|
Time is not open to interpretation for reinsurers providing cover governed
by UK Law. Reinsurers are always entitled to raise issues as to the
scope of the reinsurance, notwithstanding the "follow the settlements"
term
AGF and Wasa sought declarations that they were not liable to indemnify
Lexington by following its settlements in respect of Lexington's underlying
insurance of Aluminium Company of America (Alcoa), which was governed
by US law. Lexington counterclaimed for an indemnity for damages in
respect of assessment it reached with Alcoa and legal costs in defending
Alcoa's claim.
The case concerned reinsurance cover provided for a period of three
years from 1 July 1977 to 1 July 1980. Sentry Underwriting Agencies
Ltd underwrote 2.5% on behalf of two companies, of which AGF is the
successor in title to 1.5% and Wasa is the successor in title to 1%.
The reinsurance cover is governed by English law. Lexington's underlying
insurance was for the risk of physical loss and damages occurring to
property at Alcoa world wide sites. Environmental damage at a number
of Alcoa's sites in the United States a code over a number of years
(from 1972 until at least 1986) and covered the relevant three-year
period.
The main issue in the case was whether the reinsurance contract meant
that AGF and Wasa were potentially liable to indemnify Lexington in
respect of the clean up costs for the three-year reinsurance period
only or for all damage which occurred before this period. The case hinged
upon the interpretation of time. In May 2002 the Washington Supreme
Court held that, as a matter of Pennsylvanian law, Lexington's insurance
contract, which covered the three years from 1977 to 1980, was to be
construed as rendering Lexington jointly and severally liable for the
remedial costs of clearing up all the environmental damage evident at
various specified Alcoa sites during that 3-year period, irrespective
of whether the damage had been sustained before, during or after that
period. This meant that they were liable for remedial costs for damage
sustained over a period of approximately 50 years, and a total sum eventually
comprised at $US103m.
Lexington argued (following a line of authority in Forsikringsaktieselskapet
Vesta v. Butcher [1989] AC 852 and Groupama Navigation et Transports
& Ors v. Catatumbo CA Seguros [2000] 2 Lloyd's Law Rep 350), that
the reinsurance contract should be viewed as back-to-back with the insurance
contract and therefore the time period should be interpreted according
to the Washington Supreme Court interpretation, i.e. that AGF and Wasa
should be liable for 1.5% and 1.% respectively of the total remedial
costs.
AGF and Wasa challenged this interpretation, arguing that in the cases
Lexington relied upon, the issue turned on construction of specific
legal terms in the underlying insurance contracts, which were themselves
written according to Norwegian and Venezuelan law respectively. Therefore
they could be interpreted by using the relevant legal dictionary for
each country.
In this case, they argued, the issue was to do with the definition of
time, which was not in itself a legal concept. They argued that in UK
law time is simply time and not open to interpretation. In any event,
the Court of Appeal in Municipal Mutual Insurance Ltd v. C Insurance
Code Ltd [1998] CA Lloyd Law Rep. 1 & R 41 have held that where
relevant cover was provided on a time basis this was a fundamental importance
and could not be construed as providing cover outside that period.
AGF and Wasa's potential liability was limited to the three-year period
covered by the reinsurance contract. Mr Justice Simon said that, to
interpret time "by reference to the particular interpretation that
was subsequently placed upon a similar period position in the original
insurance by a particular US state court, which happened to be seised
of the underlying insurance dispute over 20 years later…would lead
to a construction whose effect would not so much back-to-back as back-to-front".
This case is useful as the Judge refused to extend the principles in
Vesta Butcher from the interpretation of legal terms to cover fundamental
issues such as time. It confirms the Court of Appeal's approach in Municipal
Mutual, and will provide comfort to reinsurers providing cover governed
by UK law.
As an interesting side issue, Mr Justice Simon applied the previous
House of Lords' decision in Baker v. Black Sea & Baltic [1988] which
held that, in the absence of either an expressed provision or a universal
market practice in the relevant market, reinsurance contracts do not
provide cover for expenses incurred by the reinsured into spending claims.
In AGF and Wasa's case, the reinsurance was non-proportional so there
was even less reason why they should pay. The fact that, unlike Black
Sea & Baltic, there was no maximum limit to the exposure was irrelevant.
Charles Russell acted for AGF Insurance Ltd.
|