The Singapore Law Gazette

Leading Underwriter Clauses: Scope, Authority and Limits

This article examines the scope and limits of the authority conferred by a leading underwriter clause in reinsurance markets. Drawing on English and Singapore authorities, it analyses the legal basis upon which a leading underwriter may bind the following market, and considers how the courts determine the boundaries of the leader’s mandate in relation to policy amendments, coverage decisions as well as the implications of breaches of warranty for the leader’s authority.

Where a policy is subscribed to by multiple underwriters, the leading underwriter clause plays an important role in streamlining claims and facilitating the efficient management of risks between insurers. This is particularly important in the reinsurance context, where the subscription nature of the market often requires a single point of decision-making in relation to amendments and claims handling. However, the scope of authority granted to the leading underwriter is sometimes contested, and disputes may arise over whether the leader has acted beyond the mandate agreed at placement.

This article explores the scope and limitations of a leading underwriter clause drawing on case law and market practice to analyse the principles governing when, and on what basis, the following market will be bound by the leader’s actions.

Legal basis for the leading underwriter to bind the following market

Two competing theories have been identified to explain the legal basis upon which a leading underwriter may bind the following market: the agency theory and the trigger theory.¹Colinvaux’s Law of Insurance Vol 1, 14^th Ed at (1-084)

Under the agency theory,²Roadworks (1952) Ltd v Charman (1994) 2 Lloyd’s Rep 99 the leading underwriter is viewed as an agent of the following underwriters. On this view, acts performed within the scope of the leader’s authority automatically bind the following market. Conversely, acts outside of the leader’s authority may expose the leader to liability for breach of agency duty or misrepresentation of authority.

In contrast, the trigger theory³Mander v Commercial Union Assurance Co Plc (1998) Lloyd’s Rep. IR 93 treats the leading underwriter’s actions as a mechanism that binds the following market based on prior agreement. On that view, the leading underwriter does not act as the followers’ agent and cannot be liable for breach of warranty of authority.

The trigger theory appears to be gaining judicial support. In San Evans Maritime Inc v Aigaion Insurance Co SA(“The St Efrem”),⁴(2014) EWHC 163 (Comm) Teare J preferred the trigger theory in the context of the clause in question and held that a leading underwriter triggered a follow insurer’s obligation under a follow the settlement clause by entering into a settlement agreement.

From a commercial perspective, the trigger theory provides a more coherent explanation of the leader’s role in the modern reinsurance market. It avoids the arguably unnecessary extension of agency principles into a subscription context and aligns more closely with contractual principles that typically govern subscription placements.

Contractual Construction as the Starting Point

While the leading underwriter generally has wide authority to agree terms, this authority is not unlimited. The starting point is the wording of the leading underwriter clause.

A key factor that courts will consider is the purpose of the contract. This was illustrated in Barlee Marine Corporation v Trevor Rex Mountain (“The Leegas”).⁵(1987) 1 Lloyd’s Rep 471 In that case, a number of consecutive slip endorsements were added to a war risks policy by the leading underwriter. This included adding a second vessel, extending the period of insurance and increasing the number of permitted voyages. The slip provided that amendments agreed by the leading underwriter would be binding on the following market.

The following underwriters denied liability after the second vessel was struck by missiles in the Persian Gulf, arguing that the leading underwriter had no authority to agree to such substantial changes.

The English High Court rejected this argument. Hirst J stressed that the task before a Court when construing a leading underwriter clause is not to lay down a construction which will cover any possible eventuality, but rather to decide whether the extension and alterations that are in fact agreed to by a leading underwriter in the given case are within the scope of the leading underwriter clause. Here, the Court also considered that the endorsements relating to the extensions of time and the number of possible voyages fell within the scope of the main purpose of the agreement, having regard to two “held-covered provisions”. Notably, the Court rejected the use of extrinsic evidence (eg. market practice or practitioner opinions) in construing the scope of the leading underwriter clause as it was “unsound” and “commercially unworkable”.

