CGU International Insurance Plc & Ors v Astrazeneca Insurance Company Ltd

On an appeal under Arbitration Act 1996, the governing law of an underlying insurance policy and an incorporated reinsurance contract determines the meaning and scope of their coverage terms. Where both contracts are governed by English law, terms such as “Property Damage” must be construed under English law from the outset, applying ordinary English contractual principles and the commercial background.

A foreign service-of-suit clause does not, without more, divide a worldwide policy into separate contracts governed by different laws. Nor does a “follow the fortunes” clause convert into a “follow the settlements” clause where no foreign judgment exists and the reinsurance contains no such provision.

The reinsurers appealed under section 69 of the Arbitration Act 1996 from a majority partial award on preliminary issues concerning the law applicable to an excess liability policy and related reinsurance.

The underlying policy insured AstraZeneca companies worldwide, including Garst, a Delaware company operating in the United States. Garst’s claims concerning genetically modified cornseed were settled by AstraZeneca Insurance Company Ltd, which sought indemnity from the reinsurers. No proceedings had been brought by Garst, and the reinsurance contained an English governing-law clause, London arbitration and an assistance and co-operation provision described as “follow the fortunes”.

The central questions were whether Iowa law governed the scope of Garst’s cover, whether it governed the reinsurers’ liability, and what effect Article 12 had.

1. Appeal allowed. Questions (1) and (2) were answered “English law”.
2. The parties had conceded that, applying English conflict rules, the underlying excess liability policy was and remained governed by English law. Under the governing law, contractual coverage terms must be construed according to English rules of construction, having regard to the whole policy and the relevant commercial background.
3. The USA service-of-suit clause did not make the policy subject to the law of the jurisdiction in which an insured might sue. Treating different insureds or risks in a worldwide composite policy as governed by different laws would create commercial uncertainty and was inconsistent with the concessions made before the arbitral tribunal.
4. Reinsurance is an independent contract covering the same original risk, rather than the reinsured’s potential liability as such. A reinsured must establish an ascertained loss, that the loss falls within the cover of the underlying policy, and that it falls within the cover created by the reinsurance. The incorporated coverage terms were incorporated into an English-law contract and bore their English-law meaning from the outset.
5. The approach in Forsikringsaktieselskapet Vesta v Butcher concerning harmonising terms where the original insurance and reinsurance have different governing laws had no application because both contracts here had the same governing law.
6. Article 12 did not alter the result. The case involved a settlement without proceedings or a foreign judgment, and the parties did not contend that the clause had the effect of a “follow the settlements” clause. The court therefore did not determine its wider scope.

• High Court (Commercial Court): Appeal under section 69 of the Arbitration Act 1996 allowed. The majority partial award on the preliminary issues was displaced to the extent that questions (1) and (2) were answered “English law”.
• Arbitral tribunal: The majority had held that Iowa law governed the relevant coverage questions. The tribunal’s unanimous factual findings and the dissenting opinion are described in the judgment.