COMMERCIAL UNION ASSURANCE CO. PLC. AND OTHERS v. NRG VICTORY REINSURANCE LTD. SKANDIA INTERNATIONAL INSURANCE CORPORATION AND ANOTHER v. SAME

Where reinsurance makes compliance with the original policy a condition precedent, the reinsured must prove that its payment or settlement was within the original policy. A commercially sensible settlement does not itself establish that legal liability.

An implied term may require a reinsurer to treat a competent foreign judgment on the original insurer’s liability as binding, absent contrary wording. That effect is confined to a judgment from a competent court, obtained without breach of an exclusive jurisdiction provision, after proper defences were taken, and which is not manifestly perverse.

In the absence of such a judgment, the court must decide the underlying liability under the applicable law. A follow settlements clause limited to settlements within the original policy does not enlarge the reinsured’s recovery.

Direct insurers paid US$300 million to settle Exxon’s claim for oil-spill clean-up costs under section 1 of a corporate excess insurance policy. They sought an indemnity from NRG under excess of loss reinsurance treaties containing a condition precedent that settlements accord with the original policies. Most treaties also contained settlements clauses limited to settlements within the terms of the original policies.

Clarke J gave the insurers summary judgment under Order 14. He treated uncontradicted evidence that a Texas jury would probably have found the insurers liable as sufficient proof of liability under the original policy.

NRG appealed. The central issue was whether a settlement and a prediction of the likely outcome in Texas established the insurers’ legal liability so as to trigger reinsurance recovery.

1. Appeal allowed unanimously. Potter LJ, with whom Lord Woolf MR and May LJ agreed, set aside Clarke J’s summary judgment and dismissed the insurers’ Order 14 application.

2. Clause 1.3 made it a condition precedent that the reinsured’s settlement accord with the original policies. The treaties therefore required proof that the insurers were legally liable to Exxon under the original policy. The court did not need to resolve the broader classification of reinsurance as insurance of the original subject matter or of the reinsured’s liability.

3. Where an original insured obtains a judgment in a foreign court of competent jurisdiction, an implied term ordinarily requires the reinsurer to treat that judgment as binding on the original liability. The term is subject to reversal on appeal and four limits: the foreign court must be competent; the proceedings must not breach an exclusive jurisdiction or equivalent provision; the reinsured must have taken all proper defences; and the judgment must not be manifestly perverse.

4. Those principles did not decide this case because Exxon’s section 1 claim was settled before judgment. In that situation the English court had to determine whether NRG had an arguable defence to the insurers’ liability under the applicable law. There was no evidence that New York or Texas law differed materially from English law. The policy documents gave NRG at least a strong arguable defence.

5. The Texas lawyer’s prediction that a jury would probably find for Exxon did not prove legal liability. It was based on anticipated jury behaviour, perceived lack of specialist expertise and possible hostility to insurers, rather than on the applicable law and proper construction of the policy.

6. A businesslike settlement was insufficient. The settlements clauses bound NRG only where settlements were within the original policies’ terms, and did not require it to follow an out-of-scope settlement. The insurers had therefore failed to establish that summary judgment was appropriate.

• Court of Appeal (Civil Division): Allowed NRG’s appeal unanimously, set aside the Order 14 judgment, and dismissed the plaintiffs’ application: [1998] EWCA Civ 467.
• Commercial Court: Clarke J, on 1 August 1997, gave the plaintiffs summary judgment under Order 14 in their claims under the reinsurance treaties.