UK reinsurers liable for Lexington clean up costs

Lexington Insurance Company v Wasa International Insurance Company Ltd and AGF Insurance Ltd

(Court of Appeal - 29 February 2008)

A US aluminium company was forced to restore US sites damaged by pollution over a number of years. The company commenced proceedings against its US property damage insurer, Lexington Insurance Company, to recover the cost of restoring the polluted sites. The US court held that the company was able to recover the full cost of restoring each site from Lexington, even if only some of the damage had occurred at the relevant site during the three-year period that Lexington was on risk.

Lexington sought to recover these sums from its UK reinsurers, Wasa International Insurance Company and AGF Insurance, which were on risk for the same three-year period under the same US terms and conditions.

Wasa and AGF declined to pay on the basis that the reinsurance policy was governed by English law and that, as a matter of English law, a reinsurer was only liable for costs of remedying damage that occurred during the insured period. Accordingly, they could not be liable for the cost of remedying damage occurring before or after the insured period.

The Court of Appeal held that Wasa and AGF were liable. However, the issue was whether the same period of cover should receive the same interpretation in both the original insurance contract and the contract of reinsurance. The Court held that it should as the policy period was a fundamental part of the way the policy was construed by the US Court. Therefore, Wasa and AGF had taken the risk of US legal determination.

Comment

The principal that like policies should be given like construction, unless there is clear indication to the contrary, is paramount. This is so even if the construction under the law governing the original insurance contract differs from construction under English law.

- Sarah Apperley, BLM London.

This law report first appeared in Post Magazine on 24 April 2008

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