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House of Lords, England & Wales: Reinsurers Only Liable for Loss Occurring During Period of Reinsurance
Insurance Law Update
English House of Lords
The English House of Lords handed down its long-awaited decision in Lexington Insurance Company v Wasa Intl. Ins. Co. Ltd. and Lexington Ins. Co. v AGF Ins. Ltd ((2009) UKHL 40 (House of Lords, 30 July 2009)). The court held that the reinsurers were only liable for clean-up costs and contamination damage that occurred during the reinsurance period.
Lexington provided insurance to Alcoa from 1977 to 1980. Lexington was reinsured by Wasa under a policy that covered the same period. The insurance and reinsurance policies both provided coverage on an occurrence basis. Although the reinsurance policy provided back-to-back coverage, the Lexington policy was governed by Pennsylvania law and the reinsurance contract by English law.
Lexington was held liable for losses that occurred outside the period of insurance. Wasa resisted Lexington’s reinsurance claim on the basis that it could only be liable for loss occurring during the period of reinsurance.
The lower court agreed with Wasa. However, the Court of Appeal reversed this decision. It reasoned that because the parties had intended coverage to be back-to-back, the period clause contained in the reinsurance contract should be accorded the same meaning it was given in the Lexington insurance policy.
The House of Lords unanimously rejected this view. Under English law, a back-to-back reinsurance clause cannot bring into coverage risks that would not otherwise be covered. Although there will be circumstances in which loss covered under an insurance policy will also be covered under a corresponding reinsurance contract, there is no rule of construction or law that a reinsurer must respond to every valid claim under the insurance policy irrespective of the terms of the reinsurance.
For more analysis on the Lexington v Wasa decision see Sedgwick’s Reinsurance Bulletin.
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