UK: The "Double-Proviso" follow settlements clause

Last Updated: 19 May 2010
Article by Anthony Menzies, James Crabtree and Peter Kempe

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 of the "balance of probabilities". In that case, the reinsured was able to discharge the burden by recourse to reconstructed actuarial modelling.

The present case concerned an appeal to the Commercial Court from an arbitration award in favour of the reinsured, arising under an XL reinsurance programme protecting the reinsured's casualty book of business from 1976 to 1983. The relevant reinsurance contracts containing a double-proviso follow clause remarkably similar to that in Hill v. M&G.

To pursue an appeal from an arbitration award, it is not enough to contend that the arbitrators erred in their assessment of the facts; what is required is an error in their application of the law. In this case, the reinsurers complained that the arbitrators had wrongly transposed the test of "arguability" into the question of whether the claim so settled fell within the terms of the reinsurance contract (that is, the second proviso), when clearly it applies only to the issue of whether the claim falls under the underlying policy (the first proviso). The Commercial Court rejected the appeal on this ground. While there were indeed several passages in the award where the arbitrators' choice of words was "infelicitous", the court was satisfied that the tribunal's intention was (correctly) to apply the relevant test only to the question of liability for the underlying claim. Having properly reached the conclusion that the claim was one for which liability arguably existed under the terms of the direct policy (the first proviso), they had rightly gone on to conclude that the claims so recognised as such actually fell within the terms and conditions of the reinsurance (the second proviso). That was the correct approach.

The reinsurers also contended that the tribunal had erred on the question of both allocation and on that of whether the loss in each year for which indemnity was sought actually stemmed from one "event". As to the first point, the court noted and approved the reasoning adopted by the tribunal in each case. One of the claims complained about, for example, was concerned with the application of the "triple trigger" theory, favoured in many US courts, by which damage or a defect, once identified, can result in insurance liability for up to 100% of the loss, falling on any one or more of three different occasions. Faced with that prospect, the tribunal was entitled to conclude, as it did, that there existed liability for perhaps 100%, but certainly arguably 70%, on the relevant contract of insurance. To allocate on that basis could not be criticised.

Finally, as to the question of "event", the tribunal had indeed committed what the court described as a "howler", by on one occasion referring in its award to the relevant losses in each year stemming from one "cause", when in fact the aggregation language called for one "event". As was made clear in Axa Reinsurance v. Field [1996]5 the concepts of "cause" and "event" are two very different things. The court was satisfied, however, that this was simply a typographical oversight in the award. The tribunal clearly meant to conclude that the losses resulted from one event, in accordance with the relevant test in Kuwait Airways v. Kuwait Insurance Co [1996]6 to which express reference was made in the award.

Result: Judgment for the reinsured.

Footnotes

  1. Insurance Company of Africa v. SCOR [1985] 1Lloyd's Rep 312 CA
  2. [1996] 3 All ER 865
  3. [1991] 1 Lloyd's Rep 524
  4. [2009] EWHC 2787
  5. [1996] 1 WLR 1026
  6. [1996] 1 Lloyd's Rep 664

 

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