LM-2024-000252 - [2025] EWHC 2704 (Comm)

This issue concerns the proper construction of the Reinsurance Policies. The basic principles of construction are well established. I need only refer, without quotation, to Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900; Arnold v Britton and others [2015] UKSC 36, [2015] AC 1619; and Wood v CapitaInsurance Services Ltd [2017] UKSC 24; [2017] AC 1173; and to the helpful summaries offered by Sir Geoffrey Vos C in Lamesa Investments Ltd v Cynergy Bank Ltd [2020] EWCA Civ 821, [2021] 2 All ER (Comm) 573, at [18], and by Carr LJ in ABC Electrification Ltd v Network Rail Infrastructure Ltd [2020] EWCA Civ 1645, [2021] BLR 97, at [18]-[19]. That the general principles apply to the construction of reinsurance policies was confirmed by Foxton J in Unipolsai Assicurazioni SpA v Covea [2024] EWHC 253 (Comm) at [36]-[37], with reference also to the summary of principles given by Flaux LJ and Butcher J in The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm), [2020] Lloyd’s Rep IR 527, at [62]-[70].

The Reinsurance Policies are facultative, excess of loss policies, back-to-back with the respective Royal Master Policies (the provisions of which were mirrored in the Newark Subordinate Policies). Both parties referred to the dictum of Lord Griffiths in Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852, at 895:

“In the ordinary course of business reinsurance is referred to as ‘back-to-back’ with the insurance, which means that the reinsurer agrees that if the insurer is liable under the policy the reinsurer will accept liability to pay whatever percentage of the claim he has agreed to reinsure. A reinsurer could, of course, make a special contract with an insurer and agree only to reinsure some of the risks covered by the policy of insurance, leaving the insurer to bear the full cost of the other risks. Such a contract would I believe be wholly exceptional, a departure from the normal understanding of the back-to-back nature of reinsurance and would require to be spelt out in clear terms. I doubt if there is any market for such a reinsurance.”

It is, accordingly, convenient to begin with the provisions of the Royal Master Policies. The principal insuring clause states:

“IN CONSIDERATION of The Insured [i.e. BOC and its subsidiaries and associated companies] paying the Premium to The Insurers it is hereby agreed that The Insurers will, subject to the terms, exceptions, conditions and limitations contained in any of the Schedules herein or endorsed hereon, which shall all be read as one document, indemnify The Insured against Liability arising from any Occurrence during the Period of Indemnity.”

Schedule A, “Definitions”, contained inter alia the following provisions:

“2.

‘The Arrangements’ means this Master Policy and the subordinate policies issued or to be issued by or on behalf of The Insurers in different territories as evidence of insurance for The Indemnity.

3.

‘Liability’ means legal liability and shall include payments made by or with the consent of The Insurers before legal liability is established.

4.

‘Occurrence’ means any loss injury or damage happening during the Period of Indemnity for which The Insured is or may become liable in contract or tort or by statute or otherwise howsoever.

5.

‘Financial Loss’ means a pecuniary loss cost or expense suffered or incurred by a claimant not resulting from Injury or damage to or loss of tangible property.

6.

‘Injury’ means death or bodily or mental injury or disease.

…

9.

‘Products’ means goods sold, repaired, serviced, installed or supplied by The Insured.

10.

‘Professional Indemnity’ means claims arising from professional advice given in return for a fee.”

Schedule D, “The Indemnity Limits”, provided in part:

“1.

The Indemnity provided by The Arrangements shall be subject to the following limits:

In respect of any claim or number of claims arising out of any one Occurrence ……………. £20,000,000

provided that:

(i)

in respect of:

(A)

Products or

(B)

Financial Loss

it shall in either case be limited to £20,000,000 in respect of all Occurrences during any one Period of Indemnity not exceeding 12 months.

(ii)

if more than one party is to be indemnified the total amount of indemnity to all such parties shall not exceed the Indemnity Limits.

2.

The Indemnity provided by the Arrangements shall be reduced by:

(a)

The following amounts for each and every Occurrence

(i)

The first £750,000 in respect of Financial Loss

(ii)

The first £750,000 in respect of Professional Indemnity

(iii)

For any other liability the first £500,000 in respect of the Indemnity provided to [specified subsidiaries and associated companies].”

(b)

The amount of monies receivable and/or deductible [under other insurances]

Provided that these reductions shall not be cumulative.

3.

