The London reinsurance market will be watching closely in coming weeks for the judgment in Lexington Insurance Company v Wasa International Insurance Company Ltd. At stake is an important point of interpretation of “follow the settlement” clauses.

Underlying the dispute is pollution liability of Alcoa in the USA over a period dating back to the end of the Second World War. The Superior Court of Washington State, applying Pennsylvania law, determined that Lexington who had insured for only 3 years of the total period was liable for all damage flowing from the relevant occurrences. It was enough that some damage had occurred in the policy years in question and a pro rata approach was not to be taken. London reinsurers of Lexington argued to the Court of Appeal in England that the reinsurance contracts do not extend to cover such a result and only damage actually occurring in the policy years in question is within the scope of the reinsurance.

The Court of Appeal (see [2008] EWCA Civ 150) took the approach that the question was straightforwardly whether the wording used to define the period of cover was to be interpreted in the same way in both the insurance contract and the reinsurance contracts. Their answer was that it was to be interpreted in the same way, thus in effect exposing London reinsurers to an outcome in Pennsylvania which to English eyes may well be unsatisfactory. To use Longmore LJ’s own language, London reinsurers had to “take on the chin” the outcome in Pennsylvania, just as Lexington had to do.

Case Preview by Jeremy Mash of Olswang.

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