Insurance/Reinsurance Bulletin - August, 2009

Profession:Holman Fenwick Willan LLP
 
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WHEN "BACK TO BACK" POLICIES DIVERGE

Article by Edward Rushton

Lexington Insurance Company v AGF Insurance Limited

And Wasa International Insurance Company Limited

[2009] UKHL 40 (On Appeal From [2008] EWCA Civ

150)

On 30 July 2009 the House of Lords unanimously allowed

the appeals of Wasa and AGF in the above matter, overturning the

decision of the Court of Appeal.

This result has important practical implications for reinsurers

and reassureds with interests in policies that are intended to be

"back to back", but which are subject to the laws of

differing jurisdictions. The decision also goes to fundamental

questions regarding the nature of a contract of reinsurance

– it affirms the view that the subject of a proportional

reinsurance policy is equivalent to insured interest covered by the

underlying policy. This may be contrasted with Sedley LJ's

indication in the Court of Appeal that (proportional) reinsurance

contracts insure the reassured's liability pursuant to the

underlying policy.

The Background

The claim at the heart of the matter was in respect of

environmental damage caused at 58 sites, during the 44-year period

1942-1986, by waste products generated and disposed of by Aluminum

Company of America Limited (Alcoa), and its subsidiary Northwest

Alloys, Inc. (NWA).

Alcoa and NWA were insured by Lexington under an American

"all risks difference in conditions" property damage

policy. The policy period was from 1 July 1977 to 1 July 1980. The

policy contained a US Service of Suit clause which provided that,

at the request of the assured, Lexington would submit to the

jurisdiction of any Court of Competent Jurisdiction within the

United States. Wasa and AGF reinsured Lexington, on substantially

the same terms as the original (including the policy period), save

that the reinsurance was governed by English law.

Pursuant to a decision of the Supreme Court of Washington

(applying Pennsylvanian law), Lexington faced liability for

pollution occurring at particular sites, irrespective of when the

damage began, provided that part of the contamination occured

during the insurance period. Lexington settled its liability to

Alcoa and NWA for the sum of US$103 million. Lexington sought an

indemnity from its reinsurers who denied liability on the basis

that the damage did not occur within the policy period of the

reinsurance.

The English court at first instance found in favour of

reinsurers. However, its decision was reversed by the Court of

Appeal. Its reasoning emphasised the presumption that when a

proportional reinsurance policy is placed specifically to cover a

particular direct policy, and has been expressed in substantially

identical terms, English law should treat the policies as being

"back to back" and their language as having the same

meaning, notwithstanding differences of governing law (see

Vesta v Butcher and Groupama v Catatumbo). An

important part of the rationale behind this presumption is that the

contracting parties were in a position to ascertain the legal

effect of the policy language at the time when the contract was

entered into. Longmore LJ in the Court of Appeal considered that

this requirement was met in the present case.

The Essential Issue

The essential issue before the House of Lords was whether the

loss arising from Lexington's settlement with Alcoa fell within

the terms of the indemnity provided by the reinsurance slip. As

Lord Mance stated in his judgment, "the issue is one of

construction of the particular reinsurance contract against its

relevant background and surrounding circumstances".

The Lords did not dilute the force of the presumption that the

reinsurance was intended to be "back to back" with the

underlying cover. However, they were unanimous in their view that

the facts of the present case were different in one crucial respect

to those in Vesta and Groupama. Per Lord Mance, "The

reinsurance has a clear English law meaning. There was here no

identifiable legal dictionary (formal or informal), still less a

Pennsylvanian legal dictionary... which could lead to any different

interpretation of the reinsurance wording." The House

therefore ruled that the policy period was to be construed in

accordance with English law.

It was to Lord Mance "clear beyond argument, upon its

wording" that, construed according to English law, the

only property damage covered by the reinsurance was that which

occurred during the three year reinsurance period. On this basis

reinsurers' appeal was allowed.

Consequences For Reinsurers And Reassureds

This decision shows that whilst the presumption remains strong

that proportional reinsurance contracts are intended to be

"back to back" with the underlying policy, it is not so

strong as to override the English law rule of construction that the

words of a contract should be construed in accordance with their

natural meaning. In his submissions before the House, counsel for

Lexington, J.Sumption QC, asked what more Lexington could have done

to reinsure themselves on a fully back to back basis. Lord Mance

suggested an answer, which is to ensure that the insurance and

reinsurance are subject to one and the same identifiable or

predictable governing law. Failing that, he suggested that steps

could be taken at least to make sure the direct insurance is

subject to an identifiable governing law.

