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Judgments - Lexington Insurance Company (Respondents) v AGF Insurance Limited (Appellants) and one other action
Lexington Insurance Company (Respondent) v Wasa International Insurance Company Limited (Appellants) and one other action

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27.  At a later stage in the trial before Judge Learned, the jury made further findings in written answers given on 3 October 1996. In answer to question No. 2, the jury found both that some portion of the relevant property damage occurred in each area of each of the three sites in each of the years from 1st July 1977 through to 1st July 1984, and that each portion so occurring during each year contributed to the costs of the repair in each such area. In its answer No. 4, the jury held that Alcoa knew of property damage or became substantially certain such damage would incur in many of such areas before 1st July 1977 or after 1st July 1984. In a few cases it held that Alcoa acquired such knowledge during the period of the Lexington DIC policy, and in yet others it made no finding. It found itself largely unable to answer question No. 5, which asked it to give the proximate cause of any damage unknown to and unintended by Alcoa as of 1st July 1977. In answer to question No. 12 the jury found itself also unable to say whether there was “a reasonable basis or bases on which to allocate to each separate policy year the costs related to the property damage that occurred during that policy year".

28.  Judge Learned issued two further rulings dated 3rd March 1997. In the first, she concluded that there were “two cause(s) of the property damage at each of the three Phase I sites", being in the case of “property damage surrounding the manufacturing units at each plant …. releases from such units” and in the case of “property damage in and around the treatment, storage and disposal units …. the placement and release of wastes in such units or areas". In the second, she held, in the absence of any answer from the jury to question No. 12, that there existed in law a reasonable basis for allocating to each separate policy year the costs related to the property damage that occurred during that policy year. She said that Alcoa could reasonably expect the insurer on risk when the damage occurred to pay for the repair of whatever damage occurred during the policy year, even if the damage was a continuous process occurring over a number of years and even if it was not discovered until much later, but that it could not reasonably expect that the insurer would cover the entire loss, much of which occurred outside the policy period. As a matter of fact, she held that the best estimate of actual damage in any policy period was reached by simply dividing the damage over the time it took to develop.

29.  On appeal on 4th May 2000 Judge Learned’s second ruling was emphatically disapproved by the Washington Supreme Court. The Supreme Court held as follows, at (2000) 998 P 2d 856, 882-884:

“G. Allocation

The final issue we address in this case is the damages available to Alcoa upon a finding of coverage under the DIC policies. The jury found pollution damage to all three test sites occurred during the entire time the various DIC policies were in effect. The jury also found, however, pollution damage had occurred to portions of the three sites prior to the inception of insurance coverage. Because the pollution damage occurred both before and during the various policy periods, a question arose as to how to attribute the remediation costs of the pollution damage. The jury was unable to reach a verdict on whether there is a reasonable basis or bases to allocate to each separate policy year costs related to the property damage that occurred during that policy year….

Missing from the trial court’s analysis of this issue is a close examination of the applicable policy language. The insuring clause in the DIC policy states: “PERILS INSURED: This policy insures against all physical loss of, or damage to, the insured property as well as the interruption of business, except as hereinafter excluded or amended."… This language is very broad and contains no limitation as to time of the physical loss or damage to property. There is no exclusion in the policy for physical loss or damage that may have begun spreading before the policy inception. The policy definition of occurrence likewise compels a broad reading of the policy: “The word ‘occurrence’ shall mean any one loss(es), disaster(s), or casualty(ies) arising out of one event or common cause(s)". There are no words of limitation here. It seems clear from the policy language that any physical loss or damage manifesting itself during the time a DIC policy was in effect was covered by the policy, including pollution damage starting before the policy inception. The trial court’s written decision does not indicate why the court chose to allocate coverage on a pro rata basis rather than simply reading the policy as it is written and ordering full policy coverage for the damage Alcoa incurred.

