The President of Brazilian Republic approved Law no. 10,406 on January 10, 2002, establishing a new Brazilian Civil Code. This replaced the previous law, which had been in force since 1916, and unified the Private Law to deal with matters such as personal rights, property rights, judicial acts, family law, descent law, and contractual law including insurance agreements.

As it is a typical agreement, the insurance agreement was distinguished by a division into three sections (general provisions; insurance against damage; and personal life insurance) regulated in 65 articles among which the civil legislator fundamental principles of insurance remain, and are, expressed with clear references in several texts in the new regulation, in particular: casualty of the risk; legitimacy of the insured over the insured thing; submittal of proposal with the essential elements to the risk; good faith; aggravation of the risk; payment of premium before occurring the damage; term of validity of the coverage. (Articles 757, 759, 760, 763, 764, 765, 766 and 768).

The formal and protective nature of consumer rights is emphasized by the requirement to exhibit the policy or insurance policy as the evidence of the agreement or in its absence the bill evidencing the bank payment of insurance premium - article 758. An important legal alteration is the absence of an express prohibition of guarantees against risks from unlawful acts, in general to limit them to cases derived from malicious acts by the insurer, beneficiary or representatives of them. This immediately creates an opportunity for insurers to market insurance coverage against kidnapping, the demand for which is increasing.

In order to clarify the position in regard to expenses incurred e.g. in the cost of rescue services, attempting to avoid damage, minimize the loss or to salvage the insured item, the new legislation obliges the insurer to assume said expenses to the limit set forth in the agreement ratifying its strict relation with the object of the insurance (risk). (Article 771).

The renewal of the agreement for one more term of the policy is now allowed, if it is expressly provided for in the agreement. The possibility for the insurer to either pay the indemnity cash or replace the insured goods was also important. The right of the insurer to limit their guarantee to the exact amount of damage caused, at the point of the inclusion into the insurance agreement was also significant.

As an innovation since the previous law, the new Civil Code makes it possible to contract additional insurances against damage provided that the insured informs the insurer of the first policy indicating the sum to be insured for purposes of checking that the limit of the insured interest is not exceeded in both policies. This does not happen with personal insurance where the insured capital is freely set forth by the proposer, which can enter into more than one insurance contract covering the same interest with the same or different insurers.

The proportional reduction in the indemnity (pro rata clause) is only guaranteed in partial damages where there is express agreement on an insured sum lower than the amount of the insured risk itself. It is also worth to note the guarantee by the insurer over the defects intrinsic to the risk, to which the insurer is not responsible.

In response to the requirements of business, where often the transfer of the risk to third parties, as a result of a business transaction, may cause doubts as to the identity of the actual beneficiary of the indemnity, the New Law effectively permits such transfers of the insurance agreement to third parties by alienation or assignment of the insured interest.

An important innovation is the possibility that any proposer of personal insurance of others, shall now be able to enter into such a contract of insurance, provided that its manifest interest is to preserve the life of the individual the subject of the personal insurance. Further, personal insurance still has an important provision dealing with the destination of the insured capital in the absence of appointed beneficiary or heirs of the insured. In such a case the indemnity will be paid to those who can prove that the death of the insured has deprived them from the means required for subsistence.

As a definite solution to the difficulty caused by suicide, the Brazilian civil legislator has provided that there can be no cover arising from any death caused by suicide within the first two years of the agreed coverage, with any clause excluding coverage for suicide after two years of validity of the agreement, being null.

In the field of personal insurance it should be emphasized that legal provisions prevent the insurer from exempting himself from the payment of indemnity if the death or disability is caused by the use of more risky means of transportation, military service, sports or humanitarian acts to aid others. Another point to emphasize is that the subrogation of the insurer in the rights and actions of the insured or beneficiary against the one causing the damage is only guaranteed in damage insurance being prohibited in personal insurance.

In brief those were the most relevant alterations set forth in the New Brazilian Civil Code to enter into force on January 2003 with a vacacio legis of one year.

Sergio Ruy Barroso de Mello

UK : Unravelling the LMX spiral - the decision in the Kuwait test case
Mike Munro, Partner in the Reinsurance & International Risk team at Barlow Lyde & Gilbert

Introduction

On 11 July 2001, Mr Justice Langley, sitting in the Commercial Court in London, handed down his decision in Scott -v- Copenhagen Re, a test case concerning the extent to which certain losses arising out of the Iraqi invasion of Kuwait in August 1990 could be aggregated as constituting a single loss for reinsurance purposes.

The decision provides further guidance as to the meaning of an "event" under English law. However, its implications are likely to be more widely felt since the outcome poses significant logistical and practical issues for excess of loss reinsurers involved in the Kuwait losses and, in particular, for those with participations in the LMX spiral.

Background

The Invasion of Kuwait

On the morning of 2 August 1990, Iraqi forces entered Kuwait. By 8.00 am, they had reached Kuwait airport.

