Wasa International Insurance Company Limited V. Lexington Insurance Company Limited And Others: How 'Back To Back' Is 'Back To Back'?

This article was first published in Issue 127 (May) of Sweet & Maxwell's Insurance and Reinsurance Law Briefing

The recent decision of Mr. Justice Simon in Wasa International Insurance Company Limited v. Lexington Insurance Company Limited and others1 raises a number of interesting issues about the interrelationship of a facultative reinsurance contract and the original insurance contract when they are governed by different systems of law. Wasa and AGF had provided "contributing facultative reinsurance" to Lexington in respect of its liability under a "Difference in Condition" or "DIC" insurance provided by Lexington to the Aluminium Company of America ("Alcoa"). The DIC insurance provided property and business interruption cover.

The terms of the insurance and reinsurance contracts

The period of the DIC insurance was for 36 months from 1 July 1977 to 1 July 1980. The policy did not contain an express choice of law clause, but contained the following standard US service of suit clause:

"In the event of the failure of this Company to pay any amount claimed to be due hereunder, [Lexington] at the request of the insured, will submit to the jurisdiction of any Court of Competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court".

The reinsurance was placed in London. The reinsurance contract also provided cover for the period of "36 months 1/7/77 L/U &/or pro rata to expiry of original". The form interest and location clauses also stated, inter alia, "&/or as original" and the reinsurance incorporated a full reinsurance clause as follows:

"Being a Reinsurance of and warranted same gross rate, terms and conditions as to and to follow the settlements of the Company and that said Company retains during the currency of this Policy at least . On the identical subject matter and risk and in identically the same proportion on each separate part thereof, but in the event of the retained line being less than as above, Underwriters' lines to be proportionately reduced".

The claim under the direct insurance

Alcoa sustained environmental damage at a number of sites in various of the United States, as a result of failures on Alcoa's part which had caused damage between 1942 and at least 1986. The US Environmental Protection Agency and various state agencies required Alcoa to clean up this pollution and contamination. Insurance coverage litigation was commenced by Alcoa against Lexington and others before the Superior Court of King County in the State of Washington, in order to determine whether, and to what extent, Alcoa was entitled to be indemnified against these costs. One of the coverage issues considered in this litigation was whether pollution damage which had spanned more than one period of insurance should be allocated to the period of any particular policy, and, if so, how. Applying Pennsylvania law (the state where Alcoa's headquarters were located), the Supreme Court of Washington State held that in these circumstances, each of Alcoa's insurers was liable for the remedial costs of cleaning up all the environmental damage at various specified sites which were manifested during the policy period, whether it occurred within the insured period or not2. The Court held that the insuring clause in the direct insurance was:

"very broad and contains no limitation as to the time of the physical loss of or damage to property. There is no exclusion in the policy for physical loss or damage that may have been spreading before the policy inception.

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It seems clear from the policy language that any physical loss or damage manifesting itself during the time a DIC policy was in effect covered by the policy, including pollution damage starting before the policy inception"..

Following extensive litigation, Lexington settled Alcoa's claims on the basis that the insurance covered the cost of cleaning environmental damage at the relevant sites, irrespective of whether the damage had been sustained before, during or after the period 1 July 1977 to 1 July 1980.

The position under the reinsurance contract

After Lexington had made a demand for an indemnity under the reinsurance contract, Wasa and AGF commenced proceedings before the Commercial Court in London seeking a declaration that they were not obliged to indemnity Lexington in respect of its settlement with Alcoa. The principal defence raised was that the claims settled by Lexington did not fall within the terms and conditions of the reinsurance, because the settlement was on the basis that Lexington was liable under the insurance for the cost of cleaning environmental damage which had occurred outside the period 1 July 1977 to 30 June 1980, whereas the reinsurance contract only provided cover for losses occurring during that period.

It was common ground that the reinsurance contract was governed by English law. The reinsurers contended that they had only covered Lexington for the risk of loss and damage occurring within the three-year period. Lexington, it was said, could not rely on the "follow settlements" obligation" because the loss claimed did not fall within the scope of the reinsurance contract...