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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> John Wyeth & Brothers Ltd v Cigna Insurance Co Of Europe SA-NV & Ors [2001] EWCA Civ 175 (9 February 2001)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/175.html
Cite as: [2001] EWCA Civ 175, [2001] Lloyd's Rep IR 420, [2001] CLC 970

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Neutral Citation Number: [2001] EWCA Civ 175
Case No: A3/2000/2105; A3/2000/3546

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
Mr Justice Langley


Royal Courts of Justice
Strand, London, WC2A 2LL
Friday 9th February 2001

B e f o r e :

LORD JUSTICE WALLER
LORD JUSTICE DYSON
and
SIR MURRAY STUART-SMITH

____________________

JOHN WYETH & BROTHERS LTD
Claimants
Respondents
- AND -


CIGNA INSURANCE CO OF EUROPE SA-NV & ORS

Defendants
Appellants

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

C Hancock QC; Mr M Ashcroft (instructed by Messrs Kennedys for the Appellants)
D Kendrick QC; Mr D Allen (instructed by Messrs CMS Cameron McKenna for the Respondents)

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    LORD JUSTICE WALLER :

    Introduction

  1. This is an appeal from two decisions of Langley J. In the first, by a judgment dated 18th April 2000 (the main judgment) he ruled on various preliminary issues raising points of construction of policies issued by members of the AFIA group of companies in whose shoes now stand one or other of the defendants. Those policies fell to be construed by reference to New York law. In the second, delivered on 13th November 2000, he ruled on two points dealt with in his main judgment, but this time as points on the construction of a policy issued by an AFIA company governed by English law.
  2. The points arise in the context of what is known as the benzodiazepine litigation. In that litigation claims were made by the users of drugs such as Ativan and Serenid against John Wyeth & Brothers Ltd (Wyeth) (the respondents to this appeal). Cases were commenced in the courts in England, Scotland, Wales and Ireland [commencing] in the late 1980s. Ultimately Wyeth faced some 11,000 claims. The damages claimed appeared to be many millions.
  3. Ultimately the claims in England were all struck out following the withdrawal of legal aid. The actions remain dormant in Scotland and Ireland, but it is common ground that there is no real prospect of any of these claims proceeding to judgment against Wyeth. Thus no claims have in fact been established against Wyeth and no claims have been paid by Wyeth.
  4. However the costs of the litigation were very substantial. Wyeth's costs in England totalled some £17.34 million and a further US$2.44 million has been incurred in the United States. It is these costs which Wyeth say one or other of the defendants or their predecessors are bound to pay under both the policies governed by the law of New York or the policies governed by English law. It is the defendants' case that they have never been bound to pay any of these costs under the New York policies or were not bound to pay at least a proportion of them. In so far as under a defence agreement they have paid some costs they claim to be reimbursed all that they have paid or at least a proportion of what they have paid.
  5. So far as Wyeth's liability in the United Kingdom is concerned, before 1st May 1972 they were uninsured. From 1st May 1972 to 31st October 1977 their insurance was in two layers. The primary layer was provided by Guardian Royal Exchange (GRE), and the second layer was provided by AFIA companies, St Paul Mercury Insurance Company (St Paul) from 1st May 1972 to 1st July 1975, and Aetna Insurance Company (Aetna) from 1st July 1975 to 31st October 1977. From 1st November 1977 to 31st October 1980 the cover was again in two layers, but in this period provided at the primary level by an AFIA company Home Insurance Company Limited (the Home) and the second layer still by an AFIA company Aetna. It is the Home policy which is governed by English law. From about January 1984 the Cigna Group took over AFIA. One or other of the defendant companies took over the interests and liabilities of St Paul, Aetna, and the Home and I shall hereafter refer simply to Cigna as being the appellant both (1) on the issues arising under the second layer "the New York policies", and (2) on the issues arising under the primary layer "the Home policy" between 1st November 1977 to 31st November 1980.
  6. What has given rise to the preliminary issues at least so far as the New York policies are concerned (putting the matter shortly for the present) is that under the GRE primary layer policies for the period 1st May 1972 to 31st October 1977, GRE had what is termed a right to "buy-out" under which they could pay the limits (£200,000 in each of the five years), and the amount of costs incurred as at that date in the litigation between Wyeth and the claimants. That buy-out if exercised terminated their liability. They did exercise the right at the end of 1990 and beginning of 1991 by paying £1 million (£200,000 for each of the GRE policy years), and then paying the costs at that stage incurred in the sum of £750,000.
  7. Wyeth say that so far as the costs of the litigation thereafter are concerned, AFIA are bound to pay 100% of the same until 18th March 1994 ( the significance of which date will appear), and in a lesser percentage thereafter, either under the second layer New York policies for the years 1st May 1972 to 31st October 1977, or under the primary layer Home policies from 1st November 1977 to 31st October 1980.
  8. As between Wyeth and Cigna, in January 1990, a "defence Agreement" was reached so that litigation could be funded on a without prejudice basis. GRE were never party to any such agreement. They paid their limits and the costs at the end of 1990 or the beginning of 1991, and the funding agreement then continued until it was terminated in 13 May 1996 giving rise to the necessity to resolve the issues raised in this litigation.
  9. One other date is important for understanding the issues that arise. Up until 18th March 1994 it was not possible to ascertain into which years the claims of those who had ingested the drugs fell. On that day Wyeth contend, and for the purpose of the preliminary issues it can be assumed, it became clear that 31.49% of the claims related to the period 1st May 1972 to 31st October 1977; 29.56% were within the period of the Home policy; and 38.95% related to the period when Wyeth was self insured.
  10. Wyeth say that fro m 18th March 1994 the costs incurred on the litigation should be covered 31.49% by Cigna under the New York policies, 29.56% by Cigna under the Home policies; and 38.95 % by Wyeth. But they say essentially on the basis that it was unclear as to which year the claims related to prior to that date, and because they assert that while that state of affairs persisted, Cigna were bound to pay or reimburse the litigation costs, they are entitled to recover 100% of the costs incurred between the date on which GRE paid and 18th March 1994. Cigna refute that assertion saying (1) there is no liability for costs under the New York policies at all either because the GRE buy-out did not for various different reasons trigger liability on the second layer, or (less strenuously pursued) because an "efficacy exclusion" applied to exclude liability altogether; (2) if there is liability under the New York policies, once it was known that certain claims did not fall within the periods of the policies, costs should be apportioned for those incurred pre 18th March 1994 at least in the same percentages as for post 18th March 1994, and reimbursement ordered if necessary; and (3) still under the New York policies that in fact a further apportionment should take place in relation to those claims covering injuries which developed over time, the method of apportionment suggested being the same as that used to apportion liability for claims ie to divide the costs of such claims between the number of years over which the injuries continued to develop including the uninsured years, and again ordering reimbursement if applicable.
  11. Under the Home policy governed by English law Cigna again say, albeit again not strenuously, that there is no cover by virtue of an efficacy clause, and they say in the alternative that if there is a liability, then costs should be apportioned. In this instance Cigna accept that Wyeth are entitled to an indemnity for litigation costs which are reasonably related to the defence of a claim alleging an injury or illness or disease occurring during the policy period, but say that the overall costs must have been increased by virtue of the fact that the claimants alleged (a) injuries continuing through periods outside the period of the Home cover, and/or (b) separate injuries occurring outside the period of the Home cover. Cigna claim that the costs should be apportioned to take account of that factor.
  12. I append to this judgment (i) an appendix to Mr Hancock's skeleton argument which conveniently sets out the terms of the various policies to which reference need be made for the purpose of ruling on the issues; and (ii) an appendix setting out in full the preliminary issues ordered to be tried on the construction of the New York policies.
  13. New York law