At that time, 15 aircraft belonging to the Kuwait Airways Corporation (KAC) were on the ground, along with a significant quantity of aircraft spares belonging to KAC (the Spares) and a British Airways 747 (the BA Hull).

From that point, until shortly before its liberation in late February 1991, Kuwait airport remained under Iraqi control.

By then, the BA Hull had been destroyed, the 15 KAC aircraft (the KAC Hulls) had been flown out of Kuwait, appropriated by the Iraqi Airways Corporation and, in many cases, destroyed, and the Spares had been plundered.

The Insurance Position

The KAC Hulls and the Spares were insured under a primary policy (the KAC Primary Policy) which provided cover of up to $300m, any one occurrence , in respect of loss of aircraft on the ground and $150m, any one location, in respect of spares.

The Primary Policy was written by various Kuwaiti insurers, including the Kuwait Insurance Company (KIC), who had purchased back-to-back cover from London Market reinsurers. These reinsurers, in turn, retroceded the risk, as did their retrocessionaires, and so on, so that, in this way, the exposure (and losses) passed into the London Market Excess of Loss (LMX) spiral.

The BA Hull was insured under separate arrangements with a variety of primary carriers. Those carriers, again, bought reinsurance, and again, the risk, in turn, passed into the LMX spiral.

Issues Arising

The KAC Primary Policy - "One Occurrence"?

Numerous issues arose as to the construction of the KAC Primary Policy, amongst them whether the loss of the 15 KAC Hulls constituted, or arose out of, a single "occurrence", such that the $300m ground loss limit applied.

Retrocessional Issues - "One Event"

Fundamental issues also arose as to the extent to which, if at all, reinsurers exposed to both the KAC and BA losses could aggregate them and present them as a single loss to their retrocessionaires under relevant excess of loss contracts. These, typically, incorporated the Joint Excess Loss Committee Clauses 1.1.90 (the JELC Clauses) which contained an "Event Clause" providing as follows:

"Loss" under this contract means loss, damage, liability or expense arising from any one event ….."

Accordingly, the key issue for retrocessional purposes was whether the various KAC losses and the loss of the BA Hull could be aggregated as having arisen out of "one event".

The need for a test case - the decision in Hill -v- M&G Re

The early treatment of the Kuwait Losses

The BA Hull claims were, broadly, uncontentious, and were paid, promptly, in early 1991 at or around the time that the hull was destroyed. However, the position under the KAC Primary Policy was less certain.

The fundamental question of whether the loss of the 15 aircraft constituted "one occurrence" was not determined until the decision of Mr Justice Rix in Kuwait Airways Corporation v Kuwait Insurance Company SAK (KAC -v- KIC) in 1996 .

At an early stage, however, KIC made an on account payment of $300m, representing the minimum amount of their liability under the KAC Primary Policy. That payment, together with the payment of the BA Hull claim, triggered claims in the LMX market and, accordingly, the question of whether the various KAC losses could be aggregated and, if so, whether the BA loss could be aggregated with them, fell to be considered. No formal legal determination was sought at that stage. Rather, the issue was considered by the Lloyd's Claims Office ("LCO") and the view reached that all of the losses had arisen out of a single unifying event, being the Iraqi invasion of Kuwait. Whilst the LCO's view was not shared by all participants in the LMX market, presentations were made, and settled, and many thousands of claims transactions processed, on that basis.

Hill -v- M&G Re and the effect of "loss settlements" provisions

Amongst those taking a different view were M&G Re, who declined to settle claims presented to them by various Lloyd's Syndicates. The Syndicates commenced proceedings for recovery. They accepted that, in law, it was arguable that more than one event was involved. However, the relevant XL Contracts (under which they were reinsured by M&G Re) contained a clause providing that:

"All loss settlements by the reinsured shall be binding upon reinsurers provided that such settlements are within the terms and conditions of the original policies and within the terms and conditions of this policy…"

The Syndicates, relying on the Court of Appeal's decision in ICA -v- SCOR , argued that the effect of this clause was to bind M&G Re to follow any settlements entered into in an honest and businesslike fashion and that, as their settlement of the Kuwait and BA losses on a "one event" basis was honest and businesslike, it was binding on M&G Re.

Although the Court of Appeal upheld the Syndicates' argument, that decision was overturned by the House of Lords. Lord Mustill, giving the leading opinion, considered that "the crucial words are "within the terms and conditions" of the original policies and of the reinsurance" which, in his view, "… draw a distinction between the facts which generate claims under the two contracts and the legal extent of the respective covers". Accordingly, whilst M&G Re would be bound to follow any settlement of factual questions/issues by the Syndicates, it could not be bound as to the Syndicates' determinations of the legal implications of those facts , including whether, as a matter of law, the losses arose out of one event. As a result, the question of whether, as a matter of law, the KAC and BA losses arose out of a single event was referred back to the Commercial Court for determination .

