The Court of Appeal has overturned the decision of Simon J in the Commercial Court in WASA v Lexington concerning “follow the settlements” clauses in reinsurance contracts.

Lexington had insured Alcoa against loss of or damage to property and business interruption risks for three years from July 1977. The original policy was reinsured in London for precisely the same period.

Lexington was found jointly liable with other insurers by the Supreme Court of Washington State for the cost of remedying damage caused by pollution at a number of Alcoa's sites in the US over a period of nearly 50 years. The Washington court applied the law of Pennsylvania in coming to this decision. Lexington agreed to pay Alcoa a sum of more than $100,000,000. Lexington had looked to their reinsurers for indemnity but WASA and AGF (who had between them taken 2.5 per cent share of the reinsurance) declined to pay, arguing that the reinsurance contract was governed by English law and that they were liable only for such part of the damage to property as could be shown to have occurred during the three year period of the reinsurance, regardless of the “follow the settlements” language of the slip and the decision of the Supreme Court of Washington.

The Court of Appeal found that the same or equivalent words in insurance and reinsurance contracts should generally be given the same construction irrespective of the different governing laws of each contract, unless there were clear indications to the contrary. The case of Vesta v Butcher [1989] AC 852 was applied: the reinsurance contract should afford the same cover as the underlying insurance.

A more detailed summary of this decision will be available in the spring 2008 edition of Insurance Focus. The Court of Appeal's decision can be found through the following link: Insurance Focus - "Follow the settlements" in the spotlight