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8/12 M97/February 2018 Reinsurance

Lord Templeman said:
in the absence of any express declaration to the contrary in the reinsurance policy, a warranty must
produce the same effect in each policy. The effect of a warranty in the reinsurance policy is governed by
the effect of the warranty in the insurance policy because the reinsurance policy is a contract by the
underwriter to indemnify Vesta against liability under the insurance policy.

Neither the insurance nor the reinsurance contract contained an express choice of law clause and this
case may be considered authority for the proposition that general words of incorporation need not bind
reinsurers to the governing law of the underlying cover which, in this case, had been implied.
The House of Lords also pointed out the absurdity of trying to construe and apply terms in the
reinsurance contract which served no useful purpose and were appropriate only to the original policy of
insurance. One provision, for example, allowed the insurer to re-stock the fish farm with fish rather than
pay money to the insured. If incorporated into the reinsurance cover, it would have allowed the reinsurer
to pay its claim in fish itself.

Question 8.2
The reinsurance contract was held to be governed by Norwegian law, disentitling the reinsurer to deny the claim for
breach of warranty. Is this statement true or false?

While the presumption remains that certain insurance and reinsurance contracts should be construed as
being back-to-back so that their terms are interpreted consistently, the House of Lords, in the recent
decision in WASA v. Lexington (2009), were not prepared to ignore the proper – English law – effect of a
fundamental term of a reinsurance contract governed by English law which had been construed so
radically different in accordance with the proper law of the underlying insurance contract.
In this case, Alcoa had been ordered by the US Environmental Protection Agency to clean up pollution
occurring between 1942 and 1986 at a number of its manufacturing sites in the USA. Alcoa sought to
recover its clean-up costs from its insurers, including Lexington, which had insured Alcoa for a three-year
period from 1 July 1977 to 1 July 1980 in respect of physical loss and damage to Alcoa’s property Reference copy for CII Face to Face Training
worldwide. Following a Washington Supreme Court ruling in 2000, Lexington was held to be jointly and
severally liable under Pennsylvanian law for the whole of Alcoa’s clean-up costs notwithstanding that it
was on risk for only the three-year period of the insurance policy, as opposed to the 44 years during
which pollution had taken place. Lexington accordingly settled Alcoa’s claims and sought an indemnity
from its reinsurers.

The reinsurance was governed by English law and covered an identical period and subject matter to the
underlying insurance, as well as containing a ‘follow the settlements’ provision. The House of Lords held
that the period clause in the reinsurance contract had to be given its ordinary meaning under English
law, such that only loss and damage actually occurring during the specified three-year period could be
recovered. Accordingly, any claim paid, on the basis of loss or damage spanning a period of 44 years,
could not be recovered under the reinsurance.
8
Chapter C3 Aggregation clauses

Refer back to A common issue for the parties to a reinsurance contract is whether original claims may be aggregated
chapter 7,
section D4 for the for the purposes of a claim under that contract. The issue may be addressed specifically by aggregation
hours clause clauses such as the hours clause or alternatively, the parties must look to the reinsuring clause and to
the basis of the limit and retention (for example, each and every loss).
Typically, that basis is defined by reference to event or occurrence and, in recent years, the courts have
Occurrence is
synonymous with been granted many opportunities to decide quite what is meant by those particular terms. An occurrence
an event is synonymous with an event, unless the context dictates otherwise. You should be aware that the basis
of aggregation may also be defined by reference to a common cause rather than a common event.

In Caudle v. Sharp (1995), the reinsured provided errors and omissions cover to various Lloyd’s
underwriting agents, including the managing agency for syndicates 317 and 661 and the members’
agents which had placed Names on those syndicates. Those syndicates sustained terrible losses as a
result of the active underwriter writing 32 run-off contracts, which attached to a single (1982) year of
account, aggregating significant long-tail asbestos-related liabilities. The Names on that year sued the
agents for the alleged negligence of that active underwriter and, when the matter settled, the reinsured
sought recovery under various reinsurance contracts. The retention under the reinsurance contract was
expressed as ‘each and every loss’ which, in turn, was defined as ‘each and every loss and/occurrence
… or series of losses and/or occurrences … arising out of one event’.