On 21 September 2023 the Superior Court of Canada held a reinsurer bound under a retrocession agreement to a follow the settlements clause. The fronting reinsurer paid the lead insurer the full amount of a $140 million settlement and sought to recover the retrocessionaire’s share. The retrocessionaire said it was not bound by the follow the settlements clause, firstly because it did not agree to be bound by such a clause, and secondly because the lead insurer was not entitled to settle the claim on the basis that it did.
A reinsurer is required to follow the settlements under the terms of an unqualified follow the settlements clause if:
• the claims settled by the insurer must fall within coverage “as a matter of law”; and
• the settlement must be entered into in good faith and through proper and businesslike steps.
A claim falls within coverage as a matter of law if it is covered or is ‘arguably’ covered under the policy. The settling insurer does not have to prove that if the insured’s claim was decided by a court, the insured would have succeeded. As to what constitutes “proper and businesslike steps”, the court’s focus is on the steps taken by the lead insurer to consider and evaluate the claim and the insured’s losses before making a settlement. This analysis depends on the facts.
The loss was covered as a matter of law. The policy covered business interruption claims. Two exclusions relied on by the retrocessionaire (excluding loss relating to refracturing linings and oxidation) were not proved on the facts. There were conflicting opinions from expert witnesses. The fronting reinsurer was not obliged to rely on exclusions which it did not believe could be established. The court then listed the steps taken by the lead insurer which included investigating and analysing the claim, retaining numerous forensic and technical experts, seeking legal counsel on the terms of the policy, arranging for the experts to participate in hot tub sessions, responding to new issues that arose and investigating further, having third parties presenting their forensic calculations, and assessing and calculating the loss. Ultimately the lead insurer entered into the settlement based on these investigations and assessments. It sought input from and worked collaboratively with a steering group created by the reinsurers and evaluated the risks it faced in litigation. Considering all the evidence it was held that the insurer had followed proper and businesslike steps in entering into the settlement. In addition, the fronting reinsurer, faced with the settlement, repeatedly sought a detailed explanation from the representative of the retrocessionaire and got only vague answers despite multiple requests. It was held that the fronting reinsurer had also taken proper and businesslike steps before making payment to the lead insurer.
The retrocessionaire’s right to withdraw from the negotiations (which they had done when they didn’t agree with the proposed $140 million settlement) related to the conduct of negotiations and not the obligation to follow settlements.
Judgment was given for the full amount of the share of the settlement payable by the retrocessionaire of $8,969,760 plus pre-judgment interest.
The judgment is based on good reinsurance law and practice and a similar decision on the facts would be reached in South Africa based on South African law and reinsurance market practice.
[Wiener Städtische Versicherung AG v Infrassure Limited 2023 ONSC 5256]