  14. The major part of the argument involved construction of the New York policies, and thus New York law. There is no great issue between the parties on what the rules of construction are under New York law. Mr Hancock QC did not really challenge the judge's findings and approach summarised by the judge as follows:-
  15. "Essentially the rules comes to this:

    (1) The policies must be interpreted as a whole to give effect to the intentions of the parties.

    (2) If the words used are unambiguous then effect must be given to them, and it is not legitimate to "create" an ambiguity where none exists.

    (3) If there is ambiguity, evidence is permitted to explain and establish the intention of the parties. The evidence may include evidence of negotiations, drafting history, correspondence and statements prior to contract and conduct and statements subsequent to the contract. The experts were at issue as to whether evidence of uncommunicated intentions would ever be admissible, but in the event there is no need to try to resolve the conflict.

    (4) If the evidence remains inconclusive so that ambiguity remains, the doctrine of contra proferentem is applied. The experts were also at issue as to the extent of the application of the doctrine where the parties are both sophisticated commercial entities, the contract may have been jointly drafted or fully negotiated and overall, in the specific context of insurance, whether it is right to say that New York courts construe policies to provide coverage, and not to deny coverage. Judge Milonas' evidence was that the doctrine was applied rigorously in favour of the insured; Mr Wollan's evidence was that its application was much more circumscribed.

    In the event I have not felt the need to resort to the doctrine and so it is unnecessary to resolve this conflict, but I am satisfied that the weight of authority clearly favours the views of Judge Milonas. I was referred to a paper entitled "the Rules of Insurance Policy Construction and the Myth of the Sophisticated Insured" published in 1989 which indeed seeks to explode the myth of the title. In 1983 a New York District Court in American Home Products v Liberty Mutual Insurance 565 F Supp. 1485 considered the doctrine was applicable where Wyeth's parent company was the insured. In 1988 another District Court in Ogden Corporation v The Travellers' Indemnity Company 681 F Supp. 169 applied the doctrine in favour of the insured in a case where the insured's broker was primarily responsible for drafting the insurance provisions at issue (which is not suggested in this case). Thus insofar as I have decided questions in favour of Wyeth, had it been relevant and permissible to refer to the doctrine it would have served to confirm my conclusions."

    Efficacy Clause

  16. I am going to take matters in a slightly different order from the judge. Let me first deal with the "efficacy clause". Little argument was addressed to us orally and it seems to me that the judge was so clearly right in his construction of this clause that it is possible simply to say that for the reasons he gives in the main judgment from page 48 to 51 the claims in the benzodiazepine litigation were not excluded from the cover under the New York policies by the efficacy clause. It is common ground that if that is so they were not excluded from the cover under the Home policy either.
  17. New York policies

  18. The issues on the New York policies are to some extent interrelated because the construction of each of the various terms can be said to affect the construction of the others. For example on the question which the judge took first and was clearly right to take first logically ie whether the New York policies could ever provide an indemnity where GRE exercised a buy out, the construction of the terms of the New York policies as a whole need to be considered, and the construction of those terms on which other issues turn can assist in answering that question. Two examples will suffice. First Mr Hancock suggested that the construction of the maintenance warranty is important in considering this question, and criticised the judge for ignoring it when looking at this aspect. If the maintenance clause means what Mr Hancock suggested that it means there would be force in this criticism if it were true. Second, part of Mr Hancock's argument was that until a claim had been settled or litigated and a judgment entered for a sum that exhausted the GRE policy limits, cover under the New York policies simply was not triggered. That however would seem an unlikely contention if under the New York policies there was an obligation to defend litigation from the outset before it could be seen whether a claim was going to succeed to an extent which actually pierced the excess layer. How, one might ask, could the obligation to defend ever arise if it was not triggered until the litigation was over? Mr Hancock suggested that that created no difficulty because the duty on an excess insurer would only be triggered by the success of certain claims and thus he asserted the duty, even if it was akin to a duty to defend, only applied to new claims made after established claims had pierced the primary layer. But the question whether that is so or not must depend on the proper construction of the policy as a whole.
  19. The New York policies were in fact a hybrid being primary policies in certain countries and being excess in others, but the language remained the same whichever role was fulfilled.
  20. Summary of arguments

  21. An overview of the arguments considering in each case how it is said one term links with another would seem to me a useful starting point. From Wyeth's perspective the argument seems to me in broad terms to be as follows :-
  22. The alternative argument from Cigna's viewpoint is
  23. Submissions in more detail

