McMahon & Smith as Liquidators of NEMGIA Ltd v AGF Holdings (UK) Ltd & Others (1996)


Where there had been a novation of a contract of insurance, so that any payment to be made to the policy holder would be made by a third party which would derive the benefit of the reinsurance, there was no loss to the original reinsured. The liability to the policy holder would be cancelled by the payment from the reinsurer both of which had been transferred by the novation.


Preliminary issue of law on whether a party had suffered loss as a result of a direct payment agreement in an insurance contract. The dispute arose out of difficulties experienced by the plaintiff in the second action ('NEMGIA') which was an insurance company, limited by guarantee carrying on business principally in the United Kingdom underwriting in the motor and liability markets. NEMGIA also carried on business in South Africa and Australia. The Australian business was a substantial loss maker for NEMGIA. As a result of the losses incurred in Australia, NEMGIA was effectively insolvent by 31 December 1988. In May 1989 NEMGIA sought a purchaser for various elements of the business. A sale of the entire UK Business was arranged with the first defendant in the second action ('AGF Holdings'). This was arranged by the sale of the entire share capital of a subsidiary company of NEMGIA, NEM Insurance Company Ltd ('NEMIC'), to AGF Holdings. Shortly afterwards a business sale agreement was concluded between NEMIC and NEMGIA for the agreed business to be transferred. Certain reinsurances were transferred and NEMIC agreed to pay a premium to indemnify NEMGIA by reinsurance for liabilities under the policies. As part of the sale agreement the goodwill belonging to NEMGIA had been sold. The insolvency of NEMGIA placed a risk that some claims would not be met by NEMGIA which had no available funds and there would be consequential effect on the goodwill. It was agreed that these claims would be paid directly by NEMIC ('the direct payment arrangement'), acting on its own behalf and not on behalf on NEMGIA. NEMIC would take an assignment of the claims against NEMGIA from the relevant policyholders. In this way no claim would be made against NEMGIA and the indemnity would not be called upon. The issue to be resolved by the judge in this hearing was whether the effect of this transaction gave rise to loss on the part of NEMGIA directly, as opposed to the policy holders whose polices were not included in the business sale agreement so as to give rise to a claim for breach of contract or tort.


It would have to be assumed that the defendants, foreseeing the imminent liquidation of NEMGIA, tortiously or in breach of contract deliberately brought it about that the UK policyholders made no claims on NEMGIA so that there would be no claim made under the reinsurance contract. It would also have to be assumed that the sums that would have come to NEMGIA by way of the reinsurance contacts would have been available to NEMGIA for them to dispose of as they saw fit. The alleged wrongdoing was not as a loss but a relief from liability, which could not of itself be a loss. According to Chitty on Contract a plaintiff when calculating his damage for breach of contract should adopt a "net loss" approach must be set off against losses arising from the breach. This proposition was confirmed by the House of Lords in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Company of London (1912) AC 673 and the same approach was applicable in tort. The right to the reinsurance and the liability to the policyholders were a single package which could not be treated separately and would necessarily be "netted off" one against the other. It could not be a loss that NEMGIA were deprived of the opportunity of applying funds obtained from NEMIC to any cause that they felt appropriate. This in itself would be a breach of the contract with NEMIC. There could be no basis for a claim on that basis. The critical focus would be the rights and liabilities of NEMGIA and under this arrangement there was no effect upon them. There was therefore no recoverable loss in contract or tort.

Order accordingly.