WASA International Insurance Company Ltd v Lexington Insurance Company & Ors

Where the underlying insurance and reinsurance use the same or equivalent wording, that wording will generally bear the same meaning in both contracts unless clear indications show otherwise. This includes an identical period-of-cover clause. The English governing law of the reinsurance does not, by itself, justify a different construction or exclude the risk of changes in foreign law. Reinsurance is prima facie back-to-back and indemnifies the insurer against liability under the primary policy. A stated retention is a single amount where the slip does not specify a retention per occurrence, even though parts of the cover operate on that basis.

Alcoa incurred substantial costs remedying pollution at sites in the United States. Its property insurer, Lexington, was held liable by the Supreme Court of Washington, applying Pennsylvania law, for the full remediation costs where damage manifested during the policy period, including damage beginning before inception. Lexington settled the claim and sought reinsurance contributions from Wasa and AGF.

The reinsurance was placed in London under a slip covering 36 months from 1 July 1977 and was governed by English law. Simon J held that it covered only damage occurring during that period: [2007] EWHC 896 (Comm); [2008] 1 AER (Comm) 286. The appeals concerned whether the same period wording had to bear the same meaning in both contracts and whether the stated retention was payable once or per occurrence.

Appeals allowed. Longmore LJ delivered the leading judgment. Sedley LJ and Pill LJ agreed with the conclusion and reasoning on both issues.

1. Same construction of corresponding wording. The presumed intention must be directed to the particular wording in issue. Where the underlying insurance and the reinsurance use the same or equivalent wording, it should generally receive the same construction in both contracts unless there are clear indications to the contrary. Terms peculiar to the reinsurance remain separately effective.
2. Period of cover and foreign law. The period of cover was expressed in effectively identical terms in both contracts. It was fundamental, but the question was whether it had the same meaning in each contract. The answer was yes. The fact that the underlying policy was construed under Pennsylvania law by a competent Washington court, and that the result was not predictable in 1977, did not alter the position. The reinsurers took the risk of changes in the law of a competent United States jurisdiction. Vesta v Butcher [1989] AC 852 and Groupama Navigation v Catatumbo CA Seguros [2000] 2 Lloyd's Rep 350 supported the same-construction approach. Hill v Mercantile & General [1991] 1 WLR 1239 and Municipal Mutual Insurance Ltd v Sea Insurance Co Ltd [1998] Lloyds 1 & R421 were distinguishable because they involved different periods or did not raise the issue of identical wording.
3. Nature of reinsurance. The description of reinsurance as insurance of the subject matter of the primary insurance did not require a different interpretation. Its practical purpose was to indemnify the insurer against liability under the primary policy. Sedley LJ added that the historical explanation for the older terminology did not support the reinsurers' case. He referred to the former prohibition in Marine Insurance Act 1745, s.4.
4. Retention. The slip specified a retention of $1,675,000 without saying that it was per occurrence. The cover was partly per occurrence and partly aggregate for flood and earthquake. Those features, together with the commercial context, showed that the parties agreed a single retention rather than one for each occurrence.

• Court of Appeal (Civil Division): appeals allowed on both the construction of the reinsurance period and the retention issue. [2008] EWCA Civ 150.
• Queen’s Bench Division, Commercial Court: Simon J held that the English-law reinsurance covered only damage occurring during its stated period. Decision appealed: [2007] EWHC 896 (Comm); [2008] 1 AER (Comm) 286.