| This
case examines the meaning and effect of a follow the settlements clause:
a reinsurer is entitled to raise issues as to the scope of the reinsurance
contract even where the insurance is back to back.
The Court
of Appeal upheld the decision of Mr Gavin Kealey QC, sitting as Deputy
High Court Judge in the Commercial Court - [2003] EWHC 1073 (Comm).
The insurance
covered contractors' risks for the installation and maintenance of power
cables to be laid under the St. Lawrence river. In due course there
was damage and loss. When the claim under the insurance was made a variety
of coverage issues arose, which included whether the claim was for unforeseen
and sudden physical loss, whether the proximate cause of the loss was
faulty design, bad workmanship and/or wear and tear, and whether there
was one or more than one loss. The claim was eventually settled for
$4 million.
Generali
reinsured 80% of its liability under the original insurance with CGU
and a number of Lloyd's syndicates. The reinsurance was:
"As
original: ….subject to the same terms, clauses and conditions,
special or otherwise, as the original policy or policies and is to pay
as may be paid thereon and to follow without question the settlements
of the Reassured except ex-gratia and/or without prejudice settlements."
The Lloyd's
market paid its share of the claim but CGU refused to do so. CGU relied
on the two provisos to liability on a follow the settlements clause
set out in The Insurance Company of Africa v Scor (UK) Reinsurance Co
(1985) Lloyd's Rep 312, namely that the claim did not fall within the
reinsurance and that Generali had not taken all proper and business
like steps in making the settlement. Generali contended that the decision
in Scor and the particular wording of the follow the settlements clause
meant that the defendants could not rely on either provision.
At the
hearing of Generali's application for summary judgment the Judge held
that the words "without question" did not preclude CGU from
relying on either of the Scor provisos. The words "without question"
were used on the assumption that all proper and business like steps
would be taken and emphasised that reinsurers had agreed to be bound
by an admission or compromise of liability by insurers.
Generali
appealed on the basis that CGU was not entitled to raise coverage issues
where the insurance and reinsurance were on back to back terms. Generali
argued that once issues are settled by insurers with their assured,
that settlement is binding on reinsurers who cannot raise the same coverage
issues in defence of the claim on the reinsurance, any defence being
confined to terms peculiar to the reinsurance. Secondly, Generali submitted
that the parties could not have intended the words "without question"
simply to add emphasis.
In giving
judgment, Lord Justice Tuckey expressly approved the following passage
from a judgment by Evans J in the case of Hiscox v Outhwaite (no.3)
(1991)2 Lloyd's Rep 524:
"…the
reinsurer is always entitled to raise issues as to the scope of the
reinsurance contract and where the risks are co-extensive with those
of the underlying insurance he is not precluded from raising such issues,
even when there is a "follow the settlement" term of the reinsurance
contract."
Neither
Evans J, nor Lord Justice Tuckey in this judgment, found this position
to be at odds with the fact that an insurer does not have to prove that
if the original claim was fully argued it would have succeeded, as is
established law. Reinsurers are bound by reasonable compromises on liability
and quantum between the insurers and their assured under the terms of
the original policy.
The Court
of Appeal also approved of the Judge's use of the words "the claim
so recognised" in the context of the first Scor proviso. Lord Justice
Tuckey felt that this gave some sensible added meaning to the clause.
He said it gave substance to the fact that the reinsurer cannot require
the insurer to prove that the assured's claim was in fact covered by
the original policy, but requires him to show that the basis on which
he settled it was one which fell within the terms of the reinsurance
as a matter of law or arguably did so.
The Court
of Appeal did not accept Generali's second submission either. The courts
have not felt compelled to restrict the Scor provisos where variants
of the standard follow the settlements clause have been used. Previously
where the words "liable or not liable" or "in every respect..
unconditionally binding" have been used the provisos have still
been held to apply. "Without question" can now be added to
this list. The Court of Appeal accepted that the second proviso could
be excluded, but stated that clear words would be required to do so.
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