|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
41. The reference in the reinsurance slip to the retention as subject to excess of loss &/or Treaty R/I is a reminder that an insurance and reinsurance such as the present are likely to be part of a larger programme of protections. Excess of loss reinsurance is underwritten on either a losses occurring or risks attaching basis: Balfour v Beaumont  1 Ll.R. 272. In other words, it is fundamental that such a reinsurance will respond in the one case to losses occurring during the reinsurance period, in the other to losses occurring during the period of policies attaching during the reinsurance period. To treat excess of loss policies as covering losses through contamination occurring during any period, so long as some of the contamination occurred or existed during the reinsurance period, would be to change completely their nature and effect. The reference in the slip to excess of loss reinsurance underlines the difficulty about interpreting the terms of the reinsurance as covering the losses which the Washington Supreme Court have held to be recoverable under the insurance.
42. Fifthly, and crucially to the outcome of this appeal, it is said that all objections to treating the reinsurance as covering Lexingtons liability are dispelled by giving appropriate recognition to the fact that the reinsurance was placed expressly to cover the original DIC insurance; the relevant language of the insurance and reinsurance was identical; and Lexingtons evident intention in reinsuring was to cover itself in respect of the whole risk after the exhaustion of the retention. The two contracts should be treated as back to back, and a mere difference in governing law should not lead to any other result. On the contrary, English law should read the language of the reinsurance in the sense given it by the Washington court.
43. Mr Sumption submits that this line of reasoning is supported, indeed compelled, by the Houses decision in Forsikringsaktieselskapet Vesta v Butcher  AC 852 and the Court of Appeals decision in Groupama Navigation v Catatumbo CA Seguros  2 Lloyds Rep 350. In Vesta, a 90% reinsurance of a Norwegian insurance company was placed before, and on wording which was later copied into, the insurance. The reinsurance was however subject to English law, while the insurance was subject to Norwegian law. Both included a 24-hour watch warranty, as well as a claims control clause which expressly provided that failure to comply with any warranty was to render the policy null and void". Despite these express words, under Norwegian law, breach of warranty was only relevant if causative of the loss, while under general English law (reinforced in Vesta by the claims control clause) breach automatically discharges reinsurers. The House held that, by virtue of the back to back nature of the reinsurance, the 24-hour watch warranty was to be read in the English law reinsurance as having the same significance as it had in the Norwegian reinsurance. Catatumbo was also concerned with proportionate reinsurance, in this case written facultatively in circumstances where London market reinsurers had no sight or direct knowledge of the terms of the insurance issued under Venezuelan law by the Venezuelan insurers who they undertook to reinsure. The reinsurance contained a guarantee of class maintained and was treated as incorporating the terms of the insurance, which itself contained a Spanish language garantia in like terms. Again, under Venezuelan law, a warranty was irrelevant unless causative of loss. Again, this was the effect to be given to the warranties contained or incorporated in the English law reinsurance.
44. Ultimately, however, the issue is one of construction of the particular reinsurance contract against its relevant background and surrounding circumstances. In both Vesta and Catatumbo, it was possible at the time when the insurance and reinsurance were placed to identify the foreign law which would govern the insurance. The parties entering into the English law reinsurance could be taken to have had access to what Lord Lowry in Vesta described as a foreign legal dictionary to interpret the language of the reinsurance. Lord Templeman, in discussing in Vesta (at p.892B-E) the extent to which the two contracts had the like effect, did so by reference to the circumstances and terms in which they were entered into, not on the basis that the reinsurance was bound to respond to whatever liability the insurers might subsequently be held to incur. As Longmore LJ put it in the present case (para. 25): It must be sufficient if there is a way in which it would be possible to ascertain the legal position under the original insurance contract". That was so when the reinsurances were placed in Vesta and Catatumbo.
