BP sues Swiss Re, AIG, AXA on failure to pay energy claims
Under the deal, the insurers subscribed in 1999 to an "Open Cover" policy whereby they agreed to accept liability for any risks declared by oil giant Amoco between January 1, 1999 and June 30, 2000 to a limit of up to $200mn.
The risks included construction on the Valhall oilfield, located some 30km south of Norway's Ekofisk Platform complex, as well as construction at the Kingsfield deep-water site in the Gulf of Mexico.
On 18 May, 1999 and 19 July, 1999, leading underwriters AIG and Swiss Re respectively scratched the cover, followed by Aegis. London market insurers also subscribed to the cover, among them ACE with 5 percent, Euclidian, Cox, Frankona and AXA Global.
AIG are believed to have taken 17 percent of the line, followed by Swiss Re with 15 percent, Aegis with 10 percent and AXA with 2.5 percent.
At the time of the agreement, with deflated oil prices, excess capacity and low rates on energy construction, a relatively low premium was paid for the cover, a sum which would come in at ten times the original amount in current market conditions, according to one expert.
For 18 months the offshore section of the cover ran relatively smoothly. Four declarations were made in the first year and a further four in the final six months of the cover, with a total value of between $23-50mn (i.e. well below the $200mn total limit on the Open Cover).
In the meantime, however, Amoco had merged with BP - and a letter notifying insurers of a name change to BPAmoco was sent on 31 December 1998.
It read: "With effect from today's date, the BP group of companies and the Amoco group of companies have merged. The merged groups' parent company is The British Petroleum Company plc which has been renamed and will now operate as BP Amoco plc."
"Existing agreements with our former group companies will remain in effect. All insurance policies with the name of the British Petroleum Company plc should now be changed to BP Amoco plc. In respect of such insurance policies you place on our behalf, please arrange for the name to be changed with immediate effect."
Traditionally BP has preferred to use captives except when rates are suicidally low - a commercially sensible attitude but one that hardly endears the organisation to the insurance industry. In a classic example of how big market players can bring pressure to bear on their suppliers, - the letter continued: "As part of the procurement process for the new company, we will be looking for synergies and cost improvements across our supplier base. We encourage you to begin to think how you might best support this new organisation."
Later, insurers were sent an endorsement, which they were asked to sign, which read: "Underwriters hereon note and agree that with effect from 31 December, 1998 the Named Insured hereunder is amended to read BP Amoco plc in lieu of Amoco Corporation. Wherever the word Amoco appears in this policy it shall be replaced by the words BP Amoco plc."
It continued: "Furthermore, it is understood and agreed that all Underwriters subscribing hereto will be subject to all terms, clauses, credits, allowances and wordings as agreed by the leading Underwriters (AIG and Swiss Re) and it is agreed to follow automatically all additions and/or deletions and/or amendments and/or alterations of any description whatsoever therein to be agreed [sic]."
"All claim settlements made by the Leading Underwriters of this policy (no.EL9801152) to be binding on all underwriters hereon."
Then in June 2000, barely three weeks before the cover expired, an additional 27 risks - all of them BP's and all of them high value - were added to the offshore section of the cover.
The Insurance Insider understands that this was achieved with the acceptance of the leading companies on the cover, AIG and Swiss Re. There are also allegations that there was a lack of disclosure of these additional risks to other underwriters.
In subsequent months as losses escalated, the insurers' prospects gradually worsened. To date, the largest loss, Valhall, has reached its excess loss layer at $120-140mn, while a second smaller loss of between $25-30mn is believed to have occurred on the Kingsfield risk. Current estimates of total claims now stand at between $300-500mn and rising.
As news of the losses reached the market, the London Market insurers, accounting for 41.66 percent of the open cover, refused to pay, with the result that BPAmoco sued them in the Royal Courts of Justice.
In court, the company argued that the endorsement signed by the underwriters automatically bound them to the 27 additional risks, while, for their part, the insurers alleged that many of these risks were beyond the scope of the terms of the Open Cover.
On 27 February 2003, in BP plc versus GE Frankona Reinsurance Limited, the Honourable Mr Justice Cresswell found for the defendants, concluding that the London Market insurers were only liable for the first seven declared construction risks - all of which resulted in relatively low levels of losses - because either construction did not commence within the period of the Open Cover or because valid declarations had not been made to the insurers within that period.
Now, in the latest twist to the tale, the non-London Market insurers, including AIG, Swiss Re and Aegis have published letters of denial refusing to pay claims and are being sued by BP Amoco for losses outstanding on the remaining 58.34 percent of the cover.
According to sources, the insurers are considering using allegations that there was collusion between Aon and BP Amoco to take advantage of the favourable terms of the Open Cover agreed between Amoco and its original insurers.
They will also argue that requests for a breakdown of the additional cover were ignored until two or three days before the Open Cover deadline.
In the words of one underwriting source close to The Insurance Insider: “Although rates at the time of the Amoco deal were very low, the market had begun to turn by the time of BP's takeover. BP saw an opportunity to pay lower premiums before capacity contracted and premiums rose and at the last possible minute piled in the risks accordingly. When they asked the underwriters to sign the endorsement accepting the name change, people thought it was just an administrative issue. They thought they were getting the same deal."
A spokesperson for Aon said that at present there was no litigation involving Aon in the dispute.
As things stand, the case is due to come before the court for summary judgement on 23 February. In addition to the application for summary judgement, it is believed that the court will also deal with a disputed jurisdiction application between AIG, Aegis and BP.
The consequences of the litigation could be far reaching - not least for broker Aon. It is already involved in a messy legal wrangle over energy losses on the so-called Aon 77 cover - which, incidentally, may comprise some of the excess from the Valhall losses - but now it also faces the prospect of becoming embroiled in another energy dispute. Indeed, there is always the possibility of being sued by whoever ultimately loses in this latest round of court action. With damages potentially running into hundreds of millions of dollars the stakes are high....