Liability under reinsurance was not invalidated by a compromise including other claims. The parties to reinsurance contracts could set their own ways of proving the loss within a contract. A Full Reinsurance Clause is not binding in respect of any cover, or any exclusion of cover, not included in the reinsurance or otherwise in the retrocession. A reinsurer cannot be held liable unless the loss falls within the cover of the underlying insurance contract and within the cover created by the reinsurance
Lord Mustill said that a ‘follow the settlements’ provision is to be interpreted against the background of two rules: ‘First, that the reinsurer cannot be held liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. Second, that the parties are free to agree on ways of proving whether these requirements are satisfied. Beyond this, all problems come from the efforts of those in the market to strike a workable balance between conflicting practical demands and then to express the balance in words.
These practical demands can be seen most easily in the context of traditional reinsurance, where the party reinsured is the insurer under a contract made directly with the person whose property or other interest is at risk. Two impulses act in opposite directions. The first is to avoid the investigation of the same issues twice; and, moreover, an investigation on the second occasion by a reinsurer whose knowledge of what happened when the risk was written, and whose facility for investigating the claim, are inferior to those of the direct insurer. The second impulse, acting in the other direction, is to ensure that the integrity of the reinsurer’s bargain is not eroded by an agreement over which he has had no control.
This conflict is quite easily managed when the insurance and the reinsurance are on the same terms and where the parties are essentially co-adventurers; for example, in participatory reinsurance, or facultative reinsurance with a large retention. Here, the interests of the direct insurers and the reinsurers are broadly the same, and it is not imprudent for the reinsurers to put themselves unconditionally in the hands of the reinsured for the settlement of claims which will be passed on to them.
The problems are more acute when … the terms of the successive policies are not the same … For example, in the former case it may well happen that a claim under the direct policy does not require the determination of issues which are crucial to liability under the reinsurance: as happened in the ‘constructive total loss’ cases like Chippendale v Holt, (1895) 1 Com. Cas. 197; and indeed in the present case where there can be no doubt that the loss, whatever exactly it was, fell within the direct contracts, whereas this was not necessarily the case under the reinsurances.’
Gazette 25-Sep-1996, Times 15-Aug-1996,  1 WLR 1239
Appeal from – Hill and Another v Mercantile and General Reinsurance Co Plc CA 25-Jul-1994
Re-insurers are bound by ‘follow settlement’ clause where the claim is within the risks covered. . .
Cited – Limit (No 3) Ltd and others v PDV Insurance Company CA 11-Apr-2005
There had been substantial oil leaks in Venezuela, which had been insured and then re-insured in London. Permission had been given to serve the defendant out of the jurisdiction, but that permission had been set aside. The claimant now appealed.
Cited – Lexington Insurance Co v AGF Insurance Ltd HL 30-Jul-2009
The respondent insurers had been held liable in Washington, and had been granted indemnity against the appellants by the Court of Appeal. The insurance contract had been under the law of Pennsylvania, but that of the re-insurance under the law of . .
Lists of cited by and citing cases may be incomplete.
Updated: 10 May 2022; Ref: scu.81378