Download Hong Kong Key - Summer 2009 (PDF, 256KB). - Kennedys

the contract wording specifically provided for the
In delivering the leading Judgment, Lord Collins found
• Although the terms of a reinsurance contract may
contrary and that differences in governing law alone
that at the time the reinsurance was entered into
be construed to be consistent with the terms of
would not stop contracts being back-to-back. Wasa
back in 1977, it would not have been clear that
the insurance (back-to-back), whether the risk has
was therefore ordered to pay Lexington.
Pennsylvanian law was applicable to the direct policy,
been assumed under the reinsurance is a question
The Court of Appeal concluded that reinsurers who
did not want words in the reinsurance policy to be
construed in accordance with the wording of the
underlying policy should clearly indicate so in the
or how Pennsylvanian law would have determined
coverage for Alcoa’s losses and as the reinsurance
was entered into in the London reinsurance market it
should be governed by English law.
of construction of the reinsurance contract
against the relevant background and surrounding
circumstances.
• Where the insurance and reinsurance contracts do
wording of the reinsurance contract.
Rather helpfully the Lords recognised that clauses
not contain an express choice of law they may be
The Court of Appeal’s decision was, not surprisingly,
appealed by Wasa.
House of Lords
On 31 August 2009 their Lordships unanimously
gave judgment in favour of Wasa, allowing the appeal.
Whilst accepting that the normal commercial purpose
of proportional facultative reinsurance should be to
provide back-to-back cover for the direct policy, their
Lordships held that where the contracts are governed
by different laws, it remains a question of construction
of both contracts as to what risk is assumed.
The Lords held that both policies were on a loss
occurring basis and under English law, the insurer/
reinsurer is only liable to indemnify for loss / damage
that occurred during the policy period.
contained in a reinsurance contract are inserted for
good reason and held that:
• Reinsurance is an independent contract to the
direct insurance. It is not to be treated as simply
insuring the direct insurer’s own liability, but
the ‘period of risk’ which is to be determined in
accordance with the policy provisions.
• There is no rule of construction, and no rule of law,
that a reinsurer must respond to every valid claim
under an insurance policy, irrespective of the actual
terms and conditions of the reinsurance contract.
• As an independent contract, the reinsurance may
contain independent terms requiring satisfaction
before reinsureds can claim.
• The words “full reinsurance” and “follow the
settlements” clauses did not have the effect of
bringing within cover a resinsurance risk that, on
the true interpretation of the policy of reinsurance
would not otherwise be covered.
governed by different laws. It remains a question
of the construction of each contract as to under
which applicable law the risk was assumed.
In the case of Wasa the Lords were not prepared
to ignore the fact that the parties had entered into
the reinsurance contract on the basis of English law
and that the clause setting out the period of cover
would be given its ordinary interpretation according
to English law and not the interpretation given to the
underlying insurance under Pennsylvanian law.
The House of Lords further clarified that the fact a
reinsurance policy was back-to-back did not mean
that it merely indemnified the reinsured’s losses
but rather that it was an independent contract that
reinsured a proportion of the underlying risk.
Julian Wallace
Partner
j.wallace@kennedys.com.hk
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