The decision in The Leegas illustrates that courts are prepared to construe leading underwriter clauses broadly where amendments are consistent with the commercial purpose of the contract as a whole. Implicitly, the leading underwriter’s authority will not be inferred where its actions fundamentally depart from the risk structure set out in the contract.

Limits on the Exercise of the Leading Underwriter’s Authority

Minor and Customary Terms Within the Leader’s Authority

Courts may also have regard to the nature of the term agreed when determining whether the leader acted within authority. For instance, a distinction may be drawn between minor or usual terms that do not affect the premium payable. This principle was articulated in American Airlines v Hope⁶(1974) 2 Lloyd’s Rep. 301 (at p 305) where Lord Diplock observed that where the slip provides that the wording of the policy is to be agreed by the leading underwriter, the leader may occasionally introduce clauses not expressly contemplated in the slip if in his judgment it would not affect the premium.

This principle was applied in Singapore in Overseas Union Insurance Ltd v Turegum Insurance Co (“Turegum”),⁷(2001) SGHC 147 where the Singapore High Court considered whether the leading underwriter had authority to include an arbitration clause in a reinsurance contract. Prakash J accepted expert evidence that a leading underwriter could introduce such a clause so long as he acted consistently with the contract that had already been made and represented a usual term in reinsurance contracts. As the clause was a minor term that would not have affected the premium, it was held to be binding on the defendant reinsurer.

A different conclusion was reached at first instance by the English High Court in Unum Insurance v Israel Phoenix Assurance Co Ltd (“Unum”),⁸(2002) LRep IR 374 where Andrew Smith J held that general wording allowing policy terms to be agreed by the leading underwriter was insufficient to incorporate an arbitration clause. However, the apparent divergence between Turegum and Unum arguably reflects different analytical approaches. While Turegum framed the issue as one concerning the scope of the leader’s authority, Unum initially analysed the question through contractual incorporation principles. As Mance LJ made clear when the matter came to the English Court of Appeal, incorporation principles were distinct from the question of the scope of a leading underwriter’s capacity to bind a following market. Ultimately, the crucial question is whether the leader acted within the authority conferred by the leading underwriter clause whether analysed through agency principles or the trigger mechanism.

Terms within policy and undisclosed risks

The Courts have also drawn boundaries where a leading underwriter purports to bind a following market to matters falling outside the terms of the policy. In BP plc v GE Frankona Reinsurance Ltd (“BP plc”),⁹(2003) EWHC 344 BP submitted separate declarations under the terms of an open cover policy to the leading underwriters only, assuming that their agreement would bind the following market. The defendant underwriters disputed liability arguing among other things that the declarations did not fall within the terms of the open cover. The relevant clause provided as follows:

Furthermore, it is understood and agreed that all Underwriters subscribing hereto will be subject to all terms, clauses, credits, allowances and wording as agreed by the Leading Underwriters … and it is agreed to follow automatically all additions and/or deletions and/or amendments and/or alterations of any description whatsoever therein, Underwriters hereon waiving advice hereunder and also to follow all claim settlements made by the Leading Underwriters of this policy… without exception.

BP contended that a declaration was an “addition” to the policy and was binding on the market when made to the leader. The Court rejected this argument, emphasising that if “additions” should be read as including declarations, this would lead to the extraordinary result (in commercial terms) that the following market had waived advice of declarations.

The reasoning in BP plc underscores the important principle that a leader cannot, absent express wording, bind the following market to undisclosed risks for which there was no informed consent.

The same logic arguably applies with respect to Special Acceptance Clauses, which are sometimes used in reinsurance agreements to extend the authority of the leading underwriter beyond the specific terms of the original policy. In principle, such clauses should not empower the leading underwriter to bind the following market to an entirely new or unapproved risk that goes beyond the collective intent of the parties. In the light of cases such as BP plc, it is argued that special acceptance clauses do not give a leading underwriter a carte blanche to assume risks on behalf of others without proper communication. Clarity of drafting is essential to ensure that the limits of any extended authority are properly understood by all subscribing insurers.

Breaches of warranty and its effect on the leading underwriter clause

The limits of a leader’s authority may also arise in the context of breach of warranty, particularly where such a breach results in termination of the head policy.

