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Rectification of Reinsurance Policy Denied
Published in the August 2007 issue of Litigation Notes - View Article
In 1999 a class action was commenced against Weyerhaeuser Company Limited (Weyerhaeuser) relating to the failure of a roofing product supplied by Weyerhaeuser, which resulted in damage to the property of the members of the class. Weyerhaeuser is a forest products company operating in British Columbia and formerly operated as MacMillan Bloedel Limited.
Weyerhaeuser had a primary layer of liability insurance with American International Group (AIG). AIG also provided Weyerhaeuser with an umbrella liability policy. AIG re-insured 50% of its liability under the umbrella policy with Camarin Limited (Camarin). Camarin is a captive insurer and a wholly-owned subsidiary of Weyerhaeuser. Camarin in turn retroceded its share of the risk under the umbrella policy to Swiss Reinsurance Company (Swiss Re).
AIG agreed to settle the class action for $70 million and sought recovery from Swiss Re pursuant to the reinsurance policy. Swiss Re commenced an action in the British Columbia Supreme Court, seeking rescission of the reinsurance policies issued to Camarin in 1993 and for the years 1995 through 1998 on the grounds that Camarin and Weyerhaeuser had failed to disclose and/or misrepresented Weyerhaeuser’s exposure to roofing and exterior siding claims.
In the course of the litigation, it became apparent that something was missing from the umbrella policy for the relevant policy years. The policy had been in effect, in one form or another, since 1991. At its inception it contained a “follow the settlements clause” (the “Clause”) but which was omitted in the policy years commencing with 1993. If this clause were in the policy, Swiss Re would be bound by the settlement concluded by AIG on behalf of Weyerhaeuser, provided that the settlement was reasonable and there was coverage under the umbrella policy. Without it, Swiss Re could require that Camarin prove that each of the class action plaintiffs had suffered damage from the roofing product and that the damage fell within the scope of coverage under the umbrella policy.
Camarin brought an application seeking rectification of the insurance policies, on the basis that the Clause had been omitted by reason of a mutual mistake. The British Columbia Supreme Court considered the law relating to rectification and stated that a claim for rectification based on common or mutual mistake requires the following to be established:
“(a) the existence and content of a prior agreement;
(b) a written instrument that does not reflect the true agreement of the parties;
(c) the parties must have shared a common continuing intention up to the time of signature that the provision in question stand as agreed rather than as reflected in the instruments; and
(d) the precise form in which the written instrument can be made to express the prior agreement”
The Court considered the history of the various policy renewals and concluded that in this case a claim for rectification had not been made out. The Clause existed in the 1991 and 1992 policy years but was dropped from the 1993 policy. Although the policy was apparently reviewed by Camarin, Weyerhaeuser and by various insurance brokers, no one noticed or complained about the absence of the Clause.
In the 1994 year AIG offered extended pollution coverage and Swiss Re did not wish to participate. In the years 1995 through 1998 the Clause did not appear in the policy and its absence was not discussed.
Both parties produced expert opinions. Camarin’s expert submitted that the insertion of the Clause was a necessary component to the policy, in view of its structure and the other terms governing the claims handling process. Swiss Re’s expert opined that “follow the settlement” provisions fell into disuse where captive insurers were also reinsurers because the captive might be in a conflict of interest vis-à-vis the insured who controls the captive. The Court held that these opinions were of no assistance in establishing the common intention of the parties.
Camarin argued that Swiss Re would have included the Clause if it had been requested that it do so. The Court found this submission was based entirely on speculation and also did not assist in establishing the intention of the parties. The Court was equally unimpressed with the argument that there was no evidence of any intention to remove the Clause from the policy. This again failed to establish a common continuing intention. It was significant that the 1995 policy was effectively an entirely new policy and not simply a renewal of a previous policy. Rectification was denied.
Swiss Reinsurance Company v. Camarin Limited, 2007 BCSC 1202 (CanLII)