UK: Reinsurance And International Risk Recent Legal Developments

Last Updated: 4 July 2007
Article by Simon Cooper and Alex Kershaw

Originally published in BLG's Reinsurance and International Risk team Notes, Summer 2007

Although the last few months have seen fewer reinsurance disputes reaching the courts, there have been some important developments.

Follow the settlements

In Wasa v Lexington (2007) the Commercial Court had to address issues of allocation of multi-year pollution losses to reinsurers as well as the limitation on a follow the settlements clause in a facultative reinsurance contract containing a full reinsuring clause. The allocation aspects are discussed separately in this edition of RIRt Notes.

Lexington had issued property insurance to Alcoa covering three years, 1977-1980. Alcoa was an American aluminium smelting and processing company which, after the insurance was placed, became liable for huge clean-up costs in respect of pollution to its sites in the US between 1943 and at least 1980. After extensive litigation in the US, Lexington was found to be jointly and severally liable in respect of the clean-up costs over the whole period 1943-1980 even though the courts had also decided that the costs were divisible over each year of exposure. Lexington settled Alcoa's claim for US$103 million.

Following the settlement with Alcoa, Lexington sought a recovery from its reinsurers under a contributing facultative reinsurance which also covered the three year period 1977-1980. As well as claiming in respect of the settlement, Lexington also sought to recover from its reinsurers a proportion of the US$27 million legal defence costs which it had incurred defending Alcoa's claim. Reinsurers rejected Lexington's presentation arguing that they were only liable for that portion of the loss which occurred during the three years of the reinsurance cover.

The reinsurance was a slip policy governed by English law on either the J1 or NMA 1779 form. The conditions included a full reinsurance clause which the judge found incorporated a follow the settlements provision.

At trial, Lexington argued that the insurance and reinsurance were intended to be back-to-back and that this, and the follow the settlements provision, meant that the reinsurance must respond in the same way as the insurance had been found by the US courts to respond. The judge disagreed, and found for the reinsurers. In doing so, he highlighted some points which are of general significance.

The judge held that the impact of the full reinsurance clause was to incorporate the subject matter of the insurance into the reinsurance; it did not turn the cover into a reinsurance of Lexington's liability to Alcoa. The judge also found that the period clause in a time policy is of fundamental importance and the fact that the reinsurance is expressed to be back-to-back with the insurance and contains a follow the settlements clause does not have the consequence of distorting the natural meaning of the time clause or of allowing it to be disregarded.

A follow the settlements clause does not oblige reinsurers to pay claims which are outside the scope of the reinsurance as a matter of law. In this case, since the claim presented by Lexington included losses which fell outside the period of the reinsurance, the follow the settlements clause was inapplicable.

The judge also found for reinsurers on the issue of defence costs holding, in accordance with existing English authority, that in the absence of an express term or a universal market practice, reinsurance contracts do not provide cover for expenses incurred in defending claims even where the reinsurance is expressly back-to-back with the original policy.

Waiver

Two recent decisions have confirmed the position that (re)insurers will only have been held to have waived their rights in respect of non-disclosure of material information by a cedant at placement, in specific circumstances and where either by words or clear conduct, the reinsurer has acted in a way inconsistent with the enforcement of its rights. However, the position is less clear as regards the position where a (re)insured has breached a condition precedent.

In Noblebright v Sirius (2007), a case concerning fire insurance, the insured claimed that insurers had waived their right to avoid the policy for non-disclosure of three violent attacks and robberies on its premises prior to the inception of the policy, by reason of the more limited claims history information required to be given in the proposal form for the policy. It was common ground that the incidents were material, and the decision rested upon whether the insurers had waived their right to avoid.

The judge held that it was "far-fetched" to assert that the proposal form limited the scope of incidents to be disclosed, and material circumstances which might have given rise to a claim, but which did not, were still required to be disclosed. The judge found that any reasonable person would have been concerned with the incidents, even if they had not given rise to an insured loss or to a claim.

By contrast, in Kosmar Villa Holidays v Trustees of Syndicate 1243 (2007), a case concerning waiver of a breach of a condition precedent, the Commercial Court held that the insurer's conduct did amount to a waiver of its right to avoid the policy for breach of a condition precedent. The policy contained a condition that the insured notify the insurer of all accidents in respect of which "there may be a liability", but the insured did not report a holidaymaker's serious swimming pool injury in August 2002 until September 2003. The insurer did not reserve its rights when dealing with the claim, and the judge held that, on the facts, they had waived their rights to avoid for breach of condition precedent. In doing so, he distinguished waiver in a situation of breach of condition precedent from that of breach of warranty, where The Good Luck (1992) had decided that waiver was not possible. The judge declined to follow Forrest v CGU (2006), in which condition precedent and waiver had been treated in the same way.

In order to protect their position, (re)insurers therefore need to exercise caution in dealing with claims when conditions precedent may have been breached by the (re)insured.

Part 36 Offers

Part 36 Offers are settlement offers which can be made under provisions of the Civil Procedure Rules. If an offer is made in accordance with Part 36, certain costs consequences follow which are intended to promote early resolution of disputes. Since their introduction in 1999, Part 36 Offers have played a significant role in litigation strategy. If they are not "beaten" by the other party at trial, a favourable costs award for the offeror may follow. However, defendants who make such offers have, until recently, had to pay money into court in support of their offer.

In Stokes v Western Power (2005), the judge held that defendants did not have to make a payment into court in support of a Part 36 offer if they fulfilled various criteria to show their ability to pay. This has now been codified in the latest update to the Civil Procedure Rules (with effect from 1 April 2007). Defendants can thus avoid tying significant sums of money up in court for long periods.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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