Yesterday the House of Lords delivered a unanimous judgment in the long running and often controversial case of Wasa v Lexington [2009] UKHL 40, overturning the decision of the Court of Appeal (previously reported on the blog here).

In summary, the House of Lords found that the reinsurer, Wasa, was not obliged to indemnify its reinsured, Lexington, in respect of payments it made to its insured relating to damage that occurred outside the period of cover provided for in both the insurance and the reinsurance.

The appeal turned on whether the the fact that the insurance and reinsurance were on identical terms (except that they were governed by different systems of law) and were intended to be back to back, led to the conclusion that the reinsurers ought to be liable to indemnify Lexington for the whole of the loss paid under the insurance.

The House of Lords held that the reinsurance contract must be given its ordinary meaning under English law, such that it would only cover losses which occurred in the 3 year period of cover, not the losses covered by the insurance which occurred over a 44 year period. There was no rule of construction and no rule of law which stated that a reinsurer must respond to every valid claim under the insurance irrespective of the terms of the reinsurance.

The most important aspect to the decision was the way in which the Lords distinguished the present case from the decision of the House of Lords in Vesta v Butcher [1989] AC 852. It was held that in the present case (unlike in Vesta) at the time the contracts were entered into it was not possible for the parties to identify the foreign law which would govern the insurance. This was because the decision by the US courts that Pennsylvania law would govern the underlying insurance was based not on the particular facts relating to Lexington's insurance contract (which arguably had a closer connection to Massachusetts than Pennsylvania) but rather on the fact that the ultimate insured had a "comprehensive multilayered" insurance scheme with many different insurers across the US and elsewhere. As such, in the context of the wide ranging dispute with a large number of insurers, Pennsylvania (as the head office of the insured) was the only commonality between the insured and the various different insurers.

Lord Mance commented on the issue as follows: "...the reinsurance is an independent contract, with its own terms which fall to be construed under English law, and I see no basis for interpreting it as covering any liability which might subsequently be held to arise under the insurance in any State whose law might...be applied by reference to factors extraneous to the particular insurance to which alone the reinsurance related."

Accordingly, the House of Lords overturned the decision of the Court of Appeal and restored the decision of Simon J at first instance.

This decision will have wide ranging implications for London market reinsurers and the worldwide reinsurance market. It now seems that the existence of back to back contracts will not necessarily mean that a reinsurer will find that it is obliged to indemnify its reinsureds for losses that occur outside the period of cover of the reinsurance, at least in circumstances where the governing law of the insurance was not ascertainable at the time the reinsurance was entered into.