"NON-EXCLUSIVE" IN THIS CASE, MEANS NOT

EXCLUSIVE

Article by Ada Waddington

The Court of Appeal in Highland v Deutsche Bank [2009]

EWCA Civ 725 ruled that a non-exclusive jurisdiction clause

envisages the possibility of alternative jurisdiction. It allowed

the appeal of the Highland companies (based in Bermuda and Dallas),

against the Commercial Court's decision to grant Deutsche Bank

(based in Frankfurt and New York) an anti-suit injunction against

Highland's action in Texas.

Whilst acknowledging that parallel proceedings are generally

undesirable, the Court said they are not necessarily vexatious or

oppressive. It said the starting point in considering whether to

grant an anti-suit injunction is the wording. The clause reads:

"This agreement shall be governed by... the laws of

England. Buyer and Seller hereby irrevocably submit for all

purposes... to the jurisdiction of the Court of England...

Nothing in this paragraph shall limit the right of any

party to take proceedings in the courts of any other country of

competent jurisdiction." (Emphasis

added)

The parties were considered to have accepted under this clause

the possibility of parallel proceedings. The Court said it is

incorrect to presume that foreign proceedings were vexatious

because of the mere presence of a non-exclusive jurisdiction

clause, and that the party who brought the foreign proceedings has

the burden to justify them. The parties are international financial

institutions which entered into a standard form contract governed

by English law, but the dispute itself had little connection with

England. The parties chose not to make jurisdiction exclusive, the

Court said it should not therefore attempt to bar alternative

jurisdiction, unless the interests of justice require otherwise. As

there are no exceptional circumstances, the anti-suit injunction

was set aside.

The Court commented that there is an element of flexibility in

these matters and it is conceivable that a non-exclusive clause may

have been drafted to have the effect of barring parallel

proceedings. However, to avoid such costly disputes, it is prudent

to make jurisdiction exclusive at the outset!

FSA FINES

Article by Kapil Dhir and

Andrew Carpenter

In its 2009/2010 business plan, the FSA states that visible

action against market abuse and failure of compliance and risk

management strategies is "an important part of credible

deterrence". It is clear that they mean to follow up on

this: on 2 July 2009, the FSA published the Final Notice it had

issued to Richard Holmes, a director of AIF Limited (AIF), fining

him £20,020 for appointed representative (AR) failings. Mr

Holmes was found to have breached Principle 6 (due skill, care and

diligence in managing the business) and Principle 7 (compliance

with relevant regulatory requirements) of the FSA's Statements

of Principle for Approved Persons.

The Final Notice identified Mr Holmes' shortcomings, which

included:

Appointing an AR without carrying out the necessary

checks.

Accepting the AR's assurances that insurance premiums had

been brought up-to-date following complaints by an insurance

underwriter, without increasing his monitoring of the AR or

investigating how the AR was carrying on business.

By way of mitigation, the FSA took into account the fact that Mr

Holmes took remedial action once he became aware that the AR's

actions had left some of AIF's clients uninsured, that he did

not deliberately set out to contravene the requirements, and that

he cooperated with the FSA's investigations.

The FSA is clearly determined to protect any potential loss to

consumers by taking action not just against firms but against

senior management who fail to provide adequate oversight of their

business and this includes correctly monitoring ARs.

"LIABILITY TO PAY" IS NOT AN OCCURRENCE

– AND IS AN "EFFICACY" EXCLUSION ALWAYS

EFFECTIVE?

Article by Richard Jowett, Celina Fang and Brendan

McCashin

In the recent judgment of Selected Seeds Pty Ltd v QBEMM Pty

Ltd and Anor [2009] QSC 70 Justice McMurdo of the Supreme

Court of Queensland considered a claim by a grain and seed merchant

against its insurers which arose from the supply of the wrong type

of seed by the insured. The insured was ultimately joined by the

buyer of the seed to proceedings brought by the claimants who

planted seed derived from the seed supplied by the insured.

The insuring clause provided that the insurer would pay all sums

which the insured became legally liable to pay by way of

compensation, in respect of property damage happening during the

period of insurance and caused by an occurrence in connection with

the insured's business.

Occurr...

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