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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> King & Ors v Brandywine Reinsurance Co (UK) Ltd. [2004] EWHC 1033 (Comm) (10 May 2004) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2004/1033.html Cite as: [2004] EWHC 1033 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		10/05/2004

Colman J:
1. Introduction
2. Fifteen years ago on 24 March 1989 there occurred one of the worst pollution disasters ever experienced by the shipping industry. The Exxon Valdez ran aground in Prince William Sound on the coast of Alaska. There was an oil spill of some 258,000 bbls of crude oil, which was carried by wind and current on to the shore of Alaska. The length of coastline contamination extended for many hundreds of miles. The oil, upon being mixed with the seawater, decomposed into a viscous sludge, then into more solid tar balls and into a viscous mousse which had to be cleaned off the shoreline by scraping it with shovels or with hoses or other equipment. Efforts had also been made in the early stages following the grounding to contain the spread of the oil. These had a very limited effect and were soon discontinued.
3. Exxon Corporation ("Exxon") owned the oil which was in the course of being shipped from Exxon's terminal at Valdez, Alaska, on board the Exxon Valdez owned by Exxon Shipping Corporation ("ESC") an affiliate of Exxon.
4. Immediately following the grounding, Exxon, the biggest oil company in the world, initiated a massive containment and clean-up operation. This involved cleaning not only the surface of the sea but also the shoreline, including harbours and other landing facilities. This exercise was directed both at property owned by the State of Alaska or for which it was responsible, including the sea surface offshore and the shoreline as well as property owned by private owners, such as fishing facilities. This operation was at first carried out by ESC as owners of the vessel. It was an immense exercise which was organised in conjunction with Exxon and in consultation with the United States Coastguard and the State of Alaska. It could not be carried out during the winter months due to weather conditions. It was therefore only completed in June 1992, some three years after the grounding.
5. The clean-up operations were immensely expensive.
6. Initially the cost was mainly carried by ESC but by 7 August 1989, its financial resources had been exhausted, it was declared insolvent and Exxon Corporation took over as paymaster. ESC spent about US$800 million and Exxon about US$1200 million.
7. Under Alaskan legislation ESC was under a statutory obligation to clean up the pollution and Exxon, as cargo owner, and ESC, as shipowner, were under a strict liability to third parties, including the State, for any losses which were sustained caused by the oil.
8. The losses sustained by Exxon and ESC had become a highly significant part of the history of the London insurance market, particularly at Lloyd's. This single loss made a major impact on the LMX spiral which has given rise to a large part of the Lloyd's litigation in this court and to much other litigation as well.
9. The claim now before the court is brought by Claimant reinsurers against Defendant Retrocessionaires under several excess of loss retrocession. The claim is made up of thousands of individual claims against the Claimants under many different inward reinsurances. All those claims, the details of which do not matter for present purposes, originated in one of three underlying primary policies by which Exxon was insured.
10. The largest primary policy and that which is relevant for present purposes is the so-called Exxon GCE Policy. The payment of claims which have found their way down the reinsurance chain originating from the GCE Policy has been held up in the London market by reason of the coverage disputes now before this court. Although this is not a test case as such, I am told that the excess of loss market's response to all such claims is likely to be influenced by this judgment.
11. Not all the issues between the parties have been tried on this occasion. Those issues now before me fall into two groups:

(i) issues arising in relation to the scope of coverage under the primary policies; and

(ii) one issue relating to the application of an exclusion - the Seepage, Pollution and Contamination Exclusion in the outward reinsurance contract between the Claimants and the Defendants.

12. Those issues in relation to coverage under the primary policies arise for the following reasons.
13. The Claimants' outward retrocession contracts contained the following JELC Reinsurance Clause:

"It is a condition precedent to liability under this contract that settlement by the reassured shall be in accordance with the terms and conditions of the original policies or contract"

14. Further, the retrocession Claims Clause was in these terms:

"All loss settlements by the Reinsured shall be binding upon the Reinsurers provided that such settlements are within the terms and conditions of the Original Policies and within the terms and conditions of this policy and the Reinsurers shall pay the amounts due from them upon reasonable evidence of the amounts paid being given by the Reinsured."

15. It is common ground that upon these provisions the Claimants must prove that all the losses were covered by the primary policies and therefore within the terms of the inward retrocession, as well as being within the terms of the outward retrocessions.
16. There were three relevant primary policies comprised within the Exxon GCE Policy. These were:

(i) Section I in respect of loss of or damage to property;

(ii) Section IIIA in respect of Marine Liabilities;

(iii) Section IIIB in respect of Public and Third Party Liability.

17. Exxon and its Affiliates were the Insured under all three policies. ESC was an Affiliate.
18. The extent of coverage under the three Sections differed. Section I provided US$600 million per loss occurrence in excess of US$400 million annual aggregate deductible in excess of US$10 million per occurrence deductible. That section was underwritten as to US$425 million by Lloyd's and the Companies Market in London and as to US$175 million by Scandinavian leaders with a mixed following market from many different countries.
19. Section IIIA, the Marine Liabilities policy, consisted of three layers, the lowest being of US$100 million any one loss in excess of US$200 million annual aggregate deductible in excess of US$10 million per occurrence deductible. That lowest layer was written by Scandinavian leaders and a mixed following market, but not of exactly the same composition as those underwriting Section I. This Section was subject to a combined single limit per loss occurrence under Sections IIIA and IIIB.
20. The middle layer of Section IIIA was of US$100 million per loss occurrence and in the annual aggregate in excess of $300 million and $10 million per loss occurrence deductible. That was written by Lloyd's and the companies market in London but not all the same insurers who underwrote Section I. The top layer was US$50 million excess of US$400 million in the aggregate with a US$10 million deductible. It was written by Lloyd's and the companies market, but not all the same participants as for Section I.
21. Section IIIB also consisted of three layers excess of US$200 million in the annual aggregate and were all also in excess of a $10 million per occurrence deductible. Each of the three layers were of the same amount of cover as for Section IIIB. The participants were in some cases different from the insurers of both Sections I and IIIA.
22. There has already been significant litigation involving Exxon in respect of the Exxon Valdez oil spill.
23. Thus on 26 October 1990 the Superior Court of the State of Alaska held that, as owner of the cargo, Exxon was under strict liability under the law of the State of Alaska for all damage proximately caused by the oil. In 1991 the jury in the trial in the Federal Court in Anchorage, Alaska, of claims brought by private claimants in respect of loss and damage caused by oil pollution awarded damages totalling US$287 million and a further US$5 billion in punitive damages. This was later reduced on review to US$ 4 billion punitive damages.
24. On 25 November 1992 Exxon settled claims for damages for clean-up costs, environmental damage and litigation costs brought by the US Federal Government and the State of Alaska for a total amount of US$ 900 million.
25. On 4 August 1993 Exxon commenced proceedings in Harris County, Texas against Lloyd's Underwriters claiming under the Section IIIA policy. These proceedings went to trial and resulted in a jury verdict in Exxon's favour and final judgment on 3 July 1996 under which Exxon was awarded US$238,473,752.50 above the US$210 million deductible together with interest of US$161,106,406.87 and fees and costs of over US$10 million.
26. Exxon's primary insurers entered into two settlement agreements with Exxon.
27. On 15 March 1996 there was a settlement of all Exxon's claims under the Section I policy. That resulted in a payment by insurers of US$300 million.
28. On 23 January 1997 there was a settlement of all Exxon's claims under the Section IIIA and IIIB policies, including those claims under Section IIIA which were the subject of the judgment in the Texas proceedings and subsequently subject to appeal. The insurers made a payment of US$480 million. The agreement did not apportion that payment between IIIA and IIIB.
29. The main issue now before this court is whether Exxon was entitled to recover under Section I or Section IIIB. If they were not, no part of the payments under the Section I Settlement Agreement can be brought into the calculation of the ultimate net loss under the retrocessions between the Claimants and the Defendants and none of the payments under the Section IIIA and IIIB Settlement Agreement can be apportioned to Section IIIB for the purposes of the calculation of the ultimate net loss as between the Claimants and Defendants.
30. There is also a distinct issue as to whether ESC, as distinct from Exxon, was entitled to recover from the Section I primary insurers at the time of the Section I Settlement Agreement and, if it was, whether there was a settlement of insurers' liability to ESC. If there was no such liability or settlement, the Claimants cannot include in the ultimate net loss under their outward retrocession any part of the Section I settlement on the ground of primary insurers having made payment in respect of liability to ESC as co-assured with Exxon, as distinct from Exxon itself. ESC recovered from the International Tanker Indemnity Association ("ITIA") some US$400 million, which was the full extent of its cover, but which was only about half of its total clean-up expenditure.
31. There is also an issue as to the proper construction of the retrocession, namely whether the Defendant retrocessionaires are entitled to the exclusion of liability under the Seepage and Pollution Clause in respect of all constituents of the ultimate net loss attributable to expenditure on cleaning up oil deposits on land.
32. Before considering the many issues of construction now before the court, it is necessary to resolve a fundamental question which potentially at least has a direct effect on most of those issues, namely by what body of law each of the three policies comprising the GCE policy was governed. The Claimants submit that the proper law is the law of New York, the Defendants that it is English law.

The Proper Law of the Primary Policies

33. The following are matters of common ground.

(1) The issue as to the proper law of the primary contracts of insurance is to be determined by application of English conflicts of law principles.

(2) It is to be assumed that sections I, IIIA and IIIB were presented by the placing brokers to the participants on both the London and Scandinavian markets as a single package and during a very short period of time.

(3) The Rome Convention on Conflicts of Laws has no application since it came into force in April 1992 – after the contracts of insurance were entered into – and by Article 17 it does not apply retrospectively.

34. The starting point is to investigate whether the parties have expressly selected a body of law at the time of contracting or whether such selection can be implied from the express terms of the contract.
35. The presentation of the three sections as a single package would tend to suggest that, in the absence of clear indications to the contrary, the mutual intention of the parties must have been that all three sections were to be governed by the same body of law.
36. There are inter-connecting provisions where cover under one section is defined by reference to cover under another. The reference in Section I Article VIII.5 to the "Liability Policies", which must be to Section IIIA and IIIB, illustrates this interconnection.
37. The Claimants rely primarily on the Service of Suit clause. This is set out in General Condition 12 of Section I, General Insuring Condition 22 of Section IIIA and Article IX of Section IIIB but it is not in identical form under all three policies. That in Sections I and IIIA provides as follows:

"It is agreed that in the event of the failure of Insurers hereon to pay any amount claimed to be due hereunder, Insurers hereon, at the request of the Insured, will submit to the jurisdiction of any Court of competent jurisdiction within the State of New York and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such court.

It is further agreed that service of process in such suit may be made upon Mendes & Mount, 3 Park Avenue, New York NY 10016 USA and that in any suit instituted against any one of them upon this contract, Insurers will abide by the final decision of such Court or of any Appellate Court in the event of an appeal. The above named are authorized and directed to accept service of process on behalf of Insurers in any such suit and/or upon the request of the Insured, to give a written undertaking to the Insured that they will enter a general appearance upon Insurers' behalf in the event such a suit shall be instituted.

Further, pursuant to any statute of The State of New York which makes provision therefore, Insurers hereon hereby designate the Superintendent, Commissioner or Director of Insurance or other offices specified for that purpose in the statute, or his successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Insured or any beneficiary hereunder arising out of this contract of insurance and hereby designate the above named as the person to whom such process or a true copy thereof shall be mailed."

38. That in Section IIIB has a different opening sentence, thus:

"It is agreed that in the event of the failure of Insurers hereon to pay any amount claimed to be due hereunder, Insurers hereon, at the request of the Insured, will submit to the jurisdiction of any Court of Competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court."

39. Its effect is to confer on the assured an option to select the jurisdiction of the New York courts or, in the case of Section IIIB, any United States court for the resolution of any dispute in respect of which insurers have failed to pay a claim made by the assured. If that option is exercised by the assured, the insurers are obliged to comply with all procedural requirements necessary to give the New York court or (under section III B) other court jurisdiction and all matters arising are to be determined in accordance with New York law and practice or in the case of III B the law and practice of the court selected. This clearly provides for an express choice of law, but it is contingent on the assured being entitled to exercise the option as to jurisdiction and on the assured having exercised it. It is thus clear that a dispute might arise in respect of which the assured was not entitled to exercise the option: for example an allegation by insurers that they were entitled to avoid the policies for non-disclosure before any claim for payment had arisen. Equally the assured might choose to sue the insurers in their place of business not in the United States and so not to exercise its option to undertake New York or United States jurisdiction. In either event, there would be no effective express incorporation of either New York jurisdiction or New York law or under Section III B any other jurisdiction or law.
40. In Armadora Occidental S.A. v. Horace Mann Insurance Co. [1977] 2 Lloyd's Rep. 406 there was a "New York suable" clause in the following form:

"The Place of actual and physical issue and delivery of this policy is the City of London. Nevertheless at the option of the Assured and as between Assured and Assurers the place of issue and delivery of the policy shall be considered the City of New York and all matters arising hereunder shall be determined in accordance with American Law and Practice. Any suit hereunder may be brought against these insurers in any Court of competent jurisdiction within the United States of America."

41. There was also a "follow London" clause in the following form:

"Assurers herein shall follow Lloyd's underwriters and/or British insurance companies in regard to amounts, terms, conditions, alterations, additions … and settlement of claims hereunder and all matters pertaining to this insurance with or without prior notice. Notice to Lloyd's Underwriters and/or British insurance companies of any matter requiring notice shall be deemed notice to American Underwriters and/or American insurance companies interested in these insurances."

42. On the question whether the contracts of insurance were governed by English or Californian law, it was held both by Kerr J and the Court of Appeal that, although the first section of the New York suable clause could be ignored because it was demonstrably wrong since the policies had been negotiated and issued in the United States and not London, the remainder of the clause was still effective but that because the assured had not exercised the option for New York jurisdiction, the reference to American law and practice could be disregarded in addressing the question of the proper law. Since it was common ground that the policies placed in London were impliedly governed by English Law, the other policies were, by reason of the follow London clause, by implication also governed by English Law.
43. It is to be observed that there was no suggestion either by Kerr J or by Lord Denning MR in the court of Appeal that the New York suable clause, even in the absence of the exercise of the option by assured, could give rise to any countervailing consideration capable of being weighed in the balance of construction against the implicit effect of the "follow London" clause.
44. In my judgment, an unexercised option to select a body of law could not normally give rise to more than the most minimal implication that the contract was to be governed by that law. There would have to be some other weightier features of the contract which gave rise to that implication to the effect that it arose as at the moment when the contract was made regardless of whether the option was exercised in the future.
45. The concept that in English conflicts law all contracts must be accorded a proper law from the moment they are made is clearly expressed in Amin Rasheed Shipping Corporation v. Kuwait Insurance Co [1984] AC 50 per Lord Diplock at page 65. This principle – that the proper law cannot remain indeterminate or "floating" until some future event - may lead to the result that if the contract contains an option to select the proper law in the future, the effect will be to vary the contract by substituting one body of law as the proper law for another. This may be commercially disruptive but it is certainly not conceptually untenable. Indeed, such a consensual variation is expressly contemplated by Article 3.2 of the Rome Convention, albeit that had not yet been incorporated into English law when these policies were negotiated.
46. Thus, in E.I. Du Pont de Nemours & Co. and Endo Laboratories Inc. v. I.C. Agnew [1987] 2 Lloyd's Rep. 585 there was also a service of suit clause in a slightly different form which provided that at the request of the insured underwriters would submit to the jurisdiction of any court of competent jurisdiction in the United States and that all matters arising under the contract would be determined in accordance with the law and practice of such court. In concluding that the contracts in that case were governed by English Law Bingham L.J. observed at page 592:

"The service of suit clause did contain a reference to New York, which is the proper law for which the insurers contend. There are three points to be made. First, a clause of this type is not inconsistent with an English proper law, where that is otherwise to be inferred: see Armadora Occidental SA and Others v. Horace Mann Insurance Co, [1977] 2 Lloyd's Rep 406; [1977] 1 WLR 520. Second, the drafting of this clause appears to contemplate that the proper law of the contract may float until exercise of an option by the insured. But this is not a concept to which an English Court could give effect, since the rights and obligations of contracting parties crystallize when a contract is made (subject to consensual variation thereafter), and contracts can only crystallize with reference to an existing proper law since they cannot exist in a legal vacuum: Amin Rasheed at pp 370 and 65C; Armar Shipping Co Ltd v. Caisse Algerienne d'Assurance et de Reassurance, [1980] 2 Lloyd's Rep 450; [1981] 1 WLR 207. It may, I suppose, be theoretically possible for a proper law to be retrospectively varied on exercise of a contractual option, but that does not dispense with the need for a pre-existing proper law, and since the option has not been exercised it is not in any event this case. Third, the intended effect of this clause, providing for determination of disputes in accordance with the law of the Court in which the insurer is sued, does not suggest that the law of any State of the Union is already the proper law. Certainly the provision for service on New York agents does not support that inference, because service may be made upon them no matter in which State the suit is brought."

