Justificación

It has to date not been proved necessary to determine conclusively whether reinsurance is a further insurance or liability insurance⁴³. However in practice the implications are of some significance. Determination of the nature of facultative reinsurance is particularly important where the terms of the reinsurance and the underlying insurance are identical and the reinsured has been held liable in circumstances in which the reinsurer believes itself not to be liable. In such a case, if facultative reinsurance is regarded as an

independent insurance of the same risk as that covered by the direct insurance, it is easier to argue that the reinsurance covers only those risks which fall within the terms of the reinsurance as construed in accordance with its own applicable law⁴⁴. However, if its purpose is to cover the primary insurer’s loss that may be incurred under the direct policy, then the reinsurer will be obliged to indemnify the reinsured on the ground that the

reinsured’s liability to the assured has been established and quantified⁴⁵. Moreover the function of the phrase “as original” varies depending upon which theory is recognised: as seen in various parts in this thesis, acceptance of the incorporation point of view may have the effect of extending the reinsurer’s liability beyond that actually contracted for and in some cases could even amount to a re-writing of the contract of reinsurance by the

courts⁴⁶. For these reasons it appears that it is crucial to ascertain the nature of reinsurance and this thesis puts forward the suggestion that the subject matter of reinsurance is the liability of the reinsured arising from his engagement under the original insurance contract. Beside the points raised above, additional reasons for this suggestion are as follows.

First, the earlier authorities, such as Delver v Barnes⁴⁷ were decided at a time when reinsurance contracts were effected by a further insurance on the same subject matter as that of the previous policy and where the parties manipulated the word used to bring that about, eg, “insured” became “re-insured”. Such practice led to the understanding that

43 O’Neill and Woloniecki, para 1-35. Moreover, in Wasa v Lexington Longmore LJ noted that in accepting either view the result would be the same. [2008] 1 CLC 340, 358.

44 Sedley LJ, Wasa v Lexington [2008] 1 CLC 340, 362.

45 Sedley LJ, Wasa v Lexington [2008] 1 CLC 340, 362.

46 See below, Heading nos 2.4.2.2. and 2.4.3.

47 (1807) 1 Taunt 48.

reinsurance was formed as a further insurance on the subject matter insured⁴⁸. Obviously this is not the current practice of the London Market⁴⁹.

Secondly, liability insurance is defined as a contract of indemnity which covers the risk of the assured incurring liability to third parties⁵⁰. Because such an agreement is a contract of indemnity, the assured cannot recover until loss is sustained and his liability for that loss has been established and quantified⁵¹. In the same way, it is clear law that in order to make a claim against the reinsurer, the reinsured has to establish and quantify his liability, either by virtue of a judgment or arbitration award against him or a settlement binding on the reinsurer⁵². In other words, the reinsured has no cause of action against the reinsurer until his liability to the assurd has been ascertained⁵³. Moreover, there is a strong presumption that the risks covered by the insurance and facultative proportional reinsurance are likely to be identical as the two policies are generally to be construed back-to-back. This assumption is based on the notion that the reinsured cedes the whole or part of the risk insured to the reinsurer in return for a proportionate part of the premium. The reinsured chooses this method with the object of reducing the amount of its possible loss⁵⁴. If reinsurance is a further insurance, in fact, there may be no reason for assuming that the provisions of the two contracts are identical. Furthermore, as is the case with contracts of liability insurance, facultative reinsurance policies may also contain claims co-operation clauses whereby the reinsured undertakes not to admit liability or to settle a claim without first obtaining the reinsurer’s consent. It appears that the only reason for the reinsurer to be concerned about the direct loss is that it will establish his liability. On this analysis it becomes clear that facultative reinsurance contracts cover the liability of the reinsured

48 See also Sedley LJ’s comment in Wasa v Lexington [2008] 1 CLC 340, 361-362.

49 In the London Market it is often the case that the facultative reinsurance policy is subscribed before the underlying insurance has been concluded, eg Vesta v Butcher, and this practice also indicates that Mansfield CJ’s definition in Delver v Barnes does not meet the modern practice of reinsurance.

