Generali v. CGU (CofA)
The Court of Appeal has upheld the judge's findings on the effect of a ‘follow the settlements’ clause in a contract of reinsurance. Even where the insurance and reinsurance are back-to-back, the provisos laid down in the case of Insurance Company of Africa v Scor (UK) Reinsurance Company Limited  1 Lloyd's Rep 312 still applied, namely a) that insurers still have to show, firstly, that the claim so recognised by them falls within the reinsurance as a matter of law and, b) that they have acted honestly and have taken all proper and businesslike steps in making the settlement.
DMC Category Rating: Confirmed
This case note is based on an Article in the April 2004 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website
The relationship between Continental and Generali was governed by a quota share reinsurance agreement, which provided that Generali's liability "shall follow that of [Continental] in every case, and shall be subject in all respects to all the general and special stipulations, clauses, waivers and modifications of [Continental's] policies and any endorsements thereto".
Generali reinsured 80% of the risk with seven ILU reinsurers and various Lloyd's syndicates under a broker's open cover. The cables project was the subject of a declaration, which provided under the heading "Conditions":
"As original: anything herein to the contrary notwithstanding, this reinsurance is declared and agreed to be 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 loss and the settlement
The claim gave rise to a host of coverage issues, including whether there was one occurrence or two, whether the losses came under a wear and tear exclusion, whether they were sudden and unforeseen, whether there had been an effective agreement to extend the cover for the repairs or whether the second loss came under the 24-month maintenance guarantee period, and, of course, quantum.
Generali eventually settled Pirelli's claim for Can$4million. It then claimed under its reinsurance, setting out the basis on which it considered that it had been liable for the loss: that there had been one loss not two, that it had been caused by faulty design and/or fault in erection/bad workmanship and that it fell within the cover provided by the maintenance guarantee.
The Lloyd's syndicates approved the settlement and paid Generali their proportion of the claim without dispute, but the ILU reinsurers challenged the claim. The matter was referred to the court (and subsequently appealed) as a preliminary issue.
The Scor provisos
But the fact that a reinsurance contract contains a ‘follow the settlements’ clause does not mean that reinsurers have relinquished all right to challenge a settlement. The court in Insurance Company of Africa v Scor (UK) Reinsurance Company Limited  1 Lloyd's Rep 312 recognised two important provisos to insurers' right to be indemnified – firstly, that the claim so recognised by insurers has to fall within the risk covered by the contract of reinsurance as a matter of law and, secondly, that insurers have acted honestly and have taken all proper and businesslike steps in making the settlement
On appeal, Generali argued that "without question" prevented reinsurers from relying on the second Scor proviso - that the settlement was reached honestly and in a proper and businesslike manner. It claimed reinsurers would have felt adequately protected by the fact that Generali was retaining 20% of the risk. The judge's interpretation rendered the words redundant when they had clearly been intended to narrow the scope of the Scor provisos.
In Hiscox v Outhwaite (No. 3)  2 Lloyd's Rep 524, insurers, acting in a proper and businesslike way, made payments under the Wellington agreement* for which they were not legally liable under the insurance. It was held that, even though the cover was back-to-back, reinsurers were not precluded from raising issues as to the scope of the reinsurance contract and were able to argue (successfully) that the claims did not fall within the risk covered by the reinsurance.
The Court of Appeal also agreed with the judge on the significance of the phrase "the claim so recognised" in the Scor provisos. Insurers do not have to show that the claim, in fact, fell within the reinsurance as a matter of law, but that the "claim so recognised" by them did so. Where it is arguable that a claim is covered by the underlying insurance as a matter of law and insurers, having fully considered the position, decide that it is covered and settle on that basis, reinsurers will be bound. Otherwise, reinsurers would be able to re-open coverage issues in the underlying cover and the whole purpose of the follow the settlements clause would be defeated.
On the ‘without question’ issue, the Court of Appeal agreed with the trial judge that the words simply emphasised that, subject to the two Scor provisos, the reinsurers had to follow the insurers' settlements, save those that were ex gratia or without prejudice Very clear words would be required to limit the scope of the provisos. The wording of this clause was not clear enough.
*Note: the ‘Wellington agreement’ was a claims handling facility set up by producers and their insurers to deal with a large number of asbestosis claims.
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