In J. H. France Refractories Co v Allstate Ins. Co. 534 Pa. 29, 626 A. 2d 502 (1993), the Pennsylvania Supreme Court considered the issue of multiple insurance coverage over time in the case of asbestos disease. France was an asbestos manufacturer and seller from 1956 to 1972. The wife of a person who had died from asbestos exposure to France’s products that occurred between 1948 and 1978 sued France. France sought a defence and indemnification from its insurers for those years, but the insurers denied any duty to defend or indemnify France. France then filed a declaratory judgment action to force the insurers to defend and indemnify.

The six insurers at trial had provided policies at varying times and all the policies contained the same general liability language:

“[The Insurer] will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of bodily injury … to which this insurance applies, caused by an occurrence, and [the Insurer] shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily injury.”

One of the issues the trial court in that case considered was whether and how to allocate coverage among the six insurers. The trial court prorated the obligations of the insurers based on the time their respective policies were in effect (the France court did not explain the details of this proration).

On appeal, the Pennsylvania Supreme Court rejected the proration approach:-

“First, and most compelling, is the language of the policies themselves. Each insurer obligated itself to “pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of bodily injury to which this insurance applies.” We have already ascertained that any stage of the development of a claimant’s disease constitutes an injury “to which this insurance applies” under each policy in effect during any part of the development of the disease. Under any given policy, the insurer contracted to pay all sums which the insured becomes legally obligated to pay, not merely some pro rata portion thereof".

Likewise, in the “perils insured” clause of the DIC policies here, the insurers obligated themselves to insure “against all physical loss of, or damage to, the insured property,” not merely to some prorated portion thereof. The trial court attempted to distinguish this case from J.H. France by describing the difference between asbestos disease and environmental contamination:

“Asbestos that has been inhaled may have no adverse effects for years and then may suddenly cause myriad physiological problems which are not necessarily related to the length of exposure or the number of asbestos fibres taken into the body. Asbestos disease is not merely a corollary of the volume ingested. Environmental contamination, on the other hand, is merely the sum of all its parts - each part per million of a particular contaminant that is discharged to the environment equally damages the insured property either by increasing the concentration of a particular area (if movement of the pollutant is retarded) or by increasing the size of the impacted area (if the pollutant readily migrates).”

It may be true, as the trial court stated, that the progression of pollution damage can be measured and apportioned more certainly year to year than can the progress of asbestos disease, but that understanding begs the question of whether the express DIC policy language compels proration. It is the policy language that determines the scope of coverage. The policy language here does not provide for any limitations to the scope of damage. …

The insurers vigorously contend that while J. H. France may be correct as to third party coverage, it is not appropriately applied to first party coverage, citing the “all sums” language from the policy in J. H. France. We are not persuaded by this distinction. The language of the insuring agreement in the DIC policies is exceedingly broad, covering all physical loss or damage to Alcoa’s property. This language is at least as broad as the policy language in J. H. France. Moreover, if DIC policies mean what the insurers claim they mean, the policy language should reflect that meaning. The policies in this case do not, and we decline to write a proration of coverage into the policies when the insurers failed to do so themselves. The trial court erred in its decision to prorate coverage according to the years the various DIC policies were in force. We reverse the trial court on this issue …….”

Analysis

30.  Wasa and AGF do not submit that the decision of the Supreme Court of Washington on the extent of Lexington’s liability under the law of Pennsylvania as insurers of Alcoa and NWA was perverse or wrong under that law. For the purposes of this appeal, they accept it as correct. Its effect was that Lexington was liable for all damage “manifesting” itself during the three year insurance period, although such damage had, in the Supreme Court’s words, “occurred both before and during” that period or had “begun spreading” or “start[ed]” before that period. The force of the word “manifesting” is unclear, in the light of the jury’s findings that Alcoa did not know of some of the property damage or become substantially certain that it would occur until after well after the expiry of that period (indeed until after 1st July 1984). Mr Sumption QC for Lexington submitted that all that the Supreme Court meant by “manifesting” was “in being". Further, the Supreme Court did not expressly address property damage occurring after the expiry of the three year period of Lexington’s insurance. However, its judgment appears to have been read as rendering Lexington liable for all aspects or consequences of any property damage in any area at any site, whenever occurring, any part of which could be said to have occurred during the three year insurance period. In response to this last point, Mr Sumption submitted that any property damage occurring after the three year period could only be responsible for a small part of the overall loss suffered by Alcoa and NWA, and, critically (as he submitted), that Lexington had, following the Supreme Court’s judgment settled for only $103 million potential claims for over $180 million and that it was common ground that this was an honest and business-like settlement.