MacGillivray on Insurance Law, para 33-3.

50 See Fletcher Moulton LJ in British Cash and Parcel Conveyors v Lamson Store Service [1908] 1 KB 1006, 1014; Goddard & Smith v Frew [1939] 4 All ER 358.

51 West Wake Price & Co v Ching [1956] 2 Lloyd’s Rep 618; Post Office v Norwich Union Fire Insurance Society [1967] 2 QB 363; Socony Mobil Oil Co Inc v West of England Ship Owners Mutual Insurance Association Ltd, The Padre Island [1987] 2 Lloyd’s Rep 529; Bradley v Eagle Star Insurance Co. [1989] 1 AC 597; Cox v Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep 437.

52 Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312; Fireman’s Fund Insurance Co v Western Australian Insurance Co Ltd (1927) 28 Ll LR 243.

53 Per Maugham LJ in Daugava v Henderson (1934) 49 Ll LR 252, 254; Home Insurance Company of New York v Victoria-Montreal Fire Insurance Company [1907] AC 591.

54 Golding, 17.

against its undertaking in the original policy⁵⁵. However, this conclusion should not be taken to mean that reinsurance is a form of general liability insurance in favour of the reinsured. That might be possible if the reinsurer was obliged to pay for the reinsured’s extra-contractual liability, as where the reinsured has been held liable to pay a sum to the original assured in excess of its contractual obligation to the assured in tort or for breach of contract⁵⁶. The reinsurer is under the duty to provide indemnity to the reinsured only within the limits of the reinsured’s contractual liability under the original policy⁵⁷.

In terms of calculating the limitation period in liability insurance the date of the assured’s loss is the date at which his liability to the third party is established and quantified⁵⁸. If reinsurance is further insurance of the original subject matter, both the statutory – and any contractual - limitation period, should run from the same date for both the assured and the reinsured. Nevertheless, as emphasised in Dornoch Ltd v Royal and Sun Alliance plc.⁵⁹, notification clauses are not suitable for use in liability insurance because such clauses assume that there has been actual physical loss whereas in the liability insurance and reinsurance contexts there is no loss until liability has been established and quantified. In Home Insurance v Victoria-Montreal the Privy Council also stated that the reinsurer could not act until the direct loss was ascertained between parties over whom he had no control, and in proceedings in which he could not intervene. This analysis also strengthens the argument that the reinsurer insures the insurer’s liability⁶⁰.

55 See Sedley LJ in Wasa v Lexington [2008] 1 CLC 340, 362; Merkin, “Incorporation of Terms”, 66; Carter, 4.

56 See Ott v. All-Star Ins. Corp. 99 Wis 2d 635, 1981 discussed in Chapter 10 below.

57 See Butler and Merkin, para C-0137.

58 Sphere Drake Insurance plc v Basler Versicherungs-Gesellschaft [1998] Lloyd’s Rep IR 35; Halvanon Insurance Co Ltd v Companhia de Seguros do Estado de So Paulo [1995] LRLR 303; Baker v Black Sea and Baltic General Insurance Co Ltd [1995] LRLR 261 (the point did not arise in the appeal). The same principle applies to excess of loss reinsurance, in that the date that the excess point is reached triggers the reinsurers’ liability to the reinsured: North Atlantic Insurance Co. Ltd. v Bishopsgate Insurance Ltd. [1998]

1 Lloyd’s Rep 459, 462. However see Feasey v Sun Life of Canada [2003] Lloyd’s Rep IR 637 where the test was varied by express wording that the reinsurer’s duty to provide indemnity arose on the happening of a given event.

59 [2005] Lloyd’s Rep IR 544.

60 See Edelman, Burns Craig and Nawbatt, The Law of Reinsurance, para 4.71.