The Tokio Marine case

Rather more straightforwardly, the Tokio Marine case concerned a retrocession

which contained an unqualified follow clause of the type considered in Insurance
Co of Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312, namely:

‘Reinsurers agree to follow all settlements (excluding without prejudice and ex

gratia payments) made by original Insurers arising out of and in connection with
the original insurance and to bear the proportion of any expenses incurred whether
legal or otherwise in the investigation and defence of any claim hereunder in
addition to limits hereunder.’

It was therefore common ground in light of Scor that the retrocessionaire was
bound to indemnify the reinsurer so long as the claim as settled fell within the risks
covered by the retrocessionaire as a matter of law (the ‘first proviso’) and the
reinsured had acted honestly and taken all proper and business-like steps in making
the settlement (the ‘second proviso’).

The underlying claim concerned damage to a number of premises owned by Tesco

in Thailand as a result of the widespread and unprecedented floods in 2011. Tesco
was insured in respect of property damage and business interruption under a global
master policy issued by ACE European Group Ltd (ACE) and governed by English
law, which provided difference in conditions/difference in limits cover in respect
of policies issued locally by ACE entities. The master policy provided £100
million of cover on an ‘any one Occurrence’ basis, meaning ‘any one Occurrence
or any series of Occurrences consequent or attributable to one source or original
cause’ and also contained an ‘hours clause’, the general effect of which was to
deem all losses occurring during a period of 72 consecutive hours to have been
caused by a single Occurrence. ACE was reinsured for a proportion of its exposure
by the claimant reinsurer (the Reinsurer), which in turn placed excess of loss
reinsurance with the defendant retrocessionaire (the Retrocessionaire).

Tesco initially valued its losses at in excess of £100 million and claimed under the
relevant local and master policies. Due to the proliferation of losses, there was an
issue whether Tesco’s losses arose from one Occurrence under the master Policy
for aggregation purposes, or whether the hours clause meant Tesco’s losses fell
into eleven periods of 72 hours with eleven separate deductibles. This dispute was
settled, with ACE agreeing a settlement at £82.5 million applying one deductible.
However, while the Reinsurer had consented to this settlement, it was entered into
before the retrocessionaire’s approval could be obtained.
In these summary judgment proceedings, the Retrocessionaire argued that ACE
had not taken all proper and business-like steps in settling Tesco’s claim with the
result that it was not required to follow ACE’s settlement. This was said to be on
various grounds, including that ACE failed to analyse the coverage position under
the local policy as a matter of Thai law and that ACE should have obtained English
law advice on the meaning of ‘Occurrence’ under the master policy, whilst also
investigating the causes of the floods in further detail. However, the judge formed
a different view, ultimately holding that ACE’s settlement was ‘undoubtedly a
good settlement’, notwithstanding that ACE did not explore the coverage and
causation issues in further detail. This is consistent with the approach taken in Gan
Insurance Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] Lloyd’s Rep IR 667,
where it was held that in reaching a proper and business-like settlement the
reinsured must have regard to the prospects and risks attaching to the claim as a
whole. It also adds to the existing body of well-known case law on the ‘second
proviso’.

As a result of this judgment, the Retrocessionaire will be required to follow ACE’s

settlement, unless its reported appeal to the Court of Appeal in connection with its
other defences based on the true construction of the retrocession succeeds. In those
proceedings, the Court of Appeal will be considering (amongst other issues)
whether the follow clause requires the Reinsurer to show that the claim as settled
falls within the terms of the retrocession on the balance of probabilities, or whether
it need only show that the claim arguably does so. In doing so, it is likely that the
Court of Appeal will resolve a longstanding issue arising from comments made by
Tuckey LJ in Assicurazioni Generali SpA v CGU International Insurance plc
[2004] 2 All ER (Comm) in connection with the ‘first proviso’.