Reinsurance cases in English law are rare, but when they arise, it is useful to consider what has been in dispute and why. Royal & Sun Alliance v Equitas, heard before the High Court at the end of 2025, is one such case where several issues between Insurers and Reinsurers were addressed by the Court.
Background
RSA provided worldwide insurance to BOC, reinsured by Equitas on a back-to-back basis under facultative excess of loss agreements. BOC faced numerous employee injury claims that were settled by RSA in 2001 under a ‘Toxic Tort Settlement Agreement’. Insurers claimed under their reinsurance policy but it was rejected by reinsurers.
Issues considered
Four key issues were before the Court:
- Counting RSA’s defence costs towards the reinsurance excess before triggering coverage.
Insurers contended that its losses, including defence costs, had exhausted the underlying excess and thereby triggered the reinsurers’ liability under the excess of loss reinsurance. They claimed they were directly connected to the insured event and were unavoidable. Equitas argued however that only indemnity payments would erode the excess. The Court agreed with Reinsurers finding that the policy dealt with indemnity limits and defence costs separately.
- Reinsurers’ obligation to follow Insurers’ settlement
Insurers argued that Reinsurers were bound to indemnify them under the Follow the Settlements clause, on the basis that the Toxic Torts Settlement Agreement had been entered into honestly and in a proper and businesslike manner.
Reinsurers asserted it was not bound by the settlement, on the basis that the Claims Co-operation Clause restricted Insurers’ ability to bind Reinsurers without their involvement.
The Court agreed here with Insurers - the Claims Cooperation Clause did not restrict Insurers’ ability to settle. It applied only to the conduct of litigation and did not impose a requirement for reinsurer consent prior to settlement.
- Insurers’ steps in a ‘proper and business-like’ manner
Reinsurers alleged that the settlement itself fell outside the scope of the Follow the Settlements clause, arguing that it had not been reached in a proper and business-like manner, but was instead based on an unreasonably high allocation of liability. The Court confirmed that the requirement to take all proper and business-like steps in settling the claim had been satisfied. The burden to demonstrate that the settlement was not reasonable and business-like fell on the Reinsurers, and it was suggested that such an argument was akin to an allegation of professional negligence.
- Interest
Reinsurers opposed Insurers’ claim for interest from the dates on which the losses were suffered on the basis that there had been a number of lengthy delays on Insurers’ part. However the Court ruled that interest runs from the date of the loss, and that an award of compound interest must reflect the claimant’s actual loss. An award for interest is compensatory not penal. Interest was awarded at 2% above the Bank of England base rate.
Comment
Insurers and reinsurers will note the clear distinction between indemnity and defence costs and how it will apply to excess layers. Equally, the follow the settlements clause is what it says it is and reinsurers will not be given post event approval rights. Any divergence from this must be clearly stated in the policy.
