House Of Lords Reverses The Court Of Appeal In Wasa V. Lexington

The long-awaited decision of the House of Lords was handed down

on 30 July 2009.

To understand the significance of this case, one needs to go

back to the seminal decision in Vesta v. Butcher

[1989]1 some 20 years earlier. In that case, a Norwegian

insurer of a fish farm reinsured the risk in the London market on

terms by which reinsurers followed the terms and conditions of the

direct policy. The court held that the follow clause did not have

the effect of importing the choice of law of the direct policy,

Norwegian law, into the reinsurance. However, in applying the

governing law of the reinsurance contract, that is English law, and

as a matter of construction of the reinsurance contract, the clear

intention was that the reinsurance be "back-to-back" with

the underlying policy. In other words, if the governing law of the

insurance policy (in this case, Norwegian law) imposed a liability

on the reinsured to pay the claim, then the governing law of the

reinsurance contract (English law) imposed upon the reinsurer an

obligation to indemnify the reinsured in turn. At the time of

contracting, reinsurers could see from the terms of the direct

policy that any liabilities under it would be determined by

reference to Norwegian law. At any time they could have reached for

their Norwegian "legal dictionary", from which they would

have been able to see exactly what it was they were agreeing to

follow. Accordingly, reinsurers could not treat themselves as

discharged from liability on account of the insured's

non-causative breach of warranty, as such a remedy was unknown

under Norwegian law.

That principle, which in Vesta v. Butcher

survived two unsuccessful appeal attempts to the Court of Appeal

and the House of Lords, has remained good ever since, and has been

applied (arguably extended) in many subsequent cases.

The Commercial Court Decision

In April 2007, however, the Commercial Court distinguished the

Vesta line of authorities in the decision of

Wasa v. Lexington [2007]2. In this

case, the underlying insurance, issued by Lexington, covered the

risk of physical loss and damage occurring to property operated by

the Aluminium Company of America (Alcoa) for a three year period,

namely 1 July 1977 to 30 June 1980.

In the early 1990's, Alcoa was required by the US

Environmental Protection Agency to clean up pollution that had

accumulated at a number of its industrial sites over a 44 year

period, from 1942 to 1986. Having expended the cost of that clean

up operation, Alcoa then sought in turn to recover the cost from

those insurers whose policies had been in place at the relevant

time. There is, however, a long running debate in US jurisprudence

about how such long-term damage or liabilities should be allocated

between insurer interests. Some states apply a pro-rata basis of

allocation (so a loss or liability of $100m accumulating over 10

years equates to a claim of $10m against each policy year). Others

impose joint and several...