Equitas Ltd v R&Q Reinsurance Company (UK) Ltd

A reinsured must prove that a settlement falls within both the underlying cover and the reinsurance cover, on the balance of probabilities. A follow-the-settlements clause does not, without clear wording, require the claimant to reconstruct every stage of an underlying reinsurance spiral. The manner of proving the loss is ordinarily a question of fact and evidence. Actuarial modelling may be used where it provides a reasonable representation of the relevant features of the spiral and permits reliable conclusions about individual claims. A minimum recoverable loss may be established on the balance of probabilities without scientific exactitude, provided the claimant accepts the resulting limitation.

Equitas, as assignee of Lloyd’s syndicates, claimed under retrocessional excess of loss contracts written within the London Market Excess of Loss spiral. The claims concerned losses which had initially been wrongly aggregated or had included irrecoverable elements. Equitas accepted that it could not recover those elements, but relied on actuarial modelling and conservative discounts to establish the recoverable minimum losses.

R&Q contended that Equitas had to reconstruct the properly aggregated and recoverable losses through every level of the spiral. The central issues were whether the settlements clauses imposed that requirement, whether actuarial evidence could establish the individual syndicates’ losses, and how subsequent refunds should be treated.

1. Construction of the settlements clauses. The clauses required Equitas to satisfy both provisos identified by Lord Mustill in Hill v Mercantile: the settlements had to fall within the terms and conditions of the original contracts and within the terms and conditions of the reinsurance. That was a legal burden, to be discharged on the balance of probabilities.
2. The clauses did not require proof of liability under every underlying contract or reconstruction of the LMX spiral. The reference to the original policies or contracts concerned the inward contracts of the syndicates. Whether recoverable losses had reached the relevant attachment points was a fact-sensitive evidential question. There was no rule of law either requiring or prohibiting reconstruction.
3. Actuarial evidence. There was no principled objection to using actuarial models. The models did not need to replicate the spiral precisely. They had to provide reasonable representations of the features material to the issue, including the mixing of recoverable and irrecoverable losses and the effect of removing the irrecoverable elements.
4. The models were based substantially on actual market data, produced results representative of ordinary spiral participants, and included relevant attachment points, leakage, delays and sensitivity testing. The syndicates were not shown to have extreme characteristics. The conservative tenth-percentile approach enabled the court to conclude, on the balance of probabilities, that the syndicates had suffered at least the claimed minimum recoverable proportions or ratios.
5. The court preferred the lower figures produced by the two modelling methodologies. Equitas was therefore entitled to declaratory relief establishing minimum recoverable ratios of 86.5 per cent for the recoverable KAC losses and 75 per cent for the recoverable Exxon losses.
6. Further modelling of UNCC refunds not yet received was unnecessary and would improperly give credit for refunds not yet received. Declaratory relief was to include reciprocal undertakings requiring the parties to process refunds received and requiring Equitas, in principle, to use its best endeavours to recover and process refunds due from non-Lloyd’s entities.