45. Sixthly, under English law, a contract has a meaning which is to be ascertained at the time when it is concluded, having regard to its background and the surrounding circumstances within the parties knowledge at that time. Mr Sumption submits that this is so here. The meaning is to be derived from reading the reinsurance terms in the sense they bore under Pennyslvanian law. The parties must have contemplated that any claim under the insurance issued to Alcoa would, if contentious, be litigated and determined before the courts of one of the United States under the Service of Suit clause. Alcoa having exercised this right to bring suit in Washington, Judge Learned did no more and no less than what an English court would have done. She decided, under the conflict of laws rules of the State of Washington, what States law governed the insurance contract. Having determined that the law of the State of Pennsylvania applied, she interpreted and applied the jurisprudence of that State. This was, in short, a foreseeable and conventional exercise. Indeed, Longmore LJ considered that an English court would, if its own conflicts rules had been applicable, also have concluded that the law of the State of Pennsylvania applied, on the basis that the insurance contract had its closest and most real connection with that State where Alcoa was incorporated and had its principal place of business.
46. I am unable to agree with Longmore LJ on this last point. Applying English law conflicts principles, I think that the insurance would fall to be treated as governed by the law of the State of Massachusetts. The insurance policy was headed with Lexingtons name followed by Boston, Massachusetts", where Lexingtons head office was, it was recorded as countersigned by Lexington at the same place, and as broked by Fairfield & Ellis, also of Boston. It was issued in Massachusetts to insure Alcoa and its subsidiaries and affiliates whose address was given as Pittsburgh, Pennsylvania. It covered property in and in various countries outside the United States. For reasons given by my noble and learned friend, Lord Collins of Mapesbury in paragraphs 91 to 93 an English court applying English law would, I consider, have concluded that Massachusetts law governed the insurance.
47. Seventhly, however, Lexingtons case does not depend on the attitude in relation to the original insurance of an English court applying English conflicts principles. What matters, in Mr Sumptions submission, is that the Washington court, properly seised of the case under the Service of Suit clause, determined under its conflicts principles that Pennsylvanian law governed. However, that was a decision reached in the context of large scale litigation involving a wide range of insurers, insurances and periods. Judge Learneds decision falls to be viewed in this light. She read the direction in the Service of Suit clause to determine all matters arising under the insurance in accordance with the law and practice of whatever court of competent jurisdiction was selected by Alcoa as a direction to apply the full law of that court, including its choice of law principles. Any other conclusion would clearly have meant that the insurance fell to be interpreted by a substantive law which depended on Alcoas ultimate choice of jurisdiction. She concluded that Washington had no special interest in applying its own substantive law, and turned to section 193 of The Restatement (2nd) of Conflict of Laws, which pointed towards the law of the site insured as the natural governing law. Having regard to the multiplicity of sites in issue, she rejected that law on the basis that it is generally presumed that contracting parties mean their contracts to have one meaning and that, although the same language in different policies might be interpreted differently in different jurisdictions, the parties were unlikely to have expected the same policy to be subject to multiple interpretations depending on the fortuity of where the damage occurs".
48. The key to Judge Learneds application of Pennsylvanian law lies in her statement that Pennsylvania was the one commonality between all the sites and all the defendants". This was on the basis that placement originated from Alcoas headquarters and was in most cases . coordinated through the Pennsylvania broker or other brokers". She added:
Analysis of each policy for the details of contract formation to count contacts in the formation of the contract would not be particularly fruitful. The coverage scheme was comprehensive, multilayered. The place of signature of the contract, or domicile or headquarters of the various defendants or other factors are of less significance than those associated with Pennsylvania. Overall, the record reflects that the meaningful center of gravity for contract formation is Pennsylvania, for most, if not all of the contracts.
She also refused submissions made by some insurers that she should defer ruling on choice of law and decide issue by issue and defendant by defendant", and concluded:
The court determines as a general rule that for those issues of contract interpretation which raise conflict-of-law issues, Pennsylvania law is deemed to have the most significant relationship and the court will apply Pennsylvania law. However, if specific or unique issues arise regarding one or more defendants or one or more sites, that raise significant considerations that override the general rule, they can be brought to the courts attention at that time.