31.  Lexington accepts that the reinsurance was and is subject to English law, while the insurance was an American policy. But it submits that this can and should make no difference. Reinsurers would and should have expected claims under the insurance to be brought in a court of competent jurisdiction in the United States under the Service of Suit clause. The Washington Court was such a court, and Judge Learned selected the law of Pennsylvania to govern the issue of policy interpretation under principles of private international law recognised in Washington. The language of the English law reinsurance should be read in the same sense as that which the American insurance was by this process authoritatively established to have. The Washington Court had done no more than decide what constituted damage occurring within the three year insurance period, and the reinsurance should respond on a like basis. The last submission involves a verbal gloss which I would not accept. The Washington Court acknowledged that its ruling enabled recovery under the insurance in respect of pollution damage occurring both before and during the policy period. Instead of identifying whether and how far such damage, or the disposal or leakage of waste causing it, occurred during the insurance period, it treated all pollution damage “manifesting” itself, or as Mr Sumption submits “in being", at any site during the policy period as covered by the insurance, whether it occurred before, during or, it appears, after that period.

32.  The appeal can in my judgment be resolved by reference to certain propositions which are as such largely undisputed. First, a reinsurance is a separate contract, which may contain its own independent terms requiring to be satisfied before insurers can claim indemnity under it. To take an obvious example, the present reinsurance was not a perfectly proportional reinsurance, by virtue of the retention of $1,675,000. More fundamentally, even a perfectly proportional reinsurance is not an insurance against liability, still less against any liability which the reinsured may be held to incur under the insurance. Statements were made in the Court of Appeal by Sedley LJ, in para 49, to the effect that the “need for the fiction that reinsurance covered the primary risk and not the insurer’s own potential liability” is “long spent” and that the “reality” is that “what is reinsured is the insurer’s own liability". Sedley LJ appears to have thought that a contrary view might have enabled Lexington to claim its percentage of $180 million, rather than $103 million, from its reinsurers. I do not consider these thoughts well-founded.

33.  Reinsurance is a settled business conducted worldwide by experts, often (even if past experience indicates not invariably) possessing very considerable legal knowledge and expertise. The well-recognised analysis which neither side gainsaid before your Lordships is that a reinsurance such as the present is an independent contract, under which the subject-matter reinsured is the original subject-matter. The insurable interest which entitles the insurer to reinsure in respect of that subject-matter is the insurer’s exposure under the original insurance. The principle of indemnity limits any recovery from reinsurers to the amount paid in respect of that insurable interest. See generally Forsikringsaktieselskabet National of Copenhagen v. Attorney General [1925] AC 639, 642, per Visc. Cave LC; Charter Reinsurance Co. Ltd. v Fagan [1997] AC 313, 392E-H, per Lord Hoffmann; Toomey v Eagle Star Insurance Co. Ltd. [1994] 1 Ll.R. 516, 522, per Hobhouse LJ and Marine Insurance Act 1906, s.9. (As noted in Toomey, a stop-loss or similar policy taken out by an insurer is not a reinsurance in this sense and operates as a whole account protection on a different basis.) Reinsurance business is classified in accordance with this well-settled analysis for regulatory purposes: Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544). Reinsurance slips are underwritten identifying the subject-matter insured (here, against the headings INTEREST and SITUATED) as the original insured’s property, rather than the insurer’s exposure or liability under the original insurance. On Sedley LJ’s analysis, the decision in Mackenzie v. Whitworth (1875) 1 Ex. D. 36, that an insurer “on goods” may reinsure by the same description without disclosing that he is a reinsurer rather than the goodsowner, could not stand. There is no basis or justification for courts to throw unnecessarily into doubt an accepted analysis with business significance.

