THE EXPLOSION AT VASILIKOS POWER STATION LEGAL MANAGEMENT OF THE INSURANCE CLAIMS

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1 THE EXPLOSION AT VASILIKOS POWER STATION LEGAL MANAGEMENT OF THE INSURANCE CLAIMS by Andrew Demetriou LLB (Hons) FCI Arb. Barrister-at-Law Director Ioannides Demetriou LLC The Contract of Insurance - Cover, Liability and Compensation The Extent and Nature of Cover The Electricity Authority of Cyprus (EAC) has traditionally insured its power plants, its transmission and distribution system against accidental loss and on a full replacement basis. Procurement of insurance is by a public tender process in which Cypriot Insurance Companies backed up by 100% reinsurance in one case and something close to 99% reinsurance in the other case. EAC's contract of insurance was therefore with two local insurance companies who were by no means able to meet their obligations to compensate EAC for their loss. It was therefore essential that a dialogue with re-insurers was immediately established. There is no loss of business cover. Up to the Vasilikos explosion there was never any requirement for loss of business cover. There was also never any criticism of EAC for not taking out loss of business cover. It should be noted that the Government does not insure any of its buildings or facilities against loss by way of accident, fire or explosion. You have heard the significance of the Vasilikos Power Station to the Republic of Cyprus. The loss of 60% of the generating capacity of the country in the middle of a hot Cyprus 1

2 summer (the period of peak demand for electricity) was clearly and understandably critical to both the economy and to EAC as a business. Repair and reinstatement of Vasilikos was of national importance as well as a question of survival for EAC. Establishing a Right to Compensation The acceptance of liability to compensate EAC by insurers was the first stage in obtaining compensation and an essential pre-requisite for the commencement of repair works. Fortunately and despite the fact that the Power Station found itself next to an ammunition dump that yielded the largest peace time explosion ever, both sets of insurers were quick to acknowledge that they were liable to compensate EAC. EAC answered each question posed by insurers and insurers were convinced that EAC, like the Minister of Defence, were unaware of the danger posed by the ammunition placed next to Vasilikos. In this context I would remind those amongst us who were in the country at the time that the then Minister of Defence had gone on national television to reassure the public that the "military materials", as they were named, were inert and sufficiently safe that they could have been stored in a populated urban area. Thankfully they were not. Insurers also apparently took the view that it had not been a secret that a naval base had been established directly adjacent to the Vasilikos Power Station and therefore they had assumed the risk of something of the nature of an explosion occurring. The contract of insurance contained a subrogation clause and from the very first meeting of the EAC Board after the explosion it was made clear to the Board that they had to comply with the subrogation clause in order to allow insurers to recover any compensation payable to EAC. The Roadmap for the Management of the Claim The Establishment of Trust and Mutual Respect A dialogue was very quickly established on three levels between EAC and its insurers with the interaction being more with the re-insurers as opposed to the insurers. 2

3 Both sides appointed loss adjusters. This was an important and essential step as it meant that both sides were able to understand each other s objectives and concerns and to speak the same language. An engineer and a re-insurer cannot hope to communicate as effectively as they did through the interface of loss adjusters. Through communication comes trust and mutual good faith. Lack of communication creates suspicion and a lack of focus. There were two essential factors in the establishment of good faith: Re-insurers had to convince EAC that they would evaluate the damage and the costs of repair in a just and reasonable manner, and EAC had to convince insurers that, despite the fact that it is an entity which is owned by the state, it would assist insurers in the exercise of their rights of subrogation which essentially meant that EAC would be prepared to sue the state for the recovery of all sums spent on the reinstatement of Vasilikos. EAC therefore complied with insurers request to advise the government that insurers exercise their rights of subrogation and would seek compensation from the government for all sums paid to EAC as compensation under the policies of insurance. The third level of communication was the establishment of a dialogue with the government who would, of course, ultimately bear the burden of paying for the loss. However, in order to be able to approach the government EAC had to be in a position to advise the government of the progress being made to restore the generation capacity and to bring power to the people and the businesses of Cyprus. Hard work by the Teams of Loss Adjusters The high level of engineering expertise within EAC, whose highly qualified, trained and experienced engineers knew the Vasilikos Power Station like the back of their hand and knew exactly what was required to reinstate the power, and a clear desire on the part of 3