47. Properly understood, these remarks are entirely consistent with the proposition that an unexercised option to select law and jurisdiction does not normally contribute any implication as to the law which governs the contract at the time when the contract is made. The lack of identification of the state jurisdiction in respect of which the option would be exercised is nothing to the point. Bingham L.J's third point is simply that at the time when the contract was entered into the option had not been exercised and therefore at that time the identification of the proper law had to be arrived at by reference to other features of the contracts, such as the fact that they were negotiated in London and on a Lloyd's form policy issued by Lloyd's and subject to claims notification to Lloyd's brokers in London. It would have made no difference to this conclusion if the service of suit clause had confined the optional law and jurisdiction to New York or any other state.
48. In Commercial Union Assurance plc v. NRG Victory Reinsurance [1998] 1 Lloyd's Rep. 80, another Exxon Valdez reinsurance claim based on the same sections I and III A as are now in issue, it was also argued that the contracts were governed by New York law on a number of grounds. It was possible to distinguish Du Pont de Nemours & Co. v. Agnew, supra, because, whereas in that case service could be effected in New York, no matter in which state the suit was commenced, in the instant cast the assured was entitled to choose arbitration in New York in which case the arbitrators were bound to apply New York law if they did not abstain from strictly following rules of law. Equally the assured could insist on proceeding in the New York courts, in which event the law and practice of those courts would apply. Clarke J stated at page 85 that he preferred the view that, because Du Pont v. Agnew could be distinguished, as submitted, the proper law of the policies was New York Law. However, it was unnecessary to decide that point.
49. The three sections each contained an arbitration clause. That under Sections I and III A was in the following form:

"In the event of any difference arising between the Insured and the Insurers with reference to this insurance such difference may, upon the agreement of the parties (after all requirements of this insurance with respect to recovery of any claim shall have been complied with) be referred to three disinterested arbitrators, one being chosen by the Insured, one chosen by the Insurers and the third chosen by the two aforesaid arbitrators before they enter into arbitration.

In case the arbitrators so chosen do not agree as to the third arbitrator within four weeks after both shall have accepted service, the third arbitrator shall be chosen by the acting Senior Judge of the United States District Court for the State of New York. In default of any party hereto qualifying its arbitrator within four weeks after receipt of written notice from the other party requesting it to do so, the requesting party may name both arbitrators and they shall proceed in all respects as above stipulated. Each party shall submit its case to the court of arbitration within four weeks of the close of the choice of the arbitrators. Any such arbitration shall take place in New York, New York unless otherwise agreed by both parties and the expense of arbitration shall be borne and paid as directed by the arbitrators. The arbitrators may abstain from jurisdictional formality and from following strictly the rules of law. To the extent the Arbitrators follow the rules of law, such law shall be that of the State of New York to the exclusion of all other laws."

50. Section III B contained a clause which differed in its opening sentence from those under sections I and III B in the following manner:

"In the event of any difference arising between the Insured and the Insurers with reference to this Insurance such difference shall at the request of either party (after all requirements of this insurance with respect to recovery of any claim shall have been complied with) be referred to three disinterested arbitrators, one being chosen by the Insured, one chosen by the Insurers, and the third chosen by the two aforesaid arbitrators before they enter into arbitration."

51. The remainder of that clause made no provision for the arbitrators to apply New York law.
52. It is to be observed that the arbitration clauses under Sections I and III A are unenforceable as binding arbitration agreements. This is because they are agreements to agree to refer disputes to arbitration. That being so, the fact that any such arbitration is to take place in New York and that the arbitrators are to apply New York law to the extent that they choose to follow any rules of law, cannot, in my judgment, contribute to the process of implication any weight in favour of New York law. The same is true of the Section III B arbitration clause. This is enforceable, for it provided an enforceable option to either party to refer any difference under the contract to arbitration. However, although any such arbitration was to be held in New York, unless otherwise agreed, the arbitrators could "abstain from jurisdictional formality and from following strictly the rules of law" and there was no express choice of New York Law.
53. These being the same clauses as were before Clarke J in Commercial Union v. NRG Victory, supra, I am not able to agree with his reasoning, albeit obiter, as to the proper law. He was, in particular, mistaken in his assumption that it was open to the assured under Section I and III A to impose New York arbitration. As I have already indicated, there was no enforceable agreement to arbitrate. It was only under section III B that the assured could, if he chose, require arbitration. I do, however, accept that if that were done, there would be an inference that the arbitrators could apply New York law if and to the extent that they applied any rules of law. Further, however, there could be no certainty when the contract was made that either party would refer a future dispute to arbitration. Both parties might prefer to litigate and the assured might not exercise its option for New York jurisdiction. It might sue anywhere with jurisdiction over the insurers. Accordingly, no weight can be attached to the arbitration clauses as indicia of the proper law under sections I and III A but some weight, but certainly not conclusive weight, can be attached to that under III B: see Compagnie d'Armamant Maritime v. Compagnie Tunisienne de Navigation [1971] AC 572.
54. Further, I am not able to accept that the differences in the provisions for service of process in this case from those in Du Pont v. Agnew, supra, give rise to any relevant distinction between the two cases. The identification of those designated to accept service on behalf of the insurers as New York attorneys was only for the purposes of the process that could be commenced if the assured exercised its option to sue the insurers there. This is absolutely clear from the wording of the second sentence of the Service of Suit clause – "service of process in such suit" (emphasis added). As to section III B, the "service of suit" Clause was the same as that in Du Pont v. Agnew.
55. Accordingly, I reject the submission that either the Service of Suit clause or the Arbitration clause have anything to contribute to the proper law applicable to sections I or III A. As to section III B, there is an indication of somewhat limited weight that, by reference to the New York arbitration clause, the proper law is New York law.
56. Which then are the other features of these contracts relevant to the proper law?
57. The Claimants rely on the fact that the Notice of Loss occurrence clause, section I Art VI.4 refers to the Insured as Exxon Corporation of New York, which is where Exxon's headquarters were located. They further rely on the provisions referred to for the service of suit on Mendes & Mount in New York and, if required by statute, the Superintendent Commissioner or Director of Insurance in New York. Section I referred to Marsh & McLennon as the Brokers and the policies bore the references of that firm. The whole package of sections was written by insurers from all over the world and sub-broked by sub-brokers in New York, Sweden and France. Further, the policies provided for payment of the premium and losses in US Dollars and there were express provisions in the policies dealing with conversion of other currency into United States dollars.
58. The Defendants draw attention to the fact that the policies make reference to English standard clauses. Thus Article X.1 of Section I provides;

"1. This insurance covers against the risks of War and Strikes etc. as per Institute War and Strikes Clauses – Hull Time – 1^st October 1983, including Vandalism, Malicious Damage and Sabotage and Terrorists Acts.

In respect of STADRILL subject to Clause 19 of London Standard Drilling Barge Form (All Risks) 1 March 1972."

59. The Institute War and Strikes Clauses state that "This insurance is subject to English Law and Practice".
60. By Addendum No.8 to Section III B it was provided:

"It is understood and agreed that Insurers hereon will indemnify or pay on behalf of the Insured any sums that the Insured may be required to pay following the provisions of the Offshore Pollution Liability Agreement, as amended and renewals thereof, but coverage hereon is subject to United Kingdom jurisdiction."

61. The Section III B contract incorporated the wording of the Excess Liability Claims Made Policy- NMANo.2233, a London market form.
62. Other factors relied on by the Defendants are that, although the head brokers acting for Exxon were Marsh & McLennan in New York, the placing brokers were its subsidiary, Bowrings, in London who placed 70.83 per cent of the risk on the London market. Thus the London market policies were negotiated in London and issued through Lloyd's and the I.L.U. in London. The leading underwriter was Richard Youell of the Jansen Green Syndicate. He had led the market during the 1986/7 and 1987/8 years of account.
63. As to the balance of the risk placed in the so-called Scandinavian market, there were Norwegian, United States, United Arab Emirates, Bahrain, Danish, French, Swedish, Finnish, British and Japanese insurers. However, apart from some minor variations, the policies issued by the Scandinavian market adopted the London policy wording which Bowring had negotiated with Jansen Green. Moreover, the Scandinavian market, wrote 29 per cent of Section 1 and a bottom layer ($100 million excess of the $200 million annual aggregate deductible) under Section III B. In as much as they were a minority market under all three sections and that the placing brokers clearly presented the risk on the basis of the London market wording, I infer that the placing brokers and Scandinavian market insurers would naturally and mutually assume that their contracts would be governed by the same body of law as governed the London market policies.
64. As indicated in Du Pont v. Agnew, supra, at page 592, there is a very strong inference that contracts of insurance placed on the London market and recorded in policies issued in London are, in the absence of strong contrary indications, intended to be governed by English law. Bingham L.J. stated the position thus:

"I think it plain, almost beyond argument, that the proper law of that policy is English. It was a Lloyd's policy, negotiated by Lloyd's brokers and issued by the Lloyd's Policy Signing Office in London. Notice of potential claims was to be given to Lloyd's brokers. The policy was for world-wide cover. Unless displaced, the inference that English law was intended to govern is in my view overwhelming."

65. As I have already held, neither the Service of Suit clause nor the Arbitration clauses carry significant weight in relation to the inference as to governing law. Although Exxon was a United States Corporation, the risks were worldwide, as was the location of a significant proportion of the following market. Part of the wording incorporated into or referred to in the policy was London market wording, for example, Article IV.23 of Schedule I, the Institute Pollution Hazard Clause. Notification of claims had to be given to the Brokers who were defined as both Marsh & McLennan in New York and Bowrings in London. The pointers towards an implication of English law thus outweigh the pointers towards New York law.
66. I therefore conclude that all the sections of GCE Policy were governed by English Law.
67. I shall therefore first consider all the issues argued at the trial with reference to English Law. In case this judgment is appealed I shall then consider how these issues would be determined if, contrary to my view, these policies are governed by the Law of New York.
68. The Claim under Section I.
69. The Claimants base their claim on Exxon being entitled to recover under two provisions of Section I.
70. This is the property damage section.
71. Article VII, in so far as is relevant, provides as follows.

"Interest and Coverage

For each loss occurrence covered by this Policy the Insurers agree with the Insured to pay or to pay on their behalf subject to the Basis of Recovery Article (VIII):

1. All losses incurred by the Insured as a result of physical loss or damage to Property of any kind or description owned by the Insured or property of others held in trust or for which the Insured may have assumed responsibility, or for which the Insured may have an obligation to insure, repair or replace."

4. All sums which the insured pays or incurs as costs or expenses on account of:

(a) General Average, Salvage Charges, Salvage, Sue and Labour, Collision and Towers Liability on the basis that recovery hereunder shall not be reduced should the Insured Value be less than any Contributory Value adopted.

(b) Removal of or attempted Removal of Debris or Wreck of Property and/or Residential Structure covered hereunder.

(c) Actions taken to defend, safeguard, preserve, recover and forward property insured hereunder.

(d) Any use and Occupancy or Business Interruption in respect of Kemya only.

5. This insurance is also to include Collision Liability as per American Institute Hull Clauses (June 2, 1977), extended to include Towers Liability in respect of the foregoing described Interests whilst under construction and/or tow and/or installation and/or in respect of any Mobile Unit insured hereunder.

Notwithstanding anything contained as above there shall be no recovery hereon for liabilities as described under the Assured's Liabilities Policy(ies) (as more fully defined and covered under Policy No. 03-0366-88 & HA127188) or for "Directors and Officers" and "Fidelity" coverage. However in respect of Liabilities as described under Assured's Liability Policy(ies) (as more fully described and as covered by Policy No. 03-0366-88) it is agreed subject to the deductible as defined in Article IV (2) that losses up to a further $200,000,000 in the aggregate annually may contribute to exhaust this policy aggregate(s) hereon. Further in respect of "Directors and Officers" and "Fidelity" coverage it is agreed subject to the deductible as defined in Article IV (2) that losses up to a further $90,000,000 any one occurrence and in the aggregate in respect of "Directors and Officers" may contribute to exhaust this policy aggregate(s) deductible(s) hereon."

72. The particular provision relied on by the Claimants is paragraph 4(b) - "Removal of or attempted Removal of Debris or Wreck of Property and/or Residual Structure covered hereunder."
73. Because of the words in the preamble "subject to the Basis of Recovery Article VIII" the Claimants rely further on that Article.
74. That Article is divided into four sub-divisions:

1. Property (other than cargo and stock);

2. Cargo and Stock;

3. Accounts Receivable;

4. Well Control Costs etc.

75. The Claimants rely on Article VIII.2(b). In order to obtain the context of this provision it is necessary to set out the following:

"(a) Recovery for any loss hereunder shall be determined as follows:

(i) for crude oil: the replacement price at the time and place of loss or if there is no price, at a price determined from a recognized price at a point through which the crude oil would normally move, adjusted to reflect the cost of transporting such crude oil to such point;

(ii) for refined or in-process products: the replacement price of such products at the time and place of loss, less all unincurred expenses;

(iii) for materials, supplies, equipments, tools and all other cargo: the cost of replacement at the time and place of loss.

(b) In addition to (a) above, recovery shall also include costs of preserving and forwarding the property, as well as costs and expenses in respect of general average, sue and labour, salvage, salvage charges and expenses incurred in removal or attempted removal of debris or wreck or property even if incurred solely as the result of governmental or other authoritative order and the amount of the reasonable extra cost of temporary repair or of expediting the repair, including overtime and the extra cost of express or other rapid means of transportation. This shall include but not by way of limitation, any costs and expenses incurred in respect of fighting a fire endangering or involving property insured hereunder."

76. It is common ground that the material words in 2(b) should read "removal of debris or wreck of property" (emphasis added).
77. It is to be observed that the same words appear in Article VIII. 1(d) in the sub-division covering Property other than Cargo and Stock which also at (f) makes specific provision in respect of sub-limits of cover for removal of Debris for scheduled major North Sea Oil Platforms. It is further to be noted that sub-division 4, "Well control costs etc", which, as its name suggests, provides an indemnity against the expense of bringing wells back under control, does not contain any wording about removal of debris. It provides as follows:

"For the purposes of coverage hereunder, a well out of control shall be defined as a well from which and whilst there is a flow of drilling fluid, Oil, Gas or Water which is uncontrollable and cannot be controlled by the blowout preventer or storm chokes or Xmas tree or other equipment generally considered prudent for the operation insured, or any well that the Assured is required by any Governmental and/or regulatory authority to control."

78. The Defendants submit that the words "removal of debris of property" do not cover oil pollution clean up costs because those words are not in their ordinary meaning wide enough to cover escaped liquid cargoes and in particular oil cargoes. Had the material intention been that cover should extend to such a risk words incorporating an express reference to " pollution" would have been used. The defendant also submit that, if they are wrong on that point, the effect of Article VIII.5 ("the Notwithstanding Clause") is that there can be no recovery under Section 1 because the loss sustained by Exxon was in consequence of "liabilities" as described under the Liability Policies, primarily Section III A, but also Section IIIB, the latter only if the Claimants are right in their submission that they are entitled to recover under Section IIIB.
79. The Defendants further rely on Article IX.3 of Section I. This provides:

"This policy does not cover –

3. Loss of, or damage to property, liability for which is imposed upon the Insured by Law, other than such property as may be included under the terms of this policy."

80. The Defendants argue that to the extent that Exxon's claim related to steps taken to prevent or reduce damage by the oil to property not insured under Article VII liability was excluded by this term.
81. The Claimants make an independent claim which arises only if Exxon's claim is within Article VII.4(b) but is excluded by the Notwithstanding Clause. The Claimants argue that ESC is within the definition of the Insured under Section I (which is not disputed), that Article VII.4(b) does not confine cover for the costs and expenses incurred in the removal of debris to the owner of the damaged property and that ESC was at the material time carrier and therefore bailee of the oil with an insurable interest arising out of its possession as bailee. The Claimants argue that the Notwithstanding Clause does not affect ESC's entitlement to recover under section I. This, it is submitted, is because of the effect of clause 1(c) of the Protection and Indemnity Risks sub-division of section IIIA which provides:

"This insurance does not insure against any liabilities, costs or expenses which are insured by the indemnity provisions of the ITIA Rules prevailing at the time of the loss, not for any amount in excess of ITIA limits of insurance prevailing at the time of the loss, nor for any liabilities, costs or expenses insured by the indemnity provisions of the Rules prevailing at the time of the loss that may be denied by ITIA in its discretion or because of the Insured's failure to comply with any of the terms or conditions of the rules prevailing at the time of the loss or any other reason."

82. That exclusion of cover under Section IIIA is said to disarm the Notwithstanding Clause and thereby to enable ESC to claim under section I. ESC is prevented from claiming under Section IIIB by reason of Article VI exclusion (f) which excludes from IIIB cover "claims made against the Insured arising out of the ownership or bareboat charter of any watercraft ….." Accordingly, there would be cover under neither of the Liability Policies in respect of ESC's claim.
83. The Defendants submit that ESC's claim is not covered by Section I for the following reasons.

(i) ESC had no title to the oil: it belonged to Exxon.

(ii) ESC did not hold the oil on trust and was not under any obligation to insure it or to repair or replace it within Section I Article VII.1.

(iii) ESC was in possession of Exxon's cargo under the terms of a Contract of Affreightment dated 14 April 1988. The Defendants rely on clause 7.2 which provided:

"Delivery, Custody, Title and Risk of Loss (General). Delivery of cargo shall be to or from a terminal designated by EUSA into a vessel nominated by ESC. Custody of all cargo delivered hereunder shall pass to or from ESC upon delivery to the flange connection between the vessel's cargo manifold and the loading or discharge facility or vessel unless otherwise stated elsewhere in this Agreement. Title and risk of loss for the cargo shall remain with EUSA at all times."

The Defendants also relied on the very wide exclusion of liability under clause 16.9.

(iv) ESC's clean-up expenditure arose from ESC's liability imposed by Alaskan law for damage to the property of the owners of the shoreline and accordingly would be excluded from cover by Section I Article IX.3 set out above.

