Generali appealed the original 2003 decision of the High Court in Assicurazioni Generali SpA v CGU International Insurance & Others that an undertaking to "follow without question the settlements of the insured except ex- gratia and/or ‘without prejudice’ settlements", remained subject to the two provisos set down in the case of Insurance Company of Africa v Scor (UK) Re ([1985] 1 Lloyd’s Rep. 312). The Court of Appeal has now upheld that decision.
The original cover, which covered contractors’ risks for the installation and maintenance of power cables to be laid under the St. Lawrence River was provided by CIC (a Canadian company) as a front for Generali.
About a year after the cables had been laid, a claim was made under the original cover in relation to the loss and subsequent replacement of one of the cables. The claim raised a number of coverage issues, but was eventually settled by Generali for $4m.
Eighty per cent of Generali’s liability was reinsured with the defendant companies and a number of Lloyd’s syndicates. While the Lloyd’s syndicates settled their share of Generali’s claim on the reinsurance, the defendants refused, relying on the two Scor provisos: (a) that the claims as recognised by the reinsured must fall within the risks covered by the reinsurance as a matter of law; and (b) that the reinsured should have acted honestly and taken all proper business-like steps in settling the claim.
However, Generali argued that the particular wording of the reinsurance precluded reinsurers from asking whether the two Scor provisos had been met. The wording in question reads as follows:
"… this Reinsurance is declared and agreed to be subject to the same terms, clauses and conditions, special or otherwise, as the original policy or policies and is to pay as may be paid thereon and to follow without question the settlements of the Reassured except ex-gratia and/or without prejudice settlements".
The Judge at first instance decided, on the hearing of a preliminary issue, that the words "without question" did not preclude reliance on the two Scor provisos, i.e. it was still open to reinsurers to question whether the claims as recognised by the reinsured fell within the risks covered by the reinsured as a matter of law, and whether the reinsured had acted honestly and taken all proper business-like steps in settling the claim.
Generali appealed. This gave the Court of Appeal an opportunity to resolve what was a short but important point arising out of a line of cases dealing with follow settlements clauses.
The Court of Appeal, having considered the line of follow the settlements cases, held that a reinsured cannot hide behind the "without question" wording to absolve itself from the obligation to act honestly and take all reasonable and proper steps in settling the claim. Indeed, the reinsurer must be able to rely on an honest and business-like resolution of the original insurance when claims are made under the reinsurance.
On the facts of this case, the wording did not preclude reinsurers from questioning whether business-like steps had been taken in the settlement of the claim under the insurance. This will now have to be resolved at trial.
However, the Court of Appeal did not say that it could never be possible to exclude the second Scor proviso. The Court said that it would not be impossible to draft a clause excluding the second proviso, but that clear words would be required to do so. The words "without question" were not clear enough to show intention to waive the reinsurer’s right to question whether honest and business-like steps had been taken in the settlement of the original insurance claim.
The Court of Appeal declined to suggest examples of wordings that might be effective to exclude the second Scor proviso, but it is evident that the wording would have to be extremely clear, most likely referring explicitly to the second proviso itself. Reinsurers would have to evidence a clear intention not to enforce the reinsured’s implied obligation to take all business-like steps in making the original settlement.
Interestingly, the Court remarked that the fact that Generali had reinsured 80% of their risk (and therefore retained 20%), would have no bearing on the interpretation of the wording "without question". Generali had not warranted that they would retain all of the 20%, and even if they had, the meaning of a clause cannot be dependent on the extent of the reinsured’s retention.
The battle-lines have been drawn. A reinsured now knows that, to avoid reinsurers questioning whether it has met its implied obligation to settle all claims in an honest and business-like manner, it will have to get reinsurers to agree to a clearly and explicitly worded clause, waiving their right to rely on the second Scor proviso.
Whether reinsurers will be minded to accept such a clause remains to be seen.
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