As recorded above, the Supreme Court stated that there was no appeal against this conclusion by Lexington.
49. It is clear that Judge Learneds conclusion about the governing law was an overall conclusion, based on a general consideration of the comprehensive, multilayered insurance scheme arranged by Alcoa over the years and a reluctance to engage in analysis of the particular circumstances of individual insurances taken out individually and with different insurers at different times and in different places. It was arrived at therefore by taking into account matters and events extraneous to the policy issued by Lexington to Alcoa or the claims arising under that policy. The choice of the law of the State of Pennsylvania to govern Lexingtons insurance of Alcoa cannot, as a result, be regarded as in any sense predictable at the time when the reinsurance was placed, or as following from the operation of the terms of the insurance as a contract independent of all the other insurance contracts held by Alcoa over several decades. This point is underlined by the reference in condition 17 of the policy issued by Lexington to Alcoa to the law of the place of issue of the policy as the appropriate law to govern the validity and period of the time limit for proceedings and the partiess agreement in this connection that the policy was subject to Massachusetts law: paragraph 26 above. Lexingtons case depends on the application of a Pennsylvanian legal dictionary. Lexington has not advanced its case on the basis that a Massachusetts legal dictionary could be relevant to or assist Lexingtons position. In my view, the present case is materially different from both Vesta and Catatumbo. The reinsurance has a clear English law meaning. There was here no identifiable legal dictionary (formal or informal), still less a Pennsylvanian legal dictionary, which can to be derived from the interaction or operation of the terms of the insurance and reinsurance and which could lead to any different interpretation of the reinsurance wording. For reasons I have already given, the reinsurance is an independent contract, with its own terms which fall to be construed under English law, and I see no basis for interpreting it as covering any liability which might subsequently be held to arise under the insurance in any State whose law might, after disputes had arisen under it and other separate insurances, be applied by reference to factors extraneous to the particular insurance to which alone the reinsurance related It follows that there is no basis for construing the two contracts as back to back in the present situation.
50. That is sufficient to dispose of this appeal. But I would make some short observations in relation to two further submissions advanced by Mr Schaff QC for Wasa, with the support of Mr Calver QC for AGF. First, Vesta and Catatumbo were both cases concerned with the effect of breaches of warranty. This is an area where English law has long been recognised as unduly stringent and in need of review. It was, as I said in Catatumbo (para. 30), commercially and legally unattractive to treat the concept of warranty in the reinsurance as retaining a stubbornly domestic English significance, trumping any limited significance of such a warranty included in the original and also incorporated by reference into the reinsurance"; a harmonious result could be achieved relatively easily by treating warranty in the reinsurance as taking its precise meaning and application from any equivalent warranty incorporated in the original. Like considerations would no doubt mean in relation to the present contracts that the reinsurance period (expressed as a unitary period of 36 months at 1st July 1977) would be understood to run back to back with the insurance term of 36 months beginning and ending at noon standard time at location of property involved": see Knight v Faith (1850) 15 QBD 649. Similarly, any doubt about the meaning of the sum reinsured of $20 million in the aggregate in respect of Flood and Earthquake would be clarified by reference to the original, which makes clear that such aggregate applies to each of these perils separately. In each case, there is no doubt about the terms or effect of the original insurance wording and there would be no problem about making the necessary minor assimilation.