At common law, breach of promissory warranty is draconian. In Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck),¹⁰(1992) 1AC 233 the House of Lords held that breach of a promissory insurance warranty discharges the insurer as from the date of the breach without any decision on the insurer’s part to end the contract. In the UK, this position has been modified by section 10 of the UK Insurance Act 2015, which abolishes automatic discharge and provides that a breach of warranty suspends the insurer’s liability only for losses occurring during the period of breach. However, there are no corresponding statutory provisions in Singapore. Accordingly, breach of warranty may still bring the policy to an end by operation of law, with direct consequences for the continued operation of any leading underwriter clause.

The implications of termination of the head policy on a leading underwriter clause were considered in American International Marine Agency of New York v Dandridge (“Dandridge”)¹¹(2005) EWHC 829. There, the head policy contained a warranty against a change of the insured vessel’s class. Although the vessel’s classification changed, the claimant insurer contended that the defendant reinsurer was bound because the lead insurer had agreed to continue cover pursuant to a leading underwriter clause. The Court rejected that argument holding that the policy had terminated automatically upon breach of the warranty, and that in any event the lead reinsurer had no authority to bind the following reinsurer thereafter.

A distinct but related issue arises where a breach of warranty is alleged (rather than established). In PT Buana Samudra Pratama v Marine Mutual Insurance Association (NZ) Ltd (The Buana Dua),¹²(2011) 2 Lloyd’s Rep 655 Teare J observed that a broadly worded “follow the leader” clause referring to “all decisions, surveys and settlements” could extend to decisions on coverage, including whether a claim should be rejected on grounds of an alleged breach of warranty arising prior to the decision or settlement. This suggests that, depending on its wording, a follow clause may require a following insurer to abide by the leader’s settlement even where breach of warranty is alleged.

The same reasoning applies more broadly to coverage disputes. In Roar Marine Ltd v Bimeh Iran,¹³(1998) 1 Lloyd’s Rep 423 hull and machinery policies contained a “follow the leader” clause requiring certain insurance markets to follow the British underwriters in relation to “settlement in respect of claims”. The lead London underwriters settled a claim arising from an engine breakdown. The following market resisted payment, contending that the loss was caused by wear and tear, an excluded peril. Mance J rejected this argument, holding that the meaning of the leading underwriter clause was clear and the defendants were bound to follow the leader’s decision unless the settlement was ex gratia or without prejudice. He emphasised the “obvious commercial purpose” of the clause was to streamline claims settlement.

This interpretation is sensible. Permitting a follow underwriter to dispute the leader’s settlement by claiming that the loss falls outside the insured perils would effectively lead to re-litigation of coverage issues. This would undermine the purpose of the leading underwriter clause, which is designed to avoid protracted disputes, and ensure the efficiency and finality of claims settlements.

Modern standard form London Market contracts, including the Market Reform Contract (MRC), now expressly set out the authority of the Contract Leader and incorporate the General Underwriters’ Agreement (GUA). The GUA categorises post-inception amendments into categories requiring leader-only agreement, leader plus specified followers, or full-market consent. Nonetheless, the case law discussed above remains relevant. The decisions articulate the underlying principles of contractual construction that courts continue to apply when interpreting leading underwriter clauses, whether in standard form or bespoke contracts. Further, not all placements use the GUA or current MRC wording. The case law therefore continues to provide important guidance for determining the scope and limits of a leader’s authority.

Conclusion

The leading underwriter clause remains an important mechanism in reinsurance for promoting efficiency and consistency across the market. The authorities demonstrate that the scope of a leader’s authority ultimately turns on careful contractual construction, with the wording of the clause and commercial purpose of the policy as the starting point. Clarity in drafting is therefore of central importance. Courts are, in the absence of express language, unlikely to interpret the leading underwriter clauses as binding the market to fundamentally new or undisclosed risks. Instead, the leader’s authority will be construed in light of the commercial expectations reflected in the slip. As reinsurance structures evolve, and further case-law and standard form contracts emerge, the principles discussed in this article remain central to determining the scope and limits of a leader’s authority.