4 the re-insurers to compensate EAC without undue delay or procrastination in accordance with policy terms and conditions meant that within a very short space of time real progress was being made in the reinstatement of Vasilikos. This progress and the clear message that insurers were approaching the issue of compensation of EAC and re-instatement of Vasilikos effectively and in good faith enabled EAC and re-insurers to commence a dialogue with the government initially via the Attorney General of the Republic and subsequently via the Minister of Finance who would eventually be the one burdened with the obligation to find the money to compensate insurers. Bringing the Government on Board De-Politicizing the Claim Initially there were indications that the government would not consider entering into negotiations to settle the Vasilikos insurance claims, as this could be seen as an admission on its part that the government was at fault for the explosion. It was not, therefore, by chance that the Attorney General was the first point of contact with the government. The Vasilikos explosion had resulted in the death of 13 innocent people (naval base personnel) and injuries to tens of others. It was a very hot political issue and the subject of a commission of enquiry which concluded that the President of the Republic bore a heavy and primary responsibility for the catastrophe. It was against this background that the insurers were seeking to be compensated by the government of the day. Our task as legal advisors of EAC was to de-politicize the issue. The issue was not political. There was a method by which insurers could be compensated without the government of the day having to admit liability. The Attorney General took the first step in this direction. In the very first meeting held between him, EAC and re-insurers, the Attorney General, in the face of impending legal action by EAC claiming on behalf of insurers and re-insurers as well as on its own behalf for uninsured losses which exceeded the sum to be paid for the reinstatement of the power station, stated that he was prepared to advise the government that it would be very difficult for the Republic to avoid liability for the compensation of re-insurers and EAC and that it was in the interests of the Republic to negotiate with re-insurers for a settlement of their claims against the Government. 4

5 This development of course depended upon re-insurers and EAC reaching agreement as to the amount of compensation that would have to be paid to EAC in order to reinstate units 1, 2, 3 and 4 of Vasilikos. Unit 5 was in the process of completion and was therefore the subject of a CAR policy held by other insurers. This task involved extensive negotiations. It also necessitated EAC management and Engineers convincing the EAC Board and the Auditor General of the Republic that the settlement figure arrived at with insurers was a fair and reasonable sum which would be sufficient for the reinstatements of four of the five units at Vasilikos. The EAC engineers had to assess the risk and the loss adjuster had to certify that their assessment was correct and that there would be no risk of any settlement amount being insufficient to cover EAC's repair costs. They then had to convince re-insurers to pay. This involved working closely with the loss adjusters respective legal teams, although, admittedly, this was more of a technical than a legal argument, but we had a role to play in advising EAC that it was in their interests to settle sooner rather than later and upon the various governmental approvals that would be required before EAC could reach agreement with re-insurers. The fact that loss adjusters were appointed from day one and the fact that re-insurers and EAC had established a relationship based upon mutual trust and respect made the settlement negotiation with re-insurers a relatively straight forward task. The high esteem in which EAC as an organisation is held and the acknowledged expertise of its engineers made it more or less a foregone conclusion that the Auditor General, the Minister of Energy and the Minister of Finance would accept that the settlement reached by EAC was a reasonable one. The settlement with the government was not, however, without its problems. A change of Minister lead to an extensive delay. Lead re-insurers had to manage the different re-insurers, some of whom clearly were not so in favour of a settlement with the government. Delays on the part of the government, which had more pressing matters to deal with, lead to an ultimatum being issued by re-insurers that if their claim was not agreed by the beginning of August 2012 they would commence legal proceedings against the government. 5

6 August came and went and there was no movement on behalf of the government. Despite this, however, the payments to EAC continued and the repair works were proceeding. Unit 4 came on line in August 2012 and EAC was able to generate all power needed by the country without having to resort to the use of inefficient and environmentally unfriendly temporary generators and the unpopular measure of paying for power that was imported from the occupied sector of the Island. A significant section of the re-insurers were clamouring for a claim to be lodged against the government. However, the lead re-insurer and leader of the re-insurance team that was heading the negotiations with the government was convinced to hold off on legal action by the argument that the government would negotiate and that the filing of a claim would jeopardise the negotiating progress and would have the opposite effect to that which was intended. The reason for this was that there were people on the side of the government who did not relish having to approach Parliament for the agreement to compensate insurers and who were happy to say Let them go to court They will get their money only if they win the case and then after 5 or 6 years at the earliest. Thankfully, however, negotiations were re-commenced and a settlement agreement was signed which left all sides feeling that their best interests had been catered for. EAC thus concluded the claims for the units 1 to 4 of Vasilikos. The settlement of the claim for Unit 5 is still pending and has been delayed by the current financial situation. It is hoped that this will be concluded in a similar manner by the new government. Thank you. 6