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Follow the Settlement Clauses: Back to Back Cover and the Standard of Proof

    • Insurance and reinsurance - E-briefings
    • Financial services


    In Tokio Marine Europe Insurance Limited –v- Novae Corporate Underwriting Limited [2013] EWHC 3362(Comm), the Defendant retrocessionaire , Novae, raised various policy construction issues in an attempt to resist following the settlement reached by the Claimant reinsurer, Tokio, in respect of a claim following damage caused by severe flooding in Thailand in 2011. 

    In dealing with these issues the Court looked at:

    • the extent to which reinsurance cover could be presumed to be back to back with an underlying policy; and
    • the standard of proof applying to a reinsurance policy containing a follow the settlements clause. 


    In October 2011, Thailand suffered from severe floods which caused the Chao Phraya River and its tributaries in Central Thailand to burst their banks.  Among the properties damaged were various shops and distribution centres owned by a subsidiary of Tesco Plc (“Tesco”).

    Tesco made claims for property damage and business interruption losses on a local Thai policy (“the Local Policy”) issued by a local insurer belonging to the ACE insurance group and on a global master policy (“the Master Policy”) issued by ACE Europe on a difference in conditions/difference limits (“DIC/DIL”) basis. 

    The claim, net of the deductible, was settled for £80 million. The settlement amount was split £57,951,052 to the Local Policy and £24,449,848 to the Master Policy.

    ACE Europe and the local ACE entity were reinsured under a facultative reinsurance (“the Reinsurance”) under which a number of reinsurers agreed to reinsure a 55% proportion of any losses suffered by Tesco.

    Tokio subscribed to a 12.5% share of the Reinsurance and, in turn, purchased from the Defendant, Novae, a facultative excess of loss reinsurance (“the Retrocession”) in excess of £53 million each and every Loss Occurrence. 

    Tokio paid its share of the settlement, agreed by ACE with Tesco, under the Reinsurance and sought to recover 12.5% of the sums paid in excess of £53 million from Novae. 

    Back to Back Cover

    The court was asked to consider whether the Retrocession covered Tokio for its liability under the Reinsurance for the amount of the settlement sum paid under the Local Policy.

    The issue arose because the Retrocession did not explicitly refer to covering any local policies; it  only referred to covering the “Original Policy” which was clearly the Master Policy.

    The court explained that in the context of proportional reinsurance, and proportional facultative reinsurance, in which the reinsured cedes a share of the risk to the reinsurer, it will frequently be inferred that it is the intent of the parties that the insurance and reinsurance are to be “back to back”: that is, intending to provide cover on the same terms because it can be inferred that the intention of the reinsurance is to cover a percentage share of the same losses. 

    However, with non-proportional reinsurance contracts, such as the Retrocession, there was no presumption that the reinsurance contract was intended to be back to back with the underlying (re)insurance, because such reinsurance did not operate on the basis of covering a percentage share of the same losses: for example, different limits would apply to the non-proportional reinsurance which affected the nature of the exposure and therefore the respective underwriters would not have the same objectives in mind when writing the risk. 

    There was therefore no assumption that the non-proportional reinsurance was back to back and no assumption that the Retrocession was back to back here.  Nevertheless, the court held that the coverage provided by the Retrocession was not limited to the Master Policy but covered the local policies as well.  The Property covered was defined in the Master Policy but this did not detract from the general nature of the coverage provided.

    In reaching this view the court said that it had borne in mind the factual matrix and presentational materials provided in respect of the Retrocession.  In particular:

    • the figures provided regarding potential exposure were ground up and at no point was it asserted that the Retrocession was not providing this protection;
    • the Master Policy provided cover on a DIC/DIL basis, but the figures provided in connection with the potential exposure were not provided on a DIC/DIL basis when this ought to have significantly affected the pricing of the risk;
    • if it were the intention that fundamentally different cover was to be provided, it would be expected to have been pointed out at the time of placement. 

    Standard of Proof

    The most significant issue considered by the court was whether Tokio had to establish on the balance of probabilities that the claim settled by ACE fell within the Retrocession or only that it “arguably” fell within the Retrocession.

    The Retrocession contained a follow the settlements clause in the following terms:

    “This Contract is subject in all respects (excluding the rate and the premium hereon and subject always to the Limits Reinsured hereon and accept as otherwise provided herein) to the same terms, clauses and conditions as original and without prejudice to the generality of the foregoing, 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 their proportion of any expenses incurred whether legal or otherwise in the investigation and defence of any claim hereunder in addition to limits hereunder.”

    According to the Court of Appeal in Insurance Company of Africa –v- Scor Reinsurance [1985] 1 LI.R 312 the effect of a follow the settlements clause in these sort of terms is that the reinsurers have agreed to indemnify insurers in the event that they settle a claim: 

    • “provided that the claim so recognised by them falls within the risk 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 businesslike steps in making the settlement.”

    These two conditions are often referred to as the “Scor provisos”. 

    The meaning and effect of  the first Scor proviso was considered in Assicurazioni Generali SpA –v- CGU International Insurance Plc (“Generali”) [2004] 2 All ER (Comm) 114 in which the Court of Appeal expressed the view that it was “well established” that an insurer did not have to prove that if the original claim was fully argued it would have succeeded, but that it was one that fell within the terms of the reinsurance “or arguably did so”

    On this basis, Tokio argued that it merely had to establish that the claim settled by ACE arguably fell within the terms of the Retrocession. 

    Novae submitted that the phrase “the claim so recognised by them” in the first Scor proviso referred to the claim made under the underlying insurance contract as recognised and settled by the underlying insurer. The point being that the reinsurer had to consider whether the claim as it was understood and settled by the insurer was covered under the reinsurance rather than investigating and seeking to argue that the true position was something different from the underlying claim as it was recognised by the underlying insurer.

    If Novae were right then the first Scor proviso would not effect the usual standard of proof of the balance of probabilities applying in determining whether the claim (as recognised by the underlying insurer) was covered under the reinsurance.  

    The court agreed with Tokio that it merely had to establish that the claim settled by ACE arguably fell within the terms of the Retrocession. It did so explicitly on the basis that it was bound to do so because of the Court of Appeal’s decision in Generali. It was clear from the court’s review of the relevant case law that up until the decision of the Court of Appeal in Generali the first Scor proviso was understood as meaning that it was not possible to look behind and challenge the claim recognised by the underlying insurers rather than that it was not possible to challenge the claim on the reinsurance if arguably liable.

    The Court of Appeal in Generali said that it agreed with the previous first instance decisions which considered the first Scor proviso without apparently recognising that it was not taking the same approach as taken in those earlier decisions.


    Reinsurance cover is often described as being “back to back”, but as was made clear in this decision a court will not take the approach that non-proportional reinsurance is intended to be truly back to back. However, this may not alter the result particularly where it is possible to view the placement of the (re)insurance programme in its factual matrix to illustrate what was intended.

    The court’s conclusions regarding the interpretation of the follow the settlements clause was particularly interesting. The clause had a standard structure similar to that considered in previous case law notably the decision in Scor. It has been said of these types of follow the settlement clauses that by making arguable liability sufficient to establish a claim their effect is to reverse the burden of proof. Many high profile reinsurance cases have been settled by reinsurers on this basis. However, it appears that this view of such clauses is open to question and they might be subject to further attacks in the future. Reinsureds might do well to bear this in mind when considering what sort of clauses might best protect their interests in the future.