The Insurers will in addition indemnify The Insured against any costs and expenses:

(a)

recoverable by any claimant from The Insured and/or

(b)

incurred by The Insured with the consent of The Insurers.

…

5.

In the event of any claim or claim under The Arrangements, The Insurers may pay to The Insured the relevant Indemnity Limit (deducting therefrom any sum or sums already paid as damages and/or compensation in respect thereof) and The Insurers shall thereafter be under no further liability in respect of such claim or claims except for the payment of costs and expenses under Clause 3 above incurred prior to the date of the payment of such Indemnity Limit.”

Thus the Royal Master Policy obliged The Insurers to indemnify BOC in respect of third-party claims up to £20 million in any one period of cover. In addition, The Insurers were obliged to indemnify BOC in respect of defence costs—both its own costs of defending claims and any costs liability it incurred to claimants. It is common ground that the liability to indemnify BOC in respect of defence costs was not subject to any financial limit but that it was subject to a temporal limit, in that it would subsist only while the £20 million indemnity limit in respect of third-party claims had not been reached. The question in the Defence Costs Erosion Issue is whether, as Equitas asserts, the £4 million excess in the Reinsurance Policies is eroded only by indemnity payments (that is, payments under paragraph 1 of Schedule D to the Royal Master Policies) or, as RSA asserts, it is eroded also by defence costs (that is, payments under paragraph 3 of Schedule D). Accordingly, I turn to the Reinsurance Policies.

The Reinsurance Policies defined the Type of cover as “Excess of Loss Reinsurance”. The section marked “CLASS” provided:

“General Third Party Liability including Products, Employers Liability, Motor Liability, Professional Indemnity, Financial Loss, Aviation and Marine Liability, as per original policy indemnifying B.O.C. International plc including all subsidiary and/or associated and/or affiliated companies.”

All the Reinsurance Policies except those for 1984/1985 (which were split into two layers of cover) provided as follows in the section marked “LIMIT” (what I shall refer to as “the ‘Limit’ provisions”):

“£16,000,000 any one loss or series of losses arising out of one occurrence/unlimited in all for General Third Party Liability, Motor, Aviation, Marine, Employers Liability and Professional Indemnity BUT £16,000,000 IN THE AGGREGATE for Products and Financial Loss

EXCESS OF

£4,000,000 any one loss or series of losses arising out of one occurrence/unlimited in all for General Third Party Liability, Motor, Aviation, Marine, Employers Liability and Professional Indemnity BUT £4,000,00 IN THE AGGREGATE for Products and Financial Loss.”

The section marked “GEN. CONDS” stated in part: “To follow original terms, conditions and settlements (as far as applicable to the layer).” The section marked “INFORMATION” stated in part: “Copy of original policy seen.” It is common ground that the “original policy” was the Royal Master Policy.

Equitas has relied on several endorsements to the Reinsurance Policies as being relevant to the Defence Costs Erosion Issue. The first endorsement relates to the General Conditions: “Re P.I. [Professional Indemnity] including claims made in the Period in respect of losses occurring prior to inception.”

The second endorsement is the Claims Co-operation Clause:

“The primary insurers shall in the event of an occurrence or series of occurrences consequent upon one original cause which may be the subject of a claim under the policy and where the potential cost may exceed £4m, or in the event of the potential cost of such an occurrence or series of occurrences reac[h]ing £4m give notice to re-insurers as soon as practically possible and furnish all available information respecting such occurrence or occurrences if required.

In either such event the course to be adopted by the primary insurers shall be determined by agreement between the primary insurers and re-insurers and the primary insurers shall not without the consent of re-insurers litigate with regard to such loss but such consent shall not be unreasonably withheld.

In the event of a difference of opinion between the primary insurers and re-insurers in respect of an opportunity whereby settlement of a loss can be obtained by the acceptance of a standing judgment or transaction agreed by the claimant re-insurers retain the right to pay to the primary insurers the amount the equivalent to their liability under this policy according to such standing judgment or transaction and shall thereafter be under no further liability under this policy in respect of the loss.”

Finally, several endorsements taking effect from inception of the 1981/1982 Reinsurance Policy are headed, “Limit of Indemnity £16,000,000 in excess of £4,000,000” or “LOI £16,000,000 excess of £4,000,000”.