51. It may not, perhaps, always be so easy to assimilate an original insurance and reinsurance, when one is concerned with as fundamental an aspect of a reinsurance as its definition of the risks and period insured and the period for which they are insured (see paras. 38 to 40 above). The almost complete absence of any context to the two placements in the present case is furthermore no assistance to such an exercise. Mr Sumption asked rhetorically: what more could Lexington have done to reinsure themselves on a fully back to back basis? The market has in the past adapted the nature of the protections arranged or their wordings to achieve the results which it believed appropriate. But another answer, under the present course of business, is to ensure that insurance and reinsurance are subject to one and the same identifiable or predictable governing law. Failing that, steps could at least be taken to make the insurance subject to an identifiable governing law, though this would not necessarily foreclose all argument. Absent a common governing law, reinsurers may still sometimes be entitled to respond, with reference to the clear meaning that their contract has under the law governing it: what more could we as reinsurers have done to make clear the basis of reinsurance? A sensible principle of construction, established in Vesta and Catatumbo, cannot be made into an inflexible rule of law, which would impose on reinsurers a liability for which, under the law applicable to the reinsurance, they did not bargain. The consideration that Lexington probably did not reckon on the liability which it was held to have in America is not by itself a conclusive reason for passing that liability to reinsurers who were, on the face of it, also entitled to be confident that no such liability could arise under the clear and basic terms of the English law contract into which they entered.
52. At times during the argument, Mr Schaff submitted that no-one, even in the United States, could at the time of placement, have predicted that an American court would put on the insurance the construction adopted by the Washington Supreme Court. It is unnecessary to express any view about the factual basis for this submission, although the cases themselves tell at least part of the story. Asbestosis litigation was in its relative infancy in 1977, although a principle of joint and several liability of manufacturers to whose products a worker had been exposed over a period of years was developed in Borel v Fibreboard Paper Products Corp. 493 F.2d 1076 (5th Cir. 1973). This was on the basis that, where the tortious acts of two or more wrongdoers join to produce an indivisible injury, that is, an injury which from its nature cannot be apportioned with reasonable certainty to the individual wrongdoers, all of the wrongdoers will be held jointly and severally liable for the entire damages (p.1095). In Insurance Company of North America v Forty-Eight Insulations Inc 633 F.2d 1212 (6th Cir. 1980) it was affirmed that liability insurance policies taken out for various terms over a period of years were triggered by an asbestosis sufferers exposure to asbestos over that period, but that insurers liability for defence costs as well as for the policy indemnity should be apportioned pro rata among insurers, with the insured asbestos manufacturer itself bearing a pro rata share of any liability arising from the victims exposure to asbestos during years when the manufacturer had no liability insurance. The court said (p 1225) that: Neither logic nor precedent support a contrary view according to which a manufacturer which had insurance coverage for only one year out of 20 would be entitled to a complete defence of all asbestos actions the same as a manufacturer which had coverage for 20 years out of 20". However, in the famous case of Keene Corp. v Insurance Company of North America 667 F.2d 1034 (US Court of Appeals, District of Colombia. 1981), the court developed the triple trigger theory according to which liability attached to all liability insurances which were in force at the time of injurious exposure, at the time of manifestation of disease or at any time inbetween (i.e. the time of exposure in residence). Further, in Keene and certain other cases, such as J.H. France Refractories Soc. v Allstate Insurance Company 534 Pa. 29 (cited by the Washington Supreme Court in the present case) some courts differed from the Forty-Eight Insulations case by holding that all such liability insurers were liable to the insured jointly and severally in full, rather than on a pro rata basis, and that any period when the insured manufacturer had no insurance was irrelevant to such liability. During the 1990s it appears that some courts began to apply similar reasoning to pollution damage resulting in remediation claims under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980: see e.g. B & L Trucking & Construction Co., Inc. v. Northern Insurance Co. of N.Y., 134 Wash. 2d 413, 951 P. 2d 250, (Washington Supreme Ct. Feb. 19, 1998), indicating that [I]n a continuing damage situation, each insurer is held jointly and severally liable for the full amount of damage, regardless of the amount that occurred during its policy period. The Washington Supreme Courts present decision cited this case and followed the same approach in relation to the property damage insurance issued by Lexington to Alcoa.
