August 11 2009
On July 30 2009 the House of Lords delivered a unanimous judgment in the long-running and often controversial case of Wasa v Lexington  UKHL 40, overturning the decision of the Court of Appeal.
The House of Lords found that the reinsurer, Wasa, was not obliged to indemnify its reinsured, Lexington, in respect of payments it made to its insured relating to damage that occurred outside the period of cover provided for in both the insurance and the reinsurance.
The appeal turned on whether the fact that the insurance and reinsurance were on identical terms (albeit governed by different systems of law) and were intended to be back to back led to the conclusion that the reinsurer ought to be liable to indemnify Lexington for the whole of the loss paid under the insurance.
The House of Lords held that the reinsurance contract must be given its ordinary meaning under English law, such that it would cover only losses which occurred in the three-year period of cover, not losses covered by the insurance which occurred over a 44-year period. There is no rule of construction and no rule of law which states that a reinsurer must respond to every valid claim under the insurance irrespective of the terms of the reinsurance.
The most important aspect to the decision was the way in which the House of Lords distinguished this case from its decision in Vesta v Butcher  AC 852. It was held that in the case at hand (unlike in Vesta), at the time the contracts were entered into it was not possible for the parties to identify the foreign law which would govern the insurance. This was because the decision by the US courts that Pennsylvania law would govern the underlying insurance was based not on the particular facts relating to Lexington's insurance contract (which arguably had a closer connection to Massachusetts than Pennsylvania), but rather on the fact that the ultimate insured had a "comprehensive multilayered" insurance scheme with many different insurers across the United States and elsewhere. As such, in the context of the wide-ranging dispute with a large number of insurers, Pennsylvania (as the head office of the insured) was the only commonality between the insured and the various different insurers.
Lord Mance commented on the issue as follows:
"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...be applied by reference to factors extraneous to the particular insurance to which alone the reinsurance related."
Accordingly, the House of Lords overturned the decision of the Court of Appeal and restored the decision of Justice Simon at first instance.
This decision will have wide-ranging implications for London market reinsurers and the worldwide reinsurance market. It now seems that the existence of back-to-back contracts will not necessarily mean that a reinsurer will find that it is obliged to indemnify its reinsureds for losses that occur outside the period of cover of the reinsurance - at least in circumstances where the governing law of the insurance was not ascertainable at the time the reinsurance was entered into.
For further information on this topic please contact Sam Tacey at Edwards Angell Palmer & Dodge by telephone (+44 20 7583 4055) or by fax (+44 20 7353 7377) or by email (email@example.com). The Edwards Angell Palmer & Dodge InsureReinsure.com Blog can be accessed at www.insurereinsure.com.
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