Properties owned by a subsidiary of Tesco plc were damaged by the Thai floods. They were insured under a Master Policy by ACE Europe and by local ACE companies under local policies. Those ACE entities were reinsured under a facultative reinsurance (the “Reinsurance”), underwritten in part by the claimant, Tokio Marine (“TMEI”). TMEI in turn benefited from a facultative excess of loss retrocession underwritten by the defendant, Novae (the “Retrocession”). TMEI paid its share of the settled claims and sought to recover from Novae. Novae denied liability, principally because it disagreed that the Thai Floods constituted a single event. Instead, it asserted that multiple deductibles were payable, none of which would trigger a claim under the Retrocession. The trial concerned five preliminary issues upon the construction of the Retrocession.
The approach to construction
The judge firstly considered the correct approach to the construction of the policy. Following Rainy Sky SA v Kookmin Bank (2011) the general approach to construing contracts is to consider what a reasonable person having all the background knowledge which would have been available to the parties at the time of contracting would have understood themselves to be agreeing in using the language in the contract. Where two constructions of a document are possible, a court is entitled to prefer that which is more consistent with “commercial” common sense but, where the parties use unambiguous language, the court must apply it. The judge then applied these principles to consider the five preliminary issues.
Preliminary Issues 1-3: Construction of the policy
1. Properly construed, did the Retrocession cover TMEI's liability to the local ACE companies as insurers of local policies issued pursuant to the Master Policy (as well as to ACE Europe under the Master Policy)?
Novae argued that the references in the Retrocession to the “Original Policy Wording” in the terms defining the scope of cover did not refer specifically to the local polices. The judge disagreed, concluding that the coverage was defined in “
general and unqualified terms
” and if the parties had wanted to restrict the Retrocession coverage so that it was fundamentally different from the Reinsurance, they should have done so expressly. Novae’s argument was inconsistent with the content of the presentation materials under the Retrocession and upon which the risk had been rated. Further, had the local policies been excluded from cover, it would have led to a “radical mismatch” between the two covers that cannot have been intended and would not have made commercial sense.
2. Did “Loss Occurrence” in the Retrocession have the same meaning as “Occurrence” in the Master Policy?
“Occurrence” was defined in the original policy as “any one Occurrence or any series of Occurrences consequent upon or attributable to one source or original cause.same terms, clauses and conditions as originalsomething which happens at a particular time, at a particular place, and in a particular way” The Retrocession was expressly subject to the “” and thereby incorporated the Master Policy wording of “Occurrence”. Novae argued that the fact that the Retrocession used the additional word “Loss” clearly demonstrated that the parties intended different meanings and that the phrase “Loss Occurrence” was to be given the same meaning as “event” and “occurrence” have when used in aggregation clauses, referring to “”.
The point was significant because, if Novae’s construction was correct, the Tesco losses would comprise numerous “Loss Occurrences” each of which would not exceed the retention in the Retrocession, thereby depriving the follow settlements clause of much of its practical effect. However, the judge concluded that if the parties had intended for a different type of “Occurrence” to be covered by the Retrocession, they would surely clearly have spelt out that that was the intention and what the different meaning was to be. Novae’s construction would have resulted in a further “radical mismatch” in coverage that would not have made commercial sense.
3. Under the follow the settlements clause in the Retrocession, did Novae agree to follow the settlements of ACE, under the Master Policy and/or the local policies respectively, or just of TMEI under the Reinsurance?
The “follow the settlements” clause provided: “Reinsurance Conditions: Following Original Policy Wording… The Contract is subject in all respects… to the same terms, clauses and conditions as original… Reinsurers agree to follow all settlements (excluding without prejudice and ex gratia payment) made by original insurers arising out of and in connection with the original insurance…” [emphasis added]
Perhaps unsurprisingly, the judge agreed with TMEI that the clear, unambiguous meaning of the words (consistent with their usage elsewhere) was that the relevant “settlement” was that made by ACE as the “original insurers” under the Master Policy and local policies as the “original insurance”. There were good commercial reasons why Novae would be required to follow the original settlement between ACE and Tesco as that was the “coalface” i.e. the level at which the substance of the claim would actually have been assessed and coverage determined.
Preliminary Issues 4 and 5: Follow the settlements
4. Under the follow the settlements clause in the Retrocession, did TMEI have to show the claim was one which actually fell within the terms of the Retrocession as a matter of law on a balance of probabilities, or was it sufficient to show that the claim arguably did so?
In finding that TMEI must show that the claim arguably fell within the terms of the Retrocession, the judge felt bound by the decision of the Court of Appeal in Generali.
In Generali, the Court of Appeal had construed the unqualified ‘single proviso’ follow provision of the type dealt with in ICA v Scor (1985)Hiscox v Outhwaite (No.3)Scoror arguably did so (and used in the Retrocession), namely that a reinsurer was obliged to follow the settlements provided the reinsured could show that (a) the claims fell within the reinsurance as a matter of law (the first proviso) and (b) the reinsured acted honestly and took all proper and businesslike steps in making such settlements. The Court of Appeal, summarising the conclusions of the judge below and also (1991), stated that for a type clause, there is no need to conduct an investigation into whether the claim was arguably within the terms of the original policy, but the reinsured would only have to show that the claim fell within the terms of the reinsurance as a matter of law, .
