AGF Insurance Ltd v Lexington Insurance Company; Wasa International Insurance Company Ltd v Lexington Insurance Company

JurisdictionEngland & Wales
Judgment Date30 July 2009
Neutral Citation[2009] UKHL 40
Date30 July 2009
CourtHouse of Lords
Lexington Insurance Company
AGF Insurance Limited

and one other action

Lexington Insurance Company
Wasa International Insurance Company Limited

and one other action

[2009] UKHL 40

Appellate Committee

Lord Phillips of Worth Matravers

Lord Walker of Gestingthorpe

Lord Brown of Eaton-under-Heywood

Lord Mance

Lord Collins of Mapesbury


Appellant (AGF):

Neil Calver QC

Stephen Midwinter

(Instructed by Carter Perry Bailey LLP (preceded by Charles Russell LLP))


Jonathan Sumption QC

Christopher Butcher QC

(Instructed by Chadbourne & Parke LLP)

Appellant (Wasa):

Alistair Schaff QC

Siobán Healy

(Instructed by Addleshaw Goddard LLP)


My Lords,


I have had the benefit of reading in draft the opinions of my noble and learned friends Lord Mance and Lord Collins of Mapesbury. I agree with their conclusion that this appeal should be allowed and the reasons that each gives for that conclusion, for those reasons are in harmony. I propose to explain shortly why I agree with their reasoning.


Essentially the result of this appeal is dictated by the agreed fact that the reinsurance contract that is the subject of the appeal is governed by English law and by the well established principle, not challenged in this case, that under English law a contract of reinsurance in relation to property is a contract under which the reinsurers insure the property that is the subject of the primary insurance; it is not simply a contract under which the reinsurers agree to indemnify the insurers in relation to any liability that they may incur under the primary insurance - British Dominions General Insurance Co Ltd v Duder [1915] 2 KB 394 at p. 400.


The following matters are common ground:

  • i) There is no significant difference between the terms of the primary insurance and the reinsurance.

  • ii) Under English principles of construction, the reinsurance covers only damage to property caused during the period of the cover.

  • iii) The Supreme Court of Washington, applying Pennsylvanian law to the construction of the primary insurance, has held that it covers incremental damage to property that includes damage that occurred both before and after the period of cover, provided only that part of the damage occurred during the period of cover.

  • iv) The decision of the Supreme Court of Washington is not perverse.


This last agreed fact is significant. The principle of the English law of construction that confines recovery to damage occurring during the period covered by the policy is no more nor less than the fundamental principle that the words of a contract should normally be given the meaning that they naturally bear. It has not been suggested, nor could it, that the alternative construction given to the policy by the Supreme Court of Washington is an alternative meaning that the words of the policy can naturally bear. The reason why the Washington Supreme Court has reached such a radically different interpretation of the scope of cover is because it has adopted a principle of construction that has been applied to contracts of insurance of property by the courts of Pennsylvania, and a minority of other American States. That principle, as Lord Collins has demonstrated, has its origin in the approach to insurance claims for the consequences of asbestos. I suspect that this may, in its turn, be derived from a similar approach to claims in tort.


It is unlikely that those who were party to the contract of reinsurance in 1977 can have anticipated that the interpretation of the wording common to the primary insurance and the reinsurance would differ so radically dependent on the law applied to its interpretation. Did the parties agree, or are they to be implied to have agreed, that in such an event the principles of interpretation adopted in respect of the primary insurance should be adopted, in preference to the principles of English law?


I agree with Lord Mance, for the reasons that he gives, that the "full reinsurance" clause in this case, and "follow the settlements" clauses in general, did not and do not have the effect of bringing within the cover of a policy of reinsurance risks that, on the true interpretation of the policy, would not otherwise be covered by it.


Longmore LJ concluded that, at the time that the reinsurance was written those parties to it would have anticipated that the interpretation of the primary insurance would be determined according to the law of Pennsylvania and implicitly agreed that the same law would apply to the interpretation of the reinsurance. For the reasons given by Lord Mance and Lord Collins, I do not consider that this finding was justified.


