An Impediment To Back-To-Back Coverage: The 'Princess Of The Stars'

English reinsurance law has cultivated a well-established practice of construing insurance and reinsurance contracts that are underwritten as "back-to-back" contracts in exactly that way. A great deal of insurance and reinsurance contracts are written on that basis, including across the Middle East. However, the presumption of back-to-back cover may not be as secure as previously thought following the ruling of the English Court of Appeal in The Princess of the Stars (October 2012) that a "follow the settlements" clause in a reinsurance policy does not negate or impinge on the general rule that a stay of English court proceedings should be granted only in rare and compelling circumstances.

Background

The "Princess of the Stars" was a roll-on roll-off passenger cargo vessel that capsized off the coast of the Philippines on 21 June 2008 after it sailed into Typhoon "Frank", which led to over 800 passengers dying, together with the loss and destruction of cargo. Owners of the cargo sued the ship owner and also brought a number of direct claims against the vessel's cargo liability insurer, "Oriental", in the Philippines. There were at least 40 sets of local proceedings involved. The insurance policies were governed by domestic law and jurisdiction.

Oriental reinsured the risk to six well-known London Market reinsurers. The reinsurance policy was subject to English law and jurisdiction and contained a follow the settlements clause in the following terms: "To follow all terms, conditions and settlements of the original policy issued by the Reinsured to the Insured, for the period specified herein, in respect of sums and interests hereby reinsured ..."

Both the insurance policy and reinsurance policy contained a Typhoon Warranty, which warranted that the vessel would not sail when there had been a typhoon warning in the relevant area. The question as to whether there had been a breach of the Typhoon Warranty, and whether this negated cover under the insurance policies, was likely to be a key point of contention in the local proceedings. In November 2010 (we assume fearing an adverse result in due course in the Philippines), reinsurers issued proceedings in England for a declaration that they were not liable to indemnify Oriental because the Typhoon Warranty in the reinsurance policy had been breached, and that Oriental was not liable under the insurance policy for the same reason. Oriental applied for a stay pending the outcome of the Philippine...