In the very recent (20 May 2009) case of Flexsys America L.P. -v- XL Insurance Co Ltd, the UK Commercial Court considered some interesting issues of overlap between different parts of the same overall programme, and in particular whether reinstatement provisions in the master cover could be used to provide extra cover for the same claim. (Short answer: No)

The Claimant, Flexsys, is the US subsidiary of a global corporation based in Belgium. It bought a master policy providing cover, including to its subsidiaries, in excess of any local policies issued to those subsidiaries.

Flexsys was insured locally under a CGL policy, and incurred legal costs of over US$2m in defending a claim brought in the US by a Korean company. It settled with local policy carriers (who expressly denied liability) for the policy limit of US$1 million, and then sought to recover the balance of its legal costs from the master policy insurers.

However, cover under the master policy was narrower than under the local policy. Memorandum E (the “Drop Down Clause”) of the master policy provided that:
>In the event of partial exhaustion of a local policy this Policy will pay in excess of the reduced underlying Limit of Indemnity. In the event of total exhaustion of a local policy this Policy will continue in force as the underlying insurance subject to the terms Exceptions and Conditions of the particular local Policy.

Flexsys argued that, the local policy being exhausted, the master policy should drop down to provide further cover for this claim on the same terms as the local policy (save for limits).

Tomlinson J sensibly rejected this argument. He held that such drop-down cover did not apply where a claim was recoverable under the local policy but not under the master policy. There would have to have been some express wording to allow for recovery where the master policy terms were narrower than those of the local policy. The true intention of the second part of the Drop Down Clause, he found, was to provide “a reinstatement of the local policy to be available to meet subsequent claims….It means that in the case of either partial or total exhaustion there is cover available from the ground up for the next claim” (emphasis added).

His Lordship also rejected Flexsys’s argument that it made no commercial sense for it to have chosen to have only US$1 million of cover in certain circumstances. Such a case was meaningless, he held, without considering further commercial questions, such as the cost of buying further cover and balancing that additional cost against the perceived risk involved.

Finally, the judge considered whether the local policy gave Flexsys cover for the legal expenses which it had incurred—it did not. Cover for ‘product disparagement’ was subject to Exclusion 2, where the insured had acted knowing that its actions would violate the rights of a third party, and/or that the material published was false. The Korean company’s claims were that Flexsys had intimidated customers into boycotting it.

>In my judgment the allegation made against Flexsys is not that it said things which turned out to be incorrect which conduct might therefore have occurred through mere negligence or recklessness but rather that Flexsys set out deliberately to injure KKPC by saying things about it and its products which it knew to be untrue. Liability in respect of such conduct is plainly excluded from the ambit of the local policy cover.

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