Reinsurance: Follow The Settlement Clauses

In a recent case the English High Court endorsed the benefit and good sense that a market settlement afforded reinsureds and reinsurers alike. The Court granted summary judgment in favour of a reinsured against a reinsurer permitting it to recover paid claims under back-to-back reinsurance. The underlying settlement which the reinsurer was requested to follow also comprised a settlement of future claims (including IBNR) as well as past and pending claims: summary judgment for amounts in respect of future claims including IBNR claims was not entered for the reinsured.

In summary English & American (E&A) entered into a settlement with its insured and sought in turn to recover a proportion of that settlement from Axa under back-to-back reinsurance. Axa refused to indemnify E&A, arguing that it was not required to follow the settlement because it was an interim good faith payment without admission of liability on a WP basis, under a full reservation of rights, and that there was no identification of which claims E&A had settled and whether they fell within the terms of the reinsurance contracts (or were IBNR or ex-gratia payments).

The judge concluded that the claims had been settled in a proper and businesslike manner since not only the London market but also Axa’s own willingness to settle in these amounts (which was communicated in an open letter to E&A which the Court admitted in evidence) indicated that payment was proper. As the Court concluded that there was no realistic prospect of Axa establishing that it did not have a liability to E&A for at least part of the claim, E&A was entitled to summary judgment in respect of claims which had been paid and which E&A could evidence. As the judge determined that Axa might have a defence to paying the sums claimed which represented the future claims element of the settlement (including IBNR), summary judgment would not be ordered in respect of these amounts and issues relating to these sums would proceed to trial.

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This case is an interesting example of the Court finding in favour of a reinsured trying to recover from its reinsurer pursuant to a loss settlement clause where the underlying settlement in issue was a global and commercial market deal.

English & American (E&A) subscribed to shares in ten excess of loss insurance contracts insuring Dow for claims against the group for personal injuries concerning the manufacture and sale of breast implants. E&A obtained back-to-back reinsurance for each of its contracts with Dow and Axa ultimately became the successor to the original reinsurer.

Following the claims made against it, Dow entered into a settlement agreement with some of its solvent insurers but not with E&A which was in liquidation. The agreement reached was a final compromise and settlement of all past, pending and future known or unknown claims; in effect, it was a commutation of Dow’s anticipated claims (including IBNR) rather than a compromise agreement of then-existing liabilities. Dow subsequently pursued claims against E&A under its insurances with it.

E&A sought indemnity under its back-to-back reinsurances. Those reinsurances contained the following loss settlement clause: "Subject to all terms, clauses and conditions as original and to follow the settlement of original Underwriters in all respects within the terms of this reinsurance…All terms and conditions as original and to strictly follow the fortunes of the E&A in all things". Because Axa was concerned that E&A had not participated in the settlement agreement, representatives from both parties had a WP meeting, following which Axa confirmed its position in an open letter (which was not headed "WP"). In that letter, Axa stated that, without prejudice to its right to deny liability, they supported a settlement up to the present value of what its share of liability under the settlement agreement would have been ($772,538). E&A then acknowledged its liability to Dow and entered into a settlement. When E&A sought to recover the $772,538 paid from Axa, Axa wrote (again in an open letter, not marked "WP"), denying its liability in respect of the Dow claims, but offering to pay E&A $1,018,874 in full and final settlement of all claims arising from the Dow litigation.

When E&A issued legal proceedings against Axa seeking indemnity under its reinsurances, Axa sought to strike out parts of E&A’s witness statements served in support of their summary judgment application on the basis that they referred to the WP correspondence. The judge decided that the letters were not WP and were admissible in evidence before the Court, despite the fact that they were written during the course of settlement negotiations, because Axa had deliberately written open letters to record its position for an interested third party.

Reinsurers are bound to follow the settlements of the reinsured when the reinsured settles any claim by their insured (either by judgment, award or settlement) provided that:

• the claim falls within the risks covered by the policy of reinsurance as a matter of law; and

• in settling the claim, the reinsured has acted honestly and has taken all proper and businesslike steps in reaching a settlement.

In this case there was no real dispute as to the construction of the loss settlement clause binding as between Axa and E&A but whether E&A could satisfy the high threshold of a summary judgment test to obtain judgment for sums it was obliged to pay pursuant to its settlement with Dow. The judge held that Axa should indemnify E&A at this summary stage for the following reasons:

• At the date that payment was made by E&A to Dow, there were paid claims in respect of four of the ten insurance contracts in the sum of $673,808 (excluding the IBNR reflected in the settlement). There was no real dispute that amounts in relation to these claims had been settled and Axa could have no defence to a demand to pay sums in respect of claims actually paid. As it could be said there might be a defence available to Axa in paying future losses, not yet quantified (specifically IBNR), summary judgment would not be ordered for those parts of E&A’s settlement demand presented to Axa.

• The claims had been properly settled since not only the London market but also Axa’s own willingness to settle in these amounts (expressed in one of their open letters) indicated that payment was proper.

• In any event, Axa had not shown that it had a realistic prospect of defending E&A’s claim for indemnity at least in respect of paid claims. In fact, Axa’s open letters showed that they recognised that they were liable to pay their portion of the settlement between E&A and Dow without further enquiry or determination.

This case is also a useful reminder that WP privilege does not always attach to letters written during settlement negotiations as the judge decided that Axa’s letters were not privileged, despite Axa’s attempts to argue otherwise. This issue is addressed separately in our Law-Now at Litigation: Without Prejudice.

Further reading: English and American Insurance Co Ltd -v- Axa Re SA [2006] EWHC 3323 (Comm).

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

The original publication date for this article was 15/02/2007.