Consideration of whether a "back-to-back"presumption was to be applied for a claim for under a resinurance policy.

In Issue

  • Whether the ‘initial event’ sentence contained in the addendum to the agreement between the parties qualified the extent of cover provided by the reinsurer; and
  • If so, what constitutes the initial event.

Background

On 23 June 2003 MetLife and RGA entered into a reinsurance treaty whereby RGA agreed to reinsure the liabilities MetLife had under group life insurance policies, set out in appendix A to the treaty.

MetLife subsequently sought cover with respect to approximately 250 total and permanent disablement claims that it had paid pursuant to its policy, however, RGA denied cover on the basis of an “initial event” sentence contained in the addendum (which meant there was no automatic entitlement to cover if the initial event that had caused the TPD claim occurred prior to 1 July 2005).

Decision at trial

The trial judge concluded that in relation to the initial event sentence, RGA was not required to consider claims unless the initial event leading to or contributing to the claim occurred after the date of effect of the treaty, and accordingly the sentence operated as a condition of, or exclusion from, cover. Accordingly, the trial judge found that RGA did not have an automatic obligation to follow the decision MetLife had made with respect to cover.

MetLife had also argued that there was a presumption that the reinsurance was “back to back” with the underlying policy. The trial judge rejected that argument on the basis that the language of the contract made it clear this was not the parties’ intention.

Decision on appeal

MetLife appealed the decision. The Court of Appeal dismissed the appeal and upheld the findings of the trial judge.

MetLife again submitted that the initial event sentence was to be construed as placing a qualification upon the types of claims where RGA would be required to automatically follow MetLife’s settlement decisions. It argued that the initial event sentence was directed towards claims handling rather than the scope of cover. In the alternative, MetLife also argued, as it had in the primary claim, that irrespective of the meaning of the initial event sentence, there was a presumption that the cover for the reinsurance contract was “back to back” with MetLife’s policy. RGA argued that the initial event sentence acted as a qualification or an exclusion upon the cover that it had granted to MetLife and that there was no apparent presumption that the cover was intended to be back to back.

In dealing with the issue of the back to back presumption, the Court of Appeal agreed with the trial judge’s conclusion that the presumption had no significance in the present circumstances. Rather, in the creation of the addendum document, the parties had intentionally sought to create an independent document stating the terms of the bargain between the parties, including where it diverged and replicated the underlying insurance. Accordingly, the Court of Appeal rejected the argument that there was a back to back presumption available to MetLife.

In terms of the initial event sentence, the Court of Appeal reaffirmed that courts will consider the ordinary meaning of terminology and the context and location in which particular phrases appear within an agreement in order to derive a logical interpretation of the relevant words. The Court of Appeal found that there were a number of difficulties with MetLife’s submissions regarding the interpretation of the initial event sentence. In particular, the placement of the initial event sentence in the policy was not logical and accordingly little weight should be placed as to where it was found within the policy wording. The Court of Appeal otherwise found that the words did not suggest that there should be any narrow interpretation applied (as argued by MetLife) and concluded that while the issues of construction were not entirely clear, there was little evidence in support of Metlife’s construction.

Implications for you

This decision again demonstrates that the ordinary construction of a policy will trump complicated arguments regarding contextual interpretations. Further, with respect to the back to back presumption, a court will not find in favour of a presumption if there is objective evidence of a differing intention by the parties.