53. Assuming that Mr Schaff were to be right in his submission that no-one, even in the United States, could at the time of placement, have predicted that an American court would put on the insurance the construction adopted by the Washington Supreme Court: would that matter? Longmore and Pill LJJ thought not, on the basis that reinsurers must take the risk of any change in the law (paras. 30 and 60). It would have been nothing to the point", Longmore LJ said, if the relevant Norwegian statute had been enacted after the inception of the policy in the Vesta case, but before the loss (para. 30). Here, moreover, one is only talking at most about a change in the construction put at common law on a particular contract wording. However, it is unnecessary to say more about any such points in this case. They may, and one certainly hopes will, rarely arise, and the market may be advised to amend its reinsurance wordings to make it even less likely that they will.
54. Although I see the general attraction of the answer which the Court of Appeal gave in the present case, I find it impossible to adopt in circumstances where Lexingtons liability has been held to arise under a system of law which was applied to the insurance not by reason of the terms of the insurance or their operation, but in the context of a choice of law on a blanket basis to cover also a large number of other independent insurances and claims. I note that Longmore LJ reached his opposite conclusion after taking an opposite view about the feasibility of identifying Pennsylvanian law as the law which would have been taken as governing the original insurance (paras. 27-28). In the upshot, I consider that this appeal should be allowed, and the decision of Simon J restored. I have also had the benefit of reading in draft the full and instructive judgment prepared by Lord Collins and I agree with the reasoning by which he reaches the same conclusion.
LORD COLLINS OF MAPESBURY
55. After banking, insurance is the United Kingdoms largest invisible export, of which reinsurance forms a large part, and amounted to at least £1.2 billion in 2007: Office for National Statistics, United Kingdom Balance of Payments: The Pink Book, 2008, p 52. These appeals raise the question of the extent to which the coverage under a proportional facultative reinsurance contract is, or should be construed as being, co-extensive with the coverage under the insurance contract. The reinsurer takes a proportional share of the premium and bears the risk of the same share of any losses. Consequently, the starting point is that normally reinsurance of that kind is back-to-back with the insurance, and that the reinsurer and the original insurer enter into a bargain that if the insurer is liable under the insurance contract, the reinsurer will be liable to pay the proportion which it has agreed to reinsure. In the usual case, any loss within the coverage of the insurance will be within the coverage of the reinsurance. This is so, whether or not (as is often the case) the reinsurance is put in place before the insurance is put in place or written. It is not necessary to characterise the reinsurance policy as liability insurance to achieve this result, which is essentially a question of commercial intentions and expectations.
56. Those commercial intentions and expectations should not be frustrated by allowing reinsurers to take uncommercial and technical points based on the difference between the effect given to terms in the insurance and the reinsurance under their respective governing laws. That was the basis of the decision in Forsikringsaktieselskapet Vesta v Butcher  AC 852, when the relationship between a contract of insurance and a contract of reinsurance in the international context was considered by this House twenty years ago. But these appeals raise more difficult and fundamental questions than those in Vesta v Butcher.
57. In the present case the insurer has become liable in the United States to the insured for losses suffered by the insured which could not have been anticipated in 1977, when the contracts of reinsurance and reinsurance were entered into. But insurers and reinsurers have to accept liability for losses which are not anticipated, and it is not that feature which distinguishes this case. What is unusual about this case is that the court which imposed the liability on the insurer, the Supreme Court of Washington, applied the law of a State (Pennsylvania) which is one of those States which imposes joint and several liability for the whole of the clean-up costs in environmental claims on all insurers at risk during the period when pollution occurred (which may be 50 years or more), provided that some pollution has occurred during the policy period in the relevant policy (in this case from 1977 to 1980). The reinsurance covered the same 1977 to 1980 period. It is common ground that under English law those losses would not be covered by a policy providing cover for losses occurring during that period. In the judgment under appeal the Court of Appeal (Pill, Sedley and Longmore LJJ, with Longmore LJ giving the main judgment) held that the reinsurance had to respond because the wording relating to the period of cover, which appeared in both the insurance and reinsurance, was to be given the same meaning in each of these contracts, namely the meaning which the Supreme Court of Washington had ascribed to it.