Follow settlements to the rescue

Insurance and Reinsurance, Legal — By on December 11, 2013 at 9:42 PM
Andrew Bandurka

Andrew Bandurka

The Thai floods of 2011 have, by virtue of their widespread impact over time and area, thrown up many apparent tensions between, for example, aggregation principles embodied in 72-hour clauses, on the one hand, and occurrence definitions on the other. Typically, these tensions have arisen where the different clauses are to be found in different contracts in the reinsurance chain. In Tokio Marine (TM) v Novae (N), they were found in the same original insurance contract, and the main issue in this case was whether a retrocessionaire was bound to follow the original insurer’s settlement which embodied a compromise of this tension.

A had insured T and others in respect of physical damage and business interruption at various locations affected by the floods. After an apparent difference of opinion as to how many deductibles should apply, due to tension between the hours clause and the occurrence language (which provided for aggregation of occurrences arising from one “source or original cause”) A settled T’s claim with one deductible. TM then followed suit under its facultative proportional reinsurance of A, which contained a follow the settlements clause.

TM sought to recover from N, which reinsured TM under a facultative excess of loss retrocession contract with “as original language”, an unqualified follow the settlements clause, and a very large excess. N, however, wanted to reopen the aggregation issue under the retrocession, on the basis that it was not bound to follow A’s compromise of the underlying aggregation issue, and that the aggregation language in the retrocession was different to that in the original policy, leading to the application of more than one deductible. Thus N’s limit and deductible were expressed to apply to each “loss occurrence”, which N argued was different to the “occurrence” in the original policy, and was, N argued, equivalent to the classical “event” i.e. something which happened at a particular place, in a particular way, at particular time (and would lead to more than one deductible). The battle lines were drawn.

A had insured T and others in respect of physical damage and business interruption at various locations affected by the floods. After an apparent difference of opinion as to how many deductibles should apply, due to tension between the hours clause and the occurrence language (which provided for aggregation of occurrences arising from one “source or original cause”) A settled T’s claim with one deductible. TM then followed suit under its facultative proportional reinsurance of A, which contained a follow the settlements clause.

TM sought to recover from N, which reinsured TM under a facultative excess of loss retrocession contract with “as original language”, an unqualified follow the settlements clause, and a very large excess. N, however, wanted to reopen the aggregation issue under the retrocession, on the basis that it was not bound to follow A’s compromise of the underlying aggregation issue, and that the aggregation language in the retrocession was different to that in the original policy, leading to the application of more than one deductible. Thus N’s limit and deductible were expressed to apply to each “loss occurrence”, which N argued was different to the “occurrence” in the original policy, and was, N argued, equivalent to the classical “event” i.e. something which happened at a particular place, in a particular way, at particular time (and would lead to more than one deductible). The battle lines were drawn.

Hamblen J. found that, on construction of this retrocession, “loss occurrence” meant the same as “occurrence” in the original. He also found that the relevant provisions in the retrocession were deliberately chosen to be back-to-back with the original (there being no back-to-back presumption, since the retrocession was non-proportional), and N was bound by A’s determination as to the application of the aggregation provisions. N was bound to follow A’s settlement/compromise of the aggregation issue, and, in order to recover from N, TM had to show that the claim, as recognised by A in its original settlement, was one which only arguably fell within the retrocession as a matter of law, as opposed to on the balance of probabilities.

These were findings of preliminary legal issues only, and, perhaps unsurprisingly in view of the general importance of some of the issues, mainly the standard of proof issue (arguably, etc), N has leave to appeal against the aggregation and follow settlement findings.

For more information, please contact Andrew Bandurka, Partner, on +44 (0)20 7264 8404, or andrew.bandurka@hfw.com, or your usual contact at HFW.

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