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Piper Alpha ruling heading to appeal

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EDINBURGH, Scotland-Insurers' subrogation efforts to recover compensation payments made after the 1988 Piper Alpha oil rig disaster appear headed to the House of Lords.

Contractors whose employees died while working on the rig are appealing a December 1999 decision by a Scottish appellate court that could leave them liable for the compensation paid plus interest, according to Douglas Russell, a partner at the Edinburgh law firm of Simpson & Marwick who represents the contractors.

The North Sea oil rig exploded in July 1988, killing 167. With an insured loss of about $1.4 billion, the Piper Alpha disaster remains one of the largest insured man-made losses in history.

The 560-page Dec. 20 decision at the Court of Session in Edinburgh ruled that the insurers of the rig's operators, which had funded the original settlement with the disaster's survivors and victims' relatives, could seek reimbursement from the contractors who employed the victims, in the name of the operators.

In 1997, a lower court judge had ruled that the operators' insurers could not sue on behalf of policyholders, because the operators had already been indemnified for their loss.

The appellate ruling, if it stands, means that the rig operators' insurers can seek about L150 million ($239.4 million), including interest, said Michael Payton.

Mr. Payton, an attorney at the law firm of Clyde & Co. in London, represented the insurers in the litigation. The insurers include ACE Bermuda Insurance Ltd., Lloyd's of London reinsurer Equitas Ltd. and London-based CGU P.L.C.

That decision also reaffirms the "general legal position in the North Sea that each operator or contractor is responsible for its own employees and property," said Mr. Payton.

The long-running litigation against the contractors was brought in the name of Caledonia North Sea Ltd., formerly owned by a unit of Occidental Petroleum Corp., on behalf of the insurers of the rig's four operators. Relatives of the victims and survivors of the disaster were compensated by the rig's operators. It was described as a "Mid-Atlantic" settlement, as the amount of compensation agreed to was higher than the level of compensation normally awarded in Scotland though not as high as typical U.S. awards.

The operators' insurers then sought to subrogate the loss against the contractors whose employees had been killed or injured while working on the rig, because the contractors' contracts included indemnity clauses under which they would be responsible for claims arising from their own employees.

A lower-level Court of Session hearing started in 1996 and lasted a record 391 days. The hearing, in which the contractors disputed the insurers' claims, involved much of the same evidence as a 1990 report from the public investigation into the disaster.

The contractors failed to prove willful negligence on the part of the operators, which would have negated their indemnity contracts. They also were unable to convince the judge that the settlements reached with the victims' relatives and survivors of the explosion were excessive.

But on the 381st day of the hearing, the contractors claimed that the action should have been brought in the insurers' own names and not in the name of the operators. While recognizing that this argument should have been raised at the beginning of the case, the judge, Lord Kaplan, agreed that the operators could not recover under indemnities with the contractors because they had already recovered from their insurers and should not be compensated twice.

On appeal, the Court of Session judges, after a 55-day hearing, ruled that the insurers were able to seek reimbursement from the contractors in their own name or on behalf of their policyholders. As a result, the insurers would be able to recover compensation from London Bridge Engineering Ltd., Pickup No. 7 Ltd., Norton (No. 2) Ltd., Kelvin International Services Ltd. and Coflexip Stena Offshore Ltd.

The contractors' lawyer, Mr. Russell, declined to name the contractors' insurers, but he noted that some of the contractors are now in liquidation.

A statement issued by the London law firm of Clyde & Co., which specializes in shipping, energy and insurance law, immediately after the appeal court decision, said there was "general relief in the oil industry at the outcome of the appeal, establishing as it does that the `knock for knock' regime in the North Sea works as everybody had previously understood it."

The appeal court judgment is a "thoroughly good statement of law regarding subrogation," said Nicholas Taylor, senior assistant lawyer in the London law firm of Davies Arnold Cooper.

If the lower court decision had been allowed to stand, "it would have driven a coach and horses through current laws of subrogation. It would have had a major impact on the law and insurance," said Mr. Taylor, who specializes in construction and engineering law.

"There was general concern that, even in more-traditional litigation, insurers and lawyers would be having to look more carefully in whose name an action was brought. It could have had far-reaching consequences," agreed David Reynolds, a partner at Clyde & Co. Mr. Reynolds added that a colleague at another law firm had informed him that they "were reviewing all their cases in the light of the Kaplan decision."

Lesley A. Gray, a partner at Paull & Williamson, the Edinburgh law firm representing the rig operators, described the appellate ruling as a "victory for common sense," noting the operators were relieved that "the courts have now found responsibility lies with the employers."

Mr. Payton, the insurers' attorney, added that "the insurers have expended a great deal of money to achieve these recoveries, and now they are vindicated. Substantial sums will be accruing to Lloyd's syndicates reinsured into Equitas, the London and Scandinavian company market and ACE Bermuda Insurance Ltd., as well as some uninsured loss for the joint (operators)."