Forsikringsaktieselskapet Vesta v Butcher (Bain Dawes Ltd v Aquacultural Insurance Services Ltd)

A proportional, back-to-back reinsurance contract ordinarily indemnifies the reinsured against the agreed proportion of its actual liability under the underlying policy. Where identical warranty wording appears in a foreign-law insurance policy and an English-law reinsurance contract, that wording should have the same meaning and effect in both contracts unless the reinsurance expressly provides otherwise.

The reinsurance may remain governed by English law while the foreign law governing the underlying policy informs the meaning and effect of the incorporated wording. A claims-control clause qualifies a follow-settlements clause. Without the reinsurer’s consent to settlement, the reinsured must prove its liability and the amount properly paid.

Vesta insured a Norwegian fish farm and obtained reinsurance from Lloyd’s underwriters for 90 per cent of its risk. Both contracts incorporated identical wording requiring a 24-hour watch and stating that failure to comply with a warranty rendered the policy void. A storm caused substantial loss. No watch had been maintained, but that failure did not cause the loss.

Under section 51 of the Norwegian Insurance Contracts Act 1930, Vesta remained liable to the fish farmer because the breach was not causative. The English-law reinsurers nevertheless denied liability on the basis that English insurance law gave the warranty an independent and stricter effect.

Hobhouse J found for Vesta at [1986] 2 All ER 488. The Court of Appeal affirmed that decision at [1988] 2 All ER 43. The central issue before the House was whether the reinsurance covered Vesta’s actual liability under the Norwegian policy or only the liability which would have arisen had that policy been governed by English law.

1. Disposition. The House unanimously dismissed the underwriters’ appeal and affirmed the Court of Appeal’s order. Lord Templeman and Lord Lowry gave the principal reasons. Lord Bridge and Lord Ackner agreed with both speeches. Lord Griffiths agreed that the appeal failed on the basis upon which the case had been conducted.
2. Nature and construction of the reinsurance. Per Lord Templeman and Lord Lowry, the reinsurance was a contract of indemnity covering 90 per cent of Vesta’s liability under the underlying policy. Its language emphasised identical terms, subject matter and risk, together with an obligation to follow Vesta’s settlements. In the absence of an express provision giving the warranties different effects, the underwriters could not treat a non-causative breach as discharging their liability when the identical breach did not discharge Vesta’s liability.
3. Effect of the foreign-law wording. Per Lord Lowry, the reinsurance remained an English-law contract. The issue was one of construction rather than a divided or hybrid proper law. Because the underlying insurance was governed by Norwegian law, section 51 of the Norwegian Insurance Contracts Act 1930 made “failure to comply” with the watch warranty mean causative failure. The parties were taken to have used that same legally informed meaning in the incorporated wording of both contracts. Norwegian reinsurance law was irrelevant.
4. Commercial intention. Per Lord Lowry, the instrument and surrounding circumstances demonstrated an intention to provide a back-to-back indemnity. Contractual language should be construed in its commercial setting and consistently with the transaction’s evident purpose. The underwriters’ construction would have defeated the matching of Vesta’s liability and the reinsurance liability without clear language requiring that result.
5. Settlements and claims control. Per Lord Lowry, a claims-control clause qualifies a follow-settlements clause. A settlement made without the reinsurer’s consent does not bind the reinsurer merely by virtue of the follow-settlements wording. The reinsured must then prove its legal liability and the correctness of the amount paid. Vesta had established both matters, and the claims-control wording did not give the underwriters a separate defence based on the non-causative breach.
6. Separate observations. Lord Griffiths questioned whether the standard form truly incorporated every term of the primary policy into the reinsurance, particularly terms inappropriate to reinsurance. Lord Bridge concurred in his general observations about the normal relationship between insurance and reinsurance. The incorporation issue was not decided because the appeal had been conducted on the assumption that the wording formed part of both contracts.

1. House of Lords: In [1989] AC 852, the House unanimously dismissed the underwriters’ appeal, affirmed the Court of Appeal’s order and ordered the appellant to pay the respondents’ costs.
2. Court of Appeal: In [1988] 2 All ER 43, O’Connor and Neill LJJ and Sir Roger Ormrod affirmed Hobhouse J’s decision that the reinsurers were liable. The court construed the watch provision as having the same effect in the reinsurance as in the Norwegian underlying policy.
3. High Court: In [1986] 2 All ER 488, Hobhouse J entered judgment for Vesta against the reinsurers. He held that the reinsurance was governed by English law, but that the construction and effect of the incorporated aquacultural wording were to correspond with its operation under Norwegian law in the underlying policy.