustments and settlements in connection with such claim or claims with the co-operation of Guardrisk. ”

[8] The thrust of the defendant’s first special plea, against which the plaintiff has noted the present exception, is that the first defendant has been absolved from any liability which it may otherwise have had under the reinsurance policy because the plaintiff, in only advising the defendant of Van Rensburg’s claim on 12 October 2000, breached the condition precedent contained in the claims corporation clause and, more particularly, the 30 day time limit provided for therein.

[9] In its first special plea, having quoted the wording of the Claims Co-operation Clause and recording that the plaintiff’s claim against the defendant arises out of the claim which Van Rensburg had against the municipality, the defendant pleads as follows in paragraph 4 thereof:

“In the circumstances, it was a condition precedent to the defendant’s potential liability to the plaintiff that the plaintiff was obliged, upon receipt of Van Rensburg’s claim and its realisation that the amount of such claim was, or may give rise to, a claim in excess of R1 million, to advise the defendant thereof immediately and in any event not later than 30 days from the date upon which the plaintiff was advised of that claim. ”

The relevant principles in interpreting the claims co-operation clause

[10] This exception turns on the proper interpretation of the claims co-operation clause. The principles pertaining to the interpretation of insurance contracts are trite and may be summarised as follows:

10.1 the ordinary rules relating to the interpretation of contracts must be applied in construing a policy of insurance. This requires that the intention of the parties be ascertained with reference to the language used in the policy. Fedgen Insurance Ltd v Leyds 1995 (3) SA 33 (A) at 38A. In ascertaining the intention of the parties Wessels CJ stated the following in Scottish Union & National Insurance Co Ltd v Native Recruiting Corporation Ltd 1934 AD 458 at 465:

“Now in construing a contract we must not only consider the intention of one party, as we do in construing a will or an Act of the Legislature, but we must see what both parties intended, and we must guard ourselves against making a contract for the parties. ”

2. In construing a written policy the court must give effect to the grammatical and ordinary meaning of the words used in it. This requires that words be given their plain, ordinary and popular meaning, unless the context indicates otherwise. Fedgen Insurance Ltd v Leyds (supra) at 38B; Scottish Union & National Insurance Co Ltd v Native Recruiting Corporation Ltd (supra) at 465-466.

2. If, however, the ordinary sense of the words necessarily leads to some absurdity or to some repugnance or inconsistency with the rest of the contract, then the court may “modify the words just so much as to avoid that absurdity or inconsistency but no more”. Scottish Union & National Insurance Co Ltd v Native Recruiting Corporation Ltd (supra) at 465-466. In addition, to the extent that the words (in themselves unambiguous) cannot readily or reasonably be applied in their literal sense to all the situations to which the agreement was directed, an ambiguity in this sense may arise. It does so by virtue of the fact that the ordinary meaning of the words creates impracticable or startling results (which could not have been intended). Lehmbecker’s Earthmoving and Excavators (Pty) Ltd v Incorporated General Insurances Ltd 1984 (SA) 513 (A) at 520I.

2. If a term of a policy is capable of a meaning which upholds the policy rather than defeats the indemnity provided thereunder, that interpretation must be preferred. Barnard v Protea Assurance Co Ltd t/a Protea Assurance 1998 (3) SA 1063 (C) 1068B-C, approved in Van Zyl v Koln Non-Marine Syndicate No 515 of Lloyds of London 2003 (2) SA 440 (SCA) at 336C-E.

2. The ordinary rule is that it is for the insured (in this case plaintiff) to prove that he falls within the primary risk insured against, whilst the onus is on the re-insurer (defendant) to prove the application of any exception upon which he relies. Van Zyl, supra, at 446F-G.

[11] The defendant does not plead that the interpretation of the claims co-operation clause is ambiguous or that its interpretation requires recourse to surrounding circumstances or other extrinsic evidence. On the contrary the defendant simply quotes the clause verbatim.

[12] Although our courts are generally reluctant to decide questions concerning the interpretation of contracts by way of exception, there is no bar to deciding such issues on exception.

[13] In Sun Packaging (Pty) Ltd v Vreulink [1996] ZASCA 73; 1996 (4) SA 176 (SCA), the court held that the mere notional possibility that evidence of surrounding circumstances may influence the interpretation of a contract does not operate to debar a court from deciding the issue on exception in a suitable case.

[14] Claims co-operation clauses of the kind under consideration (often referred to as claims control clauses) are treated by the courts as exemption clauses, with the usual consequence that the insurer (or re-insurer) will only succeed if the clause is clear. Thus in Royal & Sun Aliance v Dornoch [2005] Lloyd’s Rep IR 544 (CA) Lord Justice Longmore pointed out in connection with a similarly worded claims co-ooperation clause that:

“A reinsurer of a reinsured’s liability to a third party is prima facie liable to the extent of his subscription once it is ascertained that the reinsured is liable to that third party. A condition precedent to the liability of the reinsurer operates as an exemption to that prima facie liability. It is a well-established principle that a party who relies on a clause exempting him from liability can only do so if the words of the clause are clear on a fair construction of the clause. ”.

