Insurance Update - House of Lords reverses the Court of Appeal in Wasa v Lexington - July 2009

The long-awaited decision of the House of Lords was handed down yesterday afternoon.

To understand the significance of this case, one needs to go back to the seminal decision in Vesta v. Butcher [1989] some 20 years earlier.  In that case, a Norwegian insurer of a fish farm reinsured the risk in the London market on terms by which reinsurers followed the terms and conditions of the direct policy. The court held that the follow clause did not have the effect of importing the choice of law of the direct policy, Norwegian law, into the reinsurance.  However, in applying the governing law of the reinsurance contract, that is English law, and as a matter of construction of the reinsurance contract, the clear intention was that the reinsurance be "back-to-back" with the underlying policy. In other words, if the governing law of the insurance policy (in this case, Norwegian law) imposed a liability on the reinsured to pay the claim, then the governing law of the reinsurance contract (English law) imposed upon the reinsurer an obligation to indemnify the reinsured in turn.  At the time of contracting, reinsurers could see from the terms of the direct policy that any liabilities under it would be determined by reference to Norwegian law.  At any time they could have reached for their Norwegian "legal dictionary", from which they would have been able to see exactly what it was they were agreeing to follow. Accordingly, reinsurers could not treat themselves as discharged from liability on account of the insured's non-causative breach of warranty, as such a remedy was unknown under Norwegian law.

Avocats James Crabtree, Christopher Dixon, Christine Flion, Alain de Foucaud, Franz Janssen, Dr. Gunbritt Kammerer-Galahn, Anthony Menzies, Wolfgang Schaller