Back-to-basics in back-to-back reinsurance
The English High Court’s decision in Royal & Sun Alliance Insurance Ltd & Ors v Equitas Insurance Ltd [2025] EWHC 2704 (Comm) provides important guidance on the interpretation of back-to-back excess of loss reinsurance policies, particularly in relation to clauses dealing with defence costs, claims cooperation, and the following of settlements.
The claimants in the proceedings were the primary insurers. They had provided liability cover to a multinational manufacturing group and its subsidiaries under global master policies. The reinsurer was the successor to the liabilities of various Lloyd’s syndicates that had underwritten the relevant reinsurance policies in favour of the claimants.
The reinsurance was facultative and written on an excess of loss basis, back-to-back with the insurance policies, and expressly stated to follow original terms, conditions and settlements. The cover under the reinsurance policies was £16 million in excess of £4 million.
The underlying insured entities faced numerous bodily injury claims in the United States arising from exposure to asbestos-containing and welding-related products. The claimants indemnified the insured and sought recovery from the reinsurer under the five reinsurance policies for losses exceeding the £4 million excess. The total sum claimed, before interest, was £3,760,574.83.
The judgment addressed three key issues: whether the excess applied to defence costs; the interaction between the claims cooperation clause and the follow the settlements clause; and whether the claimants had taken proper and businesslike steps when entering into the relevant settlement agreements.
Defence costs
This issue was whether, as the reinsurer asserted, the excess in the reinsurance policies was eroded only by indemnity payments or, as the claimants asserted, it was eroded also by defence costs. The determination of this issue required a proper interpretation of the reinsurance policies.
The reinsurance policies were facultative excess of loss policies, back-to-back with the respective insurance policies, which meant that the reinsurer agreed that, if the insurer was liable under the policy, the reinsurer would accept liability to pay whatever percentage of the claim had been agreed to be reinsured.
The insurance policies provided indemnity cover up to £20 million per period, with defence costs payable in addition and without financial limit, though subject to a temporal limit; for as long as the indemnity limit had not been exhausted. The reinsurance policies provided £16 million cover in excess of £4 million and included a follow original terms clause.
The court held that the £4 million excess and £16 million cover in the reinsurance policies reflected the £20 million indemnity limit in the insurance policies and did not include defence costs. The wording of the reinsurance policies referred to “losses” in a way that aligned with indemnity obligations, not with defence costs.
Endorsements and clauses within the reinsurance policies consistently treated the £4 million and £16 million figures as relating to indemnity only.
This interpretation was regarded by the court as commercially logical. The court noted that insurers might incur substantial defence costs without triggering the excess, and once the excess under the reinsurance policies was exhausted, the reinsurers would be exposed to defence costs without financial limit until the indemnity cap was reached. This was a function of the claimant’s obligation to pay defence costs in addition to indemnity and the back-to-back nature of the Reinsurance Policies.
Claims cooperation and follow settlements
The second issue concerned the relationship between the claims cooperation clause and the follow the settlements clause in the reinsurance policies.
The relevant extract of the claims cooperation clause reads:
“the course to be adopted by the primary insurers shall be determined by agreement between the primary insurers and re-insurers and the primary insurers shall not without the consent of re-insurers litigate with regard to such loss but such consent shall not be unreasonably withheld”
The relevant extract of the settlement clause reads:
“To follow original terms, conditions and settlements (as far as applicable to the layer)”
The reinsurer argued that the Claims Cooperation Clause restricted the insurer’s ability to make settlements binding on the reinsurer, relying on the decision in Scor v Insurance Co. of Africa [1985] 1 Lloyd’s Rep 312 (Scor).
In Scor, that claims cooperation clause expressly prohibited settlement without reinsurer approval, which the court found to be materially inconsistent with the follow settlements clause. The result was that reinsurers were only bound to follow settlements they had authorised. The reinsurer sought to apply the same reasoning’s Scor, contending that the claimants could not bind it to settlements unless the reinsurers had agreed to the course adopted.
The court found that the claims cooperation clause in the reinsurance policies did not contain any express prohibition on settlement without consent. Instead, it restricted the insurer’s ability to litigate without agreement. The clause was interpreted as a strategic coordination mechanism for large exposures, not a veto over settlements.
The court explained that by interpreting the clause as requiring reinsurer approval for settlement terms would effectively emasculate the follow settlements clause, which was not supported by the wording in the reinsurance policies. The clause could have explicitly required reinsurer approval for settlements, but it did not. The court concluded that the course to be adopted referred to litigation strategy, not settlement terms, and that absent agreement to litigate, the insurer retained the freedom to settle.
The court held that the reinsurer was bound to follow settlements if the claim fell within the scope of the reinsurance and the insurers had acted honestly and taken proper and businesslike steps.
The court further found that the reinsurer had, in any event, agreed to the course adopted in respect of the settlement agreements.
Proper and businesslike steps
The third issue concerned whether the insurers had taken proper and businesslike steps when entering into the Toxic Torts Settlement Agreement.
A reinsurer can refuse to follow settlements only if the settled claim was outside the reinsured cover as a matter of law, or the insurer failed to act honestly and to take all proper and businesslike steps. An allegation of failure to take proper and businesslike steps is tantamount to alleging professional negligence, and the court noted it had not been referred to any English case where such a failure had been found.
Once the insurer shows the settled claim fell within the reinsurance, the burden shifts to the reinsurer to plead and prove a failure to take proper and businesslike steps.
The settlement agreement was a multi-party settlement agreement concluded between the underlying insured, its subsidiary, and several of its insurers, including the claimants. The settlement agreement resolved thousands of bodily injury claims arising from exposure to asbestos-containing and welding-related products.
The reinsurer argued that the insurers had failed to take proper and businesslike steps in negotiating and concluding the agreement. The reinsurer alleged that the insured’s legal adviser had not reviewed key policy documents containing pollution exclusions; that the settlement was premature as opposition briefs in the underlying litigation had not yet been filed; and that the allocation methodology used was unreasonable and led to an inflated share of liability for the insurer.
The court rejected these arguments and held that the insurer’s decisions, including the allocation methodology, legal advice, and timing of settlement, were commercially reasonable and not negligent in the circumstances of this case.
Accordingly, the court held that the reinsurer was bound by the follow settlements clause.
