The decision in MetLife Insurance Ltd v RGA Reinsurance Company of Australia Ltd1 considered the ‘back to back’ presumption in facultative proportional reinsurance and demonstrates the need for parties to take care with the language used when drafting reinsurance contracts.
MetLife Insurance Ltd (MetLife), formerly Citicorp Life Insurance Ltd, purchased a contract of reinsurance (Original Treaty) from RGA Reinsurance Company of Australia Ltd (RGA) in June 2003 for reinsurance of its group life insurance policies. Although it was called a ‘treaty’, the contract contained a facility for the parties to agree facultative reinsurance.
MetLife subsequently issued a group life insurance policy covering death or total and permanent disablement of members of the New South Wales Police Force (Blue Ribbon policy), and RGA reinsured MetLife facultatively in respect of the Blue Ribbon policy.
The terms of the reinsurance were documented by way of a sloppily drafted Addendum to the Original Treaty (Addendum). Both the Blue Ribbon policy and the reinsurance commenced with effect from 1 July 2005.
The Addendum contained a sentence which gave rise to the dispute between MetLife and RGA, as follows:
“For a claim to be eligible for consideration under the reinsurance arrangement the initial event leading to or contributing to that claim must occur after the date of effect of the treaty”
The parties referred to this provision as the ‘Initial Event Sentence’. The Initial Event Sentence formed part of the Addendum which dealt with claims handling limits. The dispute concerned whether the reinsurance extended to claims by police officers which arose in part out of events occurring before 1 July 2015.
Two issues arose for determination:
- The principal question was whether (as contended by RGA) the Initial Event Sentence qualified RGA’s obligation to provide cover under the reinsurance, rather than merely qualifying the claims handling limits within which RGA was obliged to follow MetLife’s settlement decisions.
- If RGA were correct and the Initial Event Sentence qualified the reinsurance coverage, then a subsidiary question arose as to whether (as contended by RGA) “the initial event leading to or contributing to that claim” was a reference to the initial event leading to the death or incapacity of the police officer, or was instead the event leading to the claim being made under the MetLife policy (death or a qualifying period of total and permanent disablement.)
At first instance, the judgment on both issues was in favour of RGA.
The NSW Court of Appeal dismissed MetLife’s appeal as follows:
On the principal question, MetLife argued that that the meaning and operation of the Initial Event Sequence related to claims handling, rather than it being an exclusion. In the alternative, MetLife also argued, relying on the English cases of Vesta v Butcher, Groupama v Catatumbo and Wasa v Lexington, that the Initial Event Sentence was insufficiently clear to displace the back-to-back presumption which was to be applied when construing facultative proportional reinsurance contracts.
The court did not accept MetLife’s arguments that a narrow meaning should be given to the words “consideration under the reinsurance arrangement” in the Initial Event Sentence and stated that MetLife’s arguments would be considerably stronger if this sentence had used words with a narrower connotation than “reinsurance arrangement”.
In respect of MetLife’s argument that the presumption of back to back cover had not been rebutted, the court noted that a large part of the Addendum was directed to replicating provisions from the Blue Ribbon policy, supporting an inference that the parties intended to create a free-standing document.
The Court of Appeal held that the Addendum was not a “slender” or “short form” document like a traditional reinsurance slip, which especially calls for the presumption in order to fix its legal meaning. Rather, the parties had sought in the Addendum to restate the terms of the reinsurance contract, both where it diverged from the underlying insurance, and where it replicated the underlying insurance so that no recourse to the underlying policy was needed. Accordingly, the back-to-back presumption had no significance in the construction of the Addendum.
On the subsidiary question, MetLife argued that the words “leading to or contributing to that claim” directed attention to the event leading to the claim being made under the MetLife policy (for example, the death or total and permanent disablement of the police officer, rather the underlying events leading to these conditions, which may have occurred much earlier).
The Court of Appeal disagreed and upheld the trial judge’s finding that the words “or contributing to” naturally encompassed a cause which, although it may not be the immediate or proximate cause of the claim, nonetheless contributed, in some way that was not de minimis, to the occurrence of the condition that led to the making of the claim.
This ruling throws interesting new light on the application of the back to back presumption, and again highlights the need for thoughtful contract drafting.