Goshawk Syndicate Management Ltd.& Ors v XL Speciality Insurance Company

A reinsurance contract must be construed as a whole, giving proper weight to provisions requiring cover to operate as per the original policy. A reference to an original annual aggregate deductible and original underlying deductibles may encompass the complete deductible regime in the underlying policy, including a retention applicable to large claims before the annual aggregate deductible is exhausted. The court should not confine the reference to post-exhaustion maintenance deductibles where the language does not do so. Commercial considerations may assist in identifying the parties’ intended allocation of risk, but cannot justify rewriting the contract.

The claimants, as reinsurers, sought summary judgment on a construction issue arising from a reinsurance contract covering risks insured by the defendant. The underlying policy imposed a US$5 million annual aggregate deductible, subject to a regime under which the first US$1 million of a sufficiently large occurrence contributed to the aggregate while amounts above US$1 million were paid by the insurer. The reinsurance slip stated that it responded only for losses in excess of the original annual aggregate deductible and original underlying deductibles.

The issue was whether the reinsurers were liable for the insured property losses caused by the terrorist destruction of stores before the annual aggregate deductible had been exhausted.

1. Application dismissed. The reinsurance contract was construed as requiring the reinsurers to respond where the losses exceeded the applicable annual aggregate deductible and relevant underlying deductible. Costs were to be assessed, and permission to appeal was granted.
2. The contract had to be read as a whole. Its repeated references to cover being all as per original demonstrated an intended back-to-back arrangement for the risks reinsured. It was commercially unlikely that the reinsurers would assume little or no risk for a substantial premium, or that their liability would depend on whether the annual aggregate deductible happened to have been exhausted when a major loss occurred.
3. The words “original underlying deductibles” were not confined to the maintenance deductibles that applied after exhaustion of the annual aggregate deductible. The first paragraph of clause 5A of the underlying policy included a retention or US$1 million deductible for claims exceeding US$1 million before exhaustion. That deductible was capable of falling within the words used in the reinsurance slip.
4. The word “and” in the sum insured clause did not require the annual aggregate deductible and the underlying deductibles to have been exceeded conjunctively in every case. The clause was capable of applying both where the annual aggregate deductible had been exceeded and where it had not, provided the relevant deductible had been exceeded.
5. The court rejected the argument that the US$1 million limit was merely a calculation rule and could not properly be treated as a deductible. The wording of the information clause, which placed the provision under the heading “Deductibles”, supported the construction, although no substantial significance turned on that format.