LEXINGTON INSURANCE CO. V. AGF INSURANCE LIMITED ET AL [2009] UKHL 40 (July 30, 2009)
The central issue before the United Kingdom’s High Court in this action is whether a reinsurer is responsible for the full amount of the cedent’s costs associated with a court ordered environmental clean-up under the theory of “joint and several liability.” The pollution cited to in the underlying action occurred over several decades, but the reinsurance contract covered only a portion of that timeframe.
In order to examine this issue, the court first explored the terms and conditions of the reinsurance policy itself. The reinsurance policy was issued in 1977 and covered the cedent’s business operations for 36 months. The policy, however, did not have an express choice of law provision. While conceding that United States law was referred to in the policy, the court determined that United Kingdom law would apply to the construction of the reinsurance contract.
The court then examined the follow the fortunes clause to determine if the language contained therein would force the reinsurer to pay for the entire amount of the clean-up costs. In order to examine the scope of the follow the fortunes clause, the court then analyzed the underlying decision which found the cedent liable. In the underlying action, the United States Environmental Protection Agency (“EPA”) demanded that the original policyholder clean-up a polluted site. The original policyholder then commenced an action with respect to the cedent and other insurance carriers regarding their respective coverage obligations. The Supreme Court of the State of Washington determined that the cedent was “joint and severally” liable for the all clean-up costs of the polluted site “regardless of whether or not that pollution damage actually occurred during the policy period.”
The court made the distinction that the “joint and several” doctrine was not established in United States cases until after the reinsurance policy was issued. As such, the court rejected imposing “joint and several” liability upon the reinsurer. The court determined that if it ruled in favor of the cedent and forced the reinsurer to pay the entire clean-up costs, it “would impose upon reinsurers a liability for which, under the law applicable to the reinsurance, they did not bargain.”
If the reinsurer was responsible for the entire amount, Lord Mance stated that “it would have been tantamount to saying that reinsurers must have incurred liability (in practice probably up to the reinsurance limits) as soon as they wrote the reinsurance." According to Wasa's counsel "[t]hat would have been monstrously unjust and plainly not the intention of the contract.”
The significance of this decision cannot be understated. The court effectively placed the responsibility for paying the bulk of the 103 million dollars in property damages with the cedent despite the fact there was a reinsurance policy with a follow the fortunes clause. Clearly, the UK Court effectively rejected applying the “joint and several” doctrine in an reinsurance dispute unless the parties specifically articulated the risk. This ruling will have broad impact in future environmental or asbestos-related claims facing the same issue.
For a copy of the decision click here
by Thomas F. Segalla, Jeffrey L. Kingsley and Daniel W. Gerber
https://www.goldbergsegalla.com/attorneys/Segalla.html
https://www.goldbergsegalla.com/attorneys/Kingsley.html
https://www.goldbergsegalla.com/attorneys/Gerber.html