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...
To continue reading
Request your trial