Alistair Schaff QC gave an illuminating talk on Wasa –v– Lexington at an impromptu BILA session in Lloyd’s Old Library today.
While Schaff represented the winning reinsurers he managed to convey an objective sense that the right decision had been reached. I was in tune with that since I had always found the CA decision oddly artificial and this judgment from the House of Lords strikes me as more commercially sensible.
An interesting point did arise, though. Supposing that the underlying law had always and explicitly been that of Pennsylvania – what then would have happened as regards the period of cover under the (UK law) reinsurance? In other words, how would the Courts reconcile the clash between the unusual yet legally correct (under Pennsylvanian law) finding that Lexington were liable for all loss occurring from 1942 onwards as against the very plain words of the reinsurance contract’s period clause, i.e. that it only responded to losses occurring during the policy period (for 3 years from 1 July 1977)? Schaff admitted that he did not know the answer but said that, while it would be a very close call, it was perhaps marginally more likely that reinsurers would still squeak home. He alluded to their Lordships’ comments that the period clause in the reinsurance wording was very plain, and also to the English reinsurance law position that an LOD clause is not at all far from being an express, specific provision that cover will only be available for losses occurring in that period.
Interesting. The factual matrix in Wasa was unusual and unlikely to be repeated, but that second scenario (a foreign finding at odds with English reinsurance doctrine) is not at all uncommon and one can expect this to be tested before very long, I suspect.
Emphasising that the case was all about construction, Schaff also pointed out why the ‘follow settlements’ clause in Wasa didn’t help the cedent, namely, because the clause only operates if the risk is one to which the insurance and reinsurance respond. Here, the reinsurance did not respond (because of the LOD provisions) and Lexington were thus unable to apply the follow clause.
While it seems obvious, that’s a principle worth bearing in mind. Too often, people see a follow settlements or Full Reinsurance wording and immediately conclude that cover must necessarily apply. Wasa shows quite neatly why that is not always the case.
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Hi Jolyon,
Thanks for this post. Very interesting. Wish I could have attended from Bermuda.
Re your note on the question “[s]upposing that the underlying law had always and explicitly been that of Pennsylvania”, did Mr Schaff think he would still have been home and dry for WASA on his submissions (e.g. para.50 of Mance LJ) that ‘Vesta’ and ‘Groupama’ covered only (and are best restricted to) English-style warranties found in reinsurance contracts or are policy decisions preventing reinsurers from taking overly technical defences?
Regards, Alex
Alex,
I don’t recall Schaff touching on that specific point, perhaps because it is so unknowable. My impression is that he would have been reluctant to consider himself ‘home and dry’ on any point in such waters!
Alan Weir, at Ince & Co., writes quite convincingly, I think, in their bulletin on the decision (you’ll have to search their website) that “the sensible consistency approach to interpretation will be applied to clarify modest inconsistencies between similar terms in the two policies” (my emphasis), yet also goes on to wonder where on earth this all leaves the Full RI clause: “If these are not terms of incorporation then it is logical to ask what they mean”.
If I take anything from the decision, and it may be something that is so blindingly plain as to be not worth pointing out, it is that these are essentially points of construction — you have to look at the words and if the meaning is clear, apply it; if not, then you try and use the ‘harmonious construction’ route. But how far you can apply ‘harmonious construction’ and where the line is to be drawn is far from clear as a general principle.
I think that the law has become more subtle again. I also think that this is likely to lead to further disputes.
Jolyon