The vital issue is, I think, reduced to this. Did the parties to the reinsurance implicitly agree that whatever law might be applied to interpretation of the primary cover, and whatever result this might produce, would apply equally to the reinsurance? An affirmative answer to this question would, effectively, treat the contract of reinsurance as one to indemnify the primary insurer in respect of any liability sustained under the primary cover. There might, as Sedley LJ considered, be much to be said for adopting this approach, and it is an approach that it would be open to the market, by appropriate contractual terms, to follow. Those who, in 1977, were party to this reinsurance did not do so.


It is for these reasons that I agree with Lord Mance and Lord Collins that this appeal should be allowed and the judgment of Simon J restored.


My Lords,


I have had the privilege of considering in draft the opinion of my noble and learned friend Lord Collins of Mapesbury. I am in full agreement with it and for the reasons given by Lord Collins I would allow this appeal.


My Lords,


I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Collins of Mapesbury. I entirely agree with it and add a brief opinion of my own only to stress the comparatively narrow basis on which I conclude that this appeal ought to succeed. All the relevant facts, law and argument I gratefully adopt from my Lord's opinion and none of these shall I repeat.


That the respondent insurers ("Lexington") were liable under the terms of their policy ("the insurance contract") to the insured ("Alcoa"), as held, however surprisingly to English eyes, by the Supreme Court of Washington, cannot now be disputed. This liability was for the clean-up costs of pollution and contamination damage to Alcoa's sites occurring during the 44-year period 1942-1986. No matter that the insurance contract was against the risk of "all physical loss of or damage to" Alcoa's property only for the three-year period 1 July 1977 to 1 July 1980, the Supreme Court, applying Pennsylvania law, held that:

"It seems clear from the policy language that any physical loss or damage manifesting itself during the time a … policy was in effect was covered by the policy, including pollution damage starting before the policy inception."

The language of the policy, the Court said, "is very broad and contains no limitation as to time of the physical loss or damage to property. There is no exclusion in the policy for physical loss or damage that may have begun spreading before the policy inception."


That was the basis of Lexington's liability to Alcoa and that Lexington was properly held thus liable is not in issue before your Lordships. What is in issue is the appellant reinsurers' liability to Lexington under the reinsurers' policies ("the reinsurance contracts"). The reinsurance contracts provided cover in respect of the same three-year period as the insurance contract and ostensibly in respect of the same loss: "All Risks of Physical Loss or Damage" (to the relevant property). In all material respects, save one, the terms of the reinsurance contracts mirrored those of the insurance contract. That one respect, central to the resolution of these appeals, was with regard to the applicable law respectively governing them. The insurance contract was subject to Pennsylania law (albeit, as Lord Collins explains, not predictably so at the date these contracts were entered into); the reinsurance contracts were subject to English law. Under Pennsylvania law, as already stated, the fact that cover was expressly provided only for the three years 1 July 1977 to 1 July 1980 was of no relevance in limiting the extent of the recoverable loss provided only that some physical damage became manifest during the three-year period. Plainly, however, that is not the position under English law. Under English law nothing could be clearer than that a contract providing cover for loss and damage occurring only during a specified three-year period could not be construed as covering in addition damage occurring before (or for that matter after) that three-year period.


Lexington's response I understand to be essentially this. The all-important question is what constituted the insured damage under the respective contracts. The insured damage under the insurance contract was held to be that resulting from all damage to the property whensoever occurring providing only that some of it became manifest during the actual period of cover. It is, submit Lexington, possible to construe the reinsurance contracts similarly and, because of the strong presumption that liability under a proportional facultative reinsurance policy is co-extensive with liability under the primary policy, that, therefore, is the construction which the reinsurance contracts should be found to bear.


For my part I would reject this argument. Were it correct, indeed, it would follow, as Mr...

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