  24. It seems to me that on the main issues Mr Hancock's submissions placed great reliance on the maintenance clause. It thus seems to me appropriate to start, in considering the submissions in more detail, with that clause. The judge was prepared to construe this clause as a warranty. Mr Hancock for Cigna was not anxious to support that view; indeed he was not enthusiastic about the construction that would have made compliance a condition precedent. This was no doubt because of the far reaching consequences that would follow if the clause had the meaning he contended for. This was one of quite a number of areas where he appeared to abandon the stance of his own expert witness on New York law. But even for his preferred view that a breach of the clause simply imposed a remedy in damages, there must first be established a breach. The argument has to be that the exercise of the buy-out meant that the GRE policy was no longer maintained in force, that the reduction of the limit of GRE's indemnity to nil was not "solely by payment of claims"; and that without a further policy no less restrictive being entered into Wyeth were in breach of the term.
  25. The judge's view was that the word "claims" meant, as Mr Hancock submitted, claims by the claimants in the litigation against Wyeth as opposed to a claim by Wyeth under the policy. I am not sure that the judge was right. Clearly the underlying claim is what gives rise to Wyeth's claim so the two are not unrelated. What is more, the judge was of the view that "payment of claims" did not require actual payment to the particular claimants and thus reached the conclusion that whatever claims mean payment to Wyeth in respect of those claims would be sufficient. The precise meaning of the word claims did not thus matter.
  26. Mr Hancock and his expert at the trial before him (see Transcript Day 2 pages 68-70), were inclined to accept that if Wyeth were paid £1 million in respect of claims unestablished when the payment was made, but later established, then such a payment would reduce the aggregate limits and indeed exhaust the limits so as to trigger the excess policy. It was in this context Mr Hancock submitted that "claims" meant "established claims". I take the view that Wyeth is the insured and that accordingly the claims paid under the primary insurance would certainly include payments to Wyeth indemnifying Wyeth against liabilities to claimants, and I see no warrant for the word "established" being read into the clause. The obligation of good faith would of course ensure that the payment must genuinely represent a claim by Wyeth to be indemnified, and there is no issue that when GRE made this payment, Wyeth was making a claim under the policy in respect of claims for many millions.
  27. Furthermore, if the GRE policy was in being throughout the relevant period and GRE simply paid the full limit of its indemnity, on any natural meaning of the word it would seem to me that the GRE policy was maintained.
  28. Like the judge I reject the arguments of Cigna on the construction of the maintenance clause. The weakness of the arguments of Cigna can be easily demonstrated by reference to facts already mentioned. Assume the claims were obviously and clearly made for an injury covered by the policies in a year covered by the same. Assume the litigation in which liability is to be fought will, if lost, result in damages in excess of the primary layer. Assume GRE takes a poor view of the chances of defeating liability, and exercises the buy-out and pays the costs to that date. Assume the action continues to be fought for some four years and is then lost, and damages well in excess of the £200,000 are awarded against Wyeth. Wyeth would of course pay the £200,000 received as a result of the buy-out to the claimants.
  29. Would in the above circumstances Cigna be entitled to say (1) the mere entry into the buy-out provision and/or its exercise was a breach of the maintenance clause on the basis (I) from the date of the buy-out liability under the GRE policy could be and then was terminated, alternatively (II) the payment to Wyeth at the time of the buy-out was not "solely by payment of claims"? Or could Cigna say (2) the payment under the buy-out did not exhaust the primary layer, and thus there was no liability on Cigna to indemnify for the liabilities exceeding £200,000, and no liability on Cigna to pay the costs of the litigation fought over the four year period?
  30. As I understood Mr Hancock's submissions and understand the evidence of Mr Wollan at the pages already referred to, they were hard put not to concede that if the facts were as outlined in the above example, (a) the buy-out payment would be in respect of claims at least once it was paid over by Wyeth, and (b) they would accept that the example would show the primary level being exhausted by established claims and thus triggering liability under the excess. Mr Wollan did, it is true, suggest that the concession did not as a matter of contractual obligation extend to the liability to pay costs; his view was that "in practice" the excess insurers would pay the costs.
  31. But it seems to me that in reality it is impossible for such a concession not to be made both in relation to an obligation to indemnify for claims and to pay the costs. But if so, that must demonstrate certain things; first it is not automatically a breach of the maintenance clause to enter into a buy-out arrangement or to allow the primary insurer to pay his limits and step out. Second, payment to Wyeth in relation to claims comes within the words "solely by payment of claims" and it is not a breach of the maintenance clause to make a payment in respect of claims to Wyeth; payment direct to claimants is not necessary.
  32. What follows from the above? It is obvious that in most cases it will not be clear whether the litigation is going to succeed or not when a primary insurer may want to consider tendering its limits whether under a buy-out provision or otherwise. It would be quite illogical for it to be a breach of the maintenance warranty either to enter into a buy-out arrangement or to exercise it only if it turned out eventually that the claim was defeated on liability.
  33. If it could be suggested that there was a lack of bona fides in GRE making the payment it did, so that the payment did not relate to a claim for indemnity being made by Wyeth in respect of claims being made against them, the argument that the policy was not being maintained with its limits would be a powerful one. But no such suggestion could be made in this case since the litigation still had some years to run, and could not and indeed was not treated as hopeless by either Wyeth or Cigna. The sums of money spent on the litigation after GRE exercised their right with the consent of Cigna demonstrate that fact.
  34. Thus the conclusion that the judge reached that there was no breach of the maintenance clause in this case seems to me clearly right.
  35. Furthermore if it is accepted that to pay the full limits of the indemnity under the primary policy exhausts the primary layer where some four years later liability is established, it would seem illogical for the same payment made at a stage when it is unclear whether liability will be established should not also exhaust the primary layer.
  36. Of course the key question that arises if a claim is defeated relates to the liability for costs, and to that question I now turn.
  37. There are policies where the obligation to pay the costs of litigation will only arise as part of the obligation to indemnify. The cases relied on by Mr Hancock were examples of such policies eg In re Ambassador Group Inc 738 F Supp 57 (EDNY 1990), Kenai Corp v National Union Fire Ins Co 136 B.R. 59 (SDNY 1992) and Stonewall In. Company v Asbestos Claims Management Corp. 73 F.3d 1178 (2d.Cir.1995). In those cases the insurer has no obligation even to fund the litigation and he simply waits to see if he has to pay any claim plus costs when the claim is established. Equally there are policies under which separately from the obligation to indemnify against the claim, there is an obligation on the insurer to defend. In that situation the New York courts have held at least in relation to primary policies (1) that the obligation arises as at the moment that the litigation starts; and (2) that the obligation relates to any claim that might fall within the policy. This was common ground between the experts as recorded by the judge at p.36 with a reference to Mendes & Mount v American Home 97A.D2d. 384 467 N.Y.S. 2d. 596. What is more it was also common ground between the experts in this case (and I will return to this below) that if the obligation is to defend, if it turns out that the claim is actually not covered by the policy, because for example the injury was suffered outside the relevant period, the court will not order reimbursement for costs already incurred by the insurer on the basis that it can now be seen that the claim does not fall within the policy. What is said is that the duty to defend for the future no longer exists once the insurer can, what is termed, "confine" the claim outside the coverage, but it is also said that since litigation insurance for claims that might come within the policy is what the insured paid for, there can be no question of reimbursement by the insured (see the passage quoted by the judge from American Home v Liberty Mutual Insurance 565 F Supp 1485 (S.D.N.Y. 1983) at p.37 of his judgment).
  38. The terms of a policy may impose an obligation to "pay" or "reimburse" costs of litigation. Whether that obligation is to pay costs as they are incurred for litigation relating to claims which might fall within the cover (as per the duty to defend obligation),or simply to fund until it is known whether the claims are within the cover, or whether the obligation is simply to indemnify once liability has been established, will depend on the proper construction of the policy. Mr Hancock was inclined to submit that an obligation to pay or reimburse will always carry with it the implication that the obligation to pay or reimburse is an indemnity obligation once liability to indemnify has been ascertained. Clearly (as one would expect since it must be a question of construction),that is not so as cases in New York illustrate eg Nu-Way Environmental Inc v Planet Insurance Co. 1997 WL 462010 (S.D.N.Y.).
  39. There are other aspects of relevance to this case. If insurers have an obligation either to defend or pay as the costs are incurred or even if the obligation is only ultimately to indemnify once liability is established, if there are other insurers who also had an obligation to pay the litigation costs, some contribution may be obtainable from those insurers. New York law is no different from English law (see for example Continental Casualty v Rapid-American Corp. 80 NY 2d 640). Contribution in the same sense cannot arise so far as the insurer and insured is concerned. So far as the insured and insurer are concerned if as in this case a without prejudice defence agreement is made (and for practical reasons such agreements are often made), the questions to be answered are as follows:-
  40. (1) If insured and insurer had stood on their rights at the time of the defence agreement, what would have been the obligation of the insurers so far as costs were concerned?

