Facts
Lexington insured the Aluminium Company of America (Alcoa)
against property damage at Alcoa's sites all over the world.
Lexington reinsured the risk with (among others) WASA and AGF under
a facultative contract. The policy periods of both the insurance
and reinsurance ran from 1st July 1977 to 1st July 1980.
During those three years, Alcoa sites in different US states
suffered environmental damage because of Alcoa's continuing
failures over a 40-year period to control the escape of waste
products.
Alcoa began proceedings in Washington State against its insurers,
including Lexington. In May 2000, the Washington Supreme Court,
applying Pennsylvanian law, found that, in the absence of any
relevant policy limitation or exclusion, Lexington was liable with
other insurers to pay the full cost of cleaning up the
environmental damage, whether or not the damage occurred before,
during or after the three-year insurance policy period.
The decision overturned a previous ruling that found the
insurers liable for only a proportionate share of the total
clean-up cost.
Lexington settled Alcoa's claims for US$103million and claimed
from its reinsurers. WASA and AGF started an action in the English
court seeking declarations that they were not liable.
Back-to-back cover
The reinsurance contract was governed by English law and
incorporated a standard London market full reinsurance clause:
"Being a reinsurance of and warranted same gross rate, terms and
conditions as and to follow the settlements of the Company…"
Lexington argued that this meant the reinsurance and insurance
contracts were intended to be on the same terms ("back-to-back")
and so reinsurers were bound to indemnify it against its settlement
of the insurance claim. Although the reinsurance was governed by
English law and the insurance was not, this was not enough to
disturb the back-to-back nature of the cover.
Reinsurers, however, argued that the three-year period of cover
was fundamental to the reinsurance contract. They never intended to
cover damage occurring outside that period. The reinsurance
contract was governed by English law. Under English law, even when
there is a follow settlements clause, reinsurers are not liable for
losses that fall outside the scope of the reinsurance.
The High Court agreed with the reinsurers. Neither the
back-to-back nature of the reinsurance nor the presence of a follow
settlements clause was enough to displace the importance of the
stated period of cover. Lexington appealed.
Appeal
The Court of Appeal reversed the decision and found the
reinsurers liable. The real question was whether the parties
intended that terms that were effectively identical in both
insurance and reinsurance contracts should be given the same
effect.
In this case, the policy period (although expressed slightly
differently) was the same in both contracts. The Court of Appeal
concluded that, in the absence of any clear indication to the
contrary, it could be presumed that the parties intended the same
term would be given the same meaning – whatever that meaning might
be. In this case, that meant the interpretation applied by the US
court.
Commentary
The case shows why reinsurers in the English market have learnt
to be wary of US court decisions on long-term liabilities, such as
pollution or asbestos. When they entered into the contract in 1977,
it is unlikely that either party contemplated that a future US
court ruling would hold Lexington liable for the cost of cleaning
up decades of pollution.
The scope of the decision remains uncertain. Where, for
instance, will the court draw the line between similar (but not
identical) terms that should be treated as "equivalent" and terms
that should be treated differently?
What is clear, however, is that, without making their intentions
very plain, reinsurers cannot assume they will be protected by the
more restrictive interpretation English law may give to reinsurance
policies written on a "same terms and conditions" basis.
