Aeolus Re Ltd v CS ILS SICAV-SIF, CS IRIS Alhc Fund Ltd, CS IRIS C Fund Ltd, Managed Investments PCC Ltd, Managed Ivestments PCC Ltd, IRIS Dynamic SPC on Behalf of its IRIS Post-Event Fund Sp, Alpha Z ILS Fund Ltd
| Jurisdiction | Bermuda |
| Judge | HARGUN CJ |
| Judgment Date | 06 May 2022 |
| Court | Supreme Court (Bermuda) |
| Docket Number | 2020: No. 369 |
[2022] SC (Bda) 30 Com
Hon. Chief Justice Hargun
2020: No. 369
In The Supreme Court of Bermuda
Peter MacDonald Eggers QC, Mark Chudleigh and Laura Williamson of Kennedys Chudleigh Ltd, for the Plaintiff
Timothy Howe QC, Peter Dunlop and Izabella Arnold of Walkers (Bermuda) Limited, for the Defendants
Contractual discretion in Industry Loss Warranty swaps; proper meaning and scope of determinations made “in good faith and a commercially reasonable manner”
In these proceedings the Plaintiff, Aeolus Re Ltd, claims damages for alleged breach of contract against each of the Defendants, and/or a declaration that it is entitled to be paid the sum of US$20 million deposited by the Defendants with Bank of New York Mellon (“ Trust Accounts”) by way of collateral, in respect of certain Swap Confirmations that were concluded between the parties in July 2018.
The Defendants (funds that Credit Suisse Insurance Linked Strategies Ltd., a member of the Credit Suisse group of companies, manages) counterclaim seeking declarations that they are entitled to receive back their collateral from the Trust Accounts and damages for breach of contract against the Plaintiff for its wrongful refusal in and after early July 2020 (upon the automatic termination of the Swap Confirmations in accordance with their terms) to procure the release of the collateral to the Defendants despite having been given contractual notice to do so.
These proceedings concern seven Industry Loss Warranty (or “ ILW”) swaps entered into between the Plaintiff and each of the Defendants (together “ the Swaps”) on materially identical terms. Each of the Swaps was entered into upon the terms and conditions contained in a Swap Confirmation which supplemented, formed part of and was subject to the 2002 ISDA Master Agreement between the parties, and which also expressly incorporated by reference the 2006 ISDA Definitions. It is common ground that ILW Swaps such as these are not indemnity contracts; unlike traditional reinsurance they do not require the buyer to have suffered any loss, instead they are financial instruments which enable parties in effect to speculate on the occurrence and outcome of future natural catastrophe events including in order to hedge their underlying exposure(s).
In summary, under the terms of the Swaps, the Plaintiff was the buyer from the Defendants in the event of the occurrence of a specified type of natural catastrophe in a designated geographical region during the defined Risk Period (1 June 2018 to 31 December 2018), for which the estimated losses incurred by the insurance and reinsurance industry as a whole arising therefrom, as reported by a particular nominated entity (known as a “ Report Publisher”), exceeded a specified threshold amount within a defined period (and prior to the termination of the Swaps); in that event the Plaintiff would be entitled (subject to serving a Payment Notice) to receive payment from the Defendants of the sum of US$20 million per catastrophe event up to a maximum of two events (US$40 million in total). The Defendants were required to (and did) put up collateral for a potential future payment of such sum to the Plaintiff in the form of cash deposits in certain specified Trust Accounts totaling US$40 million less the Fixed Amount. The Fixed Amount was to be and was paid as the price by the Plaintiff under the Swaps.
The Plaintiff entered into 7 Swaps, one with each of the Defendants, in early July 2018. The relevant terms of the Swaps (which were expressly governed by English law) are as follows:
1. The Swaps provided for payment by the Defendants to the Plaintiff of a set amount if there was a Trigger Event in a Covered Territory during the Risk Period, which was defined as 1 June 2018 to 31 December 2018 (and a valid Payment Notice was served prior to the Termination Date).
2. A Trigger Event was defined as a Covered Event where the Reference Amount was equal to or in excess of the Trigger Amount.
3. A Covered Event was defined as a Loss Occurrence in the Covered Territory with a Date of Loss occurring within the Risk Period in respect of which a Loss Report reports an Estimated Market Loss.
