Assicurazioni Generali SPA v CGU International Insurance Plc

A standard follow-the-settlements clause does not make a reinsurer liable merely because the insurer has settled an underlying claim, even where the insurance and reinsurance are back to back. The insurer need not prove that the underlying claim would actually have succeeded under the original policy. It must show that the claim as recognised, or the basis on which it was settled, fell or arguably fell within the risks covered by the reinsurance, and that it acted honestly and took proper and businesslike steps. Words such as without question ordinarily emphasise the manner of following the settlement. They do not displace those safeguards. Clear words are required to exclude the second proviso.

Generali provided contractors’ risks insurance for power cables beneath the St Lawrence river. Following cable damage, it settled the assured’s claim for $4 million. It reinsured 80 per cent of its liability under a back-to-back reinsurance containing a follow-the-settlements clause requiring settlements to be followed without question, subject to exceptions.

The reinsurers refused payment. The Commercial Court, on a construction issue arising from Generali’s summary judgment application, declared that the reinsurers remained subject to the two provisos identified in Scor. Its decision was reported at [2003] EWHC 1073 (Comm.) and [2003] Lloyd’s Rep. IR 725. Generali appealed on whether back-to-back wording prevented reinsurance coverage challenges and whether without question excluded the second proviso.

1. Disposition. The Court of Appeal unanimously dismissed the appeal. Lord Justice Tuckey gave the judgment, with Lord Justice Peter Gibson and Sir Martin Nourse agreeing.
2. First proviso. The effect of a follow-the-settlements clause depends on the wording agreed by the parties. The principles stated in Insurance Co. of Africa v Scor (UK) Reinsurance Co. Ltd. [1985] 1 Lloyd’s Rep. 312 and Hill v Mercantile and General Reinsurance Co. Plc [1996] 1 WLR 1239 preserve two requirements. The reinsurer is not liable unless the loss falls within the original cover and the reinsurance, although the parties may agree how those requirements are proved.
3. In a standard clause, the insurer need not prove that the assured’s claim was in fact covered by the original policy, or that it would have succeeded if fully litigated. A reasonable compromise of liability and quantum may bind the reinsurer. However, the insurer must show that the claim recognised, or the basis on which it settled the claim, fell or arguably fell within the risks covered by the reinsurance as a matter of law. This protection remains available even where the policies are back to back. The Court followed the approach in Hiscox v Outhwaite (No. 3) [1991] 2 Lloyd’s Rep. 524 and applied the reasoning reflected in Baker v Black Sea and Baltic General Insurance Co. Ltd. [1995] Lloyd’s Rep. IR 261.
4. Second proviso and “without question”. The insurer must have acted honestly and taken all proper and businesslike steps in making the settlement. The words without question describe the manner in which the settlement must be followed. They emphasise that admissions and compromises of liability are ordinarily binding, but do not exclude either proviso. The decisions in Charman v Guardian Royal Exchange Assurance Plc [1992] 2 Lloyd’s Rep. 607 and Hiscox supported that conclusion. Clearer and more explicit wording would be required to exclude the second proviso.
5. The extent of Generali’s retention could not alter the clause’s meaning. Nor could the same open-cover wording bear different meanings in different reinsurances declared to that cover. The Court declined to resolve disputes about hypothetical examples or wider principles beyond those necessary for construction; the remaining merits issues were for trial.

• Court of Appeal (Civil Division): The appeal was dismissed unanimously.
• Queen’s Bench Division, Commercial Court: Gavin Kealey Q.C., sitting as a Deputy High Court Judge, determined the construction issues and made a declaration. The judgment was reported at [2003] EWHC 1073 (Comm.) and [2003] Lloyd’s Rep. IR 725.