American International Marine Agency of New York Inc & Anor v Dandridge

In facultative reinsurance, the presumption of back-to-back cover does not justify incorporating every term of a following insurer’s separate participation. The words “the original policy or policies” must be construed in the context of the reinsurance as a whole. Where the reinsurance was subscribed before the relevant following-insurer binder, and the reinsurers’ lines were calculated by reference to the underlying risk as a whole, those words referred to the underlying insurance generally, not to a follow-the-leader clause unique to the following insurer’s participation. Such a clause was also incapable of incorporation because it was not germane or apposite to the reinsurance, made no sense in that context, and conflicted with express provisions governing variations. The reinsurers were therefore discharged by unconsented changes to classification and insured value.

The claimants had a 15 per cent participation in hull and machinery insurance of the vessel Avon. They reinsured that participation on total-loss-only terms with the defendant and other reinsurers.

The vessel’s classification changed from DNV to INSB, and its insured value was reduced. The leading underlying underwriter, Axa, agreed to those changes and paid the underlying total-loss claim. The claimants sought US$225,000 from the reinsurers, relying on a widely worded follow-the-leader clause in their own binder and on the reinsurance’s incorporation of the clauses and conditions of the original policy or policies. The central issues were whether that clause was incorporated and whether the changes bound the reinsurers.

1. The claim was dismissed. The claim recognised and paid by the claimants was not within the risks covered by the reinsurance as a matter of law.

2. The words “the original policy or policies” referred to the underlying insurance as a whole, not to the claimants’ binder. The binder postdated the reinsurers’ subscriptions, and the reinsurers’ lines were expressed as percentages of the full insured values. The incorporation provision was therefore not apt to incorporate the follow-the-leader clause.

3. The usual presumption that facultative reinsurance is back-to-back with the underlying insurance could be applied, with modification, to corresponding total-loss cover. It did not overcome the construction of the reinsurance contract or justify incorporating a clause to which the reinsurers had not agreed.

4. Even if the clause had been referred to by the incorporation provision, it failed the relevant criteria. It was not germane or apposite to the reinsurance, could not sensibly operate there without impermissible manipulation, and was inconsistent with the express terms regulating variations, continuations, deviations and extensions. A follow-the-leader clause was not analogous to a follow-the-settlements clause.

5. The expiry and change of classification breached the incorporated classification warranties, discharging the reinsurers. The unconsented reduction in insured value was also a material variation of the underlying insurance and discharged them at common law. It was unnecessary to decide whether the claimants were otherwise bound by Axa’s agreements or whether the underlying insurance had been replaced by a new contract. The judge nevertheless considered that the claimants had a substantial estoppel argument against contending that the underlying insurance had expired.