84. The Defendants further submit that under English law ESC's claim had become time-barred by the time of the Section I Settlement Agreement. ESC never made any claim for recovery of their expenditure on clean-up costs until after that Section I Settlement Agreement in on 15 March 1996. The cause of action had accrued by August 1989 by which point ESC had become insolvent due to its expenditure on the clean-up. Thereafter Exxon took over payment for the clean-up. Accordingly, the claim by ESC became time-barred in English law by mid-August 1995. As appears later in this judgment, it is submitted that under New York failure of ESC to comply with the provision for notice of a loss occurrence under Section I, Article VI.4 provided a complete defence to the claim and further that the claim was similarly time-barred by August 1995.
85. Thus, the Defendants submit, the Section I Settlement Agreement was not the settlement of any claim by ESC and was confined to Exxon's Section I claim. Accordingly, under the Ultimate Net Loss Clause in the claimant's outward retrocessions or in the JELC Net Loss Clause in the claimant's outward retrocessions or in the JELC Net Loss Clause the sum paid by primary insurers under that Settlement Agreement was not a sum paid in settlement of loss, damage liability or expense sustained by ESC.

"Removal of Debris of Property .. covered hereunder"

86. In order to identify the mutually intended meaning of these words it is necessary first to investigate the possible range of dictionary meanings, secondly to investigate the setting of the words in their contractual environment and thirdly to investigate the circumstances in which the contracts were negotiated, in particular the circumstances of the parties and the mutually known features of the market in which they were negotiating. This approach is consistent with that indicated by the House of Lords in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896 and in particular in the speech of Lord Hoffmann at page 913:

"(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] AC 749.

(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v. Salen Rederierna AB [1985] AC 191, 201:

'if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.' "

87. The reference to Mannai Investments v. Eagle Star is particularly in point for in that case one finds Lord Steyn observing:

"In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language."

88. There can be no doubt that "debris" is not a word which normally comprehends liquids. The word is of French origin meaning that which has been broken down or broken up. The shorter Oxford Dictionary definition is "the remains of anything broken down or destroyed; ruins, wreck". In Geology the meaning is "any accumulation arising from the waste of rocks etc." Then there is a wider meaning "any similar rubbish formed by destructive operations". The Cambridge Advanced Learner's Dictionary has "broken or torn pieces of something larger". The Oxford Advanced Learner's Dictionary of Current English has "scattered, broken pieces, pieces of something that has fallen down or been destroyed". All these dictionary definitions therefore contemplate broken solids as distinct from liquid or viscous substances. The oil from the Exxon Valdez apparently reacted with the seawater to form a viscous sludge and in the course of time and certainly before completion of the clean-up operation it became transformed into a "mousse" and tar balls. This last condition was the nearest that some of it got to a solid condition. There is no evidence before me to indicate how much of the oil spill remained at least viscous and how much became tar balls or how long it took for this last condition to develop. What is clear, however, is that the clean-up was carried out in accordance with the requirements of and under the supervision and with the technical assistance of the Government of the State of Alaska and the United States Coastguard. Thus if that which had to be cleaned up from the sea and the shoreline had consisted of pieces of wood or chunks of polystyrene, there would be no question but that there would be cover under Section I.
89. On the face of it, the scheme of the protection under Section I appears to be that cover is given in respect of expenses incurred in removal of wreck or debris of the property insured. Thus, in relation to property, other than cargo and stock, such as vessels, craft and offshore platforms, there is specific provision for the expenses of removal of debris. This is to be found in Articles VIII, 1(d) and (f). The property covered by VIII.1 is all solid. However, in Article VIII.2 the property in question is partly liquid – (a) crude oil and (b) refined products - whereas the property covered by (c) is solid.
90. Accordingly, if one starts from the basis that the range of meanings normally accorded to debris would not ordinarily be apt to extend to liquids or viscous substances, the question arises whether the scheme of cover under Section I suggests that as regards the costs of removal of escaped liquid cargoes the parties would not have intended that these should be treated any differently from dispersed broken solids to the effect that their mutual intention in inserting VIII.2 (b) was that it should be available in respect of clean-up of all the kinds of cargoes listed in 2 (a). The pertinent question is thus what purpose could explain differentiating between the cover available in respect of type of expense (that arising from debris removal) relating to solid insured property and the cover available in respect of exactly the same kind of expense relating to insured oil and oil products, for if there were no intelligible purpose it would be open to this court to take the view that any such distinction was so commercially improbable that the normal (broken solids only) meaning of debris would not give effect to the inferred mutual intention of the parties.
91. It was argued by Mr. Colin Edelman Q.C. on behalf of the Claimants that by examination of the insured property values, the extent of cover (US$600 million) relative to the total of the deductible and the lower layer (US$10 million plus US$400 million) the mutual intention could only have been to provide for catastrophe protection under Section I such as would be needed were there to be a major pollution event of the kind suffered in the case of the Exxon Valdez. The argument may be summarised thus.
92. The limit of cover under Section I is US$600 million ultimate net loss for any one loss occurrence in excess of US$400 million in excess of US$10 million. "Loss occurrence" is defined in Article V.2 as follows:

"The term "loss occurrence" shall mean an event or a continuous or repeated exposure to conditions which cause injury, damage or destruction. Any number of such injuries, damage or destruction resulting from a common cause or from exposure to substantially the same conditions shall be deemed to result from one "loss occurrence".

The term loss occurrence shall specifically include injury to or destruction of property as the unforeseen result of an international act.

In respect to losses hereunder arising from Tornado and/or Cyclone and/or Hurricane and/or Windstorm and/or Hail and/or Earthquake and/or Flood, the term "loss occurrence" shall be construed to mean the sum total of all the Insured's losses sustained during any one period of 72 consecutive hours commencing within the period of this Policy arising out of or caused by the same atmospheric and/or geographical disturbance.

In respect to losses hereunder arising from Riot and/or Riot attending Strike and/or Civil Commotion and/or Vandalism and/or Malicious Damage the term "loss occurrence" shall be construed to mean the sum total of all the Insured's losses sustained during any one period of 72 consecutive hours commencing within the period of this Policy."

93. Attention is drawn to the relevant agreed property values to be found in Endorsement No.4 to section I. From these it can be seen that the two most valuable insured tankers – the Exxon Valdez itself and the Exxon Long Beach had values of $137.5 million. Assuming that those two vessels collided when fully laden and that each became a total loss with a total loss of cargo worth about $20 million, the aggregate loss to be brought into account under the policy would only be US$295 million. If one then applied the per occurrence $10 million deductible, that would reduce to $285 million which would not have approached the excess layer of $400 million which had to be exhausted before the Section I cover of $600 million was engaged. That excess would be passed only if there were some feature of a single occurrence beyond the total loss of two ships and their cargo. Although it would be theoretically possible for many ships and their cargoes to be totally lost in one occurrence, this would be an unrealistic risk. Furthermore the Claimants draw attention to the various sub-limits imposed under the policy. For example, under Article VIII.1(f) there were limits for removal of debris coverage in respect of major North Sea platforms. Reference to Endorsement No.5 of Section I shows the value of Exxon's interest in these platforms. There is also cover for well control which by Article VIII 4 is subject to a sub-limit of $300 million any one occurrence. Mr. Edelman submits that by comparison with the cover of $600 million excess of $410 million any one occurrence, the property values and the removal of debris limits are so low that it is to be inferred that the mutual intention must have been to include oil pollution clean up expenses which alone could have lifted the loss from one single occurrence anywhere near US$1 billion which would burn through the total cover. Hence "removal of debris of property" insured under Section I must have contemplated a catastrophic occurrence involving massive oil pollution clean up expenses in addition to loss of insured property.
94. Mr.Edelman Q.C. further argues, on behalf of the Claimants that if it is correct that there is free-standing cover for oil tanker pollution liabilities of Exxon as cargo owner to third parties under Schedule IIIA, there is no reason why the parties should not have mutually intended that there should be protection against first party clean up losses due to pollution under Section I within the description "removal of debris".
95. There is no evidence as to how Exxon arrived at the need for cover above $410 million any one occurrence. Nor is there any evidence as to the magnitude of loss that Exxon might sustain if there were a simple occurrence involving for example, an oil tanker fully laden colliding with and exploding at a major North Sea Oil platform and thereby giving rise to the need for wreck and debris removal as well as well control. I observe however that the insured values of Exxon's interest in the oil platforms listed in Endorsement No. 5 to Section I are up to $301,750,000 and that if one adds to that the value of one of the largest tankers and a full cargo (say $147 million) as well as the removal of debris expenses, subject to sub-limits of the size set out in Article VIII.1(f), the cost of wreck removal and well control expenses, it is not unrealistic to assume that the total loss attributable to one occurrence might well not only exhaust the $400 million annual aggregate deductible, if other substantial losses had occurred and had to be brought into account for that year's aggregate but consume a substantial part of the $600 million any one occurrence cover without any loss attributable to oil pollution clean up costs. I therefore decline to draw an inference as to the scope of the words "removal of debris" from the Claimants' argument based on property values relative to the size of cover. In the absence of cogent evidence that no combination of physical losses constituting one occurrence could realistically be foreseen as giving rise to anything approaching a $600 million excess of $410 million loss it would not be justifiable to assume that oil pollution costs had been taken into account.
96. Apart from dictionary meanings of debris, it was a central plank of the submissions advanced by Mr Christopher Butcher QC on behalf of the Defendants that, in the field of insurance of oil companies and oil tanker operators, if in 1989 it was intended to provide cover against expenses caused by oil pollution, brokers and insurers would invariably draft policies to refer expressly to "pollution". In this connection, the wording of sections III A and III B of the GCE Policy are very relevant.
97. These are the Liability Policies. They both include numerous references to "pollution". Thus, in Section IIIA the Marine Liability policy, clause 6, the extent of the cover in respect of "charterers Accidental Pollution" is defined by reference to the difference between the Club Pollution Limit and the specified deductible and the vessel owners' recoveries from ITIA coverage. That sub-division of section III A entitled "Protection and Indemnity Risks etc" at clause 1(a) in so far as relevant provided:

"(i) Covering all sums for which the Insured may become liable or incur which are absolutely or conditionally recoverable from or undertaken by The Standard Steamship Owners' Protection and Indemnity Association (Bermuda) Limited and without the application of any limits or excesses contained in the Rules of that Association, in respect of the vessels and/or craft as per schedule contained in Endorsement No.1.

(ii) It is further agreed that this insurance is extended to also cover any loss sustained by the Insured or indemnify or pay on behalf of the Insured any sum or sums which the Insured may be obliged to pay or agrees to pay or incurs as expenses, on account of Removal of Debris or Wreck of vessels and/or craft as per schedule contained in Endorsement No.1 even if incurred solely as the result of governmental or other authoritative order.

Paragraphs (i), (ii) and (iii) above are subject to the following clause:

(a) In respect of any vessel insured under this Policy which is a tanker as defined by the Rules of the International Tanker Indemnity Association Limited (hereinafter ITIA) prevailing at the time of the loss, this insurance does not insure against;

(b) Any liabilities, costs or expenses which are insured by the Indemnity Provisions or the ITIA Rules prevailing at the time of the loss, nor for any amount in excess of ITIA limits of insurance prevailing at the time of the loss, nor for any liabilities, costs or expenses insured by the Indemnity Provisions of the Rules prevailing at the time of the loss that may be denied by ITIA in its discretion or because of the Insured's failure to comply with any of the terms or conditions of the Rules prevailing at the time of the loss or any other reason."

98. It is to be observed that the ITIA Rules provided the following cover:

"24(A) The liabilities, costs and expenses in respect whereof Owners and Co-Assureds shall be insured by the Association in respect of their interest in the Entered Tanker … are limited to the following:

(i) Those for which the Owner may, as a party to [TOVALOP] be liable.

(ii) Those for which the Owner or Co-Assured may be legally liable under statute or otherwise … by reason of the discharge or threatened discharge of oil, other than any damage, except pollution damage, caused directly or indirectly by fire or explosion …"

99. ITIA provided cover for all oil pollution risks of US$400 million each incident or occurrence.
100. Section IIIA 1(b) went on to specify cover for other watercraft than those listed in Endorsement No.1. By clause 1(c) it was provided

(c) "It is understood and agreed that this Section of this insurance is also to cover the legal and/or contractual liability of the Insured as Charterers of any vessel and/or watercraft and/or Unit and/or Cargo owners, including their legal and/or contractual liability as Charterers and/or Cargo owners for demurrage and/or accidental seepage and/or pollution and/or contamination and/or loss of and/or damage to cargo."

and further:

"This insurance does not insure against any liabilities, costs or expenses which are insured by the indemnity provisions of the ITIA Rules prevailing at the time of the loss, nor for any amount in excess of ITIA limits of insurance prevailing at the time of the loss, nor for any liabilities, costs or expenses insured by the indemnity provisions of the Rules prevailing at the time of the loss that may be denied by ITIA in its discretion or because of the Insured's failure to comply with any of the terms or conditions of the rules prevailing at the time of the loss or any other reason."

101. Clause 1(e) provided:

"(e) It is understood and agreed that this Section of this insurance is also to cover:

(1) the legal and/or contractual liability of the Insured as Charterers and/or Hirers and/or Lessees and/or otherwise of Mobile Drilling Barges and/or Drill Ships and/or similar types of Vessels and/or Craft and/or Units

and/or

(2) all legal and/or contractual liability of the Insured arising out of or incidental to or in any way connected with the Insured's marine operations anywhere in the world.

but excluding losses:

(a) previously covered under this Section of this insurance

and/or

(b) covered under the Insured's Third Party etc. Liability Policies (including Contractual Liabilities where applicable) being:

(i) those policies excess of $5,000,000 each loss occurrence or greater and containing a "Watercraft Exclusion"

and/or

(ii) those policies for limits up to $5,000,000 each loss occurrence and containing a "Watercraft Exclusion" or if such policies do not contain a "Watercraft Exclusion" then for the purposes of the clause (b) such policies shall be deemed to include a "Watercraft Exclusion" as contained in those policies excess of $5,000,000 each loss occurrence or greater.

In respect of coverage under (2) above for vessels owned by or on Bareboat Charter to the Insured, such coverage shall be subject to the ITIA exclusion clause as contained in paragraph 1(a)(iv) of this Section."

102. In section IIIB, the Third Liability Non-marine Policy, Article I.1 provided:

"Insurers hereby agree, subject to the limitations, terms and conditions, hereinafter mentioned (including endorsements attached hereto).

1. To pay the Insured or to pay on their behalf all sums which the Insured shall be obligated to pay as damages or incur as expenses by reason of the liability imposed upon the Insured by law or by Governmental or other local authoritative order, or assumed by the Insured under contract or agreement on account of "Personal Injury", including death at any time resulting therefrom and/or "Property Damage" caused by or arising out of each loss occurrence during the policy period, anywhere Worldwide in respect of all offshore and/or inshore and/or onshore Drilling, Production, Exploration operations and all transportation activities including all Terminal and pipeline operations and including Automobile, Aircraft, and Aircraft refueling activities and onshore fire and explosion, also including General Average, Salvage, Salvage Charges, Sue and Labour in connection therewith."

103. Article II.1 provided:

"Insurers' liability hereunder shall not exceed One Hundred Million Dollars ($100,000,000) for any one loss occurrence and in the aggregate in respect of all liability from onshore drilling, exploration and production and pollution the personal injury resulting from onshore fire and explosion and all transportation activities including pipelines and terminals but not including auto, aircraft and/or aircraft refueling liability.

In the event any loss or losses occurring in respect of onshore drilling exploration and production and pollution accidents and personal injury resulting from onshore fire and explosion and all onshore transportation activities including terminals and pipelines but excluding auto, it is hereby mutually agreed to reinstate this insurance to its full amount of $100,000,000 from the time of the occurrence of the loss to the expiry of this policy Underwriters shall never be liable under this insurance in respect of interest named above for more than $100,000,000 each and every occurrence nor for more than $200,000,000 in all, per annum."

104. Endorsement No.2 provided:

"Seepage, Pollution and Contamination Coverage Endorsements

Notwithstanding anything contained in Article 1, paragraph 1, of this Policy, all other terms and conditions of this policy remaining unchanged and in consideration of premium included, Insurers agree to indemnify the Insured or pay on behalf of the Insured:

(a) All sums which the Insured shall be legally liable to pay as damages for personal injury (fatal or non-fatal) and/or loss of, damage to or loss of use of tangible property cause by or alleged to have been caused directly or indirectly by seepage, pollution or contamination arising out of the operations of the Insured.

(b) The cost of removing, containing, neutralizing or cleaning up seeping, polluting, or contaminating substances emanating from the operations of the Insured: but not to cover repairing, replacing, redesigning or modifying the offending facility.

Provided always that such seepage, pollution or contamination is caused by or arises out of a loss occurrence during the Policy Period."

105. Finally, Endorsement No.2A provided:

"In respect of onshore seepage, pollution and contamination only this policy provides no coverage for bodily injury or property damage arising out of the discharge, dispersal, release, or escape of smoke, vapors, soot, fumes, alkalis, toxic chemicals, liquids or gases, oil or other petroleum substance or derivative or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water or any costs or expenses of whatsoever nature. This exclusion shall not apply as respects liability for an event causing discharge, dispersal, release or escape provided the Insured establishes that all the following conditions have been met:

(a) the event not being part of a continuous situation commenced during the term of this policy;

(b) the event was accidental and was neither expected nor intended by the Insured;

(c) the event was identified as commencing at a specific point in time and became known to the Insured within 180 days and reported within a further 180 days to Underwriters after being advised to the President, Exxon Insurance Services, Florham Park, New Jersey:

(d) the event did not result from the Insured's intentional and reckless violation of any local or national governmental statute, rule or regulation.

This endorsement provides no coverage for any seepage, pollution and contamination loss directly or indirectly resulting from any site or location used in whole, for the handling, processing treatment, storage, disposal or dumping of any waste materials or substances.

In respect of any multiple use by the Insured of their site or location, this endorsement provides no coverage for any seepage, pollution and contamination loss directly or indirectly resulting from that part/parts of the site or location used for the handling, processing, treatment, storage, disposal or dumping of any waste materials or substances."