With respect to counsel, whose submissions on the issue of construction were long, detailed and at times ingenious, I shall not recite or summarise their arguments here. In the end, I regard the interpretation of the provisions to be fairly clear and the construction contended for by Equitas to be correct. The reasons for this conclusion are set out below.

First, the Reinsurance Policies are facultative back-to-back policies, which “follow original terms”, and the Reinsurers had seen a copy of the “original policy”, which is agreed to be the Royal Master Policy.

Second, the financial limit of indemnity cover in the Royal Master Policy is £20 million; cover for defence costs sits alongside and in addition to the indemnity cover, without financial limit but temporally limited to the subsistence (non-exhaustion) of the indemnity cover. Therefore, in view of the nature of the reinsurance as just mentioned, the natural understanding of the “Limit” provisions in the Reinsurance Policy would be that the £16 million for cover and the £4 million for excess reflect the £20 million in the Royal Master Policy and thus relate to indemnity cover and not defence costs.

Third, that understanding is confirmed by the structure of the Royal Master Policy. The Insurers agreed to indemnify The Insured “against Liability arising from any Occurrence” during the relevant period. In the light of the definitions of “Liability” and “Occurrence” in Schedule A, the natural interpretation of the indemnity cover is that it refers to BOC’s liability for damages or compensation to third-party claimants. In arguing against this interpretation, Miss Ananda relied on the words “shall include payments made by or with the consent of The Insurers before legal liability is established” in the definition of “Liability” in clause 3 of Schedule A; these words, she contended, referred to, or at least included, defence costs. I do not agree that this is the purpose or referent of the words in question. In my judgment, in agreement with Mr Scorey’s submissions, the words relate to payments made pursuant to settlements made without a finding of liability; in their absence from a liability policy governed by English law, the existence of cover would be in doubt. As is made clear by Schedule D, the duty to indemnify relates to third-party claims, and the duty to pay defence costs (whether those of a third party or those of the Insured) is additional to the duty to indemnify and not subject to financial limit. The inclusion of defence costs in the cover under the Royal Master Policies is achieved by clause 3 in Schedule D and the temporal limitation in clause 5. The position under the Royal Master Policies is therefore straightforward. To paraphrase: The Insurers agree to indemnify BOC against BOC’s liability to compensate third parties who sustain loss during the Period of Indemnity. In addition, The Insurers agree (Schedule D, clause 3) to indemnify BOC against defence costs, but only (Schedule D, clause 5) up to the point where “the relevant Indemnity Limit”, viz. under clause 1 or 2 of Schedule D, has been reached. The indemnity in the principal insuring clause relates to the Indemnity Limits in clauses 1 and 2 in Schedule D.

Fourth, the Reinsurance Policies follow the terms of the Royal Master Policies, subject of course to the excess. The “Limit” provisions of the Reinsurance Policy are, on the most obvious reading, reflective of the £20 million of cover in the Royal Master Policies, with that figure divided between a £4 million excess and £16 million of reinsurance cover: that is, the first 20% retained and the next 80% reinsured. The wording of the two parts of the “Limits” provision lends additional support to this conclusion: it refers to cover or excess in respect of losses, arising out of occurrences, for listed types of liability, which again mirrors the structure of the Royal Master Policies and must in my view relate to the duty to indemnify, not to the additional duty to pay defence costs. Accordingly, the natural reading of the “Limit” provisions is that the £16 million and the £4 million correlate to the £20 million in the Royal Master Policies and, therefore, relate to indemnity payments and not to defence costs.

Fifth, there is the simple point that in the Limit provisions the £16 million relates only to indemnity costs; it does not include defence costs, which are additional. It would be surprising if the £4 million related differently. The various endorsements recording “Limit of Indemnity £16,000,000 [in] excess of £4,000,000” tend to confirm that both figures relate to the indemnity rather than the defence costs, as they appear to treat the two figures as relating to the same matter (viz. indemnity).

Sixth, further support for the natural interpretation of “loss or series of losses” in the “Limit” provisions of the Reinsurance Policy, namely as relating to the duty to indemnify rather than the duty to pay defence costs, is provided by other provisions of the Reinsurance Policy. In the first place, there is the reference in the General Conditions to P.I. claims “in respect of losses occurring prior to inception”; this cannot relate to defence costs. Again, the meaning of “loss” in the Claims Co-operation Clause is clearly the loss in respect of which the duty to indemnify arises, not a loss consisting of the costs of defending a claim in respect of such loss. (See further the next point.) Strictly speaking, neither of these provisions absolutely precludes a different meaning of “loss” in the “Limits” provisions, but they tend in my view to indicate that the Reinsurance Policy is consistent in its usage and coherent when so interpreted.

