Reinsurance: Follow The Settlements

Last week's Court of Appeal decision in Wasa International Insurance-v-Lexington Insurance Company may represent a shift in approach of the English judiciary towards attaching greater weight to the commercial intentions of the parties than to a strict interpretation of the language of a reinsurance contract.

Background

Lexington insured Alcoa's property. The period of insurance ran from 1st July 1977 to 1st July 1980. Lexington purchased facultative reinsurance with Wasa and AGF in respect of this underlying insurance for the same years and limit of liability.

Alcoa subsequently sought to recover remedial clean up costs from Lexington. The US Court held that Lexington was liable for these costs, irrespective of whether the damage was sustained before, during or after the inception date. Accordingly, damage prior to 1st July 1977 was not excluded. Lexington settled with Alcoa on this basis and sought to recover from Wasa and AGF.

First Instance Decision Against The Reinsured

Wasa and AGF were not obliged to follow Lexington's settlement:

The contracts were not "back-to-back" as they were governed by different law.

Wasa and AGF were not obliged to indemnify Lexington. Regardless of the US ruling on the period of cover for the insurance, Wasa and AGF only agreed to reinsure Lexington for losses that occurred during the three year period as defined in the reinsurance (ie no earlier and no later). Importantly, there was no evidence that the losses had actually occurred during that period. The back-to-back nature of the covers did not displace the importance of the prescribed period of cover and which was not to be distorted just to make it fit with the original cover.

Click here for our Law Now on the first instance decision

Court Of Appeal Allow The Reinsured's Appeal

Where the same period of cover was in issue and the parties used the same wording in the reinsurance as in the underlying insurance, the key question was not so much whether the parties intended the cover to be "back-to-back" (whatever that might mean) but whether the parties intended that wording to have the same meaning in both contracts.

On the facts, the policy period was an important part of the policy to be construed and had to receive the same interpretation in both policies. If one asked whether the parties intended that the wording of the policy period should have the same meaning in each contract, the natural answer was that it did.

There had always been the...