34.  The first proposition is not critical to the resolution of this appeal. Both sides in fact accepted its correctness before the House. A conclusion that “what is insured is the insurer’s own liability” would not entitle the insurer to indemnity against whatever liability it might be found to have in any court in which it was sued, under whatever law was there applied. Insurance against liability may, like any other insurance, be subject to specific terms which have to be satisfied before any indemnity can be sought.

35.  That leads to the second point: an insurer seeking indemnity under a reinsurance must, in the absence of special terms, establish both its liability under the terms of the insurance and its entitlement to indemnity under the terms of the reinsurance. In practice, the former task is eased by express terms in a proportional reinsurance: originally, these took the form of a provision “to be paid as may be paid", but courts gave this a limited interpretation which confined it to questions of quantum, so that it would only assist insurers once they had proved that they had some liability to their insured; there thus developed “follow the settlements” clauses or the “full reinsurance” clause appearing in the present reinsurance. As interpreted by the Court of Appeal in The Insurance Company of Africa v. Scor (UK) Reinsurance Co. Ltd. [1985] 1 Ll.R. 312, the effect of these clauses is to bind the reinsurer to follow settlements of the insurer (whether made by admission or compromise or, as in Scor itself, following a judgment against the insurer). The Court of Appeal in Scor identified two provisos: the first, that the claim so recognised falls within the risk covered by the policy of reinsurance and, the second, that the insurers acted honestly and took all proper and business-like steps in making the settlement: see per Robert Goff LJ (p.330).

36.  In Assicurazioni Generali SpA v. CGU International Insurance Plc [2004] EWCA Civ 429; [2004] Lloyd’s Rep IR 457, Deputy High Court Judge Gavin Kealey QC and the Court of Appeal considered how the principle in the Scor case might apply when the relevant terms of the insurance and reinsurance are identical. They considered whether and how the second proviso applied to an insurer who, acting honestly and taking all proper and business-like steps, settled an insurance claim under insurance terms which were identical to those of the reinsurance. They concluded that the insurer remained obliged to show that the basis on which the claim had been settled was “one which fell within the terms of the reinsurance as a matter of law or arguably did so” (per Tuckey LJ at para 17). The last three words must be read in the context of that case, where the insurance and reinsurance incorporated materially identical terms with materially identical effect (and the issue was whether and on what basis the facts fell within such terms). It is less obvious that they could apply in a case like the present where, if reinsurers are right, the like terms in the insurance and reinsurance have different effects due to the application of different governing laws.

37.  Thirdly, the present appeal is to be determined on the basis that reinsurers were and are bound by the follow the settlements provision to accept that Lexington’s settlement of Alcoa’s and NWA’s claims fairly reflected Lexington’s liability under the original insurance; and, accordingly, that, if and so far as the loss was insured and reinsured on the same basis, the reinsurer must indemnify the insurer (subject only to the second Scor proviso, that the insurer acted honestly and took proper and business-like steps in making the settlement). In his case (though not, I believe, in oral submissions) Mr Sumption supported the view that, even without the follow the settlements clause, reinsurers would, as a matter of contractual implication, have been bound by the Washington Supreme Court’s interpretation of the scope and application of the original cover. His case cited in this respect the obiter rejection by the Court of Appeal of submissions which Mr Sumption had made on the same point in Commercial Union Assirance Co. v NRG Victory Reinsurance Ltd. [1998] 2 Ll. Rep. 600. It is unnecessary to decide upon the correctness or otherwise of the Court of Appeal’s obiter observations on the effect under reinsurance of a judgment against the insurer. I note only that there was no suggestion in the Scor case, where there was such a judgment, that this judgment could be binding in the absence of a follow the settlements clause; and that the basis for such a contractual implication has been questioned by a powerfully constituted Bermudian arbitration panel in an interim award dated 12th December 2000 in Gold Medal Insurance Co. v Hopewell International Insurance Ltd., as well as by specialist writers: O'Neill and Woloniecki, The Law of Reinsurance in England and Bermuda (Sweet & Maxwell( 2nd ed., 2004), pp 191-193. Here, there is a follow the settlements clause, and any issue which might have arisen regarding the actual settlement (see paragraph 30 above) was not canvassed below or before the House. The only issue raised by reinsurers is whether the loss arising from Lexington’s settlement with Alcoa falls within the terms of the indemnity provided by the reinsurance slip.