106. From these provisions it is quite clear that the policies treat removal of debris expenses and liability for pollution as two distinct areas of cover: see in particular Section IIIA, clause 1(a)(ii) and clauses 1(a)(iv), 1(c) and 1(e) and Section IIIB, Article II.1, Endorsements No.2 and No.2A. These provisions demonstrate that where the policies are intended to relate to the provision or exclusion of pollution cover they refer to it as such. It is thus intrinsically improbable, that if the mutual intention had been to include cover under Section I for pollution clean-up, the parties would have used wording, such as "removal of debris", whose ordinary meaning does not usually connote the handling of any liquid or viscous substance.
107. I turn now to consider the commercial environment in which the GCE policy was negotiated.
108. I first consider the parties involved.
109. The leading underwriters, Mr Youell and the underwriter directly concerned, Mr Christopher Compton-Rickett, of the Jansen Green Syndicate, Exxon Insurance Corporation, which was part of the Exxon group responsible for effecting Exxon's insurances in general and this policy in particular, and the London placing brokers, Bowrings, in particular Mr Fortescue, Mr Mead and Mr Tyndall, were none of them strangers to Exxon's global insurance cover or to insurance against pollution risks.
110. This court has not heard oral evidence on market background or commercial matrix but it has had the benefit of transcripts of deposition evidence given in the Texas proceedings by a number of witnesses from the parties concerned with the placing. Hearsay notices were served in respect of passages from those transcripts and were not objected to save on the grounds of admissibility. Most of that evidence is not admissible because it is evidence of negotiations or the subjective understanding or intention of those concerned or of personal opinions after the event, but several of those involved were extremely experienced in the insurance industry and in particular in the insurance of oil producers and tanker operators and the evidence which they gave of their experience of the insurance industry background clearly is relevant to the issues of construction under Section I.
111. Mr Anthony Fortescue, Chairman of Bowring Marine Ltd said that in his 30 years experience of the marine insurance market he had never heard anyone suggest that pollution cleaning up expenses were encompassed within the term "removal of debris".
112. Mr Roger Tyndall another very experienced broker at Bowrings who had been responsible for placing the 1988/89 policy for Exxon had not been instructed to obtain any form of pollution cover under the property damage policy.
113. Mr Kettel had many years experience in the energy industry, including 16 years at Atlantic Richfield and 9 years at Chevron, in both corporations responsible exclusively for insurance matters. He had for 18 years been a member of the Oil Insurance Group consisting of about 15 insurance managers from the major energy companies, including Exxon, who regularly met to discuss insurance problems. He was also a board member of ITIA – the International Tanker Insurance Association, from 1975 to 1994. In an affidavit which he swore for the purposes of the Texas proceedings he stated that after the grounding of the Torrey Canyon in 1967, which was the first major oil spill, giving rise to a major coastal pollution problem, it became apparent that the energy industry required as much insurance for tanker pollution as the market had the capacity to cover. From the outset, because of the objective of maximizing market capacity, it was essential that insurers should be able to identify clearly the sources of their exposure to pollution risks. Consequently it became the practice in the marine insurance market to cover tanker pollution costs, liabilities and expenses through specialized policies that expressly addressed the pollution risk. ITIA was set up as a P&I Club specializing in pollution cover. It was in turn reinsured on the London market by virtue of its membership of the International Group of P&I Clubs which was protected by reinsurance in respect of pollution risks, led by the Janson Green Syndicate. Thus ITIA's ability to provide pollution cover was limited by the extent of the reinsurance cover obtained by it from the London reinsurers. By 1989 that limit was $400 million. In the 1980s some insurers offered tanker pollution cover above the limits offered by ITIA but such insurance policies always specifically identified tanker pollution as the risk. By 1989 it was possible to purchase on the outside marine market for a very substantial premium up to $200 million cover in excess of the $400 million available from ITIA but there was not sufficient market capacity to purchase as much as $600 million pollution clean up cover in excess of the ITIA cover.
114. It is true that Mr Kettel's evidence was in one sense adduced as a market expert and that, although it was the subject of a hearsay notice, there was no order of this court permitting the calling of expert evidence other than that of New York Law and Alaskan Law. Nevertheless, that which I have summarised was not opinion evidence. Rather it was evidence of the state of the energy insurance industry in the years leading up to the time when this GCE policy was entered into. Most of this evidence is well known to the judges of this court by reason of that specialist background which is one of the main reasons why those involved in international commerce are so willing to refer their disputes to its jurisdiction. To ignore this historical background merely because it had not formally been the subject of a previous court order would therefore be quite unrealistic.
115. Having regard to the structural and linguistic features of the GCE Policy to which I have already referred and to the commercial background against which the risk was placed, including in particular the limited availability of market reinsurance cover for primary pollution clean-up risks, I have come to the firm conclusion that paragraph 4(b) of Article VII of Section I is not, on its proper construction to be understood as including the cost of clean-up of oil pollution. The provisions of Article VIII, paragraph 2 - "Cargo and Stock" - contain nothing which is to be construed as expanding the meaning of Article VII paragraph 4(b) to include oil pollution clean-up costs. Paragraph 2 does not apply exclusively to liquid cargoes: it covers also cargoes consisting of "materials, supplies, equipment, tools and all other cargoes" as indicated in Paragraph 2(a)(iii). Matching the provisions in Article VIII, Paragraph 1(d) and (f) which deal with cost of removal of debris of property in the context of insured property other than cargo and stock, so Article VIII paragraph 2(b) deals with cost of removal of debris of cargo and stock. The fact that most of the cargo or stock may be in liquid form does not expand the meaning of debris, given that paragraph 2 expressly contemplates solid cargo.
116. I conclude that oil pollution clean-up expenses are not insured by Section I.
117. If it were correct to construe "removal of debris" as covering oil pollution clean-up, it would have been necessary to consider a number of other issues in relation to cover under Section I.

The Notwithstanding Clauses

118. I have already set out one such clause (see paragraph 71) above). That in Article IV has slightly different wording: "Notwithstanding anything else contained herein to the contrary". The issue, shortly stated, is as to the meaning of the words "Notwithstanding anything contained (herein to the contrary) (as above) there shall be no recovery hereon for liabilities as described under the Assured's Liabilities Policy" (emphasis added).
119. There are two liability policies: Section III A (Marine Liabilities) and Section III B (Third Party Liabilities).
120. The Defendants argue primarily that there was cover for pollution clean-up costs under section III A. The Claimants deny that submission.
121. Section III A by General Insuring Conditions, Clause 4, provided cover in respect of "Protection and Indemnity Risks and Charterer's Liability and other Marine Liabilities".
122. By clause 10 it was provided:

"In case of any loss or misfortune, it shall be lawful and necessary for the Insured, their factor, servants and assigns, to sue, labour and travel for, in and about the defence, safeguard and recovery of the property insured or any part thereof, without prejudice to this insurance, such expense to be borne by the Insurers, nor shall the acts of the Insured or the Insurers in recovering, saving and preserving the property insured, in case of loss or damage, be considered a waiver or acceptance of abandonment. This shall be deemed to include, but not by way of limitation, any costs and expenses incurred in respect of fighting a fire endangering, or involving property insured hereunder."

123. The relevant P&I Risks provisions are set out at paragraph 97 above, but as a matter of convenience I repeat them here:

"(i) Covering all sums for which the Insured may become liable or incur which are absolutely or conditionally recoverable from or undertaken by The Standard Steamship Owners' Protection and Indemnity Association (Bermuda) Limited and without the application of any limits or excesses contained in the Rules of that Association, in respect of the vessels and/or craft as per schedule contained in Endorsement No.1.

(ii) It is further agreed that this insurance is extended to also cover any loss sustained by the Insured or indemnify or pay on behalf of the Insured any sum or sums which the Insured may be obliged to pay or agrees to pay or incurs as expenses, on account of Removal of Debris or Wreck of vessels and/or craft as per schedule contained in Endorsement No.1 even if incurred solely as the result of governmental or other authoritative order.

(i) Paragraphs (i), (ii) and (iii) above are subject to the following clause:

(a) In respect of any vessel insured under this Policy which is a tanker as defined by the Rules of the International Tanker Indemnity Association Limited (hereinafter ITIA) prevailing at the time of the loss, this insurance does not insure against;

(b) Any liabilities, costs or expenses which are insured by the Indemnity Provisions or the ITIA Rules prevailing at the time of the loss, nor for any amount in excess of ITIA limits of insurance prevailing at the time of the loss, nor for any liabilities, costs or expenses insured by the Indemnity Provisions of the Rules prevailing at the time of the loss that may be denied by ITIA in its discretion or because of the Insured's failure to comply with any of the terms or conditions of the Rules prevailing at the time of the loss or any other reason."

124. ITIA provided cover for all oil pollution risks of US$400 million each incident or occurrence.
125. Section IIIA clause 1(b) went on to specify cover for other watercraft than those listed in Endorsement No.1. By clause 1(c) it was provided

(c) "It is understood and agreed that this Section of this insurance is also to cover the legal and/or contractual liability of the Insured as Charterers of any vessel and/or watercraft and/or Unit and/or Cargo owners, including their legal and/or contractual liability as Charterers and/or Cargo owners for demurrage and/or accidental seepage and/or pollution and/or contamination and/or loss of and/or damage to cargo."

126. and further:

"This insurance does not insure against any liabilities, costs or expenses which are insured by the indemnity provisions of the ITIA Rules prevailing at the time of the loss, not for any amount in excess of ITIA limits of insurance prevailing at the time of the loss, nor for any liabilities, costs or expenses insured by the indemnity provisions of the Rules prevailing at the time of the loss that may be denied by ITIA in its discretion or because of the Insured's failure to comply with any of the terms or conditions of the rules prevailing at the time of the loss or any other reason."

127. Clause 1(e) provided:

"(e) It is understood and agreed that this Section of this insurance is also to cover:

(1) the legal and/or contractual liability of the Insured as Charterers and/or Hirers and/or Lessees and/or otherwise of Mobile Drilling Barges and/or Drill Ships and/or similar types of Vessels and/or Craft and/or Units

and/or

(2) all legal and/or contractual liability of the Insured arising out of or incidental to or in any way connected with the Insured's marine operations anywhere in the world.

but excluding losses:

(a) previously covered under this Section of this insurance

and/or

(b) covered under the Insured's Third Party etc. Liability Policies (including Contractual Liabilities where applicable) being:

(i) those policies excess of $5,000,000 each loss occurrence or greater and containing a "Watercraft Exclusion"

and/or

(ii) those policies for limits up to $5,000,000 each loss occurrence and containing a "Watercraft Exclusion" or if such policies do not contain a "Watercraft Exclusion" then for the purposes of the clause (b) such policies shall be deemed to include a "Watercraft Exclusion" as contained in those policies excess of $5,000,000 each loss occurrence or greater.

In respect of coverage under (2) above for vessels owned by or on Bareboat Charter to the Insured, such coverage shall be subject to the ITIA exclusion clause as contained in paragraph 1(a)(iv) of this Section."

128. The Defendants submit that the effect of the Notwithstanding Clauses is to avoid an overlap of cover between section I and the Liability Policies - Sections III A and III B. I was referred to the observations of Potter LJ. on the identical policies in Commercial Union Assurance Co plc v. NRG Victory Reinsurance Ltd [1998] 2 Lloyd's Rep 600 at 603, namely:

"It is common ground that the specified policy numbers under para 3 above were a reference to section 3 of the GCE policy itself. Thus, on the face of it at least, the policy intended that losses sustained which might otherwise fall within the wording of section 1, but which were recoverable under section 3, should not also be recoverable under section I."

129. This being a view expressed in the course of a judgment on the issue whether reinsurers had an arguable defence for RSC Order 14 purposes, it is no more than a provisional view, but nonetheless one of persuasive authority in this court.
130. The Claimants argue that on its proper construction the Notwithstanding Clause only applies to losses attributable to liabilities of Exxon in the strict sense that, unless the clean-up costs were incurred by Exxon because it was liable to compensate third parties or to indemnify the State of Alaska, expenditure for oil clean-up fell outside the scope of the clause. It is argued that Exxon incurred the clean-up expenditure of US$1100 million voluntarily and not because a claim had been brought against it and the payout in respect of that claim had been the subject of a judgment or settlement. In this connection, the Claimants rely on the decision of the Court of Appeal in Yorkshire Water Services Ltd v Sun Alliance & London Insurance plc [1997] 2 Lloyd's Rep 21 for the proposition that expenditure by the insured incurred for the purpose of preventing a liability being incurred is not recoverable under a liability policy in the absence of express provision giving such cover. Exxon's entitlement to recover under the policy therefore never arose.
131. The Claimant further relies on General Insuring Condition 14 in Section III A. This provides, as far as material:

"Control of Claims:

With respect to this Section, the Insured may take whatever immediate steps they may consider appropriate to mitigate any liability or anticipated or potential liability to third parties without the prior approval of Insurers and any such action shall be without prejudice to the Insured's right to recover hereunder. Insurers shall be given the opportunity to associate with the Insured in the defence and control of any claim, suit or proceeding relative to a loss occurrence where the claim or suit involves or appears reasonably likely to involve Insurers, and in the event Insurers wish to be associated with the Insured, the Insured and the Insurers shall co-operate in all things in the defence of such suit, claim or proceeding but Insurers shall not be called upon to assume charge of the settlement of defence of any claim made or suit brought to proceeding instituted against the Insured."

132. It is argued that this provision makes it clear that there is no cover for the cost of taking steps to mitigate a liability or an anticipated or potential liability.
133. The Defendants submit that the Notwithstanding Clause is not to be so confined and that, even if there is expenditure to mitigate an anticipated liability, albeit that liability is not at the material time ascertained by judgment on a claim or by settlement of a claim, provided that, but for the expenditure, a loss would have been caused by a peril insured against under section IIIA, there is cover under that section. They argue that in using "liabilities" the parties were doing no more than indicating that there was to be no recovery under section I for expenditure covered under Section IIIA.

Discussion

134. The function of the Notwithstanding Clauses is self-evidently to prevent coverage overlap between Section I and Sections III A and III B. The scope of coverage provided by Section III A is expressly defined to include the legal and contractual liability of the Insured as cargo owners including such liability for "pollution and/or contamination" (P&I Risks Interest and Coverage clause 1(c)) and all legal and/or contractual liability of the Insured arising out of or incidental to or in any way connected with the Insured's marine operations anywhere in the world" (clause 1(e)). The Basis of Recovery in respect of those P&I Risks is expressed to be "the actual liability and/or expense incurred by the Insured" (Clause 2(e)). However, under clause 2(g) it is provided that certain paragraphs, including 1(c), shall "also include any costs and/or expenses incurred in respect of general average, salvage, salvage charges, and sue and labour". On its proper construction this means that if and to the extent that the Insured, in its capacity as charterer or cargo owner, incurs expenses which are within the categories set out in 2(g) and connected with its legal or contractual liability as charterer or cargo owner for pollution or contamination, there will be cover under Section III A.
135. I observe that clause 10 - the sue and labour clause - set out at (122) above is in a form applicable to the insurance of property as distinct from liability insurance of the nature of the P&I Risks covered by Section III A. Given that clause 2(g) expressly provides for recovery of sue and labour expenses in addition to the amount of actual liability, it is to be inferred that it was the mutual intention that sue and labour expenses incurred consistently with what is contemplated by the Claims Control Clause set out at (131) above should extend to the purpose of minimising the liability or the anticipated or potential liability of the insured to third parties.
136. Accordingly, the relevant issue is whether such expenses fall outside the word "liabilities" under the Notwithstanding clause.
137. In my judgment they do not. This is because the entitlement to sue and labour and other expenses is referable to the Insured's measures to avoid liability for which the insured would otherwise be entitled to be indemnified. It is commercially inconceivable that the wording of the Notwithstanding clauses was designed to avoid coverage overlap in respect of liability but not in respect of the cost of avoiding apprehended liabilities. Thus, if Exxon had failed to initiate and carry out clean-up measures and the State of Alaska had initially borne the cost and, as on the evidence, it would have been entitled to do, had then sued Exxon to recover an indemnity, Exxon would, it is common ground, have been liable to the State. If Section I is assumed, but for the Notwithstanding clause, to cover such costs, and Section IIIA also provided such cover, Section I cover would be excluded. If, for example, as in the present case, Exxon incurred expenditure on the clean-up without waiting for the State to carry out the work and claim an indemnity from Exxon and that expenditure were properly described as "sue and labour" expenditure under clause 2(g) of the P&I Risks Interest and Coverage, there would be no rational commercial purpose in permitting double cover in respect of that expenditure under Sections I and IIIA when there would only have been cover under Section IIIA if the Insured had allowed its liability under a claim for an indemnity by the State to be incurred.
138. The sue and labour expenditure being part of the Section IIIA coverage, directly related to the occurrence which would otherwise have given rise to a liability strictly so-called, it must, in my judgment, be within the scope of "liabilities" under the Notwithstanding clauses. Although it is true that a sue and labour clause is a separate and express engagement to indemnify the insured distinct from that in respect of the duty to indemnify for a loss sustained directly in relation to the subject-matter of the policy, the purpose of that engagement is so closely related to the apprehended loss giving rise to an insured liability that, given the commercial setting, common sense demands that the Notwithstanding clauses be given a construction wide enough to include it.
139. The Control of Claims clause - Section IIIA clause 14 does not, in my judgment, suggest that there is no cover in respect of sue and labour expenditure nor does it somehow displace clauses 2(e) and (g). It has two distinct functions. Its first sentence operates as a traditional waiver clause and secondly it deals with claims control once a claim, suit or proceeding has been commenced. The first sentence is consistent with the operation of the sue and labour provision but does not in itself operate as such a provision. However, it does serve to illustrate circumstances in which sue and labour may be incurred for the purposes of clause 2(g).
140. In the course of argument there was some discussion as to whether the decision of the Court of Appeal in Yorkshire Water Services Ltd v. Sun Alliance, supra, as the Claimant submitted, precluded the recovery by the Insured under Section IIIA of sue and labour expenditure incurred to avoid or reduce an otherwise inevitable liability to the State and to owners of private property. It was submitted by Mr Edelman QC that in the context of liability insurance, as distinct from insurance on property such as goods or ships, there was no room for recovery of sue and labour expenditure.
141. The starting point for consideration of this issue is that there are two quite distinct aspects to the so-called "duty" to sue and labour. First, there is the substantive aspect which is reflected in section 78(4) of the Marine Insurance Act 1906:

"It is the duty of the assured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss."