    (2) If the answer is the insurer was bound to pay litigation costs where the claims might fall within the policy and to pay them at the time those expenses were incurred, is the implication that once it is clear that some claims can be confined to periods where the insured was self-insured, a reimbursement will take place so as to apportion between the claims that would be met and those that would not be met by the insurer under the indemnity?

    (3) If the answer is that the insurer was under no contractual obligation to pay costs until the claims were established or was simply under an obligation to fund the costs until liability could be established, how should the costs be apportioned between the insurer, and the insured to take account of the fact that it now transpires the litigation concerns some claims that fall outside the insurance cover ?

  41. As previously indicated it was common ground between the experts that if independently from the obligation to indemnify, a separate obligation was imposed to defend, then that obligation was to defend litigation in respect of claims that might fall within the policy until the claims could be confined as outside the cover. Once the claims could be so confined to for example a self insured period, the obligation to defend those claims would cease, but there would be no obligation on the insured to reimburse the costs of defending those claims up until that date. (see for example Cigna's expert Mr Wollan's evidence at Transcript Day 2 pages 21-22). If that is right, in my view no question of apportionment for that period can arise either. The reasoning of the judge on this aspect (p.47) in preferring Judge Milonas' view seems to me irrefutable.
  42. Mr Hancock before us sought to suggest that his expert was not right to concede the point on reimbursement in his evidence and that this should no longer be taken as common ground. He relied on NL Industries v Commercial Union Insurance Company 935 F Supp 513 a decision of the United States District Court of New Jersey. In the judgment in that case the Judge in New Jersey predicted that if New York courts had to rule on the matter, they would rule that even in a duty to defend case, if it transpired that the claims were in fact being made in relation to an uninsured period, reimbursement would be ordered (see page 521). This case was in the bundle of authorities before the judge, and indeed he referred to a different part of the judgment at page 46. But the passage relied on by Mr Hancock was never put to either of the experts and indeed it was never suggested that the common view they expressed was wrong.
  43. It seems to me that it is impossible for this court to start to make findings on New York law which contradict agreed views expressed by both experts. In any event, the logic of the position taken up by the experts is sound. The logic is simply that a clause which imposes an obligation to defend claims which may be within the policy is the cover that the insured bought. That is litigation insurance bought separately from the indemnity insurance. It would be to contradict that coverage to suggest that the insured should reimburse that which he has contracted to receive.
  44. What ultimately divided the experts was the question as to the proper construction of the particular terms of the St Paul and Aetna policies. Those policies were in slightly different terms as between themselves but as the judge said in his judgment neither side was contending that a different result would be reached depending upon which policy was applicable.
  45. The policies were hybrid being primary where there was no underlying insurance and being excess over underlying insurance where there was any. Strictly it seems to me that one should ask oneself first what the policy would mean if it were a primary layer policy, and then consider what the effect is of the policy being excess in this particular case. So far as the St Paul policy is concerned it provided under a distinct "Agreement II" that St Paul would "pay for the costs of legal expenses incurred with the consent of the company or at its sole option, defend any suit, even if groundless, false or fraudulent, brought against the insured on account of loss coming within the purview of the policy...."
  46. So far as the Aetna policy is concerned the agreement relating to costs was not separate, but it originally provided following the general indemnification provision "…the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage even if any of the allegations of the suit are groundless, false or fraudulent …". But by an endorsement the word "defend" was deleted, and in place were substituted the words "to reimburse the insured for costs to defend".
  47. The evidence of Mr Wollan and the argument of Mr Hancock was that there is a clear distinction between an obligation to pay or reimburse costs as compared with a duty to defend. An obligation to pay or reimburse should be construed simply as an obligation to pay once claims under the policy have actually been established or at the most as an obligation to fund pending resolution of whether claims actually fell within the policy. Thus it would be said that if Cigna did not exercise the option to defend under the St Paul policy and under the terms of the Aetna policies, Cigna would have no obligation to pay until liability was established.
  48. Judge Milonas was of the view that the obligation to pay or reimburse the costs of litigation in the context of the St Paul and Aetna policies would be construed as litigation insurance, and as covering precisely those costs which would have been incurred by the insurers if they had defended under an obligation to defend.
  49. Ultimately, it is for the English court assisted by the rules of construction under New York law and looking at the matter as best it can as if it were a New York court, to make up its mind what these particular clauses meant.
  50. As previously indicated the court should not start from the position that an obligation to pay costs must carry with it the implication that the obligation is simply to indemnify once liability is established. As the New York cases indicate it is a matter of construction. In my view there are significant pointers to the proper construction of the clause under these policies being to oblige the insurers to pay the costs of the litigation as those costs were incurred, and to pay such costs in relation to any claims which might fall within the policies, or which could not be confined to a period outside the policies.
  51. The obligation could not, as it seems to me on the proper construction of the words, be simply to pay once liabilities are established, and nor could the words sensibly mean the obligation was to fund until the claims were established as falling within the policies. I say that for the following reasons.
  52. (i) It would be strange if the option in the St Paul's policy and the deletion and insertion in the Aetna policy totally changed the nature of what the insurers were obliged to do. When the word defend was in the Aetna clause, and if the insurers chose to defend under the St Paul policy, it is common ground that the obligation would have covered claims that might fall within the policy until the time came when they could be confined to outside the cover. It seems most unlikely that the parties were bargaining that for the same premium Wyeth in the one case was giving an option that in effect costs might not be covered at all, and in the other agreeing by the deletion that costs might not be covered at all.

