This secrecy can put the insurance company at a disadvantage as it attempts to compile information that will help it determine if the claim is valid. Lack of transparency is the main reason why insurance policies contain provisions such as the cooperation clause. Under this agreement, the policyholder is legally obliged to provide information about the events and actions taken before, during and after the incident covered. Dorel was insured for up to $6 million and had a surplus policy from Ironshore Inc. to provide an additional $25 million in coverage. Ironshore`s contract with Dorel contained a support and cooperation clause stipulating that Ironshore could partner with Dorel to defend a claim. In exchange, Dorel had to cooperate if Ironshore made use of its right and asked Dorel to promptly provide all legal information requested by Ironshore. The receivables were settled for $30.5 million during the March 2004 mediation. A Memorandum of Understanding was signed between the parties on 23 March 2004. At this stage, no agreement had yet been reached between Smartforce and AIG on recovery under the insurance. In June 2005, AIG paid Smartforce`s debt under the D&O policy for the full $15 million and attempted to recover as part of its reinsurance.
Faraday refused to pay the debt. It argued that it had not been notified in accordance with the cooperation clause on damages. Specifically, Faraday argued that the claims cooperation clause was very similar to that contemplated in Royal & Sun Alliance vs. Dornoch in 2005. Judge Morison reviewed the decision of the Dornoch Court of Appeal and came to the same conclusion: Judge Morison decided that AIG was not aware of an actual loss until 23 March 2004, the date on which the Memorandum of Understanding between the applicants and Smartforce was concluded. At this point, a “potential loss” has become an actual loss for reinsurance purposes. If there had been no comparison, there would have been no actual loss, given that there had been no disclosure or exchange of expert advice at the time of mediation and there was no solid basis for concluding that there was proven liability or loss. AIG`s reservations did not justify knowledge of a loss.
Booking was just a process in which insurance companies anticipate the possibility of a loss in a policy. In those circumstances, AIG had informed Faraday of actual damage within 30 days of the announcement of the damage. Morison J. commented that he suspected that the issue of costs had been raised only to support the argument that “loss” means “potential loss”. The loss mentioned in the cooperation clause was the loss of the third party resulting from the acts or omissions of the directors covered by the D&O Directive. The costs incurred by the applicants in proving their claim were not included. In any event, the settlement of the claims between Smartforce and AIG did not contain payment for those costs. Similarly, AIG was never asked to contribute to Smartforce`s defence costs, so no compensation would be available for them. After the verdict, Ironside hired a lawyer for the first time and negotiated a settlement with the family in accordance with Ironshore`s terms. The company sued the ship Hardin to do so, claiming in particular that it had committed negligent misrepresentations in violation of the provisions of the Dorel Support and Cooperation Clause. In a case recently reported by Business Insurance, the inclusion of a cooperation clause proved crucial to obtaining attorney immunity and led to the rejection of a lawsuit.
