Toomey v Eagle Star Insurance Co Ltd: CA 1994

The word ‘reinsurance’ is often used loosely simply to describe any contract of insurance which is placed by or for the benefit of an insurer, but it should be construed more properly to require the insurance of an insurable interest in the subject matter of an original insurance. ‘The Court must ask itself whether the contractual intention was that the exclusion should cover both the possible negligent grounds of liability as well as the non-negligent grounds.’
Liability insurance is a species of original insurance whereby an assured insures the risk of his becoming liable to others: ‘The element of ‘liability’ was effectively introduced into this branch of insurance by the attempts of insurers, through the use of special clauses, to get round the need to prove their loss by proving an insured loss of the original subject matter. The history of this part of the law is reviewed in the judgments of the Court of Appeal in Insurance Company of Africa -v- Scor (UK) Reinsurance Co Limited [1985] 1 Lloyd’s Rep.312. The original form of the relevant clause required reinsurers ‘to pay as may be paid thereon’ a wording which Mr Justice Matthew in Chippendale -v- Holt (1895) 1 Com Cas 157 held only went to the quantum of any payment that had been made by the reinsured, not to the question whether a loss covered by the original insurance had ever taken place. The market then introduced the clause which required the reinsurers to ‘follow the settlement’ of the reassured. This clause was successful in requiring the reassured to accept any bona fide settlements made by the reassured with the original assured. The position was summarised by Lord Justice Robert Goff in Scor at [1985] 1 Lloyd’s rep at p.330 .. the effect of a clause binding reinsurers to follow settlements of the insurers, is that the reinsurers agree to indemnify insurers in the event that they settle any claim by their assured .. provided that the claim as so recognised by them falls within the risks covered by the policy of reinsurance as a matter of law and provided also that in settling the claim the insurers have acted honestly and have taken all proper and business like steps in making the settlement . . . Over the years, Judges have on a number of occasions, when dealing with reinsurance policies containing various types of settlement or payment clauses used the language of indemnification in respect of liabilities . . . In my judgment these references to liability must not be read out of context. They derive in part from particular reinsurance clauses which have been included in policies and from the basic proposition that a reinsured must prove a loss and must give the reinsurer the benefit of all rights of subrogation. These, and similar, statements do not alter the character of reinsurance or make it into something which is a mere liability insurance.’
Hobhouse LJ referred to the principle in Hooley Hill Rubber and said: ‘It is also necessary that the court should have regard to previous decisions of the courts upon the same or similar wording. Parties to a commercial contract are to be taken to have contracted against a background which includes the previous decisions upon the construction of similar contracts.’


Hobhouse LJ


[1994] 2 Lloyd’s Rep 516


England and Wales


CitedRe Hooley Hill Rubber and Royal Insurance Co CA 1920
When interprting a contract, it is assumed that the draftsman works with a view to certainty of sense and standardisation of terms. Bankes LJ said: ‘Courts should be chary in interfering with the interpretation given to a well-known document and . .
CitedPhoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd ChD 1985
The court was asked to consider preliminary issues concerning facultative obligatory (fac. oblig.) reinsurances of a variety of business. The issues included whether the reinsured was obliged to keep a retention and whether the writing of its . .

Cited by:

CitedHIH Casualty and General Insurance Limited and others v Chase Manhattan Bank and others HL 20-Feb-2003
The insurance company had paid claims on policies used to underwrite the production of TV films. The re-insurers resisted the claims against them by the insurers on the grounds of non-disclosure by the insured, or in the alternative damages for . .
CitedBedfordshire Police Authority v Constable and others ComC 20-Jun-2008
The authority insured its primary liability for compensation under the 1886 Act through the claimants and the excess of liability through re-insurers. The parties sought clarification from the court of the respective liabilities of the insurance . .
Lists of cited by and citing cases may be incomplete.

Insurance, Contract

Updated: 27 October 2022; Ref: scu.219306