Forsikringsaktieselskapet Vesta v Butcher and Others (First Appeal)

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Bridge of Harwich,Lord Templeman,Lord Griffiths,Lord Ackner,Lord Lowry
Judgment Date26 Jan 1989
Judgment citation (vLex)[1989] UKHL J0126-1

[1989] UKHL J0126-1

House of Lords

Lord Bridge of Harwich

Lord Templeman

Lord Griffiths

Lord Ackner

Lord Lowry

Forsikringsaktieselskapet Vesta
Butcher and Others
(First Appeal)
Lord Bridge of Harwich

My Lords,


I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Templeman and Lord Lowry. For the reasons they give I would dismiss the appeal.


I wish also to record my concurrence in the views expressed by my noble and learned friend Lord Griffiths regarding the relationship normally to be found between contracts of insurance and contracts of re-insurance. I entirely agree with him as to the desirability of the Lloyd's standard form of reinsurance being redrafted in grammatical, intelligible and unambiguous language. The only people who can expect to profit from the obscurities of the present form Jl are the lawyers.

Lord Templeman

My Lords,


The business of the respondent Norwegian company, Vesta, comprises or includes the issue of insurance policies against the risk of loss from storm damage and other catastrophe being suffered by Norwegian fish farmers. The business of the appellant underwriters includes the issue of reinsurance policies against the risk of loss being suffered by insurers of fish farmers in many parts of the world. Vesta insured a Norwegian fish farmer. Vesta effected reinsurance with the underwriters for 90 per cent. of the liability of Vesta to the fish farmer. The fish farmer suffered loss as a result of storm damage and Vesta paid the loss. In these proceedings Vesta seek to recover 90 per cent. of the loss from the underwriters. The trial judge (Hobhouse J.) and the Court of Appeal (O'Connor and Neill L.JJ. and Sir Roger Ormrod) found in favour of Vesta. The underwriters appeal.


When both the insurance policy by Vesta in favour of the fish farmer and the reinsurance policy by the underwriters in favour of Vesta were under negotiation, the brokers required both policies to incorporate the following terms:

" Special conditions and warranties

It is warranted that a 24-hour watch be kept over the site.

Claims control clause

In the event of loss hereunder, no payment, offer or compromise shall be made without the consent of underwriters who shall have sole control of all negotiations.

Failure to comply with any of the warranties outlined hereunder will render this policy null and void. All warranties to be completed at the assured's expense."


A 24-hour watch was not kept on the fish farm so that there was a breach of warranty in each policy. Under Norwegian law, which governed the insurance policy issued by Vesta to the fish farmer, the breach of warranty did not render the policy null and void, despite the express words of the policy, because the breach was irrelevant to the loss. A 24-hour watch could not have prevented the loss of fish caused by the storm. Under English law, which governed the reinsurance policy issued by the underwriters to Vesta, the breach of warranty, whether relevant to the loss or not, rendered the reinsurance policy null and void. Therefore, say the underwriters, they are not liable to pay Vesta under the reinsurance policy although Vesta were liable to pay the fish farmer under the insurance policy.


The question is whether the reinsurance policy, upon its true construction, insured 90 per cent. of the liability of Vesta under the insurance policy or 90 per cent. of the liability which would have been incurred by Vesta if the insurance policy had been governed by English law.


By the reinsurance policy in terms both inelegant and ungrammatical:

"the underwriters hereby agree to reinsure against loss to the extent and in the manner hereinafter provided. Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the company [Vesta] and that the company retains during the currency of this policy at least the amount stated in the schedule as the retention on the identical subject-matter and risk and in identically the same proportion on each separate part thereof but, in the event of the retention being less than that stated in the schedule, the underwriters' lines to be proportionately reduced."


The reinsurance policy thus emphasised that the two policies were on identical terms, that the risks of the underwriters and Vesta were identical and that a claim settled under the insurance policy would be a claim payable under the reinsurance policy.

