Wasa & AGF v. Lexington (CofA)
The Court of Appeal’s decision highlights the risk that the scope of the reinsurance can be dictated by the law of the underlying policy, even if that was not known or predictable at the time the policy incepted.
DMC Category Rating: Developed
This case note is based on an Article written by Victoria Anderson, solicitor in the London office of the firm Edwards Angell Palmer & Dodge. The article first appeared in the June 2008 Edition of the firm’s quarterly newsletter ‘Insurance and Reinsurance Review'.
The Reinsurance was broked in the London market on one of two alternative London forms and incorporated a full reinsurance clause as follows: "Being a Reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the ... Company...". There was no express choice of law clause, but it was common ground that the construction and legal effect of the Reinsurance was governed by English law.
Environmental damage was sustained at a number of Alcoa’s sites during the relevant three year period. The damage arose out of continuing failures on Alcoa’s part in dealing with waste products and the failure of manufacturing units to contain pollutants. Importantly, these failures first began causing damage in 1942 and continued at least until 1986.
In the early 1990s, the US Environmental Protection Agency and various state environmental agencies required Alcoa to clean up this pollution and contamination. Alcoa began proceedings against its insurers, including Lexington, in the courts of the state ofWashington in order to determine whether, and to what extent, Alcoa was entitled to be indemnified for the clean up costs. The Washington Supreme Court, reversing the findings of the Superior Court, held that, as a matter of Pennsylvania law (the state where Alcoa’s headquarters were located), Lexington’s insurance of Alcoa was to be construed as rendering Lexington jointly and severally liable for the remedial costs of cleaning up all the environmental damage at various specified sites whether the damage occurred within the three year policy period or not.
Lexington then settled Alcoa’s claims in the region of US$103m on the basis that the Insurance covered the cost of cleaning up the damage, irrespective of whether the damage had been sustained before, during or after the period specified by the Insurance.
After Lexington had made a demand for indemnity under the Reinsurance, Wasa and AGF commenced proceedings in the English Commercial Court seeking a declaration that they were not obliged to indemnify Lexington in respect of its settlement with Alcoa. The principal defence raised was that the claims settled by Lexington did not fall within the terms and conditions of the Reinsurance, which only provided for losses occurring during the three year policy period.
At first instance,
Simon J held that Wasa and AGF were not liable, as the period of reinsurance was
clear and sacrosanct and the principle that you get only the cover you pay for
in terms of time was fundamental.
The period clauses, he concluded, were effectively identical, although expressed in slightly different words, and so it was natural to assume that the parties’ intention was that the wording should have the same meaning in each contract. The Court relied on authorities which supported the proposition that the same or equivalent wordings should be given the same meaning in the Reinsurance as the Insurance unless expressly stated to be otherwise (Vesta v Butcher  AC 852 and Groupama vCatatumbo  2 Lloyd’s Rep 350). Longmore LJ considered that his view that the wording, which appeared in both contracts, was to be given the same meaning in both contracts was supported by the fact that the reinsurers accepted the premium on the same basis as Lexington.
The court strongly rejected the submission by Wasa that the reinsurers had not taken the risk of a change in law in any one of the large number of American jurisdictions. The court held that reinsurers must themselves take that risk, if they reinsure an American insurance company, just as the insurers must take that risk. It was in respect of this argument that Lord Justice Longmore added a postscript to his judgment stating the following:
United States courts in relation to asbestosis and pollution claims are remotely satisfactory from the point of view of insurers let alone reinsurers. Reinsurers’ arguments ... had a whiff of an assertion ... that Lexington were an American Corporation and had therefore to take unsatisfactory American decisions on the chin, while reinsurers were English (or doing business on an English Market) and could not be expected to do so. That, of course, will not do."
Longmore LJ also commented that a way around this problem would be for reinsurers to use the Bermuda Form, although it is not clear how that would have helped Wasa and AGF on the key issue in this case.
The court rejected the submission by the reinsurers that reinsurance was an insurance of the subject-matter of the primary insurance and not an insurance of the insurer’s own liability. This was dismissed by Lord Justice Longmore as a "misconceived submission", whilst Lord Justice Sedley stated that "the need for the fiction that reinsurance covered the primary risk and not the insurer’s own potential liability is thus long spent. The practice and vocabulary of reinsurance law have for a long time now reflected the reality that what is reinsured is the insurer’s own liability".
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