In Wasa v Lexington [2008] EWCA Civ 150, Lexington appealed against the decision of the English Commercial Court that it was not entitled to recover from its reinsureds in full its settlement with its insured, Alcoa. Lexington had settled with Alcoa after being found jointly and severally liable by the Supreme Court of Washington for Alcoa’s clean-up costs for pollution damage, irrespective of whether the damage had been sustained before, during or after the insurance period. Mr Justice Simon held that the reinsurance contract required the reinsurers to indemnify Lexington in respect of the clean up costs for the three year reinsurance period only, and not for all damage which occurred before and after that period. Click here for full details of the first instance decision.

The Court of Appeal unanimously overruled Simon J's findings and allowed Lexington's appeal. The Court considered that rather than ask whether the reinsurance was intended to be back to back, or whether it was intended only to apply to loss and damage occurring within the policy period, it was best to ask whether the parties intended that, to the extent that they used the same or equivalent wording in the reinsurance as in the underlying insurance, the wording was to have the same meaning in both contracts. The contracts provided cover for property for the same period. As such, it was natural to infer that the parties intended that the wording should have the same meaning in each contract. The same period of cover was in issue and the same period of cover should receive the same interpretation in both the original insurance and the reinsurance.

The Court disagreed that the reinsurance was an insurance of the subject-matter of the primary insurance and not an insurance of the insurer's own liability and confirmed that “the need for the fiction that reinsurance covered the primary risk and not the insurer’s own potential liability is…long spent. The practice and vocabulary of reinsurance law have for a long time now reflected the reality that what is reinsured is the insurer’s own liability.”

This decision has been eagerly awaited by insurers and reinsurers alike. Reinsurers will have to be alive to the fact that where similar wording is used in the insurance and reinsurance contracts, a court may find that the parties intended the wording to have the same meaning in both contracts. In order to avoid the position now facing Lexington's reinsurers, express language will need to be included to exclude losses outside the period of cover. It remains to be seen whether this landmark ruling will be appealed to the House of Lords and we will continue to report developments here on InsureReinsure.com.