Seventh, I do not think that the Claims Co-operation Clause (“the Clause”) is supportive of either party’s case; it certainly does not, in my view, contain anything sufficiently clear to override the interpretation that would be indicated by other provisions of the policies. I make the following observations.

Eighth, I do not regard it as relevant that the Reinsurers made substantial partial payments in the 1990s on the basis that defence costs eroded the insurance excesses. No plea of estoppel has been advanced. The basis on which the partial payments were made indicates what the Reinsurers thought (or, at least, what they failed to think) about the construction of the Limit provisions in the Reinsurance Policies but not what the proper construction of those provisions actually is.

Ninth, the submission on behalf of RSA that from the agreed fact that the Reinsurance Policies cover RSA’s liabilities for both indemnity and defence costs “it follows inexorably that both must be capable of eroding the insurance excesses” is a nonsequitur. The conclusion no more follows from the premiss than would the (false) conclusion that the £20 million limit in the Royal Master Policies includes defence costs follow from the (true) premiss that the cover under the Royal Master Policies extends to both indemnity and defence costs.

Tenth, I am unpersuaded by the argument of Miss Ananda and Mr Rich (written closing submissions, paragraphs 2ff) that the only conceivable alternative to their proposed construction of the Limit provisions would be that no limit or excess applied to the Reinsurers’ liability for defence costs, so that they are payable by the Reinsurers as soon as they are incurred by The Insurers and for as long as they continue to be incurred. Such a construction might be logically available. But it would divorce the liability to pay defence costs from the exposure to indemnity liability on which it was, in Mr Scorey’s word, parasitic. RSA’s liability to pay defence costs was dependent on its liability for indemnity costs—it arose when the prior level of BOC’s insurance cover, which was provided by Liberty, was exhausted and ended when the limit of RSA’s liability for indemnity costs was reached. So too, in my judgment, the Reinsurers’ exposure to liability for defence costs arose when the £4 million excess for indemnity costs had been exhausted and would end when the £16 million limit for indemnity costs was reached. This seems to me to be entirely logical, internally consistent and by no means uncommercial.

Eleventh, more generally, I do not see that there is anything uncommercial in my interpretation of the “Limits” provisions of the Reinsurance Policies. It is true that the result might be that The Insurers would expend large amounts of money on defence costs without the excess ever being exhausted. But their own obligation under the Royal Master Policies was to pay defence costs without financial limit; only when the indemnity limit had been reached would the obligation to pay defence costs end. On the other hand, once the £4 million excess under the Reinsurance Policy was exhausted the Reinsurers would be similarly exposed to an obligation to pay defence costs without financial limit and until the £16 million of indemnity cover was exhausted. Things could turn out disadvantageously for either party. That is simply a consequence of the combination of (i) The Insurers’ obligation to pay defence costs in addition to the indemnity and (ii) the back-to-back nature of the reinsurance. In support of their submission that it was implausible that the Reinsurers would be subject to liability for unlimited defence costs despite making clear provision for a £16 million limit (written closing submissions, paragraph 3), Miss Ananda and Mr Rich relied on the dictum of Robert Goff LJ in The Insurance Co. of Africa v Scor (UK) Reinsurance Co. Ltd (“Scor”) [1985] 1 Lloyd’s Rep. 312, at 332-333:

“Furthermore the implication contended for would give rise to an open-ended promise of indemnity, when the contract of indemnity contained in the policy is expressly limited to $3,500,000; I do not think that it is possible to accept an implication which is inconsistent with that express term of the policy.”

Those remarks were in an entirely different context. In Scor, the reinsurance policy contained a “follow the settlement” provision but also a clause—considered by the majority of the Court to be inconsistent with and to emasculate the “follow the settlements” provision—requiring reinsurers’ consent to any settlement. The reinsurers had refused consent. The argument of the reinsured was in nuce that, as a result of the allegedly unreasonable withholding of consent, they had incurred additional loss and expense, for which they could recover under an implied term that the reinsurer would indemnify them for such additional loss or expense. Neither the facts nor Robert Goff’s reasoning have anything to do with the issue in the present case. Reliance on the dictum simply begs the question of the proper construction of the Reinsurance Policies.