    (ii) The obligation in both cases was to pay for the costs of defending claims that might turn out to be fraudulent or groundless. That certainly demonstrates that it was not contemplated that insurers would not have to pay the costs simply because a claim failed, and is a clear pointer that this was litigation insurance.

    (iii) In the St Paul policy the provision providing for the insurers to be obliged to pay or defend was separate and described as Indemnifying Agreement II.

    (iv) The language of each clause is consistent with an obligation to pay costs as they are incurred.

    (a) In the St Paul policy, the option whether to pay or defend has to be exercised at the time when the litigation commences, and even where the option is to pay the insurer had certain rights to negotiate or settle, all consistent and only consistent with payment being made as the costs are incurred.

    (b) In the Aetna policy the language is to reimburse for costs to defend, not of defending and again contemplates rights of negotiation or settlement, again all and only consistent with the obligation arising when the costs are incurred.

  53. The only question as it seems to me is whether the existence of a primary layer policy would in some way affect the position. I accept that it clearly can be a significant point in considering the construction of a term relating to an obligation to pay costs or to defend that the term is in an excess policy. The New York authorities demonstrate that (see for example E.R. Squibb & Sons Inc v Accident and Casualty Insurance Co. 860 F.Supp. 124 and United States Fidelity & Guaranty Company v Treadwell Corporation 58F.Supp. 2nd 77). But there is not a complete consistency between the authorities both in jurisdictions other than New York, or in New York itself, and each case seems to depend on its own circumstances. (see Belmer v Nationwide Mutual 599 N.Y.S. 2d 427 where different approaches in different jurisdictions are fully explored). In the circumstances of this case where the policy might be primary or excess, I do not see how, when it is excess, that could alter the meaning of the words in any radical way. What it seems that it might do is to alter the time at which the obligation to defend and thus the commencement of the obligation to pay might arise .
  54. On this the expert evidence of Judge Milonas was first that as a general point, if a primary policy carried with it an obligation to pay costs, and there were claims which on their face pierced an excess layer which also contained such an obligation, if the primary insurer paid its indemnity limits and paid the costs of the litigation up to that date, the New York court would hold that at least from that moment the excess insurer's obligation to pay defence costs would "kick in". The decision in Belmer supra itself would seem to me to support this view. Furthermore, Allstate Insurance Company v St Paul Fire & Marine Ins. Co 1984 WL 1969 (S.D.N.Y.) supports at the very least, in the context of the policies with which that case was concerned, the view that, although under New York law the tendency would be to construe a primary policy as being the policy having the liability to pay costs and not the excess policy, if the liability for costs in the primary policy was capped, then the court would hold that the excess policy should apply to the costs in excess of that cap. Furthermore the passage quoted by the judge at p.25 of his judgment from the Ninth Edition of the Handbook on Insurance Coverage Disputes (Ostrager and Newman) in discussing the excess insurers duty to defend, supports the view that even if the traditional opinion is that an excess insurer is not required to contribute to the defence of an insured so long as the primary insurer is required to defend, an excess insurer must provide defence coverage in cases where the primary limit has been exhausted and the primary insurer has refused to continue the defence. "The guiding principle is that the insured, having purchased both primary and excess coverage cannot be abandoned by his insurer".
  55. The construction of the Aetna and St Paul policies would at the very least suggest that with the above principles in mind they should apply so as to pick up the liability to defend or pay the costs once GRE's liability for costs was capped, or GRE refused to pay any further costs of defending.
  56. The submission by Mr Hancock that the clause would only cover new claims after certain claims had been established and had pierced the primary layer, certainly does not fit with the language of this particular clause.
  57. Judge Milonas supported the above view in particular saying that if the excess insurer was aware of the ability of the primary insurer to "buy-out" under its contract with the insured, New York law would hold that the obligation to pay arose at least from the date when that option was exercised.
  58. If I am right so far, the position that is reached can be summarised as follows:-
  59. (i) It is not a breach of the maintenance clause to provide for a buy-out or to exercise that buy-out (at least if the exercise was bona fide so far as the insured was concerned);

    (ii) The obligation to take over the defence or to pay costs if the defence is not to be taken over, applies as from that date;

    (iii) The obligation is to pay costs of litigation which relate to claims which might fall within the policy ie which fall within the terms and period of the cover and which might pierce the excess layer;

    (iv) That being the obligation there is no requirement for the insured to reimburse or thus apportion in relation to the period up to the date when costs can be confined to claims outside the cover.

