Whether a retrocessionaire bound to follow a settlement on basis the reinsured had not acted in a business-like manner


The background to this case was set out in Weekly Update 40/13. The claimant is a reinsurer seeking recovery from its retrocessionaire (the defendant). The retrocession contained an unqualified follow the settlements clause. It was established in the case of ICA v Scor [1985] that such  a clause is subject to two provisos: (1) that the claim falls within the scope of the reinsurance contract as a matter of law; and (2) that the reinsured has acted honestly and “taken all proper and businesslike steps in making the settlement”. The earlier decision (now on appeal to the Court of Appeal) dealt with the standard required to prove the first proviso. This case dealt with the second proviso and the retrocessionaire’s argument that the reinsured had not taken all proper and business like steps and hence it was not bound to follow its settlement. The claimant applied for summary judgment on the basis that the retrocessionaire’s defence had no real prospect of success.

The retrocessionaire argued, in essence, that the reinsured had not considered the wording of the direct policy when reaching its settlement with the insured and it ought to have taken legal advice from local lawyers. It argued that it was no defence to argue that the retrocessionaire ought to show that a better settlement would have been achieved had the reinsured taken the steps which the retrocessionaire wanted it to take. The claimant argued that the proviso mentioned above is intended to protect reinsurers against prejudicial settlements and if the final settlement figure was a good one, it cannot be said that there has been anything improper or unbusinesslike.

Field J held that there was no prospect of success in arguing that the reinsured had failed to act in a businesslike manner, even though it had not fully investigated the issue of aggregation under the local policy. The reinsured had been entitled to conclude that there was nothing further to be gained from such an investigation because the settlement figure was “undoubtedly a good settlement” (and GBP 10-20 million less than the projected final adjustment figure produced by the reinsured’s loss adjusters).

Accordingly, summary judgment was granted and if the retrocessionaire’s appeal to the Court of Appeal fails, it will be bound to follow the reinsured’s settlement.