UK: English High Court Rules on the Application of a Follow the Settlements Clause

    The case of Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd [2013] EWHC 3362 (Comm) concerned losses suffered by a Thai subsidiary of Tesco plc arising out of severe floods in Thailand in 2011. The Tesco subsidiary claimed for losses of approximately £125m under various insurance policies underwritten by certain ACE group companies (referred to collectively as ACE). That claim was settled by ACE for £82.5m. ACE was reinsured under a facultative reinsurance policy (the Reinsurance) of which the Claimant, Tokio Marine Europe Insurance Ltd (Tokio), subscribed for a 12.5% line. Tokio agreed to pay its 12.5% share of the settlement reached by ACE (£80m net of deductibles under the Reinsurance).

    Tokio had in turn obtained a retrocession from the defendant, Novae Corporate Underwriting Ltd (Novae), which provided cover for 12.5% of the losses sustained by the Tesco subsidiary in excess of £53m (the Retrocession). The Retrocession contained an unqualified follow the settlements clause (the Follow Clause). Tokio subsequently sought to recover under the Retrocession, but Novae refused to pay on various grounds.

    The present action dealt with a number of preliminary issues arising out of the dispute, the most significant of which related to the construction of the Follow Clause. In particular, the issues to be determined were: (1) whether the Follow Clause related to the settlement made by ACE under the original policies or that of Tokio under the Reinsurance; (2) whether the burden on Tokio was to show that the claim fell within the terms of the Retrocession Clause as a matter of law on the balance of probabilities, or simply that it arguably did so; and (3) the extent to which Novae was bound by a determination by ACE (or Tokio, depending on the answer to issue (1)) as to the construction of the aggregation provisions in the original policies.

    On the first issue, Mr Justice Hamblen found that based on the clear and unambiguous words of the Follow Clause (which stated that Novae was to “follow all settlements…made by the original insurers” (emphasis added)), it was clear that Novae was to follow the settlements of ACE under the original policies. On the second issue, Hamblen J decided, applying (with some reluctance) the Court of Appeal’s decision in Assicurazioni Generali SpA v CGU International Insurance Plc [2004] All ER (Comm) 144, that Tokio need only show that the claim arguably fell within the terms of the Retrocession, not that the claim was covered, on the balance of probabilities, under the Retrocession. Finally, on the third issue, Hamblen J held that Novae was indeed bound by any determination made by ACE as to the construction of the aggregation provisions in the original policies.

    This case raises a number of interesting issues in relation to the way in which this type of unqualified follow the settlements clauses operates in practice. It will be the subject of more detailed analysis and discussion in the upcoming edition of Edward Wildman’s Insurance and Reinsurance Review, to be published in December.

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