4. A Reference Amount was defined as the Estimated Market Loss for the applicable Covered Territory arising from such Covered Event. Estimated Market Loss was in turn defined as the estimate of incurred losses from the insurance industry and reinsurance industry as a whole, arising from a Loss Occurrence, as reported by the Report Publisher in a Loss Report.
5. A Loss Report was defined to mean any loss report originated and disseminated by the Report Publisher during the Reporting Period concerned (which for Japanese Windstorm was defined as the 2-year period ending on 31 December 2020) that identifies and assigns a number to a Loss Occurrence or gives preliminary estimates (or subsequently resurvey estimates) of losses arising from a Loss Occurrence.
Different Report Publishers were nominated for different sections of the Swaps. For the three sections of the Swaps which related to US events, Property Claims Services (“ PCS”) was chosen as the Report Publisher, while for the section concerning events in Australia, PERILS AG was selected. The Report Publisher for the section of the Swaps concerning Japanese windstorms was (at the Plaintiff's election) nominated as NatCatSERVICE (“ NCS”). NCS is part of the publication activities of the major reinsurance company, Munich Re.
Between 1 June 2018 and 31 December 2018, only one relevant Covered Event occurred, namely a Japanese Windstorm, Typhoon Jebi, pursuant to Section 4 of the Swap Confirmations. The Trigger Amount for a Windstorm in Japan was US$12.5 billion. In the event that the Estimated Market Loss was equal to or greater than that Trigger Amount, the Plaintiff would have been entitled to payment of the sum of US$20 million from the Defendants.
It is common ground that both PCS and PERILS, which are commonly referred to as ‘official’ Report Publishers, provide loss estimates on a ‘paid for’ or subscription basis and explicitly contemplate the use of their information as an index in ILW swaps for a fee. According to the terms of their contractual engagement, their loss estimates are regularly updated in accordance with a specified schedule. By contrast NCS, which is commonly referred to as an ‘unofficial’ Report Publisher, is a publication service which is freely available. It is not intended or designed to be used as an index for ILW swaps.
As an ‘unofficial’ Report Publisher, NCS did not (and does not) commit to publish a certain minimum (or maximum) number of loss reports, nor to update its loss estimates over time, nor to observe any pre-defined time intervals between publishing any loss estimates for a given event and it is not contractually engaged or remunerated by the parties to an ILW swap to act as a Report Publisher. In contrast, an ‘official’ Report Publisher such as PCS is typically appointed or engaged by the parties to such transactions to act as a Report Publisher under a licensing agreement and for a fee, and it will typically make a contractual commitment to maintain the format, and to adhere to the specified schedule and frequency of publication, of its loss reports.
At the time of entering into the Swaps, in July 2018, for practical purposes there was only a choice of Report Publishers for Japanese events between NCS and Sigma (both ‘unofficial’ Report Publishers), as PERILS and PCS did not at that time cover Japan. Sigma is owned by the major reinsurance company, Swiss Re.
If at the Risk Period End Date (31 December 2018) a Covered Event had occurred but the size was either not yet known or was reported by the agreed report publisher at an amount which was not large enough to trigger the payment obligation, then a Development Period applied, namely a further time period in which to monitor whether the estimated insured loss developed sufficiently in order to trigger a payment under the Swaps. By clause 9(f) of the Swap Confirmations, the Development Period End Date was 18 months after the Risk Period End Date (i.e. 30 June 2020) if the loss estimate for Typhoon Jebi was less than 80% of the Trigger Amount (i.e. less than US$10 billion) by that date. By clause 8.2(b) the Swaps were to terminate on the 3rd Business Day following the Development Period End Date - namely 6 July 2020.
The Reporting Disruption provision on which the Plaintiff bases its case is at Clause 7 of the Swap Confirmations and provides as follows:
7. Reporting Disruption:
If the Report Publisher (“ P”) ceases to provide any Loss Reports or materially changes the methodology, determination or reporting of a catastrophe or any loss estimates in any way that, in the determination of the Calculation Agent, makes such events or estimates unsuitable for the purposes intended herein, then the parties shall determine a successor Report Publisher in lieu thereof for the purposes of the Transaction by using the following methodology:
7.1 The parties shall use commercially reasonable efforts to choose a mutually acceptable industry recognised benchmark Report Publisher that uses the methodology most closely tracking the methodology used by P prior to the cessation or material change of reporting by P and such agency will be deemed...
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