Last November the Commercial Court provided guidance on the operation of follow the settlements clauses in Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd (2013).  The case concerned the determination of five preliminary issues and the court dismissed Novae’s arguments on all five issues.  A summary of that decision can be found here.  Novae’s appeal is due to be heard in October 2014.  In the meantime, Tokio Marine (“TMEI”) sought summary judgment against Novae’s other defence: that the underlying insurer failed to take all proper and business like steps in making a settlement with the original insured.  Judgment was handed down on 2 July 2014 granting the summary judgment against Novae, concluding that original reinsured, ACE, achieved a “good settlement”.


Properties owned by a subsidiary of Tesco plc were damaged by the Thai floods in 2011. They were insured under a Master Policy by ACE Europe and by local ACE companies under Local Policies. Those ACE entities were reinsured under a facultative reinsurance (the “Reinsurance”), underwritten in part by the claimant, TMEI.  TMEI in turn benefited from a facultative excess of loss retrocession underwritten by the defendant, Novae (the “Retrocession”). 

The Master Policy contained a 72 hour clause and was governed by English Law, and also included aggregation provisions that allowed a “series of Occurrences” to be aggregated into one Occurrence if that series is attributable to “one source or originating cause”.  The Local Policies did not include the 72 hour clause and were governed by Thai law. 

Tesco claimed in the first instance over £125m.  ACE appointed loss adjusters and forensic accountants to adjust Tesco’s claim, and the claim value was considered to be £113m.  ACE initially took the view that applying the 72 hour clause resulted in 11 policy deductibles.  Tesco obtained a letter from its lawyers strongly contending that the losses arose from one “Occurrence” applying the aggregation wording in the Master Policy, and therefore only one self-insured retention of £2.5m applied.  Tesco made an offer to settle its claim for £82.5m with a single deductible for £2.5m subject to a deadline that settlement had to be concluded within the 2011/2012 financial year, and ACE agreed to the settlement. 

TMEI paid its share of the settled claims and sought to recover from Novae.  Novae denied liability, principally because it disagreed that the Thai Floods constituted a single event.  Instead, it asserted that multiple deductibles were payable, none of which would trigger a claim under the Retrocession.  In addition, Novae alleged that ACE did not take all proper and business like steps in making the settlement and TMEI brought a claim for summary judgment against Novae asserting that such a defence has no real prospect of success.

Proper and Businesslike steps

The Retrocession contained a single proviso follow the settlements provision of the type dealt with in ICA v Scor(1985) namely that a reinsurer was obliged to follow the settlements provided the reinsured could show that (a) the claims fell within the reinsurance as a matter of law and (b) the reinsured acted honestly and took all proper and businesslike steps in making such settlements.  

In arguing that ACE did not take all proper and businesslike steps, Novae’s primary submission was that ACE should have further considered the coverage position under the Local Policies and not only the Master Policy.  Novae also submitted that it was unbusinesslike for ACE to have failed to properly analyse and investigate a number of factors, including whether the losses could be attributed to different sources or original causes, suggesting that ACE should have procured meteorological reports into the weather patterns responsible for the Thai flooding.

Novae further argued that it is irrelevant that Novae had not demonstrated that settlement would have been better if ACE undertook the further investigation i.e. that the alleged proper and business like steps were taken – the focus should be on the conduct of ACE in entering the settlement and not the reasonableness of that settlement.  In other words, Novae argued that there is no requirement for a reinsurer to show causation under the Scor test.

In response, TMEI pointed out that the burden was on Novae to show that ACE did not take proper and businesslike steps and reasoned that, even if advice on Thai law had been completely in favour of ACE, the deductibles for each occurrence would have been £7.53m, and so settlement of a potential £113m claim at £82.5m was still an excellent settlement.  In addition, even if the opinion of Thai lawyers had been sought on the meaning and effect of the Local Policy, it would have been very unlikely that the advice would have meant that the £7.53m deductible (i.e. 212 Occurrences) would have applied.  TMEI argued that it cannot be said to be improper or unbusinesslike to not take points that would not affect the bottom line.  In other words, even if ACE had strong arguments that the higher deductible should have applied, it would still have been proper and businesslike to settle a claim projected to be finally adjusted at between £90 to £100m for £82.5m net.

Decision and comment

Mr Justice Field accepted TMEI’s submissions and concluded that Novae’s defence, that ACE failed to act in a proper and businesslike manner, had no prospect of success.  In making his decision Mr Justice Field considered that given Tesco’s offer to settle and the loss adjuster’s projected final figure for the loss, ACE were entitled to conclude that there was nothing additional to be gained by further investigation into the coverage under the Local Policy or by disputing Tesco’s opinion as to the meaning and definition of “Occurrence”.

The Judge did not deal specifically with any of Novae’s submissions in relation to whether the test under ICA v Scor as to proper and businesslike steps should include an element of causation.  However, he did comment that “the settlement at £80m net was undoubtedly a good settlement” perhaps demonstrating that his decision was influenced by the fact that Novae could not show that further investigation by ACE may not have led to a better settlement. 

The judgment does not set down any hard and fast legal guidance on what may constitute “proper and businesslike steps” under a Scor follow the settlements clause in any given case.  Each case will ultimately need to be decided on its facts as to the conduct of the (re)insured.  Reinsureds will, however, be encouraged that at least one Commercial Court judge appears to take the view that a settlement is likely to be upheld if the reinsured has achieved a ‘good deal’ from a commercial standpoint.  A reinsurer is unlikely to be able to challenge the steps taken by the reinsured unless it can demonstrate that, if the reinsured acted differently, it would have achieved a materially better settlement.   This reflects the widely understood purpose of the Scor type follow clause, in which a reinsurer has the burden to show that it should not follow the settlements of the reinsured.  This judgment suggests that in the majority of cases that burden is likely to be a difficult one to satisfy.

Further readingTokio Marine Europe Insurance Limited v Novae Corporate Underwriting Limited [2014] EWHC 2105 (Comm)