142. As I held in National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd's Rep 582 at p618, omission of the assured to take steps to prevent the effects of an already occurred or imminent peril in circumstances in which a prudent uninsured would have taken such steps will generally break the chain of causation between the incidence of the insured peril and the loss to the effect that the assured cannot recover in respect of loss proximately caused by his own failure to act as distinct from the incidence of an insured peril. The second aspect is the entitlement of an assured who does so act to recover from the insurers expenses thereby incurred. It is provided in section 78(1) of the Marine Insurance Act as follows:

"Where the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or that the subject-matter may have been warranted free from particular average, either wholly or under a certain percentage."

143. Thus, where there is a sue and labour clause, as such, there will be implied into a marine policy under English law a "supplementary engagement" on the part of the insurer to pay expenses properly incurred by the assured pursuant to that clause. It is clear from the wording of section 78(1) that the supplementary engagement will not arise in a marine policy regardless of whether there is an express term of the policy to that effect. Where there is no sue and labour clause as such, there will be no such implied supplementary engagement: see Cunard Steamship Co v. Marten [1902] KB 624, affirmed [1903] 2 KB 511. In other words, the cost of intervening to prevent an insured peril causing an insured loss is not generally recoverable unless the policy contains an express term to that effect or in the exceptional case where a term is to be implied to give business efficacy, as in Netherlands Insurance Co Est 1845 Ltd v. Karl Ljunberg v. Co AB [1986] 2 Lloyd's Rep 19 at p22. The relevant issue in Yorkshire Water v. Sun Alliance, supra, was whether in a non-marine public liability policy there was to be implied a term that the insured was "entitled to be indemnified ... in respect of expenditure reasonably incurred to prevent or minimise further loss which may otherwise fall to the insurer consequent upon the occurrence or event." There were express terms to the effect that the insured would take reasonable precautions to prevent any circumstances which might given rise to an insured liability. However, it was expressly provided that these precautions were to be at the insured's own expense, at least as regards pre-occurrence precautions. It was held that in the absence of an express term that the insured was to take post-occurrence precautions to avoid or minimise the loss and that he was to be entitled to an indemnity from the insurers in respect of the cost of such precautions, there could be no implied term to that effect. Given that pre-occurrence precautions had to be taken but expressly at the insured's expense, there was no necessity to imply a term that post-occurrence precautions should be taken at the underwriters' expense.
144. The discussion in Yorkshire Water at pages 28 to 29 of the facts which had to exist before the insurers could become liable under a public liability policy, was directed to the argument that the peril insured against under that policy, namely the insured's legal liability for loss or damage to property was wide enough to cover costs and expenses incurred by the insured in respect of an event that might give rise to such legal liability. By reference to Post Office v. Norwich Union Fire Insurance Society [1967] 2 QB 363 and Bradley v. Eagle Star Insurance Co Ltd [1989] 1 AC 957, it was held that, given that the cause of action under the main insuring clause could arise only when an insured event had caused the assured to become liable to a third party and such liability had been ascertained by judgment or settlement, there was no basis for extending the main insuring clause to cover expenses incurred in minimising the liability.
145. That decision therefore certainly does not support the proposition that the general principles regarding sue and labour clauses do not apply to liability policies. It is indeed clearly open to the parties to such policies by an express term to introduce an obligation to sue and labour in respect of the circumstances giving rise to the assured's legal liability. Given that such a provision could be a "supplementary engagement" in a marine policy there would certainly be no inconsistency between it and the principle that insurers only became liable at the moment when the assured's liability was ascertained by judgment or settlement. It is equally open to them to include an express term to the effect that the expense incurred in suing and labouring should be paid by the insurer, thereby contractually introducing the obligation imposed on insurers by section 78(1) of the Marine Insurance Act in relation to a statutory sue and labour clause.
146. I was also referred by Mr Butcher QC to Bridgeman v. Allied Mutual Insurance Ltd [2000] 1 NZLR 433, a decision of Nicholson J. in the High Court of New Zealand. The relevant issue was whether under a public liability policy covering liability for accidental loss of or damage to property of others the plaintiffs were entitled to recover the costs relating to land stabilisation after an initial landship where the purpose of the stabilisation was to prevent a repetition of the landship. It was held that there was an accrued legal liability of the assured to the local authority for the stabilisation costs and that, in as much as such costs were incurred to prevent further landships, they would have been recoverable under the insuring clause but for an express policy exception because the peril of further landship was imminent and had begun to operate as a peril at the time when the preventive action was taken. Nicholson J. distinguished Yorkshire Water on the grounds that there was in Bridgeman an existing liability at law to stabilise the land at the time when the expenditure was incurred whereas there was no such existing liability. He further relied on the decision of Gorell Barnes J. in The Knight of St Michael [1898] p30. In that case, which involved an insurance on the freight to be earned by the assured under a voyage charter, the policy covered fire "and all other perils, losses and misfortunes that have or shall come to the hurt, detriment or damage of the subject-matter of the insurance or any part thereof". Only part of the freight was earned because in the course of the voyage the remainder of the cargo overheated and had to be discharged. Otherwise it was reasonably certain that it would have caught fire. It was held that the insurers were liable for the balance of the freight as a loss by a peril of fire or a loss eiusdem generis with such a peril and therefore within the general words of the policy.
147. I am bound to say that I find the reasoning in Bridgeman profoundly unconvincing, both as regards the basis upon which the judge distinguished Yorkshire Water and as regards the conceptual relevance of the The Knight of St Michael. The legal liability of the plaintiff to the local authority for carrying out stabilisation measures would not appear to be a relevant liability given the terms of the insuring clause - liability - "for accidental loss of or damage to property" - and was in reality a measure aimed at preventing future additional liability if further damage to property occurred. That measure was not relevantly analogous to the discharge of the coal cargo which was not for the purpose of preventing a future loss under the freight policy but was a direct consequence of an insured peril which proximately caused the loss of the subject matter of the policy, namely the chartered freight. It was never an issue that the cost of discharge of the coal could be recoverable as a loss under the policy.
148. These authorities, therefore, have no direct bearing on the issue whether the scope of cover under Section IIIA material to Exxon's expenditure on clean-up extends to expenditure incurred by Exxon in anticipation of its liability given that Section IIIA expressly provides for cover for such expenditure as sue and labour expenses.
149. It follows that, if contrary to my judgment, removal of debris includes oil pollution clean-up, the cost could only be recoverable under Section I if Exxon were not entitled to recover it under Section IIIA on the ground that Exxon incurred a liability to a third party (viz the State of Alaska) in respect of such clean-up or the cost of it or because the cost was a sue and labour expenditure in the sense expressed in clause 2(g)
150. Having considered the expert evidence on Alaskan Law of Mr David Oesting, relied on by the Claimant, and of Mr Eric Saunders, relied on by the Defendants, and the other factual evidence as to the Exxon Valdez disaster, I find as follows:

(i) Exxon, as owner of the oil, was strictly liable for all damage to property and other damage proximately caused as a result of the oil spill.

(ii) If and to the extent that Alaska incurred expenditure in containing and cleaning up the oil, Exxon was liable to indemnify the State for that expenditure. If no quantifiable damage to property (including the sea) was thereby caused, the State would have no claim against Exxon.

(iii) Once the vessel had grounded and its hull opened, allowing oil to enter the sea in massive quantities, immediate measures had to be taken to extract the oil from the sea, to contain it so as to stop it being washed ashore, to protect the shore line and the wildlife, and subsequently to de-contaminate the shore and rescue the wildlife. Had those measures not been taken there was a serious risk that far greater physical damage by pollution could have been sustained.

(iv) If Exxon and ESC had taken no such measures it is to be inferred that the State of Alaska and Federal Coast Guard would have done so. That inference is to be drawn from the extremely close monitoring, co-ordination and planning participation and assistance in relation to the maritime containment and clean-up measures rendered by the State and the Coast Guard.

(v) If Exxon and ESC had not conducted the clean-up operation at their expense, and it had instead been carried out by the State, at its expense, a claim would have been brought against Exxon and ESC for an indemnity. To that claim there could have been no defence as to liability. Similarly, private property owners who had incurred expenditure in reasonably preventing or cleaning oil contamination would be entitled to recover damages from Exxon and ESC.

(vi) Exxon's primary insurers would have been liable to indemnify Exxon in respect of that liability under Section IIIA.

(vii) It is to be inferred that if neither Exxon nor the State had conducted a containment and clean-up operation, local property owners would have carried out individual clean-up operations and would have claimed to be indemnified by Exxon. It is possible that the cost of these claims could have exceeded the actual clean-up cost incurred by Exxon. In this connection, there would have been a very high risk of jury awards of substantial punitive damages which is what happened at the trial of claims by private Claimants in the United States District Court for the District of Alaska. The jury awarded against Exxon and ESC jointly and severally US$287 million by way of compensatory damages and US$5 billion in punitive damages, subsequently reduced to US$4 billion.

151. The evidence of Exxon's witnesses, Mr Otto Harrison in deposition and Mr Lee Raymond, President of Exxon, at the trial in Texas, was that as cargo owner Exxon had responsibility and accountability for cleaning up the oil, following discussions with the regulatory authorities, the lawyers and with regard to its general understanding of what the statutes required.
152. The effect of this evidence is, as I infer, that Exxon and ESC conducted the clean up operation because they appreciated that if they did not do so, they would become liable to the State and private claimants. Their conduct was that which they considered appropriate to avoid the consequence of incurring liability as a result of doing nothing. That liability would have fallen within the cover provided by Section IIIA for which the insurers would have been liable. The course taken by Exxon avoided that potential liability. As such, it was, I have no doubt, an expense of the character of sue and labour expenditure incurred to avoid an insured potential liability and therefore fell within the scope of clauses 2(e) and (g) of that section.
153. I conclude that, if contrary to my judgment, the cost of removal of debris of property under Schedule I, were capable of extending to the clean-up of oil pollution, the effect of the Notwithstanding clauses is such as to exclude the right of Exxon to recover the actual expenditure incurred since such expenditure was recoverable under Schedule IIIA.
154. The Section I, Article IX 3 exclusion
155. If, contrary to my conclusions on the meaning of "removal of debris" and on the effect of the Notwithstanding clauses, there would otherwise be a right to recover clean-up expenses under Section I, it is submitted by the Defendants that such right is excluded by Article IX set out at (79) above.
156. It is argued by Mr Butcher QC that

(i) the effect of this exclusion is to prevent claims for damage to the property of third parties as distinct from the property of the Insured;

(ii) the clean-up expenses were incurred by reason of damage to the sea and the land for which Alaskan law imposed liability.

157. The Claimant argues that the words "other than such property as may be included under the terms of this policy" have the effect of confining the exclusion to property owned by third parties and making it inapplicable to loss of or damage to property owned by the Insured. The cost of removal of debris (ex hypothesi oil and oil contamination) was incurred in consequence of liability imposed by law for the loss of or damage to the oil which was owned by Exxon and not by any third party. Further, Exxon was not under any liability imposed by law to carry out the clean-up. Its liability imposed by law was for the quantifiable damage to property of third parties caused by the oil spill and, if the State of Alaska incurred expenditure in a clean-up, to indemnify the state.

Discussion

158. Section I is expressly confined to first party losses due to loss of or damage to the insured's property. It is not concerned with liability for damage to third parties caused by the loss of or damage to their property. The contractual function of Article IX.3 is obviously to insulate cover under Section I from liability to third parties in respect of property now owned by the Insured. However, Section I cover includes the expense of removing debris of the insured property. Clearly that debris may have come to rest on the property of third parties. For example, damaged drums of noxious chemicals may have been deposited in private harbours or on private beaches as a result of insured perils in circumstances where the cargo owners are obliged by law to remove them or to pay for the owners of the endangered property to do so. In other words, damage or the threat of damage to a third party's property is an inherent risk associated with the dissemination of debris. For this reason it cannot have been the intended effect of the Article IX.3 exclusion that debris removal expenses under Articles VII.4(b) and VIII.2(b) would be confined to removal the need for which was not occasioned by damage or the threat of damage to third parties' property if the debris were not removed.
159. In my judgment, therefore, the exclusion would not operate to prevent recovery of clean-up costs if the words of Article VIII.2(b) covered oil pollution clean-up.

ESC Claim

160. This issue arises only on a triple alternative hypothesis which is as follows:

(i) "Removal of debris of property" is properly construed as applicable to oil pollution, contrary to this judgment;

(ii) the Notwithstanding clauses exclude cover for Exxon under Section I, as I have held;

(iii) Article IX.3 would not exclude cover for oil clean-up if removal of debris applied to oil pollution, as I have held.

ESC's Title to Sue and Insurable Interest

161. The Claimants contend that ESC was an Insured under Section I because it was a company affiliated with Exxon. This is certainly correct. The submission may then be summarized as follows:

(i) Articles VII.4(b) and VIII.2(b) do not confine recovery in respect of removal of debris of property to the insured company which owned the property. It is sufficient if ESC, in accordance with Article VII.1, held the property of Exxon "in trust" or if ESC had "assumed responsibility" for it or had an "obligation to insure, repair or replace" it.

(ii) Cover under Section I in respect of a claim by ESC for clean-up expenses was not excluded by the Notwithstanding clauses. This was because ESC, as owner of the Exxon Valdez, was at the relevant time insured under the Rules of ITIA. By clause 1(a)(iv) set out in (97) cover was excluded where the relevant liabilities, costs and expenses were insured by the Indemnity Provisions of the ITIA Rules or exceeded the amount so insured or had been denied by ITIA in its discretion or due to the Insured's non-compliance with any of the terms or conditions of such Rules.

Discussion

162. As to the Defendant's submissions that ESC, not being the owner of the oil and not holding it in trust, had no insurable interest, there can be no doubt that ESC had custody of the oil under the terms of the Contract of Affreightment of 14 April 1988 between it and Exxon. It is also true that under the express terms of that Contract the risk of accidental loss of the cargo remained in Exxon. However, the widely-drawn exceptions clause – clause 16.9 concludes at (b) with the following:

"The exceptions stated in this paragraph shall not affect ESC's obligations and undertakings with respect to the condition particulars and capabilities of any vessel nominated or the obligations of ESC in respect to the loading, stowage, custody, care and discharge of the cargo."

163. Further, by clause 16.2 the United States Carriage of Goods by Sea Act 1936 was incorporated and there is no derogation from the carrier's obligations under that Act.
164. Specifically in relation to pollution prevention, clause 15.1 provided as follows:

"Clean Seas. ESC agrees to participate in a program covering oil pollution avoidance. Such program aims to prevent the discharge into the sea anywhere in the world of all oil, oily waste or ballast, chemicals, or oily waste material in any form if the said material is of a persistent nature, except under extreme circumstances whereby the safety of the vessel, cargo, or life would be imperiled.

ESC shall comply with all laws, rules and regulations applicable by their terms to a vessel owner relating to water or air pollution and will, in the case of an escape or discharge of oil from a vessel hereunder (whether or not caused by the vessel's negligence), promptly take whatever measures are necessary to prevent pollution damage from thereby arising and to mitigate any such damage.

Notwithstanding any other provision of this Agreement, the foregoing provisions shall be applicable only between ESC and EUSA and shall not affect, as between ESC and EUSA, any liability of ESC to third parties or governments resulting from navigation of a vessel, loading or unloading of cargo, pollution or other causes if ESC shall have any such liability.

The Master shall contain on board the vessel all oil residues from consolidated tank washings, dirty ballast etc. Water shall be removed from such residues to the extent possible using safe and established methods of settlement and decanting or mechanical separation to the approved and recognized standards in accordance with applicable laws, regulations, and international conventions.

The oil residues shall be pumped ashore at the loading or discharge terminal either as segregated oil, dirty ballast or commingled with cargo as it is possible for EUSA to arrange with each cargo.

If EUSA requires that demulsifiers, detergents or chemicals be used for the separation of oil and water, or tank cleaning, the purchase and disposal cost of such demulsifiers shall be at EUSA's expense."

165. Under clause 15.2 ESC, having warranted that it was and would continue a participant in TOVALOP, undertook as follows:

"When an escape or discharge of oil occurs from the vessel and causes or threatens to cause pollution damage, or when there is the Threat of an escape or discharge of oil (ie. a grave and imminent danger of the escape or discharge of oil which, if it occurred, would create a serious danger of pollution damage) then ESC, consistent with its pollution and oil loss control responsibilities referred to in Article 8.9, shall undertake such measures as are reasonably necessary to prevent or minimize such damage or to remove the Threat. EUSA may, at its option, upon notice to the ESC person-in-charge, undertake further actions deemed necessary, unless ESC promptly undertakes the same. EUSA shall keep ESC advised of the nature and result of any such measures intended to be taken by EUSA and, if time permits, the nature of the measures intended to be taken by EUSA. Any of the aforementioned measures taken by EUSA shall be deemed taken on ESC's authority and as ESC's agent, and shall be at ESC's expense."

