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8/16 M97/February 2018 Reinsurance

A similar wording was recently considered in Equitas v. R&Q (2009). This case is particularly interesting
because the court approved the use of actuarial models to satisfy the first proviso – namely that, on the
balance of probabilities, the losses were within the terms and conditions of the original, or in this case,
the underlying, policies.
An issue was whether the fact that the London Market had wrongly aggregated certain losses and
included irrecoverable losses relating to, for example, the Iraqi invasion of Kuwait, precluded Equitas
from recovering under particular retrocessional excess of loss reinsurance contracts otherwise
recoverable losses, but tainted by its inability to replicate the LMX spiral completely (and extract the
irrecoverable losses).
It was held that while it was plainly necessary to proceed with caution, the models provided an
acceptable and soundly based route to establishing the properly recoverable minimum losses sustained
by the syndicates, and it was not necessary for Equitas to prove that the sums claimed were properly
due, on a contract by contract basis.
Following the grounding of the tanker, Exxon Valdez, and subsequent spillage, and clean-up, of crude oil
in Prince William Sound, Alaska, a reinsurer (NRG Victory Re) disputed its liability to reimburse
reinsureds (including Commercial Union (CU)) for amounts paid to Exxon in respect of Exxon’s liability for
clean-up costs, in Commercial Union v. NRG Victory Re (1998). The reinsureds had settled with Exxon
during legal proceedings in Texas and, under the reinsurance contracts, it was a condition precedent to
the reinsurer’s liability that the reinsured’s underlying settlements were in accordance with the terms
and conditions of its original policies. NRG argued that the original policies were governed by English
law and that the reinsureds were not liable to Exxon under that law, hence it was not bound by the
settlements. In turn, CU argued that it had demonstrated its legal liability to its insured by taking all
reasonable defences in the proceedings and making a sensible settlement on the advice of its local
lawyers.
At first instance, it was held that the reinsureds had proved their loss. On appeal, this was overruled on
the basis that the first instance judge should have made his own decision as to whether or not it was
arguable that the reinsureds were not liable to Exxon under the applicable law, and not relied on the
local lawyer’s opinion. The wider point is perhaps that, if a reinsured’s liability to its insured is
established by a court of competent jurisdiction, the reinsurer will be liable under a reinsurance contract Reference copy for CII Face to Face Training
which is governed by English law.

Question 8.3
Does the reinsured have to prove that it acted honestly and took all proper and businesslike steps in settling a claim,
in order to recover from a reinsurer?

Further, in AstraZeneca Ins Co v. XL & Ace (2013), a pharmaceutical’s captive sought reimbursement from
its reinsurers for settlements and costs incurred in the USA in relation to a prescription drug, Seroquel.
Unusually, the Bermuda Form was governed by English law and conferred jurisdiction on the English
Commercial Court. Reinsurers declined reimbursement on the basis that the cases were settled in the
8 absence of any legal liability to do so. Accordingly, the main issue before the court was whether it was
Chapter only necessary for the claimant to demonstrate that it settled an arguable liability rather than an actual
liability (that is, in the sense that, on a balance of probabilities, ‘it would have been liable for the claim
in question, on the basis of the correct application of the system of law governing the claim to the
evidence properly analysed’. Justice Flaux held that the form responded only to an actual liability.
Other settlements
On occasion, loss settlements clauses make reference to ex gratia and/or without prejudice settlements
Clauses make
reference to ex gratia as to whether to include or to exclude one or both of them from the obligation to follow settlements. Ex
and/or without gratia settlements are payments made in the absence of legal liability for pure commercial reasons,
prejudice settlements
whereas without prejudice settlements are those made with no admission of the existence of any
liability under the terms of the original policy.
To illustrate, Faraday entered into a settlement agreement with its insured which recited, among other
things, that it was ‘by way of compromise, and without prejudice to or waiver of their respective
positions … and without the London market insurers admitting liability’. Faraday’s reinsurance contract,
however, excluded from its reinsurer’s (Copenhagen Re) ‘follow settlements’ obligations both ex gratia
and without prejudice settlements. The Court held that the compromise settlement was plainly a without
prejudice settlement and so fell outside the clause in the reinsurance contract (see Faraday v.
Copenhagen Re (2006)).