Page 223 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 8 Legal issues relating to reinsurance 8/15

So, in cases of absent dishonesty or breach of the implied obligation, reinsurers have no basis to
reinvestigate the original claim, and must rely on the honesty and professionalism of the reinsured. The
businesslike obligation will extend to include the appointment of the adjuster, the adjuster adjusting the
claim and the reinsured settling the claim. Further, it is not relevant how the original claim was
presented to the reinsured only that it was settled. Reinsurers may, however, argue that the claim falls
outside the risks covered by the reinsurance contract. On this point, it has been held in the Court of
Appeal that a reinsured does not have to show that the claim it settled, in fact, falls within the risks
covered by the reinsurance, but that the claim which [it] recognised ‘did or arguably did’ (Tuckey LJ in
Assicurazioni Generali v CGU International Insurance (2004)).
In the ICA case, there was an added complication in that the reinsurance agreement also contained a
claim cooperation clause which contradicted the follow the settlements clause in requiring the
reinsurer’s agreement before settling the claim. The court concluded that this requirement took
precedence over the follow the settlements clause. On the facts, this made no difference since the court
concluded that the loss had been suffered and was covered by the clause. Nevertheless, one can see
that the claims cooperation clause can operate to emasculate a follow the settlements clause.

As regards the burden of proof, the courts have confirmed that, in most cases, once a reinsured has
demonstrated that it has settled a claim in the ordinary course of its business and its claim falls within
the reinsurance contract, it will be for the reinsurer to prove that the original settlement was not in fact
bona fide or businesslike. In other words, there will be a presumption in favour of the reinsured that the
original claim is bona fide and businesslike.
Subsequently, the courts have considered the meaning of ‘liable or not liable’ and ‘without question’
Clear words must be
when added to loss settlements clauses. The first phrase was held to make no difference to the used if the parties
relationship between the parties (Charman v. GRE (1992)), and did not remove the obligation to settle intend to exclude this
implied obligation
inwards business in a businesslike fashion. Similarly, in relation to the latter phrase, it was held only to
emphasise that reinsurers were bound by the settlement, even if it was subsequently proved that there
was in fact no original liability, and did not mean that the only limitation on the reinsurers obligation to
follow the reinsured’s settlement was that the reinsured had not acted in bad faith (Assicurazioni
Generali v. CGU International & Ors (2003)). Clear words must be used if the parties intend to exclude
this implied obligation. Reference copy for CII Face to Face Training
Loss settlements binding clause

An alternative loss settlements clause often found in excess of loss treaties and which was considered by the House
of Lords in Hill v. M&G Re (1996), is as follows:
All settlements by the reinsured shall be binding upon reinsurers provided that such settlements are within
the terms and conditions of the original policy and within the terms and conditions of this policy.

Kuwait Airways Corporation (KAC) and British Airways (BA) lost a number of aircraft that had been on the
ground at Kuwait Airport, following the Iraqi invasion of Kuwait on 2 August 1990. The aircraft belonging
to KAC were flown out of Kuwait at various times on dates in August and September 1990. Some were
later recovered and returned but seven were destroyed during the course of the allied air offensive Chapter
during 15 January and 28 February 1991. The BA plane remained in Kuwait but was destroyed in an
explosion on 22 February 1991. 8
The reinsured, a Lloyd’s syndicate underwriting as Hill & Others, had settled inwards claims on the basis
that such claims represented one loss that occurred on the date of the Iraqi invasion. The reinsurer, M&G
Re resisted the claim on many grounds including an argument that the losses had occurred in 1991
when, for example, those reinsurance contracts on a losses occurring during 1990 basis had expired.
M&G Re also argued that not all of the aircraft in respect of which an indemnity was claimed had, in fact,
been lost; some were subsequently recovered, and that, if lost, there was no single loss encompassing
all aircraft. In this context, the issue before the court was whether the reinsurer could question the loss
settlement of the reinsured. No issues were raised in relation to the implied obligation.

The House of Lords distinguished the case from ICA v. SCOR on the grounds that the relevant clause
expressly required claims under the outward reinsurances to be within the terms and conditions of both
the original policies and the reinsurances. The reinsurer was, accordingly, entitled to query whether it
should be bound by the settlement of a loss which occurred during a year in which it did provide
reinsurance to the reinsured, and which was made up of distinct losses, each of which fell below the
retention.