166. Thus, the effect of the Contract of Affreightment in respect of any particular cargo carried by ESC was that ESC were bailees and carriers for reward, they were under the qualified obligations imposed by the Carriage of Goods by Sea Act and in the event of an escape of oil they were under a duty to take such measures as were reasonably necessary to prevent or minimise damage or remove the threat of pollution.
167. In these circumstances I have no doubt that the effect of Article VII.1, Article VII.4(b) and Article VIII.2(b) was that the oil on board the vessel in the custody of ESC was Property for which ESC had assumed those responsibilities defined by the Contract of Affreightment, including the obligation to prevent or minimise oil pollution if that was caused by the cargo. Its relationship with the cargo was thus sufficient to create an insurable interest under Section I.
168. It is also correct that ESC did not have cover for pollution clean-up under Section III.A because of the effect of clause 1(a)(iv). The notwithstanding clauses were therefore not a bar to a claim under Section I.

Was there a liability of Primary Insurers to ESC under Section I at the Time of the Section I Settlement Agreement? Was there a Settlement of such Liability?

169. The Defendants further submit that ESC neither had an effective claim nor ever advanced a claim under Section I. By August 1989 when ESC became insolvent and Exxon took over the funding of the clean-up operations, the deductible under Section I had already been exceeded. By August 1995, ESC's claim was time-barred in English Law and there had been no notice of claim by ESC. The Defendants also submit that ESC's failure to give notice of any claim in accordance with Section I, Article IV.4 had rendered any such claim untenable in New York Law by the time of the March 1996 Settlement Agreement in relation to Section I. The claim was also time-barred under New York Law by that time. Further, that settlement Agreement was not a settlement of any claim by ESC: it simply settled Exxon's claims against the primary insurers. Consequently, the payment by primary insurers under that settlement which is the foundation of the claim in these proceedings was not a sum paid by the reassured in settlement of any loss or liability within the Ultimate Net Loss Clause in the outward retrocession underwritten by the Lloyd's Claimants or within the JELC Net Loss Clause written by the companies market.
170. The Claimants submit that Exxon's notice of 4 April 1989 was a valid notice of loss occurrence for the purposes of Section I Article VI.9. Even if it were not, that term neither made the giving of notice a condition of advancing a valid claim nor required notice to be given within a specified period of time.
171. As for the issue of time bar, the Claimants submit that under New York Law the six years time-bar had not expired for the following reasons. In general, time runs on a property policy from the date of the loss. Where the contract makes the giving of notice a condition precedent to commencing suit, the claim will not become due and payable until a reasonable period of time has elapsed after the giving of notice. Consequently, if, as submitted by the Claimants, notice was effectively given in April 1989, the claim would not become due and payable until a reasonable time after that date or, if the primary insurers rejected the claim, until a reasonable time for commencing proceedings had elapsed following such rejection. Thus, assuming that the 4 April 1989 notification was effective in respect of ESC, the next relevant date was 30 October 1990 when the primary insurers arguably rejected the claim put forward by Exxon. That was less than six years before the Section I Settlement Agreement of March 1996. Although a period of 18 months following notification of claim on 4 April 1989 before rejection of the claim by the primary insurers might appear to exceed what amounted to a reasonable time for underwriters to consider their position and although it might be said that a reasonable time for a decision to reject had already expired by March 1990 (eleven months after the notification of claim) this was a very substantial and complicated claim. Not only was the substance of the claim complex and such as would require substantial detailed information, both from the insured and the loss adjusters in addition to that given in the April 1989 notification but the necessary quantification of the claim having regard to the large deductible would be relevant to underwriters' acceptance of coverage.

Discussion

172. Article VI.4 of Section I provides as follows:

"Whenever the Insured has information from which it may reasonably be concluded that a loss occurrence covered hereunder is likely to exceed the deductible(s) under this policy, notice shall be sent to the Brokers who negotiated this insurance, who shall promptly inform Insurers and assign adjusters on behalf of insurers as may be agreed. Failure to notify the Brokers of any occurrence which, at the time of its happening did not appear to involve this policy but which, at a later date, would have given rise to claims hereunder, shall not prejudice such claims."

173. The definition of Loss Occurrence is to be found in Article V.2 set out at paragraph 92 above. There can be no serious issue but that the grounding and subsequent pollution of the sea and shoreline was a Loss Occurrence.
174. The Insured for the purposes of acquisition of information of a loss occurrence under Article VI.4 was expressly defined as the Assistant Treasurer of Exxon or the President of Exxon Insurance Services Corporation. The relevant information – that a loss occurrence had occurred and was likely to exceed the deductible – was known to either or both of those corporate officers long before 7 August 1989 when ESC's assets were exhausted. The precise date cannot be identified, but there can be no serious doubt that by then the information that the ultimate cost was likely to exceed US$410 million was known to Exxon's and ESC's management. Whether such information was available as early as 4 April 1989 is unclear. However, on that date Marsh & McLellan sent the following fax to Bowring in London:

"Exxon Corporation, ETAL

Global Corporate Excess

Our Risk Nos.

03-0364B-88

03-0366B-88

Tanker "Exxon Valdez"

Stranded – March 24, 1989 and Subsequent Oil Spill

For your information we quote below message received today from Exxon which will represent your first advices in connection with this incident.

Quote

In accordance with Article VI paragraph 4 of the above policy, we give notice of the following incident.

At 12.30 am Alaska time, Friday, March 24, 1989, the Exxon Valdez struck the Bligh reef 25 miles south of Valdez, Alaska.

The vessel was holed in numerous tanks with loss of crude and resultant pollution.

Lightering of the vessel is proceeding and clean-up operations are underway, salvage contracts are being negotiated and a general average had been declared.

Further details will be advised in due course.

This notification is without prejudice to terms and conditions of Article IV, paragraph 3 of the Policy. Unquote

You will be kept advised of developments."

175. It is to be observed that Article VI.4 provides not for notice of an accrued claim under the policy but for notice of the likely future accrual of a claim. Further, the policy contains no provision for the giving of notice of any already accrued claim. Accordingly, the only notice requirement was in respect of a loss occurrence that might never develop into an accrued claim. Further, if there has been an occurrence which only later on apparently gives rise to a claim but which originally did not appear likely to do so, that claim is not to be prejudiced.
176. In my judgment, compliance with this provision is neither expressly nor impliedly a condition precedent to the making of an effective claim. The absence of a specified time limit and the saving for late developing claims suggest that absence of notification or less than prompt notification do not bar subsequently raising a claim. It would take clear wording to invest this provision with the force of a condition precedent to an effective claim: see K/S Merc – Scandia XXXXII v. Certain Lloyd's Underwriters [2001] Lloyd's Rep IR 802 per Longmore LJ. at paras 12-13.
177. If it were necessary or relevant to examine the position under New York Law, which in view of my decision as to the governing law of Section I, it is not, there is some evidence that a New York Court would hold that compliance with a notice provision is generally considered to be a condition precedent to the making of an effective claim. The 2^nd Supplemental Report of Mr John Kimball, the Defendant's New York Law expert, stated at paragraph 12 that the giving of notice of loss within a reasonable time would be a condition precedent to coverage. He referred to the judgment of the New York Supreme Court, Appellate Division in Vanderbilt v. Indemnity Insurance Co of North America (1943) 39 NYS 2d 808 and Security Mutual Insurance Co of New York v. Acker-Fitzsimmons Corporation (1972) 31 NY 2^nd 436, a decision of the New York Court of Appeals. I accept that evidence: those decisions support the general principle that even in a case where there is no express time limit for the notice to be given and the notice is to be merely of an anticipated as distinct from an accrued claim, compliance within a reasonable time or in accordance with the express provision – such as "prompt" notice – is a condition precedent to recovery. That is to say, compliance was to be proved as an element in the cause of action against insurers.
178. Was there any sufficient notification of an anticipated claim by ESC in accordance with Article IV.4? What had to be given was notice of a loss occurrence covered under the policy if it were likely to cause an insured loss exceeding US$410 million. In my judgment, given that it was the happening of the loss occurrence and the relationship between the consequent aggregate losses anticipated to be sustained and the policy deductible, an effective notice could be given without specifying which particular constituent of the insured Exxon Companies was expected to sustain the loss. Indeed, the content of the notification of 4 April, including its reference to the condition of the vessel, salvage contracts and general average makes it reasonably clear that it may in future be claimed that insured losses have been suffered by ESC as shipowners, as well as by Exxon as cargo owners.
179. By way of expansion of the 4 April notification, on 28 April 1989 Marsh & McLennan informed Bowrings by fax that provisional estimates for vessel repairs were US$35 million. That was scratched by the leading underwriter on 5 May 1989 with the notation "ITIA (exclusion) noted". So underwriters, as was only to be expected, clearly appreciated that the notification covered ESC.
180. In any event, specification of the identity of the assured who was likely to bear the loss was at that stage unnecessary: what mattered was the global loss and the likelihood of its exceeding the deductible.
181. I conclude that, contrary to the view of Mr Kimball and to the Defendant's Submissions, the omission to refer in the 4 April 1989 notice or in subsequent notifications to insurers in the course of 1989 specifically to ESC did not result in non-compliance with Article IV.4 such as would bar a subsequent claim by ESC under New York law.
182. Was a claim by ESC time-barred by the date of the Section I Settlement?
183. Since the GCE Policies were governed by English law, the date when the cause of action arose was that when the relevant property was damaged, namely May 1989, or the date by which the expenditure was first incurred by ESC. This principle was adopted by the Court of Appeal in Spring v. Royal Insurance Co (UK) Ltd [1997] CLC 70 in approving the decision of Hirst J. in The Italia Express (No.2) [1992] 2 Lloyd's Rep 281. Accordingly, under English law the claim by ESC was certainly time-barred by May 1995, many months before the Section I Settlement Agreement (15 March 1996).
184. The issue which has divided the experts is as to when the cause of action arose so as to start time running. The decision of the United State Court of Appeal on appeal from the United States District Court for the Southern District of New York, in Continental Casualty Company v. Stronghold Insurance Co (1996) 77 F 3d 16, is directly in point. It is authority for the following propositions:

(i) Time begins to run, whether under a primary insurance or a reinsurance contract, when sums are due and payable by insurers.

(ii) If there is a notification clause, the question arises whether compliance with it is a fact which would have to be proved in order to establish that insurers were in breach of their contract in failing to pay.

(iii) In the absence of time limits in a notification clause, notice has to be given within a reasonable time and the insurers have to make payment within a reasonable time of having been given notice of losses.

(iv) Whether compliance with a notification clause has to be proved to establish that the cause of action has arisen depends on the terms of the clause.

(v) If compliance with a notification clause has then to be proved and is proved, the insurer will be in breach of contract unless he accepts the claim within a reasonable time or if before expiration of a reasonable time he rejects the claim.

185. In the present case, as I have held, compliance with the notification would have been treated under New York law as a condition precedent and, further, that condition was complied with. It follows that insurers had a reasonable time within which to accept the claim. If that time had expired more than six years before 15 March 1996 (that is by 14 March 1990) the cause of action that would have arisen against insurers would have by then become time-barred.
186. It is impossible on the evidence before this court to take any properly-informed view on whether a reasonable time for insurers to accept liability had expired by or before 14 March 1990. They eventually apparently rejected all clean-up claims under Section I on 30 October 1990. In view of the fact that I have held that on the proper construction of that policy they were fully entitled to do so, it becomes a peculiarly artificial exercise to consider what was a reasonable time for acceptance of a hypothetically good, but actually bad claim. I decline to do so. If this matter goes further and the issue ever becomes relevant to liability the Court of Appeal can embark on this further investigation for itself.
187. The Defendants have referred to the Loss Adjustment and Advance Payments clause in Article VI.9 which provided:

"(b) It is expressly understood and agreed that in the event of a loss insured under the terms of this policy, the Insurers shall pay 90 days after such loss has occurred an amount equivalent to 75% of the agreed estimated loss hereunder as a payment on account."

188. The obligation that arises under this provision takes effect when there is an "agreed estimated loss". Since no estimated loss in excess of the deductible was put forward in relation to Section I as distinct from Section III.A, the point had not been reached by 90 days before 15 March 1990 when there was an agreed estimated loss. Accordingly, this clause was not engaged at any stage relevant to the running of time for limitation purposes.
189. In the event, it is not established on the evidence before this court that time began to run for New York law limitation purposes before 15 March 1990. Accordingly, it is not established that under New York law a claim by ESC was time-barred on 15 March 1996 when the Schedule I Settlement Agreement was entered into.
190. Given that, at least under New York law, there must be assumed for present purposes to have been a claim by ESC not time-barred at the time of the Settlement Agreement, albeit the claim was time-barred under English law, was there by that Agreement a settlement of a claim by ESC as distinct from Exxon? To this question the following considerations are material:

(i) Exxon alone and not is affiliates, such as ESC, was party to the Agreement.

(ii) Although by clause 24 of the Recitals it was stated that the parties intended to terminate and discharge "all existing disputes and claims between the …. for or relating insurance coverage of Exxon Valdez under Section I" and although Exxon Valdez Claims were defined by clause 1.2D of the Definition Clause as including losses or expenses incurred by an Affiliate, by clause 3.6 Exxon agreed to indemnify and hold harmless the insurers if an Exxon Affiliate brought a claim against insurers.

(iii) By clause 3.5 there was a mutual release of claims which involved the Insurers releasing Exxon and its Affiliates from all claims it might have against them and Exxon releasing the Insurers in respect of its claims for coverage of Exxon Valdez Claims, that is its claims for losses or expenses incurred by itself or its affiliates.

(iv) The cross releases and the indemnity in respect of claims by Exxon affiliates suggest that by this settlement the Insurers were paying to be discharged from or indemnified in respect of all outstanding and any future Exxon Valdez claims, whether they were claims advanced by Exxon or Exxon's affiliates.

(v) The pending proceedings in relation to Section I were the Texas action commenced on 4 August 1993. By Exxon's Second Amended Petition dated 15 December 1995 it stated by paragraph 17 that:

"Exxon is not seeking to recover any losses of ESC". In other words the claims under Section I were advanced only by Exxon and only in respect of its own losses and expenditure and did not cover what had been spent by ESC. That remained the position up to the date of the Section I Settlement Agreement. ESC at no stage up to that date advanced any kind of claim under Section I. It had recovered the full extent of its cover with ITIA but had made no claim over and above that.

(vi) There is no evidence that Exxon had at any stage put forward to underwriters any claim under Section I which covered ESC's expenditure on clean-up costs.

191. Having regard to these considerations, the payment made under the Settlement Agreement was for the discharge of all existing and future Schedule I claims by Exxon itself and for an indemnity by Exxon in case any affiliate advanced a claim in future. The relevant affiliate – ESC - had by that time not only never asserted a claim under Section I but had no such claim which it could assert under that law which governed that policy, a fact which, had such a claim been raised on 15 March 1996 would have been blindingly obvious to the Insurers' legal advisers.
192. I therefore conclude that the primary insurers' payment under the Section I Settlement Agreement was not made to settle any claim asserted or that could be asserted by ESC or any claim by Exxon for expenditure incurred by ESC.
193. The question therefore arises whether the Claimant reinsured can demonstrate as against the Defendant reinsurers that they can include in the Ultimate Net Loss Clause (Lloyd's policies) or the Net Loss Clause (JELC policies) the loss and expense now said to be a claim by ESC.
194. The Ultimate Net Loss clause provides as far as relevant:

"The term 'Ultimate Net Loss" shall mean the sum actually paid by the Reinsured in settlement of losses of liability after making deductions for all recoveries, all salvages and all claims upon other Reinsurances whether collected or not and shall include all adjustment expenses arising from the settlement of claims other than the salaries of employees and the office expenses of the Reinsured."

195. The Joint Excess Loss Committee Net Loss clause provides as far as relevant:

" 'Net loss' under this contract means the sum paid by the reassured in settlement of loss, damage, liability or expense (other than the reassured's office and salary expenses) after deduction of all salvage and recovery including recovery from all reinsurances other than those specified in section D of the schedule."

196. Thus, the reinsured has to establish:

(i) actual payment of the sum claimed under the reinsurance;

(ii) that payment was made in settlement of a loss or liability or (under the JELC form) damage or expense of the primary insured.

197. It is conceded by Mr Edelman QC on behalf of the Claimant that it has to be established that the reinsured was liable to the insured for at least the amount of the payment. It follows that if, as I have concluded at paragraph 84 above, any claim by ESC was time-barred under English law, which this court must apply, the Claimants cannot bring the payment under the Section I Settlement within either of the net loss clauses. It was not a payment in settlement of any loss or liability or damage or expense of ESC because such loss or liability or damage or expense was at the time of payment irrecoverable from the primary insurers.
198. If, contrary to my view, it is necessary to consider New York law, I am unable to conclude on the evidence now available whether any claim by ESC against primary insurers was time-barred on 15 March 1990 – the date of the Section I Settlement. If it were not time-barred and, contrary to this judgment, three were coverage for ESC's clean-up expenditure under Section I, do the Claimants establish that their payment was a relevant settlement for the purpose of the net loss clauses?
199. It is not enough for the reassured to prove that there was liability to one of several primary insureds unless it is also proved that such liability was ascertained by judgment or settlement. If insurer X insures A and B against losses caused to either or both by a given peril and A claims, but B does not claim, that it alone has suffered loss caused by an insured peril and if there is then a judgment or arbitration award on a claim brought by A alone against or a settlement of A's claim, it is quite unarguable that X's liability to B has thereby been ascertained so as to establish that X is entitled to recover as a reinsured loss such amount as B may subsequently claim under the policy. The proposition only has to be stated to be seen to be wholly untenable.
200. Does it make any difference if A promises by the terms of the settlement agreement to indemnify X if in future B should bring a claim against X under the primary policy for loss caused by the same insured peril? Clearly the answer must be No.
201. Apart from express provisions to the contrary, that which triggers the obligation of a reinsurer to pay under his contract of reinsurance is not only the liability of the reassured to the primary assured but also the ascertainment of that liability by judgment or award against the reassured or by settlement by the reassured of a claim asserting such liability: Bradley v. Eagle Star Insurances Co Ltd [1989] 1 AC 957. In the absence of a judgment or award which concludes that a reinsured is liable to the primary insured, the process of ascertainment of such liability by settlement involves that an agreement has been made between the reinsured and the primary insured who asserts a claim under the policy under which the primary insured withdraws his claim for the consideration of usually a promise of payment by the reassured. The substance of this requirement is that for such consideration the liability of the reassured has been discharged. It is the cost of the discharge of the reassured's liability which becomes the reinsured loss.
202. It follows that if in the settlement agreement between A and X there is nothing more than an indemnity by A to X in case B should in future claim against X, there is missing from such agreement the essential feature that the assured liability of X to B has been discharged in consideration of a payment by X. There has been no such discharge and there has been no agreement as to the cost of that discharge.
203. Accordingly, I conclude that even if ESC's claim against its primary insurers in respect of Section I was not time-barred at the time of the Section I Settlement Agreement, the Claimants cannot include ESC's clean-up claim in their ultimate net loss or in their net loss under the retrocession contracts.

