The Construction of Terms of Facultative Reinsurance Contracts: is Wasa v Lexington the Exception or the Rule?

AuthorÖzlem Gürses
Publication Date01 Jan 2010
The Construction of Terms of Facultative Reinsurance
Contracts: IsWa s a vLexington the Exception or the Rule?
zlem Gˇrses
Do reinsurers insure the liability faced by the reinsured under its original insurance contract?
Where the reinsurance and direct insurance policies are written in identical terms, is it enough
for the reinsured to proveits l iability under the original insurance policy in order to make a suc-
cessful claim against its reinsurers? These questions are crucial, because theydetermi ne whether
the terms of the reinsurance are to be construed identically to those of the direct policy even
though they have di¡erent governing laws.The issues came before the House of Lords in Was a
International Insurance Co Ltd vLexington InsuranceCo [2009] UKHL 40 a nd the answerswere pro-
vided in a judgmentdel ivered on 30 July 2009,the last day of the operationof the House of Lords
as a court.Thi s note discusses the nature of facultative reinsurance contracts in the light of their
Reinsurance is insurance taken out by insurers, in order to maintain their solvency
by risk-spreading, and in order to expand their capacity to write additional risks.
Much of the world’s reinsurance business is placed in the London market, with sub-
stantial bene¢ts to the UK economy. Reinsurance is also a means of obtaining busi-
ness for London which would otherwise not be written at al l: in many jurisdictions,
only local insurers are licensed to carry on insurance business, so those that do not
have the inclination orcapacity to write a particular risk may nevertheless do so but
then transfer to external reinsurers anything up to100 per cent of that risk.
Reinsurance may be written in many forms, but the focusof this note is facul-
tative proportional reinsurance, whereby a single risk is reinsured by a reinsurer.
Thus, if a factory is insured against ¢re by insurer A, A may transfer a given per-
centageof the risk ^ say, 30 per cent ^ to reinsurer B in exchange foran equivalent
percentage of the premium: if the factory is destroyed by ¢re,B indemni¢es A for
30 per cent of its payment to the assured.Th is arrangeme nt presumes that (subject
to ¢nancial limits) theoriginal insurance and reinsurance provide identical cover.
The issue before the House of Lords inWasaInternational Insurance Co Ltd vLexing-
ton Insurance Co
(Wa s a ) was whether that presumption holds good where the
direct policy and the reinsurance have di¡erent applicable laws.
In the London market, when a facultative proportional reinsurance contract is
proposed, it is usual to provide the potential reinsurerswith a copyof the wording
Lecturer in Commercial Law, Norwich Law School, University of East Anglia. My thanks to
Professor RobMerki n of University of Southampton for his invaluable comments.
r2010The Author. Journal Compilationr2010 The Modern Law ReviewLimited.
Published by BlackwellPublishing, 9600 Garsington Road,Oxford OX4 2DQ,UK and 350 Main Street, Malden, MA 02148, USA
(2010)73(1) 119^14 0

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