The Commercial Court has affirmed, yet again, that a reinsurer’s obligation to “follow the settlements” of its reinsured does not entitle the reinsured to cover where the reinsurance contract contains terms making its scope narrower than the original policy.

The dispute in this case concerned whether Aegis, as reinsured, was able to recover from Continental Casualty Company (CCC), its reinsurer, for claims arising from incidents at an oil refinery on the Caribbean island of Aruba. The claims were in respect of damage to the ‘Visbreaker’ unit and the ‘DIA reactor’ (“DIAR”) - both pieces of machinery used in the oil refining industry. Aegis had settled the claims made by the refinery owner. Aegis then sought recovery from CCC. It was not disputed that Aegis’s underlying settlement had been made properly.

CCC denied Aegis’s claim, relying on the fact that attached to the reinsurance slip were additional conditions relating to Boiler and Machinery cover containing definitions of “accident” and “object” which, if found to apply to the entire reinsurance contract, would exclude recovery from the reinsurers. CCC argued that the Visbreaker was not an “object” within the restricted definition of that term in the additional conditions; with respect to the DIAR loss, reinsurers relied upon an exclusion for “explosion” in the definition of “accident.”

Aegis argued that the provisions of the slip concerning the type of cover and interests protected did not use the terms “accident” and “object”; the definitions of those terms in the attached conditions did not therefore impinge upon the general reinsurance provisions. Further, although both terms appeared (and were defined) in the original policy, neither was used in the definition of cover; the terms were used in the policy only in the context of specific clauses relating to cover for accidents causing pollution or the insurer’s right to suspend the policy in the event of the discovery of a dangerous condition in an object. As the reinsurance provided that the cover would "follow terms, clauses, conditions, exceptions of the original policy wording as far as applicable", the additional conditions were to be understood to relate only to the incorporated terms of the direct policy.

The court found against Aegis on the issue of construction of the reinsurance. As the underlying policy did not use either “accident” or “object” in the definition of cover, the court was not willing to believe that these terms in the reinsurance related only to the minor incidental provisions in the original policy in which the same words appeared. CCC’s interpretation whereby the additional provisions should be regarded as providing a definition of cover was favoured by the court.

The court went on to find that the Visbreaker was not an “object” within the restricted definition of the reinsurance and so upheld the reinsurers’ denial of cover for that loss. As regards the DIAR loss, however, the court was not persuaded that the damage was caused by an explosion. Aegis therefore succeeded on the DIAR claim.

As the original policy and the reinsurance were found not to be entirely “back to back” Aegis was not able to rely on the “follow” provision; this was qualified by the limitation “insofar as applicable”. The court interpreted this to mean that “follow the settlements” would apply only where the risk was actually covered by the reinsurance policy.