Rare Decision On The Operation Of Follow The Settlements And Claims Co-operation Clauses In Reinsurance Policies

It is rare for reinsurance disputes to come before the courts as many reinsurance policies provide for disputes to be resolved in confidential arbitrations. However, the case of RSA Insurance Group v Equitas Insurance Ltd [2025] EWHC 2704 (Comm) has provided an opportunity for the Court to consider a number of issues, in particular the operation of Follow the Settlements and Claims Co-Operation clauses.

BACKGROUND

In the mid-1980s, a British multi-national manufacturing company, BOC Group Plc (BOC), faced numerous personal injury claims in the US in relation to the use of its products including injuries resulting from exposure to asbestos and welding-related products. BOC incurred substantial defence costs and paid out significant damages, both of which it sought to recover from its liability insurers.

Having exhausted its primary layer of cover, BOC claimed an indemnity from the claimants in this case (RSA or the Insurer), who provided five excess-of-loss policies for the four-year period from 1981-85.

This case concerned RSA's losses of around £3.8 million. A significant proportion of those losses related to sums paid by RSA pursuant to the Toxic Torts Settlement Agreement (TTSA) agreed between BOC and a number of its insurers (including RSA), covering both liabilities incurred to date, and future liabilities.

Having made those payments, RSA then sought an indemnity under its excess of loss reinsurance policies (the Reinsurance Policies) underwritten by Equitas (the Reinsurer), to whom the liabilities under those Reinsurance Policies had been transferred in 2009 by a Part VII transfer.

There were four key issues for the Court to consider in determining whether the Reinsurer was liable to pay out under the Reinsurance Policies, and in what amount:

1. Erosion of Excess: The Reinsurance Policies, which were described as being back-to-back with the underlying policy, were subject to a £4 million excess. Was the excess eroded by (i) both indemnity payments and defence costs, or (ii) by indemnity payments only?
2. Claims Co-operation and Follow the Settlements Clauses: Does the Claims Co-operation clause alter, or nullify, the effect of Equitas' obligations under the Follow the Settlements clause?
3. Proper and Businesslike Steps: If Equitas were required to follow the settlements entered into by the Insurer, had the Insurer taken proper and businesslike steps in entering into the TTSA with BOC?
4. Interest: to what extent is the Insurer entitled to interest on any recovery it makes under the Reinsurance Policies?

DECISION

Erosion of Excess

The Reinsurance Policies were facultative, excess of loss policies which were back-to-back with the underlying RSA policies. As explained in Vesta v Butcher [1989] AC 852, 'back-to-back' means that the reinsurer agrees that if the insurer is liable under the policy, the reinsurer will accept liability to pay whatever percentage of the claim he has agreed to reinsure.

The Court's starting point for analysis of this issue was the construction of the underlying RSA policies. RSA agreed to indemnify BOC in respect of third party claims up to £20 million in any one period of cover. In addition, RSA was obliged to indemnify BOC in respect of defence costs. It was common ground that the indemnity for defence costs was not subject to a financial limit but that it was subject to a temporal limit in that it would subsist only while the £20 million indemnity limit in respect of third party claims had not been reached.

The Court agreed with the Reinsurer that the £4 million excess in the Reinsurance Policies was only eroded by indemnity payments and not by defence costs. Since the £16 million limit of indemnity under the Reinsurance Policies did not include defence costs, the Court said it would be surprising if the £4 million excess was to be calculated differently.

The Insurer had sought to rely on the definition of "Liability" in the underlying RSA policies which referred to "payments made by or with the consent of The Insurers before liability is established" as demonstrating that liability for payments in relation to costs incurred was not separate from indemnity payments. This was rejected by the Court on the basis that the natural reading of the provision referred to settlements reached by the insurers without a finding of liability, rather than to costs incurred.

In addition, the Court pointed to certain provisions of the Reinsurance Policies, the natural reading of which was that they related only to the indemnity payable and not to costs. For example, the definition of "loss" in the Claims Co-operation clause was held to relate only to the indemnity payable, and not to costs incurred. In fact, the Court determined that the Claims Co-operation clause was therefore irrelevant to either parties' argument in respect of erosion of the excess. It was similarly irrelevant that the Reinsurer had made earlier partial payments on the basis that costs did erode the excess. The Court held that this was evidence only of the Reinsurers' interpretation of the clause, rather than of its proper construction.

Claims Co-operation and Follow the Settlements Clauses

The Reinsurance Policy contained a "Follow the Settlements" clause which stated: "To follow original terms, conditions ad settlements (as far as applicable to the layer)".

It also contained a Claims Co-operation clause which was helpfully paraphrased by the Court as follows:

It was common ground that compliance with the Claims Cooperation clause was not a condition precedent to the Reinsurer's liability.

However, the Reinsurer argued that the Claims Co-operation clause meant that it was only required to comply with the Follow the Settlements clause where such settlement had been agreed between the Insurer and Reinsurer, relying on the Court of Appeal decision in The Insurance Co. of Africa v Scor (UK) Reinsurance Co. Ltd [1985] 1 Lloyd's Rep. 312. In that case, the claims co-operation and follow the settlements clauses were found to conflict which meant that the reinsurer only had to follow the settlements clause where the reinsurers had approved the settlement in question. Absent such conflict, the general requirements of a follow the settlements clause are that the Reinsurer is bound by the settlements entered into by the Reinsured provided that:

• the claim falls within the risks covered by the reinsurance policy, and
• the insured acts honestly and properly in achieving settlement.