  60. That being my conclusion I would answer the preliminary issues relating to the New York policies in the same way as the judge and I would dismiss the appeal from the main judgment.
  61. Home policy

  62. The only issue on the Home Policy that now remains relates to apportionment. As already indicated Cigna concede that Wyeth are entitled to recover costs which are reasonably related to the defence of a claim alleging that an injury, illness or disease occurred during the period of the Home policies. Wyeth concede in relation to these policies that if Cigna can demonstrate that the costs have been incurred in relation to a claim which is not covered by the Home policies, Cigna will not be liable for those costs.
  63. Wyeth seek declaratory relief in relation to costs incurred which reasonably relate to claims alleging injury, illness or disease, but also reasonably relate to claims alleging a worsening of those injuries or illness or disease in uninsured years, or alleges a separate injury in uninsured years. Wyeth assert that provided the costs do reasonably relate to claims alleging injuries, illness or disease occurring within the period of the Home policies, they are entitled to recover the same, whereas Cigna argue that because the costs are bound to have been increased by virtue of the allegations of increased injury or further injury, the obligation on Cigna should be limited to paying only a portion of the costs.
  64. We were not shown any practical examples of situations in which Cigna suggested that apportionment should take place, nor with any precision how it was suggested that the costs in such situations should in practice be apportioned. Furthermore there is no evidence to support the assertion that costs, which on this hypothesis do reasonably relate to a claim falling within the policy period, must have been increased by the inclusion in the same pleading of allegations of injuries increasing over the years.
  65. It seems to me that if the starting point is that the costs do reasonably relate to the defence of claims falling within the policy period, the contractual right of Wyeth is to be paid those costs. I do not see once that threshold has been reached that there is any room for saying that simply because the costs may also relate to an increase in the injury during some period outside the cover, the obligation on Cigna is cut down in some way. That is the view that the judge took. It is supported also by the Privy Council decision in New Zealand Products v New Zealand Insurance Company [1997] 1 WLR 1237.
  66. I would dismiss the appeal from the judgment delivered on 13 November 2000 as well.
  67. LORD JUSTICE DYSON

  68. I agree. In relation to the first issue, Mr Hancock submits that (i) the excess layer was never pierced, and (ii) as a matter of New York law, excess insurers are not obliged to pay costs incurred at any time until the primary layer has been exhausted. He contends that the only way in which the excess layer could be pierced was by exhaustion of the primary layer by payment in respect of "established" third party claims: a claim is "established" by settlement or judgment. I cannot accept this.
  69. The relevant New York law is stated in cases such as Steyr-Daimler-Puch AG v Allstate Insurance Company 151 AD 2nd 942, 543 NYS 2nd 538. Excess policies do not contribute to a loss "until the limits of the underlying primary policy have been reached". An excess insurer is not required to assume the responsibility of the primary carrier who has become insolvent where the language of the excess policy is clear and unambiguous. On the face of it, therefore, and subject always to the express wording of the policy, excess coverage starts where primary coverage ends. None of the cases say that the only way in which a primary insurer can exhaust his limit of liability or his policy obligations for costs is by settling with the third party claimants, or by (unsuccessfully) contesting their claims to judgment.
  70. Leaving the maintenance clause in the St Paul policies on one side, there is no basis for construing condition 4 as applying only to claims that have been "established" in the limited way for which Mr Hancock contends. None of the rules of construction under New York law require the policies to be construed in this restrictive way. Indeed, Mr Hancock's submission is inconsistent with the "guiding principle" identified in the Handbook on Insurance Coverage Disputes (Ostrager and Newman) that "the insured, having purchased both primary and excess coverage, cannot be abandoned by his insurers". So far as indemnity insurance under these policies was concerned, the effect of the buy-out was undoubtedly to exhaust the limit of liability of GRE. The primary coverage came to an end. On the face of it, therefore, the excess coverage as regards the indemnity against liability started once the buy-out was made.
  71. Does the maintenance clause make any difference? Mr Hancock submits that it does. He says that the words "except for any reduction of the aggregate limits contained herein solely by payment of claims" support his submission. That raises the question whether the entering into and/or exercising the right of buy-out amounted to a breach of the maintenance clause. I agree with Waller LJ that for the reasons that he gives, it did not. In exercising that right, GRE reduced the aggregate limits contained in paragraph 9 of Endorsement 9 by "payment of claims". Mr Hancock accepts (rightly) that "payment of claims" may be payment to Wyeth in respect of third party claims, but he submits that those claims must be "established". If Wyeth had paid the £1M over to third party claimants, then Mr Hancock concedes that the excess layer would have been pierced. It was not pierced, he says, because Wyeth did not pay the money over. The difference is that in the former case the claims would have been "established"; in the event, they were not. But there is no warrant for reading the word "established" into the maintenance clause. The word is not there, and there is no principle of New York law that requires the clause to be read as if it were there. The purpose of the clause is clear. It is to ensure that the excess insurer is not exposed to coverage where the primary insurer falls out for reasons other than responding to claims covered by the primary insurance. Thus, it would be a breach of the maintenance clause if the primary cover ceased to be available because the primary insurer became insolvent, or if it was terminated as a result of some act or omission of the insured. But it would be extraordinary if the excess insurer could escape from the obligation to provide excess cover against liability where the primary insurer has made payment in full to the insured of the amount of the primary cover in response to claims in respect of the liability which is covered by the primary insurance. The primary insurance policies were maintained in force, and the limits were reduced according to their terms. Once GRE exercised its right of buy-out, there was no prospect that Cigna would thereafter be called upon to pay that primary limit.
  72. In my judgment, the judge was right to hold that there was no breach of the maintenance clause. The effect of the buy-out was to trigger the excess insurance. As I understand his argument, Mr Hancock accepts that, if the effect of the buy-out was to pierce the excess layer, then Cigna's obligation to take over the defence of the claims or pay the cost of the defending the claims took effect from the date of the buy-out. Accordingly, the foundation for the argument that there was in principle no obligation on Cigna to pay for the cost of defending the claims fails.
  73. The second issue concerns the scope of Cigna's obligation to pay for the cost of defending the claims. This raises two questions: (a) does the obligation apply to the cost of defending claims which might be or which are (if made good) within the cover; and (b) what (if any) allocation of costs is to be made to the insured if claims occur in or continue over periods when there was no insurance to meet them?
  74. As regards the first question, in my view, the judge was entitled to accept the evidence of Judge Milonas that, in the absence of wording to contrary effect, it is a general principle of New York law that, provided that a claim might be within cover, an insurer's obligation to defend or pay the costs of defending arises and continues until it becomes clear that it is not covered. Judge Milonas said that, for this purpose, there is no difference between the duty to defend and the duty to pay the cost of defending. It is true that Judge Milonas was unable to cite any authority to support this proposition. But as he put it, he testified from years of experience that there was no distinction. Mr Kendrick cited ER Squibb v Accident and Casualty Insurance 1992 WL 133899 (SDNY) to us, where the judge said at page 92: "The parties do not dispute that the duty to defend under a policy affording legal defence or coverage for defence costs includes situations where liability is possible but unclear". This concession accords with the evidence of Judge Milonas.
  75. Mr Hancock places much emphasis on the words "within the purview of this policy" in the St Paul policies. He submits that these words mean that the suit must be on account of loss actually coming within the purview of the policy, and not loss which might come within the purview of the policy. But Mr Hancock is driven to accept that the words "coming within the purview of this policy" qualify the duty to defend (if the defence option is exercised) as well as the duty to pay for the cost of defending (if that option is exercised). In my view, clear words would have been needed to indicate that the parties intended the meaning of the phrase "coming within the purview of this policy" to vary according to which of the two options given by the policy was adopted. There is no indication that the parties had any such intention. In substance, there is not a great deal of difference between the two options, especially under the St Paul policies. Under those policies, the legal expenses incurred by the insured must be incurred with the consent of the insurer, and the insurer may make such investigation, negotiation and settlement of any claim as it deems expedient. It would, therefore, be most surprising that there should be an important difference as to the scope of litigation insurance cover depending on whether the insurer chose to defend or to pay for the cost of defending. For this reason in addition to those given by Waller LJ, especially at paragraph 45 of his judgment, I agree with the judge that the scope of the litigation insurance cover should be determined in the same way as the scope of the duty to pay for the cost of defending.
  76. As regards the second question, I agree with the judge that the answer flows from the answer to the first question, and I agree with paragraphs 35-37 of Waller LJ's judgment.
  77. I also agree that for the reasons given by Waller LJ that the appeal from the decision on the Home policy should be dismissed.
  78. SIR MURRAY STUART-SMITH