However, Novae submitted that neither the first instance judgment in Hiscox nor Generali specifically stated that the standard of proof in the reinsurance is “arguability” as opposed to on balance of probability (the reference to “arguability” being the threshold under the insurance). Further, the former (lower) standard of proof would appear to be contrary to the right of the reinsurer to dispute that the settlement does not fall within the reinsurance (that was expressly recognised in Hiscox). Novae referred to Evans J in Hiscox who stated that “The reinsurer may well be bound to follow the insurer’s settlement of a claim which arguably, as a matter of law, is within the scope of the original insurance, regardless of whether the Court might hold, if the issue was fully argued before it, that as a matter of law the claim would have failed” [emphasis added].
Despite agreeing with the “considerable force” of Novae’s analysis of the first instance decisions in HiscoxGeneraliGeneralireinsuranceGenerali"Whilst I do not agree with that analysis of what Evans J was saying [in Hiscox], that is the Court of Appeal’s analysis of it and I am bound by the decision to which it leads…”
and , the judge felt bound by the Court of Appeal in that the test of arguability relates to the . Referring to the Court of Appeal’s conclusion in , the judge commented
5. On the assumption that ACE acted in an honest, proper and businesslike manner in settling, was Novae bound by a determination by ACE (if any) as to the construction and application of the aggregation provisions in the Master Policy to the Tesco losses?
Novae sought to reopen the basis upon which ACE had construed the aggregation provisions in settling Tesco’s claims (and argued that because the Thai floods had not occurred in a single 72 hour period, they did not constitute a single occurrence). Novae asserted that the first limb of the Scor follow provision (i.e. that the claims fell within the reinsurance as a matter of law) should not be applied here in the same manner as it had been in GeneraliGenerali
. The judge rejected Novae’s assertion that, unlike in , this was not a case where a retrocessionaire would entrust its liabilities under the Retrocesssion to TMEI, still less to ACE. In reaching that decision, he was influenced by his finding that the relevant terms were deliberately back-to-back (specifically, the 72 Hours clause and definitions of “Occurrence”/”Loss Occurrence” were materially identical in the Reinsurance and the Retrocession).
Therefore, having ruled that the first limb of the Scor Generaliarguablyprovision was to be applied as in and that the terms were materially the same, because TMEI could show that, on the facts, the ACE settlement fell within the Retrocession as a matter of law, Novae was precluded from re-opening the issue as to ACE’s construction of the aggregating provisions to the Tesco losses.
As matters currently stand, if a reinsurance contains a ScorarguablyGeneraliHiscox type follow provision, a reinsured will only have to show that a claim falls within its reinsurance as a matter of law, which is a lower burden than that on a balance of probabilities. This conclusion is based on the Court of Appeal in , but the judge in this particular case was clearly of the opinion that the Court of Appeal may have relied on a misstatement of the court’s determination in , It seems that resolution of this issue will have to wait until the next time the issue is brought before the Court of Appeal, and may require determination by the Supreme Court.
The judge observed “It is difficult to see why a lesser standard of proof than the usual civil standard should govern the application of the first Scor provisoHill v MercantileScor”, but also that this lesser burden of the unqualified Scor type follow provision was “part of the bargain” deliberately struck by the parties. If a reinsurer wishes to reserve the right to challenge whether a settlement actually fell within the original insurance and/or the reinsurance cover, it could adopt the qualified type follow settlements provision which requires the settlements to be within the terms of the original policy and the reinsurance on a balance of probabilities. If the parties agree to a type provision, it would not make commercial sense to allow a reinsurer to effectively re-litigate an issue of construction arising on a materially identical clause, which had already been the subject of a dispute between the original insured and insurer.
Other points of significance relevant to a reinsurer's obligation to follow:
- 'Original policy wording' on facultative reinsurance means what it says unless the express language of reinsurance/retrocession makes it clear that it was the parties' intent that there be a mismatch between the original policy and reinsurance/retrocession.
- Where a reinsurance/retrocession includes "same, terms, clauses and conditions as original" language, the court will again apply the same meaning to an "occurrence" unless a different intent is spelt out in the reinsurance/retrocession.
- Where a reinsurance/retrocession provides that it will follow all settlements of original insurers arising out of and in connection with the original insurance, it again means what it says, it refers to the original insurers. Again this 'presumption' can be rebutted by clear language.
- All the above findings demonstrate the Commercial Court's resolve to place its weight firmly on the scales of justice in favour of reinsureds on follow the settlement issues in facultative reinsurances unless clear language is included in the reinsurance evincing a contrary intent. There are, however, pointers that the court would not necessarily favour the reinsured to the same degree in excess of loss treaty reinsurance.
Further reading: Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd  EWHC 3362 (Comm)