UK: A-Z Of Reinsurance: Aggregation And Allocation

Last Updated: 16 July 2007
Article by Yvonne Jefferies and Simon Jackson

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

Over the past decade, the English courts have discussed a variety of wordings used in the London Market (for example, "event", "occurrence", and "cause"). Coupled with the drive for contract certainty, it has never been more important to ensure that policy wordings are clear and unambiguous, and to ensure consistency of cover where there is reinsurance and retrocession cover.

Allocation is a growing area of concern for many insurers. In contrast to the US, there has been little case law to date on how the English courts will approach issues of allocation between different policy years. However, there have been a number of recent developments in this area, including the recent decision of the Commercial Court in WASA v Lexington Insurance (2007).


Aggregation disputes typically concern who bears the loss, and for how much (taking into account relevant deductibles and excesses). The sums at stake can be significant, for example, one of the principal factors in the World Trade Center litigation (recently settled by insurers for $2 billion) was whether or not the terrorist attacks on 11 September 2001 constituted one "event" or more.

There are a number of wordings in use in the London Market, but essentially, there is a distinction on the one hand between event/occurrence based wordings and cause/originating cause based wordings.


"Event" has been defined narrowly by the English courts, although it has been held that "occurrence" is synonymous with "event". The House of Lords in Axa v Field (1996) said an event was something that happens at (i) a particular time (ii) at a particular place and (iii) in a particular way.

A helpful analysis of the meaning of an event was developed in the Dawson's Field Arbitration (1972) and later adopted by the House of Lords in Kuwait Airways v Kuwait Insurance Corp (1999). The question to ask is: do the circumstances of a loss involve such a degree of unity (from the point of view of an informed observer in the position of the insured) so as to justify their being described as, or arising out of, one event/occurrence? The unifying factors to look for are:

  • cause
  • locality
  • time
  • motive

A general state of affairs cannot constitute an "event". In Caudle v Sharp (1995), Mr Outhwaite had a recurring "blind spot" in relation to the effect of the LMX spiral on the London Market and negligently underwrote 32 insurance contracts. The resulting claims could not be aggregated as Mr Outhwaite's "blind spot" was a general state of affairs, not an event in itself.

In Scott v Copenhagen Re (2003), the loss of a British Airways plane at Kuwait airport could not be considered to arise out of the same event which led to the loss of 15 Kuwaiti aircraft. The British Airways loss occurred at a different time, principally as a result of allied bombing rather than the invasion by Iraqi forces and, in addition, it had not been part of Saddam Hussein's plan to seize a British Airways plane.


The concept of "cause" is wider than "event". Again in Axa v Field, the House of Lords held, contrasting an "originating cause" with an "event", that:

"a cause is something altogether less constricted. It can be a continuing state of affairs; it can be the absence of something happening. Equally, the word "originating" was in my view consciously chosen to open up the widest possible search for a unifying factor in the history of the losses which it sought to aggregate".

So, in a factual scenario similar to Mr Outhwaite's negligent underwriting, it was held in Cox v Bankside (1995) that the "originating cause" of claims under separate policies of insurance was the incompetence of a particular Lloyd's underwriter.

Related series

It is also common to see in the Market, particularly in the professional indemnity, E&O and D&O context, wordings where separate events can be aggregated if they are "related".

In Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group (2002), it was argued that the separate acts of pensions mis-selling were all "related" through a failure by Lloyds TSB properly to train their pension salesmen. The court construed this term narrowly and "related series" could not mean an underlying or common cause.


Many reinsurance contracts provide cover on a "losses occurring" basis, and the cedant must therefore prove that the loss occurred during the relevant contractual period. What happens when the insured cannot prove exactly when the loss occurred?

There has been very little guidance from the courts on this issue. Until recently, the main authority was Municipal Mutual Insurance v Sea Insurance Company (1996). There, machinery was progressively stripped and vandalised by a number of independent acts over an 18 month period. Three separate insurance policies covered the 18 month period of loss, and it was impossible for the insured to say how much loss occurred in each separate period of insurance. The court was prepared to assist the insured by inferring that the damage had occurred evenly throughout the period and so the reinsured could recover from its reinsurers proportionately to their time on risk during the period (subject to the relevant deductible).

That case was discussed recently by the Commercial Court in WASA v Lexington Insurance (2007). The full facts are set out in the "Recent Legal Developments" article on page 6, which discusses the "follow the settlements" aspect of the case. However, the Court also considered allocation.

The US trial court held that Alcoa's liability for clean up costs for environmental damage (starting in 1943 and running through to 1980) could be pro-rated across each contract year. Notwithstanding that, the US Appeal Court found, on the wording of the specific policy, Lexington joint and severally liable for the full amount of the loss (settled for $103m plus $27m defence costs). Lexington claimed this entire sum from reinsurers, who rejected the claim on the basis that the loss claimed did not occur within the policy period: reinsurers had agreed to insure Lexington for three years, not forty. The period of cover was fundamental and reinsurers should not have to pay losses outside that period.

The Commercial Court, drawing on MMI v Sea Insurance, agreed with reinsurers and held that the reinsurance would not respond to Lexington's claim. The period clause of the reinsurance was of fundamental importance and it was for Lexington to demonstrate that the loss fell within the policy period. The fact that the insurance and reinsurance contracts were expressed to be "back-to-back" and the existence of follow the settlements language did not mean that the period clause of a time policy could be "distorted" or "disregarded".


It can be seen that aggregation clauses are strictly interpreted by the English courts, and it is therefore important to ensure the most appropriate form of wording is used. In the Lloyds TSB case, Lord Hoffman noted: "there are often well established alternatives open to the parties in the drafting of their agreement. The choice made from among these alternatives represents part of the bargain struck by the parties and must be respected".

It is also important to ensure consistency between insurance and reinsurance policies. Typically, a reinsurer will not be bound to follow the cedant's aggregation of underlying claims and may be entitled to look at matters afresh.

"Sole Judge" clauses are one way for a cedant to reduce the scope for aggregation disputes. However, the party exercising the "sole judge" power must do so in a reasonable manner and must direct himself to the correct questions when doing so. For example, in Brown v GIO (1998), the reinsured underwriter (Mr Brown) decided to aggregate a number of claims against brokers in relation to underwriting in the LMX spiral, following the law as he saw it at the time. The law changed by the time the claim was presented to reinsurers, who challenged Mr Brown's aggregation decision. The court upheld Mr Brown's decision as he had acted reasonably and directed himself to the right question, even if his conclusion was wrong in law.

Allocation remains a developing area. Whilst the court may exercise some flexibility (e.g. assuming the rate of loss was constant in MMI v Sea Insurance), the burden remains on the cedant to ensure that the losses claimed fall within the terms and period of the reinsurance contract.

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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