Reinsurance And International Risk Recent Legal Developments

Originally published in BLG's Reinsurance and International Risk team Notes, Summer 2007

Although the last few months have seen fewer reinsurance disputes reaching the courts, there have been some important developments.

Follow the settlements

In Wasa v Lexington (2007) the Commercial Court had to address issues of allocation of multi-year pollution losses to reinsurers as well as the limitation on a follow the settlements clause in a facultative reinsurance contract containing a full reinsuring clause. The allocation aspects are discussed separately in this edition of RIRt Notes.

Lexington had issued property insurance to Alcoa covering three years, 1977-1980. Alcoa was an American aluminium smelting and processing company which, after the insurance was placed, became liable for huge clean-up costs in respect of pollution to its sites in the US between 1943 and at least 1980. After extensive litigation in the US, Lexington was found to be jointly and severally liable in respect of the clean-up costs over the whole period 1943-1980 even though the courts had also decided that the costs were divisible over each year of exposure. Lexington settled Alcoa's claim for US$103 million.

Following the settlement with Alcoa, Lexington sought a recovery from its reinsurers under a contributing facultative reinsurance which also covered the three year period 1977-1980. As well as claiming in respect of the settlement, Lexington also sought to recover from its reinsurers a proportion of the US$27 million legal defence costs which it had incurred defending Alcoa's claim. Reinsurers rejected Lexington's presentation arguing that they were only liable for that portion of the loss which occurred during the three years of the reinsurance cover.

The reinsurance was a slip policy governed by English law on either the J1 or NMA 1779 form. The conditions included a full reinsurance clause which the judge found incorporated a follow the settlements provision.

At trial, Lexington argued that the insurance and reinsurance were intended to be back-to-back and that this, and the follow the settlements provision, meant that the reinsurance must respond in the same way as the insurance had been found by the US courts to respond. The judge disagreed, and found for the reinsurers. In doing so, he highlighted some points which are of general significance.

The judge held that the impact of the full reinsurance clause was to incorporate the subject matter of the...