  79. I agree that this appeal fails for the reasons given by my Lords.
  80. Order: Appeal dismissed; order of costs reserved; Leave to appeal to House of Lords refused.

    (This order does not form part of approved judgment)
    GRE POLICIES

    The material insuring clause provided that:

    [GRE] will subject to ... the conditions of this Policy indemnify the insured against all sums which the Insured becomes legally liable to pay as damages in respect of ... bodily injury to any person ... happening ... during the Period of Insurance and caused by [pharmaceutical products] sold, supplied ... in Great Britain ... in connection with Wyeth's business....[GRE] will also pay Legal Costs and Solicitors' Fees.

    The Limit of Indemnity was expressed to be:

    The liability of [GRE] for all damages in respect of all bodily injury loss or damages happening in any one Period of Insurance shall not in the aggregate exceed the limit of indemnity.

    Legal Costs were defined to mean:

    Legal costs and expenses recoverable by any claimant and all costs and expenses incurred with the written consent of [GRE].

    So far as material the Conditions provided:

    CLAIMS 4

    (a) The Insured shall give written notice to [GRE] of any bodily injury loss or damage or claim or proceeding immediately the same shall have come to the knowledge of the insured or his representative.

    (b) The insured shall not admit liability for or negotiate the settlement of any claim without the written consent of [GRE] which shall be entitled to conduct in the same name of the Insured the defence or settlement of any claim ... and shall have full discretion in the conduct of any proceedings and in the settlement of any claim.

    (c) ...

    (d) In connection with any one claim or number of claims other than in respect of claims ... [for] Employers' Liability occurring in any one Period of Insurance [GRE] may at any time pay to the Insured the amount of the Limit of Indemnity (after deduction of any sum or sums already paid as compensation) or any less amount for which such claim or claims can be settled and thereafter [GRE] shall be under no further liability under this Policy in connection with such claim or claims except for Legal Costs incurred prior to the date of such payment.

    HOME POLICIES

    The material insuring clause provided that:

    ... subject to the Terms, Exceptions, Limits and Conditions contained here in or endorsed hereon the Company will indemnify the Insured against all sums which the Insured shall become legally liable to pay as compensation in respect of Accidents as described in the Specification arising in connection with the Business and occurring within the Geographical Limits during any one Period of Insurance.

    THE COMPANY WILL IN ADDITION in respect of a claim for compensation to which the Indemnity expressed in the Policy applies, indemnify the Insured against

    (a) all cost and expenses of litigation recovered by any claimant from the Insured and

    (b) all costs and expenses of litigation incurred with the written consent of the Company.

    Special clause 7(c) provided as follows:

    7. This Policy shall not apply to liability incurred by the insured in respect of

    ...

    (c) bodily injury ... resulting from the failure of the named insured's products ... to perform the function or serve the purpose intended by the named insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specification, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to bodily injury ... resulting from the active malfunctioning of such products ...

    ST PAUL POLICIES

    Coverage under the Indemnifying Agreements was for Bodily Injury Liability and Property Damage Liability combined, the former expressed as:

    To indemnify the insured for all sums which the insured shall become obligated to pay by reason of the liability imposed on him by law for:

    Damages, including damages for care and loss or services because of bodily injury, sickness, disease, including death at any time resulting therefrom, sustained by any person or persons and caused by accident.

