Last week's Court of Appeal decision in Wasa International Insurance-v-Lexington Insurance Company may represent a shift in approach of the English judiciary towards attaching greater weight to the commercial intentions of the parties than to a strict interpretation of the language of a reinsurance contract.

Background

Lexington insured Alcoa's property. The period of insurance ran from 1st July 1977 to 1st July 1980. Lexington purchased facultative reinsurance with Wasa and AGF in respect of this underlying insurance for the same years and limit of liability.

Alcoa subsequently sought to recover remedial clean up costs from Lexington. The US Court held that Lexington was liable for these costs, irrespective of whether the damage was sustained before, during or after the inception date. Accordingly, damage prior to 1st July 1977 was not excluded. Lexington settled with Alcoa on this basis and sought to recover from Wasa and AGF.

First Instance Decision Against The Reinsured

Wasa and AGF were not obliged to follow Lexington's settlement:

  • The contracts were not "back-to-back" as they were governed by different law.
  • Wasa and AGF were not obliged to indemnify Lexington. Regardless of the US ruling on the period of cover for the insurance, Wasa and AGF only agreed to reinsure Lexington for losses that occurred during the three year period as defined in the reinsurance (ie no earlier and no later). Importantly, there was no evidence that the losses had actually occurred during that period. The back-to-back nature of the covers did not displace the importance of the prescribed period of cover and which was not to be distorted just to make it fit with the original cover.

Click here for our Law Now on the first instance decision

Court Of Appeal Allow The Reinsured's Appeal

  • Where the same period of cover was in issue and the parties used the same wording in the reinsurance as in the underlying insurance, the key question was not so much whether the parties intended the cover to be "back-to-back" (whatever that might mean) but whether the parties intended that wording to have the same meaning in both contracts.
  • On the facts, the policy period was an important part of the policy to be construed and had to receive the same interpretation in both policies. If one asked whether the parties intended that the wording of the policy period should have the same meaning in each contract, the natural answer was that it did.
  • There had always been the possibility that the US Court would interpret the policy wording unexpectedly. But reinsurers had agreed to cover that possibility by accepting premium on the same basis and by using words almost indistinguishable from those in the underlying policy.

Comment

Reinsureds will no doubt say that common sense has perhaps prevailed here over legal opportunism. They will take comfort from a decision that attaches greater weight to the commercial intentions of the parties than it does to a strict legal interpretation of the language of a reinsurance contract.

This decision offers comfort to reinsureds that where, at least, in a facultative reinsurance, there is the same wording in both covers (coupled with a follow provision), the courts are prepared to bind reinsurers to follow the settlement, thereby granting reinsureds with consistency in coverage.

The decision may well be viewed by reinsurers as less helpful. It may make it more difficult under English law for reinsurers to dispute settlements which, although commercial, are not necessarily in line with a strict constrution of the wording of the reinsurance.

Further reading: Wasa -v-Lexington [2008] All ER (D) 433 (Feb); [2008] EWCA Civ 150.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.



The original publication date for this article was 06/03/2008.