Reinsurance disputes and following the settlements

Summary

Reinsurers will often be watching the outcome of an insured event and any resulting claims with interest; depending on the particular arrangements in place, they may well bear the lion's share of any loss. It is not uncommon for insurers to settle the underlying claim(s), only then to find themselves involved in a dispute about the extent to which losses can be passed on to reinsurers.

In some circumstances, it may be in all parties' interests to allow reinsurers to join the underlying proceedings (or negotiations, as appropriate).

Follow the Settlements clauses

In order to pass losses to reinsurers, the insurer (ie the reinsured under the reinsurance contract) will need first to prove that it was legally liable to the insured. Second, of course, the insurer will need to establish that the reinsurers are liable under the terms of the reinsurance agreement.

The reinsured usually overcomes the first hurdle by pointing to a judgment, award or binding settlement agreement with the insured. A settlement, however, is not binding on the reinsurers, and this issue has in the past provided fertile ground for disputes about the existence or not of underlying legal liability, or the reasonableness of a settlement. In order to mitigate the potential for uncertainty or disputes many reinsurance contracts therefore contain a "follow the settlements" clause. This means that a reinsurer can only challenge the question of the reinsured's underlying legal liability in limited circumstances. Reinsurers can put their reinsured to further proof if they can show that the settlement was not entered into in a "bona fide and businessllike fashion".

Avoiding multiple sets of proceedings

Where there is uncertainty about the reasonableness of an underlying settlement, and associated disputes as to the effect of a follow the settlements clause in a reinsurance contract, it may be desirable for reinsurers to join underlying proceedings and so to avoid subsequent disputes.

The court has a discretionary power to join a party to proceedings under r.19.2(2)(b) where that party's rights might be affected by the dispute, and it is desirable to do so in the interests of justice, where, for example, that might avoid a multiplicity of proceedings. The existence of a significant financial stake in the outcome will not necessarily be a factor justifying joinder, however.  

Reinsurers in Aegean Baltic Bank SA v Renzlor Shipping Ltd & Ors (September 2020) applied to join proceedings brought by a lending bank against an insured shipowner, where reinsurers would pick up 80% of any losses and it was argued that there had been an unreasonable settlement of the underlying insurance claim. In the event the court rejected reinsurers' application to join, on the basis that it was too late in the proceedings to introduce additional factual and expert evidence, but an application made earlier in the proceedings might have been successful.

What this means

Where there is a potential reinsurance issue in play, in particular where there is a dispute as to the circumstances in which an insurance claim was settled, and, accordingly, as to the application and interpretation of a follow the settlements clause, it may be more efficient and cost effective to allow reinsurers to join the underlying insurance dispute and enable the court to consider all of the issues in the round.

If reinsurers are aware of a dispute involving their insured, where it might be beneficial for the court to hear issues involving reinsurers and for all concerned to avoid a multiplicity of proceedings, reinsurers should apply early. They will need to have detailed arguments and evidence in place to show why questions of fact and interpretation involving the separate reinsurance contract qualify as a "connected dispute", such as where there are overlaps in the required evidence, and how the interests of justice would be best served by hearing all of the issues at once.