Aegis Electrical & Gas International Services Company Limited ("Aegis") provided "all risks" cover for an oil refinery in Aruba. It obtained facultative reinsurance with Continental Casualty Company ("Continental") in respect of onshore property, ie, the reinsurance cover was narrower in scope than the insurance cover: they were not "back to back". The reinsurance included a condition which stated "to follow the terms, clauses, conditions, exceptions and settlements of the original policy wording as far as applicable hereto".

When Continental’s underwriter had initialled the slip she referred to and appended two additional clauses ("the Additional Conditions"). The Additional Conditions defined "Accident" as meaning "a sudden and accidental breakdown of an object or part thereof, which manifests itself at the time of the occurrence by physical damage that necessitates repair or replacement of the Object or part thereof". It then provided that "Accident shall not mean or include any loss or damage" resulting from specified events or of specified kind, including "(f) from explosion…". Aegis settled claims arising from two incidents at the oil refinery and sought to recover from Continental. Continental denied that either loss fell within the scope of the reinsurance. The first issue concerned how the Additional Conditions affected the scope of the reinsurance cover. Continental argued that the Additional Conditions restricted the scope of the reinsurance cover to losses from an Accident, as defined.

In response Aegis submitted that the Additional Conditions could not impinge on the provisions of the reinsurance contract contained in the slip. It argued that the type of risks covered by the reinsurance contract was defined in the slip as "Machinery breakdown, boiler explosion and business interruption following for onshore assets only". Accordingly, the reinsurance applied to all such losses. Aegis argued that the purpose of the Additional Conditions was to amend two relatively incidental provisions in the underlying insurance contract. (As stated above, the reinsurance contract included a follow the settlements clause.)

Mr Justice Smith considered that it would be surprising that the parties should decide to tinker with the effect of the follow the settlements provision in the reinsurance cover in the minor and oblique way suggested by Aegis. He therefore preferred Continental’s view that the Additional Conditions defined the scope of cover under the reinsurance contract. Accordingly, Continental was not liable to Aegis in respect of the first loss.

The dispute regarding the second loss concerned whether it arose from an explosion, which was excluded from the definition of Accident in the Additional Conditions. The exclusion would only apply if explosion was the proximate cause of the loss.

Continental argued that the loss was caused by an explosion. Aegis disputed this. Aegis also argued that the follow the settlements clause prevented Continental from disputing the factual basis upon which Aegis settled the underlying claim (which Aegis argued was not on the basis that there was an explosion), and that Continental was confined to arguing whether on that basis the loss fell within the reinsurance contract as a matter of law. Mr Justice Smith considered expert evidence relating to the cause of the loss and the meaning of the term explosion, which should be interpreted as a matter of ordinary usage. On the facts he was not persuaded that there was any explosion. The second loss was therefore covered by the reinsurance contract.

Comment

Mr Justice Smith’s conclusion meant that it was unnecessary for him to consider Aegis’ argument in relation to the follow the settlements clause. Nevertheless, he went on to decide that the manner in which the claim was settled by Aegis did not exclude the possibility that the loss had resulted from an explosion, but that he would have rejected Aegis’ argument in any event. The insurance and reinsurance cover were not back to back and, accordingly, it did not follow that a loss which falls within the original cover would fall within the reinsurance cover, or would do so only subject to legal questions about what the reinsurance covers. The clause did not preclude Continental from disputing the basis on which Aegis settled the claim or the facts that they recognised as the basis for settling it.