Section IIIB

204. This claim could be made only by Exxon. No claim could be asserted by ESC due to an express exclusion under Article VI(f) of claims "arising out of the ownership or bareboat charter of any watercraft".
205. There were three layers of cover above the US$210 million deductible: US$100 million written by the "Scandinavian" market, above which the London syndicates and companies wrote the second layer of US$100 million and the third layer of US$50 million. Article I.1 had different wording in the first layer from that in the second and third layers. Further, the first layer in Section IIIA included a joint limits clause applicable across sections IIIA and IIIB, whereas the second and third layers were not subject to any such provision. The July 1996 judgment referable to Section IIIA in the Texas proceedings exhausted the joint limit under the two policies. Accordingly, the Scandinavian market insurers cannot have intended, at the time of the January 1997 Settlement Agreement in respect of Section III, to make any payment in respect of Section IIIB. Therefore, that first layer never paid anything in settlement of a Section IIIB claim and it is therefore only in respect of the London underwriters' and companies' payments in respect of the second and third layers that the Claimants in these proceedings are concerned. It is consequently only necessary to consider the terms of the Section IIIB policies written by those two layers.
206. The Claimants assert that the primary insurers were liable to Exxon under Article I.1. This has been set out in paragraph 102 but is repeated here for convenience:

"Insurers hereby agree, subject to the limitations, terms and conditions, hereinafter mentioned (including endorsements attached hereto).

1. To pay the Insured or to pay on their behalf all sums which the Insured shall be obligated to pay as damages or incur as expenses by reason of the liability imposed upon the Insured by law or by Governmental or other local authoritative order, or assumed by the Insured under contract or agreement on account of "Personal Injury", including death at any time resulting therefrom and/or "Property Damage" caused by or arising out of each loss occurrence during the policy period, anywhere Worldwide in respect of all offshore and/or inshore and/or onshore Drilling, Production, Exploration operations and all transportation activities including all Terminal and pipeline operations and including Automobile, Aircraft, and Aircraft refueling activities and onshore fire and explosion, also including General Average, Salvage, Salvage Charges, Sue and Labour in connection therewith."

207. The substance of this submission is that "all transportation activities" is wide enough to include ocean movement of oil in a tanker, such as the carriage of oil in the Exxon Valdez. In particular, this phase is not to be limited in scope by any qualification imposed by the words "offshore and/or inshore and/or onshore Drilling, Production, Exploration operations". The words "all transportation activities" are said to be distinct and a separate area of perils from the latter having regard to the fact that "Automobile, Aircraft and Aircraft refueling activities "which are expressed to be included in "all transportation activities" have no necessary connection with drilling, production or exploration, whether offshore, inshore or onshore, whereas Terminal and pipeline operations and Automobile, Aircraft and Aircraft refueling activities were included in order to forestall arguments that transportation activities were interrupted or inconsistent with those more specific operations.
208. Further, the Claimants pray in aid Article II.1 of Section III B which provides as follows:

"Limit of Liability

Insurers' liability hereunder shall not exceed One Hundred Million Dollars ($100,000,000) for any one loss occurrence and in the aggregate in respect of all liability from onshore drilling, exploration and production and pollution and personal injury resulting from onshore fire and explosion and all transportation activities including pipelines and terminals but not including auto, aircraft and/or aircraft refueling liability."

209. They draw attention to the linguistic separation of "all transportation activities" from "onshore drilling, exploration and production" in support of the submission that the latter words do not limit the scope of the former phrase.
210. The Claimant further relies on Article VI (f) - the watercraft exclusion – which provides:

"(f) Claims made against the Insured arising out of the ownership or bareboat charter of any watercraft, it being understood and agreed that this exclusion shall not apply to the liability of the Named Insured for personal injury to their employees, unless such liability is more specifically excluded under this policy.

For the purpose of this policy the following shall not be deemed to be watercraft except whilst in transit:

An installation of any kind, fixed or mobile which is used for the purpose of exploring for, producing, treating, storing or transporting oil or gas from the seabed or its subsoil, excluding any tank vessel not being used for storage of oil or gas commencing at the loading manifold thereof and excluding absolutely any self-propelled tank or Supply Vessel."

211. It is submitted on behalf of the Claimant that this exclusion does not give rise to any inference that ocean transportation is outside the cover. In particular the exclusion does not cover cargo-owner's liability.
212. There is an express qualification to the exclusion to the war risks cover in Article VI (g) which provides:

"This exclusion shall not apply to liability of the Assured arising out of the hiring, chartering, or leasing of aircraft for the purpose of evacuating the assured's employee(s), contractor's employee(s) and their respective families from any crisis worldwide but excluding liability to hulls of aircraft so chartered or to crew or passengers of such aircraft."

213. It is submitted on behalf of the Claimant that this demonstrates that the air transportation for the purpose of evacuating employees or their families from "any crisis worldwide" is within "all transportation activities" within Article I.1, although it may have nothing to do with the transportation of cargo. Accordingly, that phase is not qualified by offshore, inshore or onshore drilling, production or exploration operations.
214. Further, it is submitted that Article VI (f) interlocks with Section III A.1 (e)(2) set out at (101) above, liability of the Insured under that policy arising out of or incidental to or in any way connected with its marine operations anywhere in the world as owner or bareboat charterer (by reason of clause 1(a) (i) of the P&I Risks set out at paragraph 97 above).
215. The Claimant further relies on Endorsement No.2. This provides cover in the following terms:

"Seepage, Pollution and Contamination Coverage Endorsements

Notwithstanding anything contained in Article 1, paragraph 1, of this Policy, all other terms and conditions of this policy remaining unchanged and in consideration of premium included, Insurers agree to indemnify the Insured or pay on behalf of the Insured:

(a) All sums which the Insured shall be legally liable to pay as damages for personal injury (fatal or non-fatal) and/or loss of, damage to or loss of use of tangible property caused by or alleged to have been caused directly or indirectly by seepage, pollution or contamination arising out of the operations of the Insured.

(b) The cost of removing, containing, neutralizing or cleaning up seeping, polluting, or contaminating substances emanating from the operations of the Insured: but not to cover repairing, replacing, redesigning or modifying the offending facility.

Provided always that such seepage, pollution or contamination is caused by or arises out of a loss occurrence during the Policy Period."

216. It is submitted that Exxon's consignment of its oil cargo for ocean carriage on board the Exxon Valdez was an "operation" within (a). The liability of Exxon to pay damages for damage to property or loss of use of property was caused by or alleged to have been caused directly by pollution or contamination arising out of such "operation". Mr Edelman Q.C. on behalf of the Claimant relies on Dunthorne v. Bentley [1999] Lloyd's Rep. IR 560 at pages 562-3 and Coxe v. Employer's Liability Assurance Corporation [1916] 2KB 629 to make good his submission that there was a sufficiently close causal nexus between Exxon's oil consignment operations and the pollution or contamination to come within Endorsement No. 2 to the effect that the negligence of the crew of the vessel did not break the necessary chain of causation for "arising out of".
217. The Claimants also rely on Endorsement No 2A the text of which has already been set out at paragraph 128. Mr Edelman submits that in as much as this provision excludes cover for bodily injury or property damage caused as stated "in respect of onshore seepage, pollution and contamination only" (emphasis added) demonstrates that the parties intended the Section IIIB cover otherwise to apply to offshore pollution.
218. It is submitted by Mr. Butcher Q.C., on behalf of the Defendants that sub-clause (b) of Endorsement No. 2 expressly indicates by the words "the offending facility" that sub-clause (b) applies only to operations involving a "facility", that is to say any such pollution or contamination must emanate from a specific location where a "facility" of the Insured is situated. This, he submits, is clearly not wide enough to cover the ocean carriage of an oil cargo on board a tanker. In as much as "the operations of the Insured" are both (a) and (b), the basis of the connection between the Insured and the pollution or contamination giving rise to the damage in (a) or expenditure in (b), namely the Insured's "operations", must have the same scope in both cases.
219. More generally, it is submitted on behalf of the Defendants that Section IIIB was essentially a non-marine third party liability policy. As such, it was not designed to provide cover in respect of marine ocean transportation as distinct from relatively minor transportation associated with or relating to exploration, drilling or production.

Discussion

220. In approaching the issues of construction of Section III B Article I.1 and Endorsement No.2, paragraph (a), it is necessary to keep in mind the overall coverage structure which, it is to be inferred, was mutually intended to be created as between the brokers and the underwriters. This involved (i) protection against property damage in respect of property owned by or held in trust or under responsibility by the Insured and certain kinds of expenditure by the Insured relating to such property (Section I); (ii) protection against marine liabilities of a P and I nature, including oil pollution if not covered by ITIA (Section III A); (iii) third party liabilities of a non-marine nature arising out of the Insured's commercial activities in relation to the energy industry (Section III B). As I have already concluded, at paragraph 116 and 153 above, the expenditure on oil pollution clean-up was recoverable by Exxon as cargo owner under section III A and not under Section I. That right of indemnity under Section IIIA arose from the fact that such policy provided cover to a cargo owner who, not being a shipowner or bareboat charterer, did not have the benefit of cover from ITIA. As cargo owner Exxon therefore had the benefit of a wider scope of cover in relation to P and I risks, including ocean carriage than ESC as shipowner. In as much as Section III B does not provide P and I liability cover, the question arises whether it is to be inferred from the terms of that Section, against the background of the overall structure of the cover provided by insurers, that Exxon, not being the owner or bareboat charterer, was to have the benefit of cover of a scope which overlapped with that already granted to it as cargo owner in respect of marine liability risks under Section III A.
221. There can be no doubt, in my judgment, that Article VI (f) of Section III B is designed to exclude from cover the very liabilities which would be insured by a shipowner or bareboat charterer under its P and I insurance. The distinction between an installation in transit, which is deemed to be a "watercraft" and therefore excluded, and one that is not and is therefore covered, between an installation used for transporting oil which is not in transit and one that is and between a tank vessel that is not being used for oil or gas storage and one that is, as well as the absolute exclusion of any self-propelled tank or supply vessel, strongly points towards a mutual purpose of excluding all liability cover in relation to marine transportation in self-propelled vessels. That cover would clearly be available under Section III A.
222. Against this background, can it have been the mutual intention to include within the words in Article I.I "all transportation activities" cover for liability incurred by a non-shipowner Insured? Or was the mutual intention to confine such transportation activities by a non-shipowning Insured to those which were associated with drilling, production or exploration but did not involve ocean carriage of oil or gas.
223. The scope of cover under Section III B is very wide, extending to personal injury, death and property damage occurring anywhere worldwide, offshore, inshore or onshore caused by or arising out of drilling, production or exploration operations or any transportation activities. Further, the liability of the Insured to their employees for personal injuries is not subject to the watercraft exclusion, so the liability could arise out of personal injury sustained on board a tanker even while it was in course of transit while transporting oil. Endorsement 2A is also a clear indication that pollution originating offshore is covered save where expressly excluded.
224. A provision of Section I which is not present in Section III B is the Notwithstanding clause, discussed earlier in this judgment. That, as I have held, was inserted with the clear purpose of avoiding overlap in the cover provided by that Section I and Sections III A and III B. There is, however, no equivalent provision in III B expressly directed to avoiding overlap in cover with III A. It could thus be argued that, if that had been the mutual intention, the parties could easily have inserted an equivalent term in III B. Is their omission to do so an indication that they were indifferent to coverage overlap? That this was not wholly true is clear from Clause 1(e) of the P and I Risks provisions in Section III A set out at paragraph 101 above which excludes from cover in respect of liabilities "arising out of or incidental to or in any way connected with the Insured's Marine operations anywhere in the world" under 1(e) losses previously covered under Section III A and covered under Section III B, specifically with reference to the watercraft exclusion.
225. Given that Article III A makes very specific provision for the liability of charterers and cargo owners as distinct from shipowners and bareboat charterers, for pollution and or contamination in the course of ocean transport as clause 1(c) set out at paragraph 81 above and for expenses incurred, including sue and labour at clause 2 (e) and (g) set out at paragraph 134 above, it would be very surprising and distinctly improbable if, when it came to Section III B, the parties, all fully aware of Section III A, had mutually intended to create duplicate cover under Section III B for the benefit of Exxon.
226. In the light of all these considerations, as well as the parties' respective submissions already set out, I have come to the conclusion that it is to be inferred that Article I.1 was not mutually intended to duplicate cover expressly provided by Section III A. Although "all transportation activities" are obviously capable of being read as extending to ocean carriage of oil cargo, the construction which confines the meaning of these words to carriage specifically associated with drilling, production or exploration accords, in my judgment, more closely with the structure of the cover and its division into three policies, including a marine and non-marine liability risks policy. The wording of Article I.1 in as much as it refers to the inclusion of "all Terminal and pipeline operations" lends some weight to the construction which associates transportation activities with drilling, production and exploration operations.
227. I now consider Endorsement No. 2 – the Seepage, Pollution and Contamination Coverage Endorsement, which is set out at paragraph 215104 above.
228. The effect of the opening words is clearly to extend the cover provided under article I.1 of Section III B. The first issue is as to the meaning of "operations of the Insured" in paragraph (a). Is that phrase wide enough to cover consignment on board an oil tanker for ocean carriage, as submitted by the Claimant, or is it confined to conduct of the Insured in relation to a static "facility" in a particular place, as submitted by the Defendants?
229. Clearly both paragraphs (a) and (b) are directed to indemnify the Insured against the consequence specifically of seepage, pollution or contamination. Paragraph (a) on which the Claimant relies, is concerned with liability of the Insured for damages for personal injury and property loss or damage and paragraph (b) is concerned with expenditure by the Insured in removing, containing, neutralising or cleaning up such polluting or contaminating substances as emanate from the "operations" of the Insured. The word "operations" is also found in Article I.1, used with reference to drilling, production and exploration as well as terminals and pipelines. It is nowhere used to connote the shipment of cargo for ocean carriage. The concept would thus appear to involve drilling, exploration, extraction and production of oil as well as physical transfer of oil in or between those places where such activities take place. Moreover, the word "operations" must have been used with the same scope in both (a) and (b). However, in the latter the words contemplate "the offending facility", that is to say some static structure or unfixed equipment in which some defect has given rise to the seepage, pollution or contamination in question. If this provision had been intended to cover the carriage of oil by sea it would surely have made similar provision excluding the cost of repairing of defects in any vessel involved, for one would hardly describe an oil tanker utilised for ocean transit as a "facility".
230. For these reasons, I conclude that the function of Endorsement No.2 is to cater for personal injury and death and property damage specifically caused by pollution or contamination arising or emanating from a range of industrial activities conducted by the Insured and closely associated with some industrial facility of the Insured but not ocean transit on board a vessel. This limited meaning would be consistent with a mutual intention to confine pollution and contamination cover under Section III B to risks not covered by Section III A or ITIA.
231. If this construction is wrong and paragraph (a) is wide enough to cover pollution caused by grounding of a tanker in the course of ocean transit, there is an issue as to whether the escape of oil from the vessel and the consequent damage to property could be said to have arisen out of the operations of the Insured. Would there be a sufficiently close causal connection between the pollution and contamination and the conduct of Exxon in procuring the carriage of its cargo on the Exxon Valdez?
232. In Dunthorne v. Bentley and Others [1999] Lloyd's Rep. I R 560 the Court of Appeal had to consider the meaning of the words "caused by or arising out of "the use of a motor vehicle within section 151 of the Road Traffic act 1988. That had to be determined in order to ascertain whether the third party motor insurers were liable to satisfy the judgment given against their insured in respect of her having caused personal injury to the driver of another vehicle. That driver had suffered head injuries when the insured driver, having run out of petrol and parked at the side of the road, negligently ran into the path of the plaintiff's car while crossing the road, as it was inferred, to attract the attention of a passing friend in order to acquire more petrol. It was held that the plaintiff's injuries were not caused by the insured's use of a car but arose out of it. The Court of Appeal referred to a decision of the High Court of Australia in Government Insurance Office of New South Wales v. Green and Lloyd (1965) 114 C L R 437 on similar wording in the equivalent Australian legislation and referred to and followed the judgment of Menzies J. at p.445:

"The words 'arising out of the use' have no doubt a wider connotation than the words 'caused by … the use'. To my mind, however, they do import a relationship between the use of the vehicle and the injury which has some causal element in it."