[15] The learned Judge also emphasized that it is not part of the court’s function to “go out of its way to give a purposive or business common sense construction to one part of a clause in favour of one party and thus enable that party to seek to take advantage of another part of the clause which has draconian consequences for the other party”.

Insurers and reinsurers

[16] It is important to bear in mind in this matter that one is concerned with a reinsurance policy, and the relationship between the reinsurer and the insurer. The re-insurer’s principal interest is in his liability to the insurer under the contract of reinsurance, and not the direct loss suffered by the insured. In this regard it has been said that:

“A reinsurer is only indirectly interested in direct losses, that is, to the extent that they affect his liability to his reinsured under the contract of reinsurance. The reinsurance relationship is brought about by the reinsurance contract and is mutually exclusive from the relationship between the insurer and the original insured. The original insured has no legal interest in the reinsurance relationship. This important fact must be borne in mind. The liabilities and obligations of the reinsurer and reinsured are new ones which are created and governed by the reinsurance contract. They are not – despite what some reinsurance terminology might suggest – a simple ‘share’ of an existing obligation, although there are circumstances where some elements of the underlying contract may be incorporated into the reinsurance contract. ” Barlow Lyde & Gilbert: Reinsurance Practice & the Law, para 1.3; Meadows Indemnity Co. Ltd v The Insurance Corporation of Ireland plc & International Commercial Bank plc [1989] 2 Lloyds Rep 298.

[17] Clause 6 of section 1 of the insurance policy provides:

“6. CLAIMS

The Insured shall on the happening of any event which may give rise to a claim under this policy, at his own expense –

1. inform the Insurers thereof (notification to the leading Insurer will be regarded as notification to all participating Insurers) as soon as reasonably possible and furnish particulars of any other insurance covering such event as are insured hereunder;

2. as soon as practicable after the event, submit to the Insurers in writing full details of any claim;

3. furnish the Insurers with such proofs, information and sworn declarations as the Insurers may require, and immediately deliver to the Insurers any notice of claim or communication whatsoever, writ, summons or other legal process issued or commenced against the Insured in connection with the event giving rise to the claim. ”

Clause 7 of the insurance policy, which deals with the plaintiff’s rights after an event, provides:

“7. INSURERS’ RIGHTS AFTER AN EVENT

(a) On the happening of any event in respect of which a claim is or may be made under this policy the Insurers and every person authorised by them may without thereby incurring any liability and without diminishing the right of the Insurers to rely upon any conditions of this policy

(i) to take possession of any damaged property and deal with it in any reasonable manner. This condition shall be evidence of the leave and licence of the Insured to the Insurers to do so. The Insured shall not be entitled to abandon any property to the Insurers whether taken possession of by the Insurers or not;

(ii) take over and conduct in the name of the Insured the defence or settlement of any claim and prosecute in the name of the Insured for their own benefit any claim for indemnity or damages or otherwise and shall have full discretion in the conduct of any proceedings and in the settlement of any claim. No admission, statement, offer, promise, payment or indemnity shall be made by the Insured without the written consent of the Insurers.

(b) The Insured, shall, at the expense of the Insurers, do and permit to be done all such things as may be necessary or reasonably required by the Insurers for the purpose of enforcing any rights to which the Insurers shall be or would become subrogated upon indemnification of the Insured whether such things shall be required before or after such indemnification. ”

[18] A comparison between clauses 6 and 7 of the insurance policy on the one hand and the provisions of the claims co-operation clause in the reinsurance policy on the other hand reveals that:

18.1 Whereas under the insurance policy the Municipality as the insured is obliged to furnish to the plaintiff “in writing full details of any claim”, the plaintiff is merely obliged under the reinsurance policy to furnish Euclidian with “all necessary information in respect of any such claim or claims”. It is clear from the clause that the reference to “such claim or claims” is a reference to claims against the reinsurance policy and not the insurance policy.

2. The Municipality as the insured is obliged to furnish the plaintiff with “such proofs, information and sworn declarations as the Insurers may require, and immediately deliver to the Insurers any notice of claim or communication whatsoever, writ, summons or other legal process insured or commenced against the Insured”. No similar obligation is however placed upon the plaintiff under the reinsurance policy.

2. Under the insurance policy the plaintiff is entitled, in the event of a claim being made thereunder, to take possession of any damaged property and deal with it in a reasonable manner, take over and conduct in the name of the Insured the defence or settlement of any claim, and prosecute in the name of the Insured for its own benefit any claim for indemnity or damages. By contrast, Euclidian’s rights under the reinsurance policy following upon a claim are very limited. They are simply to appoint loss adjusters and to appoint a representative “to control all negotiations, adjustments and settlements in connection with such claim or claims with the co-operation of Guardrisk”.

