Nationwide General Insurance Company & Nationwide Mutual Insurance Company & Anor v North Atlantic Insurance Company Ltd & Ors

In a reinsurance pool, entitlement to reinsurance proceeds depends on the proper construction of the agency and reinsurance contracts. A fronting arrangement does not, without more, make the fronter the sole reinsured where each pool member participated, paid its share of premium and received corresponding protection. Internal accounting arrangements cannot deprive an insolvent member’s liquidator of an asset owed to that member unless a valid trust has been established. Arrangements that alter the pari passu distribution on insolvency are contrary to public policy.

The Rutty Agency underwrote insurance business for a pool of insurers and obtained reinsurance intended to protect the pool. Some risks were written in the name of a solvent member acting as front, while other pool members contributed agreed percentages and some later became insolvent.

Cooke J, in the Commercial Court, answered 26 questions concerning the Rutty pool, its reinsurance arrangements and the effect of insolvency. He held that the insolvent contributing members, rather than the fronting insurer, were entitled to their shares of the reinsurance proceeds. The fronting insurers appealed. The central issue was whether the reinsurance contracts protected the fronting insurer alone or each contributing pool member to the extent of its share.

1. Appeal dismissed. The reinsurance debts were assets owed to the insolvent pool members in proportion to their agreed shares, and their liquidators were entitled to collect them.
2. The decisive question was who were the parties to the reinsurance contracts. The agency agreements authorised the Rutty Agency to underwrite each member’s percentage share and to reinsure risks for the common account of the participating companies. The later authority to front did not fundamentally alter that arrangement. It merely allowed one member to be named on the inward risk while the pool members remained liable, paid their shares of the reinsurance premium and received the corresponding protection.
3. The wording and operation of the reinsurance contracts supported that construction. Descriptions referring to the member companies or companies underwritten for by the agency were consistent with each pool member being protected. The structure of the surplus, catastrophe excess of loss, aggregate excess of loss and premium provisions would be difficult to operate if only the fronter were reinsured. The single facultative renewal naming Nationwide did not alter the overall arrangement.
4. The implied contract between the pool members, sometimes called the Satanita contract, required each member to indemnify the fronter for its agreed share. It did not make the pool a partnership, create a joint entitlement to the reinsurance proceeds or bind the reinsurers to an arrangement restricting payment.
5. Internal accounting provisions could not prevent the liquidators from collecting debts owed directly by the reinsurers. A trust over the Premium Reserve Fund did not establish a trust over the reinsurance proceeds. Although such a trust could have been created, the agreements used express trust language where a trust was intended and did not use it for the reinsurance claims. The insolvency clause was invalid because it attempted to alter the statutory distribution on insolvency.
6. The court applied the public-policy principle in British Eagle v Air France [1975] 1 WLR 780: parties cannot contract out of the pari passu distribution prescribed by insolvency legislation. The general liquidation rules therefore prevailed, and the liquidators’ rights were not displaced.

• Court of Appeal (Civil Division): On 2 April 2004, dismissed the appeals and upheld the relevant answers given by Cooke J.
• Queen’s Bench Division, Commercial Court: Cooke J’s judgment dated 13 March 2003, cited as [2003] EWHC 449 (Comm), answered 26 questions concerning the Rutty pool, its reinsurance arrangements and the insolvency of pool members. He held that the insolvent contributing members were entitled to the relevant reinsurance proceeds.