Those nostalgic for the good old days of reinsurance litigation – alright, I admit it, I am one of you – may be drawn to this decision. The issues it addresses remain relevant today, however.
RSA (now ‘Intact Insurance’) paid out substantial damages and costs in respect of US products claims. It then sought to recover £3.7 million from Equitas under facultative reinsurance for £16 million xs £4 million.
The first issue was whether damages and defence costs eroded the £4 million excess, or just damages. RSA argued it was both, which would maximise its recovery.
The reinsurance excess language did not expressly address the point. It merely said:
£4,000,000 any one loss or series of losses arising out of one occurrence/unlimited in all for General Third Party Liability, Motor, Aviation, Marine, Employers Liability and Professional Indemnity BUT £4,000,000 IN THE AGGREGATE for Products and Financial Loss
The reinsurance wording then went on to say:
To follow original terms, conditions and settlements (as far as applicable to the layer)
The ‘original’ in this case provided £20 million cover for damages up to set limits, plus cover for defence costs with no limit.
His Honour Judge Keyser KC held, in favour of Equitas, that only damages eroded the £4 million reinsurance excess. Unlimited defence costs cover sat alongside the (limited) damages cover in the reinsurance, just as it did on the underlying contract. The contracts were ‘back to back’.
Takeaway: These contracts go back some years (the first notification of potential loss was in 1986) but compressed, unclear limits and/or vague deductible/retention/excess language continue to bedevil reinsurance and excess layer contracts.
Expressly addressing issues like whether defence costs erode the excess is an easy fix.
RSA v Equitas also addresses the interaction between follow settlements and claims co-operation provisions, first aired in ICA v SCOR [1985] 1 Lloyd's Rep 312, in the days of telex, faxes and typing pools. [OK Boomer – Ed]
The follow settlements clause in this case we have already seen: it said, “to follow original… settlements”.
The Claims Co-operation clause required RSA to notify reinsurers of claims which could impact the reinsurance and then said that, if a matter was notified:
…the course to be adopted by the primary insurers shall be determined by agreement between the primary insurers and re-insurers and the primary insurers shall not without the consent of re-insurers litigate with regard to such loss but such consent shall not be unreasonably withheld.
This clause lacked clear language to give reinsurers a ‘lock’ on any settlement, e.g. prior written approval from reinsurers as a condition precedent to cover. Instead, it said the reinsured and reinsurer should “agree” the course to be adopted, without explaining what would happen if there was no agreement.
His Honour Judge Keyser KC found that the clause dealt with litigating without the reinsurers’ consent but was silent on what would happen if RSA settled a claim. It did not expressly prohibit RSA from entering settlement agreements without reinsurers’ agreement. The follow settlements and claims co-operation clauses could, therefore, be read consistently with each other. On the facts of the case, the follow settlements clause bound Equitas to its full extent.
Takeaway: Reinsurance contracts can shy away from the awkward, but key, question of who gets to sign off on underlying claims settlements. Inconsistencies between follow settlements and claims co-operation clauses still appear. This case demonstrates how this can produce disputes further down the line.
Under a ‘single proviso’ follow settlements clause, such as in this case, a reinsurer is bound by a reinsured’s settlement, provided that:
a) the claim falls within risks covered by the reinsurance (and at least arguably within the underlying cover); and
b) the reinsured acts honestly and takes all proper and business-like steps in making the settlement. The onus is on the reinsurer to prove that the reinsured failed to take proper and business-like steps.
Equitas argued that RSA adopted an unreasonable interpretation of New Jersey law and failed to obtain all the information relevant to making settlement decisions, leading to an overpayment.
His Honour Judge Keyser KC found that RSA had obtained professional New Jersey legal advice, which was shared with reinsurers without their demur. Equitas therefore failed to make out that RSA had failed to take proper and businesslike steps in their settlement.
Takeaway: Showing failure to take proper and businesslike steps has always been a high bar for reinsurers, especially where there is a single proviso clause (and thus limited scope to examine coverage under the underlying policy). So it proves again: another reminder of the importance of paying attention to the follow settlements regime in reinsurance contracts.
The dates of loss, from which interest would normally run, went back to 2001/2. RSA sought compound interest for the period from the dates of loss through to the judgment. His Honour Judge Keyser KC agreed about the period but declined to award compound interest.
Takeaway: Reinsurance claims can take many years to quantify but this on its own does not prevent interest being incurred from whenever the cedant settles the underlying claim. At the same time, compound interest awards are not readily made. Reinsurance contracts today often address the question of interest expressly, which should promote certainty about an issue that can have a high dollar value for particularly venerable cases.
For help with reinsurance disputes or drafting advice, contact our expert team.
Andrew Schütte – Partner & Head of Reinsurance
Neema Daniel - Assistant Solicitor
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