Insurance/Reinsurance Bulletin - August, 2009

WHEN "BACK TO BACK" POLICIES DIVERGE

Article by Edward Rushton

Lexington Insurance Company v AGF Insurance Limited

And Wasa International Insurance Company Limited

[2009] UKHL 40 (On Appeal From [2008] EWCA Civ

150)

On 30 July 2009 the House of Lords unanimously allowed

the appeals of Wasa and AGF in the above matter, overturning the

decision of the Court of Appeal.

This result has important practical implications for reinsurers

and reassureds with interests in policies that are intended to be

"back to back", but which are subject to the laws of

differing jurisdictions. The decision also goes to fundamental

questions regarding the nature of a contract of reinsurance

– it affirms the view that the subject of a proportional

reinsurance policy is equivalent to insured interest covered by the

underlying policy. This may be contrasted with Sedley LJ's

indication in the Court of Appeal that (proportional) reinsurance

contracts insure the reassured's liability pursuant to the

underlying policy.

The Background

The claim at the heart of the matter was in respect of

environmental damage caused at 58 sites, during the 44-year period

1942-1986, by waste products generated and disposed of by Aluminum

Company of America Limited (Alcoa), and its subsidiary Northwest

Alloys, Inc. (NWA).

Alcoa and NWA were insured by Lexington under an American

"all risks difference in conditions" property damage

policy. The policy period was from 1 July 1977 to 1 July 1980. The

policy contained a US Service of Suit clause which provided that,

at the request of the assured, Lexington would submit to the

jurisdiction of any Court of Competent Jurisdiction within the

United States. Wasa and AGF reinsured Lexington, on substantially

the same terms as the original (including the policy period), save

that the reinsurance was governed by English law.

Pursuant to a decision of the Supreme Court of Washington

(applying Pennsylvanian law), Lexington faced liability for

pollution occurring at particular sites, irrespective of when the

damage began, provided that part of the contamination occured

during the insurance period. Lexington settled its liability to

Alcoa and NWA for the sum of US$103 million. Lexington sought an

indemnity from its reinsurers who denied liability on the basis

that the damage did not occur within the policy period of the

reinsurance.

The English court at first instance found in favour of

reinsurers. However, its decision was reversed by the Court of

Appeal. Its reasoning emphasised the presumption that when a

proportional reinsurance policy is placed specifically to cover a

particular direct policy, and has been expressed in substantially

identical terms, English law should treat the policies as being

"back to back" and their language as having the same

meaning, notwithstanding differences of governing law (see

Vesta v Butcher and Groupama v Catatumbo). An

important part of the rationale behind this presumption is that the

contracting parties were in a position to ascertain the legal

effect of the policy language at the time when the contract was

entered into. Longmore LJ in the Court of Appeal considered that

this requirement was met in the present case.

The Essential Issue

The essential issue before the House of Lords was whether the

loss arising from Lexington's settlement with Alcoa fell within

the terms of the indemnity provided by the reinsurance slip. As

Lord Mance stated in his judgment, "the issue is one of

construction of the particular reinsurance contract against its

relevant background and surrounding circumstances".

The Lords did not dilute the force of the presumption that the

reinsurance was intended to be "back to back" with the

underlying cover. However, they were unanimous in their view that

the facts of the present case were different in one crucial respect

to those in Vesta and Groupama. Per Lord Mance, "The

reinsurance has a clear English law meaning. There was here no

identifiable legal dictionary (formal or informal), still less a

Pennsylvanian legal dictionary... which could lead to any different

interpretation of the reinsurance wording." The House

therefore ruled that the policy period was to be construed in

accordance with English law.

It was to Lord Mance "clear beyond argument, upon its

wording" that, construed according to English law, the

only property damage covered by the reinsurance was that which

occurred during the three year reinsurance period. On this basis

reinsurers' appeal was allowed.

Consequences For Reinsurers And Reassureds

This decision shows that whilst the presumption remains strong

that proportional reinsurance contracts are intended to be

"back to back" with the underlying policy, it is not so

strong as to override the English law rule of construction that the

words of a contract should be construed in accordance with their

natural meaning. In his submissions before the House, counsel for

Lexington, J.Sumption QC, asked what more Lexington could have done

to reinsure themselves on a fully back to back basis. Lord Mance

suggested an answer, which is to ensure that the insurance and

reinsurance are subject to one and the same identifiable or

predictable governing law. Failing that, he suggested that steps

could be taken at least to make sure the direct insurance is

subject to an identifiable governing law.

"NON-EXCLUSIVE" IN THIS CASE, MEANS NOT

EXCLUSIVE

Article by Ada Waddington

The Court of Appeal in Highland v Deutsche Bank [2009]

EWCA Civ 725 ruled that a non-exclusive jurisdiction clause

envisages the possibility of alternative jurisdiction. It allowed

the appeal of the Highland companies (based in Bermuda and Dallas),

against the Commercial Court's decision to grant Deutsche Bank

(based in Frankfurt and New York) an anti-suit injunction against

Highland's action in Texas.

Whilst acknowledging that parallel proceedings are generally

undesirable, the Court said they are not necessarily vexatious or

oppressive. It said the starting point in considering whether to

grant an anti-suit injunction is the wording. The clause reads:

"This agreement shall be governed by... the laws of

England. Buyer and Seller hereby irrevocably submit for all

purposes... to the jurisdiction of the Court of England...

Nothing in this paragraph shall limit the right of any

party to take proceedings in the courts of any other country of

competent jurisdiction." (Emphasis

added)

The parties were considered to have accepted under this clause

the possibility of parallel proceedings. The Court said it is

incorrect to presume that foreign proceedings were vexatious

because of the mere presence of a non-exclusive jurisdiction

clause, and that the party who brought the foreign proceedings has

the burden to justify them. The parties are...

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