By the operative parts of the reinsurance policy:

"the underwriters � hereby bind ourselves � to pay or make good to the company all such loss as herein provided, such payment to be made after such loss is proved �"


The schedule defined the reinsured as Vesta and the original assured as the fish farmer. Retention was 10 per cent. The sum reinsured was 90 per cent. of 750,000 Norwegian kroners, the amount insured by Vesta, The period of reinsurance was expressed to commence and expire at the hour expressed in the original policy. "The perils and interest reinsured hereunder" were expressed to be " livestock reinsurance rainbow trout and salmon only, the property of the fish farmer] only as more fully set forth in the original policy."


By the reinsurance policy, the underwriters promised that if Vesta became liable for a loss under the insurance policy, then the underwriters would make good 90 per cent. of the loss. Vesta became liable for a loss under the insurance policy and the underwriters must perform and observe their promise in the reinsurance policy. The provision incorporated in the reinsurance policy that upon a breach of warranty the reinsurance policy shall become null and void is identical with the provision in the insurance policy that upon a breach of warranty the insurance policy shall become null and void. In my opinion, in the absence of any express declaration to the contrary in the reinsurance policy, a warranty must produce the same effect in each policy. The effect of a warranty in the reinsurance policy is governed by the effect of the warranty in the insurance poliicy because the reinsurance policy is a contract by the underwriters to indemnify Vesta against liability under the insurance policy. The reinsurance policy could have provided expressly that the warranties were to have different effects in the two policies. The reinsurance policy could have limited the liabiliity of the underwriters by providing that a breach of warranty by Vesta would absolve the underwriters even if an identical breach of warranty by the fish farmer did not absolve Vesta. Any such limitation would, however, have been inconsistent with the concept of reinsurance, unacceptable as a basis for the business relationships between brokers, insurers and reinsurers and contrary to the language of the reinsurance policy which insists on the identity of terms, subject-matter and risk involved in both the reinsurance policy and the insurance policy.


Mr. Walker, in the course of a painstaking and forceful address on behalf of the underwriters, submitted that the "follow settlements" clause which provided for the reinsurance "to follow the settlements" of Vesta, was emasculated by the incorporated "claims control clause" which provided that no payment offer or compromise should be made without the consent of underwriters who should have sole control of all negotiations. For this purpose, Mr. Walker cited the judgment of Robert Goff L.J. in Insurance Co. of South Africa v. Scor (U.K.) Reinsurance Co. Ltd. [1985] 1 Lloyd's Rep. 312, 331. In deciding this appeal I decline to follow counsel down the trail of insurance jargon in a reinsurance policy and incorporated documents littered with language which is ungrammatical and contradictory.


The "follow settlements clause" shows that a compromise of Norwegian proceedings brought by the fish farmer against Vesta was intended to bind the English underwriters. The "claims control clause" shows that the underwriters were entitled to negotiate a settlement of Norwegian proceedings brought by the fish farmer against Vesta. Neither the settlements clause nor the claims control clause indicates that if Vesta, or underwriters on behalf of Vesta, unsuccessfully defend proceedings brought by the fish farmer in Norway on the grounds that the fish farmer has committed a breach of warranty, nevertheless, the underwriters may successfully defend proceedings brought by Vesta in England on the grounds that an identical breach of warranty was committed by Vesta.


In my opinion the reinsurance policy in the present case, upon its true construction, insure 90 per cent. of the liability of Vesta under the insurance policy and I would dismiss the appeal of the underwriters.

Lord Griffiths

My Lords,


It is common place for an insurer to wish to lay off in the reinsurance market part of the risk he has accepted on a policy of insurance. This litigation arises out of that everyday situation in the insurance market. I find it disturbing that the underlying document, form 31, used in the Lloyd's market to effect reinsurance should be framed in terms which are inelegant and ungrammatical, to quote Lord Templeman and, in my view, obscure. I also regret that so little thought was apparently given to the difference between a primary insurance contract and a reinsurance contract at the time the reinsurance was placed with Lloyd's.


The essential facts are simple. Lloyd's brokers produced a policy of insurance to cover fish farms. The brokers interested Vesta, a Norwegian insurance company, in accepting insurance of fish farms on the terms of this policy on the understanding that the brokers would be able to obtain reinsurance of 90 per cent. of Vesta's risk under the policy in the Lloyd's reinsurance market in London. Vesta insured a Norwegian fish farm on the terms...

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