The 'Double-Proviso' follow settlements clause

The Commercial Court revisits the test

IRB Brasil Resseguros SA v. CX Reinsurance Company Ltd

Commercial Court, 7 May 2010

Not all follow settlements provisions are the same. In many cases, the reinsurance will be expressed to be "subject to the same terms, clauses and conditions as the original" and the stated obligation of the reinsurer will be quite simply to "follow the settlements of the reinsured". In such cases, the reinsurer is required to follow any settlement so long as: (1) the reinsured has acted honestly and taken all proper and businesslike steps in reaching the settlement; and (2) the claim so recognised by the reinsured falls within the risks covered by the reinsurance as a matter of law.1 It is no defence for the reinsurer to show that the underlying claim, whether on its facts or in law, would have (or would likely have) failed had the reinsured defended it to trial.

In other cases, however, the follow settlement provisions may be much more restrictive. In Hill v Mercantile & General Reinsurance Co [1996]2, for example, the House of Lords had to consider a clause in the following terms:

"All loss settlements by the Reassured, including compromise settlements...shall be unconditionally binding upon the Reinsurers provided such settlements are within the terms and conditions of the original policies and/or contracts and within the terms of this reinsurance".

Faced with such a clause, it is not enough that the reinsured has acted in a proper and businesslike manner, since the clause requires that the inward settlement actually falls within the terms of the direct policy. Quite simply, as Lord Mustill put it, "the reinsurer cannot be held liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurer".

But how, precisely, does the reinsured go about satisfying these two provisos? Does he, for example, have to litigate the underlying claim to its ultimate conclusion? In Hiscox v. Outhwaite (No. 3) [1991]3, Evans J. concluded not; it may be sufficient, he suggested, that the underlying claim was "arguably, as a matter of law" within the scope of the original insurance, even if a court might hold otherwise were the claim fully argued before it. The burden of proof was also considered more recently in Equitas Ltd v. R&Q Reinsurance Co [2009]4, in which the court confirmed that the burden was on the reinsured to demonstrate compliance with the provisos, but only to the standard...