The decision in Scott -v- Copenhagen Re

Following the House of Lords' decision in Hill -v- M&G Re the processing of the KAC/BA claims in the London Market came to a standstill, pending a resolution of the "event" issue. Scott -v- Copenhagen Re emerged as the test case by which this would be determined.

KAC -v- KIC and the resolution of the "occurrence" issue

In the meantime, the proceedings between KAC and KIC concerning, amongst other things, the application of the per occurrence ground limit in the KAC Primary Policy had reached trial. Mr Justice Rix found that the loss of all 15 KAC aircraft and the Spares did arise out of the same occurrence, being the invasion of Kuwait incorporating the capture of the airport and, with it, KAC's aircraft on the ground and the spares. Having commented that, in his view, "event" and "occurrence" are synonymous in most circumstances, he stated that, as a matter of principle:

"an "occurrence" … is not the same as a loss, for one occurrence may embrace a plurality of losses. Nevertheless, the losses' circumstances must be scrutinised to see whether they involve such a degree of unity as to justify their being described as, or as arising out of, one occurrence. …..
In assessing the degree of unity regard may be had to such factors as cause, locality and time and the intentions of the human agents."

Since the KAC aircraft and spares "were already lost on August 2 … [when]… KAC lost possession and control of their aircraft", Mr Justice Rix concluded that the KAC losses constituted a single occurrence as:

"There is unity of time. There is also unity of location …. There is unity of cause [and] [t]here is unity of intent."

Scott -v- Copenhagen Re - The problem of the BA Aircraft

Mr Justice Langley supported Rix J.'s view that, in most cases, "occurrence" and "event" are synonymous. He also agreed that the KAC losses arose out of a single occurrence and, as such, could be aggregated as arising out of one event, holding that:

"The "unities" are I think present. There was unity of intent on the part of the Iraqis both to capture the aircraft and spares and to deprive KAC of them permanently. There was unity of time: the objective was achieved when the airport was captured. There was unity of cause: the invasion."

Further, given the finding that the Iraqis specifically intended to appropriate the KAC aircraft and spares as an element of their invasion plan, it followed that the KAC aircraft and the spares were all "lost" for insurance purposes on 2 August.

The position in relation to the BA aircraft was different. Based on his review of the facts and of the expert evidence before him, Langley J decided that the BA Hull "was not … lost as a result of the invasion and capture of the airport."

Whilst, on 2 August, it was obvious that there would be "real difficulties for BA in accessing and recovering its aircraft … the evidence belies an intent to capture or plunder and does not support any formed intention on the part of Iraq at any time permanently to deprive BA of the aircraft." (emphasis added).
Since there was no unity of intent and, further, since he did not view the invasion as having been sufficiently "causative" of its loss, the loss of the BA Hull could not be said to have arisen out of the same "event" or "occurrence" as the KAC losses.

Legal Implications

As a matter of law, Mr Justice Langley's decision does not contain any striking or new propositions. It does, however, emphasise that the English Courts, in considering the question of what constitutes an "event" or "occurrence" will focus on the extent to which there is unity of:

1. time;
2. location;
3. cause; and
4. where human agents are involved, intention.

If these requirements are, indeed, to be applied across all classes of business, the decision brings into even more stark relief the problems inherent in aggregating liability (as opposed to physical damage) losses under traditional "event" or "occurrence" based wordings.

In particular, unity of intention, to the extent that it focuses on the motivation of individuals involved, it likely to be particularly troublesome.

Practical Implications

The immediate practical implications of the decision are, perhaps, more significant.

Many thousands of claims in the LMX market have been processed and, in many cases, settled (sometimes subject to a reservation of rights) on the premise that the BA and KAC losses arose out of the same event.

In the light of Mr Justice Langley's decision, that premise will need to be reviewed which raises the spectre of having to unravel some, or all of the transactions processed to date so that the elements attributable to the BA loss can be stripped out.

Even without regard to the logistics involved, such an exercise would, no doubt, give rise to difficult issues particularly in cases where payments have been made without reservation, or where commutations or insolvencies have intervened. Given that the BA loss accounts for only a small proportion of the overall, it may be that some form of commercial solution will be pursued.

Conclusion

The saga of the Kuwait losses is, to some extent, a salutary one.

Questions of aggregation are, in many cases, straightforward. However, where issues arise, reinsureds and reinsurers alike need to tread carefully.

In many cases, it may prove costly to proceed on the assumption that reinsurers or retrocessionaires will be bound, by "follow the settlements" or equivalent provisions, to follow a reinsured's determination as to what constitutes the relevant event, however, honest and businesslike that determination might be.

Equally, cash flow requirements may well militate against a purely "wait and see" approach.

In future, test cases may be considered at an earlier stage although whether it is useful or practicable to do so until key issues at primary level have been resolved will, in any given situation, require careful consideration.