    Indemnifying Agreement II referred to Defence, Settlement, Supplementary Payments. It provided:

    It is further agreed that as respects insurance afforded by this policy the company shall:

    (a) pay for the costs of legal expenses incurred with the consent of the company or at its sole option, defend any suit, even if groundless, false or fraudulent, brought against the insured on account of loss coming within the purview of this policy; but the company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient.

    (b) pay or reimburse the insured for all premiums on bonds to release attachments ...

    The company agrees to pay or reimburse the insured the amounts incurred under this Insurance Agreement No II in addition to the applicable limit of liability of this policy.

    The Conditions of the Policy included:

    4. Other Coverage. If the insured carries coverage other than that which is provided under this policy, coverage hereunder shall apply only as excess over and above the total amount of such other coverage.

    8. Notice of Claim or Suit. If claim is made or suit is brought against the insured the insured shall immediately forward to the company ... every demand ... received ...

    The Maintenance Clause was contained in the Special Provisions in paragraph 9 of Endorsement 9. It provided as follows:

    A reduced rate to be determined per 1000 of sales shall apply in those countries where local admitted underlying products liability insurance is maintained at a minimum of the equivalent to

    US $25,000 each person

    $50,000 Each accident

    $50,000 Aggregate Bodily

    Injury Liability

    $10,000 Each Accident

    $25,000 Aggregate Property

    Damage Liability

    In consideration of the reduced premium for which this endorsement is written, it is warranted that underlying policies, or renewal or replacements thereof not more restricted shall be maintained in force, except for any reduction of the aggregate limits contained herein solely by payment of claims. It is further agreed however, that if applicable limits of insurance in this policy are in excess of the limits provided by such other insurance, this policy shall provide excess insurance.

    It is further agreed that the Insured will furnish the company with copies of underlying policies and the amount of sales by country for adjustment purposes.

    Other terms and conditions of the policy not in conflict herewith remained unchanged.

    Endorsement 11 provided that where local foreign insurance was not afforded:

    ... the insurance under this policy shall be primary insurance.

    The Efficacy Exclusion was contained in Endorsement 6. It provided insofar as material as follows:

    This insurance does not apply to bodily injury ... resulting from the failure of the named Insured's products ... to perform the function or serve the purpose intended by the named insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specification, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to bodily injury ... resulting from the active malfunctioning of such products ...

    AETNA POLICIES

    The printed insurance clause provided as follows:

    The company will indemnify the insured for or, at its sole option, pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of ... A. Bodily injury or ... B. Property damage to which this insurance applies caused by an occurrence and the company shall have the right and duty to reimburse the insured for costs to defend any suit against the insured seeking damages on account of such bodily injury or property damage even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company's liability has been exhausted by payment of judgments or settlements.

    Paragraph 5 of the Foreign Coverage Endorsement provided as follows:

    If the insured carries insurance other than that which is provided under this policy, against a loss covered by this policy, insurance hereunder shall apply only as excess cover and above the total amount of such other insurance.

    Endorsement 3 contained a Maintenance Clause in the following terms for the period to 1 July 1978:

    A reduced rate to be determined per 1000 of sales shall apply in those countries where local admitted underlying products liability insurance is maintained at a minimum of the equivalent to

    US $25,000 each person

    $50,000 Each Accident

    $50,000 Aggregate Bodily

    Injury Liability

    $10,000 Each Accident

    $25,000 Aggregate Property

    Damage Liability

    In consideration of the reduced premium for which this endorsement is written, it is warranted that underlying policies, or renewal or replacements thereof not more restricted shall be maintained in force, except for any reduction of the aggregate limits contained herein solely by payment of claims. It is further agreed however, that if applicable limits of insurance in this policy are in excess of the limits provided by such other insurance, this policy shall provide excess insurance.

    It is further agreed that the Insured will furnish the company with copies of underlying policies and the amount of sales by country for adjustment purposes.

    APPENDIX
    LIST OF PRELIMINARY ISSUES

    Note: The expressions "GRE policies", "AFIA local policies" and "the Benzodiazepine litigation" have the meaning ascribed to them in the Points of Claim.

  81. In 1990 and 1991 the GRE Insurers exercised their express contractual right under the GRE policies to pay the Limit of Indemnity and legal costs up to the date of payment of the Limit of Indemnity, and thereby discharged themselves from all further liability, including defence costs, in respect of the Benzodiazepine litigation. On true construction of the AFIA worldwide policies and applying New York law, (the law of the policies), what if anything was the effect of such payment and discharge upon the Claimants' entitlement to coverage for defence costs under the AFIA worldwide policies? In particular:
  82. a. Applying New York law, did

    i. The effecting by Wyeth of the GRE policies in terms which gave the GRE Insurers such option: and/or

    ii. The exercise of such option by the GRE insurers; and/or

    iii. A failure to renew or replace the GRE insurance

    constitute a breach by the Claimants of the Maintenance Clause in the AFIA worldwide policies, and, if so, what is the effect of any such breach?

    b. Were the Claimants entitled to coverage for defence costs under the AFIA worldwide policies when the GRE Insurers ceased to be liable following the tender of the Limit of Indemnity?

  83. Applying New York law (the law of the policies) what is the correct criterion to determine whether costs incurred by the Claimants in defending the Benzodiazepine litigation are covered by the AFIA worldwide policies, and, if so, the extent of that coverage? In particular, on true construction of the policies and as a matter of New York law:
  84. a. Should costs be apportioned where injury to a particular claimant was alleged to extend over more than one policy year

    b. Was the effect of the payment by the GRE insurers that the AFIA Worldwide Insurers became liable thereafter for 100% of the costs for all claims which could arguably come within the policy period of the AFIA Worldwide Insurance, unless and until the AFIA Worldwide Insurers proved that the claims fell outside their policy period?

  85. On true construction of the AFIA worldwide policies, and applying New York law, (the law of the policies), were the claims made by the claimants in the Benzodiazepine litigation, as pleaded in the Master Statement of Claim, outside the scope of cover granted by the AFIA worldwide policies by reason of the Efficacy Exclusion set forth in clause 7(c) in some or all of the AFIA worldwide policies?


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