Wasa v Lexington - The Repercussions For Reinsurers

The House of Lords handed down its much anticipated judgment on

30 July. Its decision to allow the reinsurers' appeal and to

refuse to accept Lexington's contention that the insurance and

reinsurance contracts should be construed as "back to

back" will be a popular one amongst many London market

reinsurers conducting business in the US and equally proinsured

jurisdictions.

The presumption that a proportional facultative contract should

be construed as co-extensive with the underlying direct policy

remains valid. However, this does not mean that a reinsurance

contract which is subject to English law will be construed in a

different manner from its ordinary meaning in the London insurance

market in circumstances where, at the time of underwriting, there

was no identifiable system of law applicable to the direct policy

which could have provided a basis for a different construction.

The House of Lords found that the reinsurers, who had written a

three year policy, were not liable for 30 years of damage despite

the contrary conclusion having been reached by the Washington

Supreme Court, applying Pennsylvanian law, in respect of the

underlying insurance policy written by Lexington which provided

cover for the same three year period.

The earlier Court of Appeal decision was controversial. It left

many uncertain of their potential exposures, whether they had

sufficient reserves in place and whether their own outwards

protections would respond as previously anticipated. In essence,

the Court of Appeal decision had meant that reinsurers were exposed

to the same risk whether they had written the contract for three

years or less, thereby emasculating the period provision in the

reinsurance. The very real commercial difficulties with which

London reinsurers were faced were recognised by the House of

Lords.

Key facts

Lexington had insured Aluminium Company of America (Alcoa) under

a property damage and business interruption policy for losses

occurring during the three year period commencing 1 July 1977. The

policy did not contain an express choice of law clause but did

contain a standard US Service of Suit clause. Lexington obtained

facultative reinsurance cover from, amongst others, Wasa and AGF,

on the same terms and conditions "as original", including

the same three year period of cover and a full reinsurance clause

as follows:

"Being a Reinsurance of and warranted same gross rate,

terms and conditions as and to follow the settlements of the

...Company..."

Although the reinsurance slip policy did not contain an express

choice of law clause, it was accepted by the parties that English

law applied.

In the 1990s, Alcoa incurred substantial clean up costs in

respect of pollution, which had taken place between 1956 and 1985,

at various of its manufacturing sites in the US. Alcoa turned to

the Washington courts for a declaration of entitlement to insurance

coverage for these costs. Some of Alcoa's insurers for the 30

year period in question escaped liability because of relevant

exceptions or liability provisions in their policies and some

because they simply could not be traced. Lexington was not so

fortunate.

The Supreme Court of Washington, applying Pennsylvania law (as

it was entitled to pursuant to the...