Wasa International Insurance Company Ltd. v Lexington Insurance Co

A follow-settlements clause does not extend reinsurance beyond the risks and period defined by the reinsurance contract. The reinsurer remains entitled to establish that the claim recognised by the settlement falls within the reinsurance cover as a matter of law. A time-based period clause is fundamental and cannot be distorted because the underlying insurance is construed more broadly under foreign law. Back-to-back wording does not make the reinsurer liable for losses outside its agreed period of risk. In the absence of an express provision or universal market practice, a reinsurance contract does not imply cover for the reinsured’s defence costs. A retention expressed without further qualification was construed as applying per occurrence.

Wasa and AGF subscribed small proportions of a facultative reinsurance of Lexington’s insurance of Alcoa’s property. Both contracts covered a three-year period from 1 July 1977 to 1 July 1980. Alcoa’s environmental damage had begun before that period and continued afterwards.

Following proceedings in Washington State, Lexington settled Alcoa’s claims on a basis that included damage outside the reinsurance period. Wasa and AGF sought declarations that they were not liable to indemnify Lexington. Lexington counterclaimed for its settlement payment and defence costs. The issues were the effect of the follow-settlements and period clauses, the construction of the retention, and whether defence costs were recoverable under an implied term.

1. Scope of reinsurance. Wasa and AGF were not obliged to follow Lexington’s settlement. The reinsurance covered Alcoa property damage occurring during the period from noon on 1 July 1977 to noon on 1 July 1980. It was not insurance of Lexington’s liability to Alcoa.
2. A follow-settlements clause regulates how the reassured proves matters otherwise required for recovery. It removes the need to prove that the original loss actually fell within the underlying insurance, provided the reassured acted honestly and took proper and business-like steps. It does not remove the first scope proviso: the claim recognised by the settlement must fall within the risks covered by the reinsurance as a matter of law.
3. The period clause was fundamental. Back-to-back wording and the follow-settlements clause did not displace it. The evidence showed that damage occurring during the reinsurance period could be identified. Lexington had settled on the basis that it was liable for remedial costs relating also to damage outside that period. The settlement therefore exceeded the reinsurance cover.
4. The reasoning in Vesta v. Butcher and Groupama v. Catatumbo did not assist Lexington. Those decisions concerned terms incorporated into reinsurance by reference to an underlying contract and an identifiable foreign-law meaning. No such meaning of the period clause existed here in 1977. The later construction adopted by a Washington State court could not be written into the reinsurance contract.
5. The retention of $1,675,000 was a per-occurrence retention. The wording of the reinsurance, which was principally expressed on a per-occurrence basis, supported that construction.
6. Lexington could not recover its defence costs. Following Baker v. Black Sea & Baltic General Insurance Co Ltd, no term could be implied without express contractual provision or proof of a universal market practice. The present facultative, non-proportional reinsurance provided an even stronger case against implication.

Declarations were made for Wasa and AGF. The issue of any recovery for losses occurring within the three-year period was left open by agreement.