Applying these principles to the present pleadings

[19] There are two distinct elements of the claims co-operation clause which are important for purposes of this exception. They are the following:

1. The condition precedent contained in the claims co-operation clause only arises in respect of “claims for more than R1 000 000 per event”.

2. The plaintiff’s obligation to advise Euclidian of a claim only arises where it has “knowledge of the amount and any circumstances which may give rise to such a claim against the reinsurance policy”.

[20] The reference in the opening paragraph of the claims co-operation clause to a claim of more than R1 000 000 per event is a reference to an actual claim sounding in money in excess of that amount. Consequently notice by a third party to the Municipality that it intends holding it liable for an unspecified amount simply does not qualify as a claim under the claims co-operation clause and the clause does not apply.

[21] The defendant does not allege, and indeed given the circumstances pleaded in the plaintiff’s particulars of claim cannot allege, that a claim in excess of R1 000 000 was actually made. The most that the defendant was able to do was to allege in its first special plea that the plaintiff knew that the claim “would or may exceed R1 000 000”. In my view this is not sufficient for the claims co-operation clause to become operative.

[22] The defendant has also failed to plead facts from which it can be inferred or concluded that the second requirement of the claims co-operation clause identified above has been met, namely that the plaintiff must have knowledge of the amount of the claim against the reinsurance policy. Again, the best that the defendant has been able to do is to plead that the plaintiff had knowledge that the claim would exceed R1 000 000. There is no allegation that the plaintiff had knowledge of the actual amount of the claim.

[23] There is a further difficulty which the defendant faces. In terms of paragraph (a) of the claims co-operation clause, the plaintiff’s duty to notify Euclidian only arises where it has knowledge of the amount of a claim “against the reinsurance policy”. Nowhere in the defendant’s first special plea does it allege that the plaintiff had knowledge of the amount of the claim against Euclidian.

[24] Before this Court, Mr Loxton, on behalf of the plaintiff/excipient referred to decisions in the English courts where claims co-operation clauses were the subject-matter of the litigation. The two cases quoted by him, namely AIG Europe (Ireland) Ltd v Faraday Capital Ltd [2007] Lloyd’s Report IR 267 and Royal & Sun Alliance Insurance plc v Dornoch Ltd [2005] EWCA and CIV 238 deal with such a clause in cases where “losses” are the subject-matter of the litigation, as opposed to “claims” which are the subject-matter of the present case. In my view these cases are not entirely in point.

[25] In the present case one must accept that the word “claim” can mean nothing but a demand for something due. Here it would be a demand for compensation for the damages suffered as a result of the Municipality’s wrongful act. In the circumstances the plaintiff could only become aware that Van Rensburg’s claim against the Municipality was in excess of R1 million on such claim being expressed in monetary terms. Until that time a claim, if there was to be one, would be based on pure speculation.

[26] In my view there is no substance in the argument of Mr Berridge who appeared on behalf of the defendant, that the language of the claims co-operation clause indicates an obligation on the plaintiff to notify the defendant when it becomes aware that a claim is or may be more than R1 million. This interpretation of the clause avoids dealing with the concept of a “claim” in the context of the reinsurance agreement. Because the plaintiff’s obligation to advise the reinsurer only arises when claims which are in excess of R1 million are made, it is plain that a “claim” to which no monetary value is attributed cannot be the subject-matter of the clause concerned. It is only when an amount is attributed by the claimant to the “claim’ that the obligation, if there is one, to make a report to the defendant arises. It is then, and only then, that subparagraph (c) of the clause in question becomes relevant. In these circumstances the re-insurer is entitled to investigate the “claim”, qua claim, not the possibility of a claim.

[27] In the circumstances in my opinion the defendant has failed to plead facts from which it can be inferred that the plaintiff failed to meet the requirements of that clause. Indeed it went further than it need have done when it advised the defendant of the possibility of a claim once it had received the loss adjuster’s report.

[28] Because of the importance of the interpretation of the claims co-operation clause, which I have been informed is common in most reinsurance contracts, I am of the view that the plaintiff was entitled to employ two counsel in bringing its exception against the defendant.

[29] In the circumstances I make the following order:

1. The exception is upheld.

2. The defendant is given 15 days within which to amend his first special plea.

3. The defendant is ordered to pay the plaintiff’s costs of suit, such costs to include the costs of two counsel.

__________________________

P BLIEDEN

JUDGE OF THE HIGH COURT

COUNSEL FOR PLAINTIFF/EXCIPIENT ADV C D A LOXTON SC

ADV M A CHOHAN

INSTRUCTED BY DENEYS REITZ INC

COUNSEL FOR DEFENDANT ADV B BERRIDGE

INSTRUCTED BY WEBBER WENTZEL BOWENS

DATE OF HEARING 20 JUNE 2007

DATE OF JUDGMENT 29 JUNE 2007

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