38.  Fourthly, it is common ground that, if the present reinsurance slip, including such terms of the original insurance as it incorporates, is to be construed according to purely English law principles, it does not have a meaning or effect similar to that which the Washington Supreme Court gave to the insurance. The only property damage which the reinsurance, construed according to purely English law principles, covers is property damage occurring during the three year reinsurance period. This is under English law clear beyond argument upon its wording. It insures property against risks during a stated period. The reference in the slip to the use of form J.1 (designed for use with a full policy wording) or NMA 1779 (designed for use with the slip to constitute a slip policy) is itself not without interest, even though neither a formal nor a slip policy has been identified (one may question how premium was ever closed, unless at least the latter at some time existed). The understanding must have been that any formal policy would be on terms consistent with those of any slip policy. Form NMA 1779 provides for reinsurers “to pay …. all such Loss as aforesaid as may happen to the subject matter of this Reinsurance, or any part thereof during the continuance of this Policy” - confirmation of the basic nature of the reinsurance.

39.  This construction of the slip also reflects the basic principle of English property insurance law, that “the insurer is liable for a loss actually sustained from a period insured against during the continuance of the risk": Knight v Faith (1850) 15 QB 649, 667 per Lord Campbell CJ. (The emphasis in that case was on the need for the peril insured against to occur during the continuance of the risk - damage materialising or developing from it after the policy period would still be covered. Usually, the occurrence of the peril and of loss concur, although one may contemplate the disposal or leakage of waste causing spreading contamination over a period.) Hobhouse LJ summarised the legal principle in Municipal Mutual Insurance Ltd. v Sea Insurance Company Ltd.[1998] Ll. R.I.R. 421, 435-436:

“The judge came to the surprising conclusion that each reinsurance contract covered liability in respect of physical loss or damage whether or not it occurred during the period covered by the reinsurance contract and he went on expressly to contemplate that the same liability for the same physical loss or damage might be covered under a number of separate contracts of reinsurance covering different periods. This is a startling result and I am aware of no justification for it. When the relevant cover is placed on a time basis, the stated period of time is fundamental and must be given effect to. It is for that period of risk that the premium payable is assessed. This is so whether the cover is defined as in the present case by reference to when the physical loss or damage occurred, or by reference to when a liability was incurred or a claim made. Contracts of insurance (including reinsurance) are or can be sophisticated instruments containing a wide variety of provisions, but the definition of the period of cover is basic and clear".

The insurance in this case was not against liability incurred or claims made. It is clear that the Washington Supreme Court approached it as property damage insurance, and held Lexington liable on that basis, because of its conclusion that the insurance should be seen as covering all contamination whenever caused or occurring at any site, so long as any part of it could be said to have manifested itself (or been in being) at the site during the three year insurance period.

40.  Viewing the reinsurance through purely English law eyes, it cannot therefore be construed as a contract to indemnify Alcoa in respect of all contamination of Alcoa sites, whenever caused or occurring, provided that part of such contamination manifested itself or was in being during the reinsurance period. That would involve reinsurers in an unpredictable exposure, to which their own protections might not necessarily respond. It would mean that the same exposure would arise, even if they had granted the reinsurance for a shorter period than the three year period matching the original - since the original itself would, even if in force for only one year, have had effectively the same exposure as that for which the Washington Supreme Court held it answerable. Under the approach taken by the Washington Supreme Court, reinsurers must have incurred liability (in practice probably up to the reinsurance limits), as soon as they wrote the reinsurance. The retention must likewise have been exhausted before the reinsurance period began, and cannot have fulfilled any object of introducing an element of discipline into insurers’ handling of the insurance. These represent as fundamental and surprising changes in the ordinary understanding of reinsurance and of a reinsurance period as those to which Hobhouse LJ was referring in the Municipal Mutual case.

 
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