233. and of Wyndeyer J. at p.447:

"Caused by" connotes a "direct" or "proximate" relationship of cause and effect, "Arising out of" extends this to a result that is less immediate, but it still carries a sense of consequence. It excludes cases of bodily injury in which the use of the vehicle is a merely causal concomitant, not considered to be, in a relevant causal sense, a contributing factor."

234. The trial judge's decision that the injury did arise out of the use of the car because the purpose of the assured in crossing the road was to acquire more petrol was upheld.
235. On the facts of that case the negligent conduct of the insured which was the proximate cause of the injury arose because of the insured's use of the car. In the present case, did the navigation of the Exxon Valdez which proximately caused the pollution in the course of its voyage arise because of the insured's consignment of an oil cargo for carriage on the vessel? Was the incidence of negligent navigation such as to break the necessary causal link with the operation of consigning the oil on board the vessel. On balance, I conclude that, having regard to the context in which these words occur, there was still a sufficient causal link to justify the conclusion that the pollution did "arise out of" Exxon's consignment of the oil.
236. I, therefore, conclude that for the reasons set out in paragraphs (225-231) above Exxon's clean-up expenditure was not covered under Section III B.

The Seepage and Pollution Exclusion

237. All the retrocession contracts, except certain of the Lloyd's policies, included the following term:

"This contract excludes any loss arising from seepage, pollution or contamination on land unless such risks are insured solely on a sudden and accidental basis. This contract also excludes liability in respect of disposal or dumping of any waste materials or substances.

These exclusions shall not apply to coverage provided in respect of:

(a) control of well policies where such seepage, pollution or contamination follows a well out of control above the surface of the ground or waterbottom;

(b) liability under:

1. Offshore Pollution Liability Agreement

2. Outer Continental Shelf Lands Act, Federal Water Quality Improvement Act, Artic Waters Pollution Protection Act,

3. Seepage, pollution or contamination covered by Protection and Indemnity policies,

4. Aviation policies subject to clauses no less restrictive than Aviation Seepage and Pollution Exclusion Clause (1988 amendment)."

238. It is submitted on behalf of the Defendants that in view of the fact that Section I and III B did not insure the risks of Seepage, Pollution and Contamination solely on "a sudden and accidental basis", reinsurers are not liable in respect of moneys paid in relation to most of the clean up costs. This is because the clean-up expenditure was nearly all directed to contamination of the land and not the sea. Indeed Exxon incurred total clean-up costs of US$1,250 million of which only US$25.7 million was in respect of offshore operations and these were almost entirely discontinued by the end of June 1989 and before the total expenditure exceeded the Section I deductible.
239. The applicability of this clause only becomes material if, contrary to this judgment, Exxon was entitled to recover clean-up expenses under either Section I or Section III B.
240. The key issue is as to the meaning of the words "on land". The Defendants submit that it signifies the place where the effect of the pollution or contamination is located. Hence, in the present case, it was the pollution and contamination of the shoreline that was cleaned up. The Claimants submit that the clause applies only where the seepage, pollution or contamination originates from a source on land.
241. In Commercial Union plc v. NRG Victory Reinsurance Ltd. [1998] 1 Lloyd' Rep. 80, which concerned a contract of reinsurance of an insurer under Exxon's GCE policies, such contract also included the Seepage and Pollution Exclusion. Upon an application for summary judgment under RSC Order 14 by the insurers of Exxon, who had settled under section I, against their reinsurers it was argued by the latter that the Seepage and Pollution Exclusion operated as a defence because the clean up costs had been incurred in relation to pollution and contamination of the shoreline. Under Order 14 the issue was whether this construction provided an arguable defence. Clarke J. rejected the argument at page 89L:

"Mr Kendrick submitted that that clause refers only to a case where the source of the seepage, pollution or contamination is on land. I agree. I do not think that it is arguable that the clause is apt to exclude liability for pollution emanating from a vessel."

242. Mr. Butcher submits that this is not correct. The clause must cover all pollution or contamination of land, even if that originates offshore because otherwise the disapplication of the exclusion of liability under the Offshore Pollution Liability Agreement and the Protection and Indemnity Policies would be otiose.
243. The Offshore Pollution Liability Agreement ("OPOL") 1986 is an agreement under which the parties are operators of Offshore Facilities used in connection with exploration for or production of oil and gas. It provides for the payment by such operators who are parties to the Agreement of reimbursement of expenditure or compensation up to a specified amount where any Public Authority takes remedial measures or any person sustains pollution damage caused by a Discharge of Oil from a Designated Offshore Facility. That is defined as "an escape or discharge into the sea from such Facility. An Offshore Facility is defined as follows:

"Offshore Facility" means:

A. any well and any installation or portion thereof of any kind, fixed or mobile, used for the purpose of exploring for, producing, treating, storing or transporting crude oil from the seabed or its subsoil; and

B. any well used for the purpose of exploring for or recovering gas or natural gas liquids from the seabed or its subsoil during the period that any such well is being drilled (including completion), recompleted or worked upon (except for normal work-over operations);

Which is located within the jurisdiction of a Designated State to the extent that it and, in the case of any well, any installation from which it is drilled, are both to seaward of the low-water line along the coast as marked on large scale charts officially recognized by the Government of such Designated State:

Provided however that none of the following shall be considered an Offshore Facility:

(i) any abandoned well, or

(ii) any ship, barge or other craft not being used for the storage of crude oil, commencing at the loading manifold thereof."

244. Had it not been for this disapplication of the exclusion and that relating to seepage, pollution and contamination within the P and I policies, I should certainly have preferred the construction of the opening sentence of the Exclusion submitted by the Claimants in accordance with the views of Clarke J. in Commercial Union Assurance, supra. However, that construction would render the disapplication of coverage for liability under OPOL completely inexplicable because liability under OPOL cannot arise except in respect of pollution or contamination emanating from a source not on land. Reference to the P and I Policies points to the same conclusion.
245. It is not clear that the disapplication provisions in these exclusions or their relevance to construction of the Exclusion were drawn to the attention of Clarke J. Had that been so, the extremely conscientious nature of that judge would certainly have caused him to refer to the point in his judgment.
246. Although, it has long been a firmly established approach to the construction of commercial contracts that there is no presumption against surplusage, the question how much, if any, weight should be given to wording which is redundant only if some related part of the contract which falls to be construed is accorded a particular meaning must depend in each case on all those surrounding circumstances relevant to construction generally. These include the knowledge and familiarity of the parties with the discipline in relation to which the contract was drafted. In the present case the opening wording of the Exclusion is certainly capable of having the meaning which would not confine the source of contamination to land. Further those who entered into this retrocession must be taken to have been very familiar with the coverage under OPOL and P and I policies. It thus presents itself to me as highly improbable that in this very sophisticated market these disapplications were inserted by mistake or without appreciation that they would be otiose.
247. In the event, I conclude that the exclusion properly construed refers to seepage, pollution or contamination which affects land, whether it originates on land or offshore.
248. Accordingly, it provides a good defence to a claim under the retrocessions in respect of clean up costs relating to land pollution or contamination.

New York Law relating to the Construction of Insurance Policies

249. The construction of the GCE policies by reference to New York Law construction principles only becomes relevant if I am wrong in concluding that those policies were governed by English Law. Further, the construction issue in respect of the meaning of "removal of debris of property" in Section I has no bearing on the ultimate conclusion as to whether the Claimants are entitled to recover under the terms of the retrocession from the Defendant reinsurers in respect of Exxon's clean-up expenses unless my conclusion as to the effect of the Seepage, Pollution and Contamination Clause in the retrocession is wrong. Nor does it have any effect on the ultimate conclusion as to whether the Claimants are entitled to recover ESC's expenditure as part of their net loss under the reinsurance contracts unless I am wrong in concluding that the primary insurers made no payment in settlement of any loss or liability or expenses of ESC and also wrong on the effect of the Seepage etc. Clause. Accordingly, I do not propose further to lengthen an already long judgment by a detailed analysis of the expert evidence on New York Law and its application to the relevant issue of construction of the words of Section I. Similarly the application of New York Law principles of construction to Section III B only becomes relevant if I am wrong on the effect of the Seepage etc. Clause.
250. I summarise my conclusions as follows. The evidence as to New York Law was given by Mr. John Woods of the well-known law firm of Thacher, Proffitt and Woods, on behalf of the Claimants, and by Mr. John Kimball of the equally distinguished law firm of Healy and Baillie, on behalf of the Defendants.
251. The general principles of construction of policies of insurance and a number of matters relevant to the application of these principles to the GCE policies were largely agreed between the experts. The following points from their joint memorandum are relevant.

"1. The Exxon Policy is to be construed as a whole and to give effect to the parties' intended purpose.

2. A New York court would look at the whole Policy as a "package" – and not just at one clause or a selection of clauses in isolation – to discern the intent of the parties in drafting a particular provision. A New York court would consider the Exxon Policy as a "package", ie. Sections 1, 3A and 3B together, to determine the intent of the parties.

3. In attempting to discern the meaning of the Exxon Policy, a New York court would do so in light of the reasonable expectations of a business person engaged in a similar business.

4. The insured bears the burden of proving by a preponderance of the evidence that the claimed loss falls within the meaning of the Policy terms.

5. The insurer bears the burden of proof when it contends that an exclusion in the Policy applies.

6. To the extent a contract is unambiguous, a New York court will look at the plain meaning of the words used to determine the parties' intent.

8. If the Policy or any parts of the Policy are determined by the court to be ambiguous because they are susceptible to two or more reasonable interpretations, then the court would consider extrinsic evidence to determine the proper interpretation of the Policy.

9. A New York court would not be permitted to expand coverage beyond what may fairly be construed from the plain meaning of the Policy, nor would the court be allowed to extend coverage based on equitable notions of fairness or justice.

10. A term or provision will not be deemed ambiguous merely because there is disagreement between the parties as to its interpretation.

11. Although a number of the terms in the Exxon Policy are capitalized, and while there are definition sections for both Section I (Article V) and Section 3B (Article VII), the word "debris" is not defined in the Exxon Policy.

12. It is not uncommon for a court to look to a dictionary for assistance in determining the ordinary meaning of words contained in a contract of insurance.

13. The American Heritage Dictionary defines "debris" as "the scattered remains of something broken or destroyed; ruins" while Webster's has defined debris as: "scattered fragments; remains, rubbish, especially that caused by destruction." One New York court has used the dictionary meaning of the term "debris", noting that "[d]ebris is defined in Webster's Third New International Dictionary 582 (1986 ed) as, inter alia: 'the remains of something broken down or destroyed'. Lenard v. 1251 Americas Assocs, 241 AD 2d 391, 294 n2 660 NYS 2d 416, 418 n2.

15. The precise question of whether a "removal of debris" clause in a property insurance policy should cover costs of oil spill removal has not yet been decided in a New York court. No United States court in any jurisdiction has addressed the question whether a removal of debris clause in a marine property insurance contract covers a cargo owner's costs of oil spill clean up.

19. The "watercraft" exclusion in Article VI, section (f) is not applicable to Exxon because it was neither the owner nor the bareboat charterer of the Exxon Valdez. ESC was the owner of the Exxon Valdez and a New York court would recognize that Exxon should be treated as a separate corporate entity."

252. In general it was the view of Mr. Woods that a New York court would approach construction of the policies bearing in mind that the fundamental purpose of all insurance was to provide protection of the insured from losses. Thus, clauses which in substance have an exclusionary effect will be construed in favour of the insured. That construction will be given which accords with the reasonable expectation and purpose of the reasonable insured businessman. Accordingly, where there is more than one reasonable interpretation of a term, the court will adopt that interpretation which is in favour of the insured. This applies regardless of whether the contract of insurance was drafted by the insured. Mr. Woods referred to a decision of the Court of Appeals of Georgia in Lexington Insurance Co. v. Ryder System Inc. 142 Ga.App.36 in which it was held in relation to a non-marine all risks property policy that "cost of removal of debris" included the cost of removal of oil from the ground into which it had leaked from a storage tank. The Georgia Court of Appeals has a good reputation in New York.
253. Mr. Woods also referred to the decision of the United States Court of Appeals in Antilles Steamship Co. Ltd. v. The Members of the American Hull Insurance Syndicate 733 F.2 at 195 which included the remains of a liquid cargo which had polymerised into remains some of which were liquid as "debris of cargo".
254. Although a New York court would construe a policy with regard to all relevant surrounding circumstances it would not admit extrinsic evidence of custom or usage unless it had first concluded that the words used were ambiguous. Such extrinsic evidence could include evidence of the parties actual intention as to the meaning of the contract but little weight would be added to it unless it was communicated to the other party, or at least recorded, at the time.
255. The Defendants, in reliance on Couch on Insurance at Rule 22.24 challenge Mr. Woods' evidence that, independently from the contra proferentem rule, the New York courts lent in favour of the insured. That rule of liberal interpretation is displaced in disputes involving "sophisticated insureds". Mr. Woods accepted that this was so.
256. The Defendants draw attention to the fact that, in all the cases relied on by Mr. Woods to demonstrate such leaning in favour of the insured, the policy had been drafted by the insurance company. This approach to construction in favour of the insured was not accepted by Mr. Kimball.
257. In my judgment, a New York court would probably place significant weight on the decisions in Lexington, supra, and Antilles Steamship Co., supra, and give the words "removal of debris of property" a meaning wide enough to cover oil pollution of the sea and shoreline. I do not consider that such court would treat the words as ambiguous. Nor do I consider therefore that the court would admit evidence relevant to an investigation as to whether having regard to insurance market practice cover in respect of oil pollution was expressly so described.
258. Exxon would thus have been covered under Section I unless such cover were excluded by the Notwithstanding Clauses. Having considered the evidence of New York Law given by Mr. Woods and Mr.Kimball and the many authorities they have referred to including in particular Eberhard V. Aetna 235 NYS 445, Bankers Trust Co. v. Hartford Accident & Indemnity Co. (1981) 518 F.Supp.371, Kutsher's Country Club Corpn. V. Lincoln Insurance (1983) 465 NYS 2d 136, ECDC , Environmental v. New York Marine and General Insurance Co. (1999) US District Court for the Southern District of New York and Oil Corporation v. Insurance Company of North America (2000) 221 F.3d.307, I have come to the conclusion on balance that a New York court would hold that Exxon's expense in a clean-up in anticipation of liability, which would be incurred if the clean up were left to the Alaskan State, was a liability covered by the provisions of Section IIIA.
259. Accordingly, the Notwithstanding clauses would be applied to bar a claim under Section I. In particular I am not persuaded that Exxon's expenditure would be treated as a first party loss and therefore outside the scope of liability cover under Section III A.
260. As to Section III B, I have found the application of the principles of construction of New York law to the words "all transportation activities" somewhat elusive. I am satisfied that a New York court would not treat the words as having customary meaning excluding ocean carriage. I am impressed by the weight likely to be attached to the absence of words expressly limiting the scope of that phrase. I am further persuaded that, taking these words in their immediate setting, it is likely that they would be held to be ambiguous so as to justify the admission of extrinsic evidence. The problem is, however, whether the absence of any ambiguity would preclude consideration of the overall matrix or setting of Section III B as part of a composite insurance package alongside Sections I and III A and whether, if that consideration were not precluded, a New York Court would accord to the features of that overall contractual setting the weight which a judge sitting in this court would give to them in determining the issue of construction. It is clear from those United States authorities put forward by Mr. Woods and Mr. Kimball that, although it is possible to identify the broad considerations which would influence a New York Court in resolving this issue, it is by no means easy to apply them in this type of case which bears little similarity to any of the New York or United States cases.
261. I have come to the conclusion that the nature of the contractual setting of Section III B as part of an overall insurance package could be taken into account in construing Article I.1, but that relatively less weight than in this court would be given to this factor as a consideration pointing away from confining the meaning of the words "all transportation activities" by reference to close association with the industrial processes of exploration, drilling and production. On balance I consider that New York Law and principles of application in the evidence and materials before me lead to the conclusion that the words would be treated as wide enough to cover consignment on board an ocean tanker. As I have already held that Exxon's expenditure on clean-up in anticipation of liability to the State of Alaska and other third parties would be treated by a New York court as an incurring of liability under Section III, I conclude that Exxon would be held entitled to recover under Section III B. However, I am not persuaded that application of New York law principles results in any independent coverage under Endorsement No.2 of Section III B.

Conclusions

262. The three policies comprising the GCE Policy were all governed by English law and not by the Law of the State of New York.
263. Oil pollution clean-up expenses were not within the cover provided to Exxon by Section I. Even if they were, because there was coverage for such expenditure under Section IIIA, the "Notwithstanding clauses" prevent recovery under Section I.
264. If there would otherwise have been cover for Exxon's expenditure, recovery would not have been excluded by Article IX.3 of Section I.
265. ESC's expenses cannot be included in the ultimate net loss under the retrocession because the March 1996 Section I Settlement Agreement did not effect the settlement of any claims by or on behalf of ESC under Section I and by the time of that Agreement any claim by ESC would have been time-barred in English law, if not in New York law.
266. There was no cover in respect of Exxon's expenses under Section IIIB or under Endorsement No.2 of that section.
267. The Seepage and Pollution Exclusion in all the retrocession contracts, except for certain of those underwritten by Lloyd's retrocessionaires, would in any event have excluded the Defendants' liability since its scope extends to pollution or contamination affecting land which originates from a source offshore.
268. Had it been necessary to apply New York law, Exxon would not have been entitled to cover under Section I because although "removal of debris of property" would be held to extend to removal of oil residues in this case, Exxon's recovery would be barred by the Notwithstanding clauses. However, Exxon would have been entitled to coverage under Section IIIB.
269. Although by application of New York law Exxon would have been entitled to coverage under Section III B, such payments as it made could not be included in the ultimate net loss under the outward retrocession contracts entered into by many of the Claimants by reason of the operation of the Seepage Pollution exclusion.