Royal & Sun Alliance Insurance Limited & Ors v Equitas Insurance Limited

In back-to-back excess of loss reinsurance, an excess stated by reference to the underlying indemnity limit is eroded by indemnity payments, not by defence costs, unless the policy clearly provides otherwise. A claims co-operation clause requiring agreement on the course of action does not restrict the insurer’s freedom to settle where it prohibits litigation without consent but contains no express prohibition on settlement without approval. A follow-the-settlements clause binds reinsurers where the underlying claim falls within the reinsured risks and the insurer acted honestly and took proper and businesslike steps. The reinsurer bears the burden of proving such a failure. Compound interest requires pleaded and proved evidence of actual interest loss; commercial status alone is insufficient.

The claimants sought recovery under five excess of loss reinsurance policies for liabilities arising from insurance provided to BOC Group and its subsidiaries. The claims included sums paid under the Toxic Torts Settlement Agreement, a related settlement, and other bodily injury claims.

The Phase 1 trial concerned four issues: whether defence costs eroded the £4 million excess; whether the claims co-operation clause restricted the follow-the-settlements clause; whether the insurers took proper and businesslike steps in entering the Toxic Torts Settlement Agreement; and the appropriate period and basis for interest.

1. Defence costs erosion. The reinsurance policies were facultative, excess of loss, back-to-back policies which followed the original terms. The £16 million limit and £4 million excess reflected the £20 million indemnity limit in the underlying policy. Defence costs were additional to that indemnity and were subject to a temporal, rather than financial, limitation. The £4 million excess was therefore eroded by indemnity payments only.
2. Claims co-operation. The clause did not contain an express prohibition on settlement without reinsurers’ approval. Read with the follow-the-settlements clause, its reference to agreement concerned strategy, particularly whether to litigate. In the absence of agreement to litigate, the insurers retained the freedom to settle. The clause therefore did not emasculate or circumscribe the follow-the-settlements clause. In any event, the reinsurers had agreed to the course adopted in relation to the settlement.
3. Proper and businesslike steps. Under the follow-the-settlements clause, once the insurer establishes that the settled claim falls within the reinsured risks, the burden moves to the reinsurer to plead and prove that proper and businesslike steps were not taken. That allegation is akin to professional negligence and protects reinsurers against prejudicial settlements. Equitas failed to prove that the advice and settlement methodology concerning New Jersey allocation law were ones that no reasonably competent lawyer could have given. The settlement was not premature or improvident, and the unpleaded complaints could not be relied upon.
4. Interest. Interest ordinarily runs from the date of loss. Delay in quantification, amendments to the claimed amount, a consensual standstill, and preparation for litigation did not justify restricting that period because Equitas had maintained a wholesale denial of liability and retained the use of the money. Compound interest was not recoverable without pleaded and proved facts supporting an inference of actual interest loss. Simple interest at 2% above Bank of England base rate was awarded from each respective date of loss.
5. Consequential matters, including the precise order, were adjourned to a further hearing.