|
Reinsurers are always entitled to raise issues as to the scope of the
reinsurance, notwithstanding a follow the settlements clause.
Reinsurance cover governed by US law, was provided by WASA and AGF for
a period of three years from 1 July 1977 to 1 July 1980, covering Lexington's
underlying for the risk of physical loss and damage occurring to property
at sites owned by the Aluminium Company of America ("ALCOA")
worldwide. AGF and WASA sought declarations that they were not liable
to indemnify Lexington by following its settlements.
Environmental damage occurred for a number of years including the relevant
three year period. In May 2002, the Washington Supreme Court held that
Lexington's insurance contract which covered the three years from 1977
to 1980 was to be construed as rendering Lexington liable for clearing
up all the environmental damage, irrespective of when it had been sustained.
The main issue in the case was whether the reinsurance contract meant
that AGF and WASA were potentially liable to indemnify Lexington in
respect of the cleanup costs for the three year reinsurance period only
or for all damages which occurred before, during and after this period.
Lexington argued that the contracts were back-to-back and therefore
the time period should be interpreted according to the Washington Supreme
Court interpretation. However, the reinsurance, in contrast to the underlying,
was subject to English law.
The Judge disagreed with Lexington. The contracts were not truly back
to back, as the governing law differed. Under English law, the period
clause was fundamental. It could not be construed as providing cover
outside the three years stated on its face and AGF and Wasa were not
obliged to follow the settlement forced upon the reinsured by the Washington
Court.
|