However, the Court here agreed with RSA that Scor could be distinguished. The Claims Co-operation clause in the Reinsurance Policies was in different terms, which could be read consistently with the Follow the Settlements clause. A major distinguishing factor in Scor was that the claims co-operation clause in that case contained an express requirement for reinsurers' approval of settlement agreements. By contrast, in the present case, the similar prohibition in the Reinsurance Policy applied only to litigating without the Reinsurer's consent. There was no express prohibition on settlement without consent. This conclusion was supported by the fact that the Reinsurance Policy did not provide specifically for an eventuality where the Insurer wants to settle, but the Reinsurers does not agree. Conversely, there was such a provision where it was the Reinsurer wanting to settle but where the Insurer wanted to litigate. This was taken as an indication that the restriction on the Insurer's freedom applied only to litigation, and not to settlement, thus avoiding the conflict between the clauses that existed in Scor.

The Court therefore held that the Reinsurer was bound to comply with the Follow the Settlements clause subject only to the two conditions mentioned in Scor and identified above.

In any event, there was deemed to be nothing in the facts to indicate the Reinsurer's contemporaneous objection to the TTSA. The Reinsurer attempted to rely on its repeated reservations of rights at the time, however this was rejected on the understanding that such reservations were in respect of the Reinsurer's obligation to indemnify, rather than its agreement with the proposed settlements.

Proper and Businesslike Steps

The Reinsurer argued that the Insurer failed to take proper and businesslike steps in entering into the TTSA because RSA had – in line with the local legal advice it had received - adopted an (in Equitas' view) unreasonable interpretation of the applicable New Jersey law, in particular on allocation of losses between policy years, and failed to obtain information relevant to the settlement decisions. As a result, Equitas claimed that RSA had agreed to pay an unreasonably high proportion of BOC's losses.

The relevant issues were distilled by the Court into this question: was the TTSA based on advice "such as no careful lawyer, reasonably competent in the law of New Jersey, could have given so as to make the decision to settle on the basis of it a failure to take proper and businesslike steps".

As noted above, the Insurer had obtained and relied upon legal advice from a Mr Miller, a New Jersey lawyer. The Reinsurer argued that Mr Miller's advice was deficient for various reasons. The Court considered each of these and found that the Reinsurer had not proved its pleaded case of a failure by the Insurer to take proper and businesslike steps in entering into the TTSA. In reaching that decision, the Court considered a number of relevant factors including that Mr Miller's advice was consistent with the approach adopted by most of the other insurers which were parties to the TTSA. The Reinsurer was therefore fully bound to follow the settlements.

Interest

The Insurer claimed compound interest (or alternatively, simple interest under s.35A of the Senior Courts Act 1982) to run from the dates of the respective losses. The Reinsurer contended that interest should be refused entirely, or limited to simple interest and should reflect the delays in the Insurer particularising and pursuing its claim.

The Court elected not to divert from the usual position that interest runs from the time of the loss. Since, in insurance and reinsurance, the (re)insurer is required to hold the insured harmless against liability or the loss insured against, insurers are usually in breach of contract as soon as the insured liability or loss occurs. In the reinsurance context that means the "date of loss" is the date of payment by the Insurer of the underlying claims.

In reaching this conclusion, the Judge rejected the Reinsurer's arguments for adopting a later date. First, the Court rejected the suggestion that interest should not run until quantum had been established: case law (BP Exploration Co (Libya) v Hunt (No. 2) [1983] 2 A.C. 352) demonstrates that uncertainty about the sum claimed does not of itself prevent interest running. Secondly, while the Reinsurer complained of the Insurer's delay in particularising its case, it was not the lack of particulars that caused Equitas to refuse to pay; rather, Equitas disputed liability on principle. Finally, the Court disagreed with Equitas that interest should not run during the period during which a standstill agreement was in place from 1997-2017. The Court held that the standstill agreement was for the benefit of both parties and it was open to Reinsurer to end this period at any point, however it chose not to do so.

The Court declined to award compound interest and awarded simple interest at a rate of 2% above base rate. It is for the claimant to demonstrate their actual losses and, in this case, while the Court accepted that actual losses in the insurance market may be better reflected by an award of compound interest, it was insufficient for a claimant to simply rely on the fact that it operates in the insurance market.

Next Steps

Following the conclusion of the hearing in late November 2025, the Court confirmed there would be no phase two trial and ordered Equitas to pay £728,388.23 plus costs of £1.85 million. The Court also refused permission to appeal to the Court of Appeal in relation to the issue of erosion of defence costs. The deadline for seeking permission to appeal to the Court of Appeal is 23 January 2026.

COMMENT

As noted above, it is unusual for reinsurance disputes to come before the Courts and this case considers a number of issues that will be of interest to cedants and reinsurers alike.

On the issue of Claims Co-operation and Follow the Settlements clauses, this case shows the importance of looking at the particular wording of the relevant clauses in the reinsurance contract under consideration. In order for the Claims Co-operation clause to prevail, as in Scor, the conflict between the two must be explicit. The Court in this case specifically noted that it was open to the reinsurers to explicitly restrict the insurers' freedom to settle, however they did not choose to do so. The Reinsurer's conduct at the time of the settlement was also taken into account – a useful reminder that caution needs to be exercised and that a general "reservation of rights" may not always be sufficient.

The judgment is also notable for the rejection of Equitas' challenge based on the legal advice received by the Reinsured. The case suggests the bar is relatively high for a Reinsurer seeking to argue that the underlying settlement was not "proper and businesslike".

The Judge's findings on compound interest are also important, and may well have relevance beyond the narrow confines of reinsurance disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.