Pollution and reinsurance

Professor Robert Lee | 12 years ago

The House of Lords have handed down judgment in a highly significant case involving the obligations of reinsurers to pay out on insurance claims in respect of land clean-up in the USA.

The land in question was operated for many years by the Aluminium Company of America.  When the former aluminium works were the subject of mandatory clean-up by the US Environmental Protection Agency, the bill was considerable as the pollution had extended between 1942 and 1986.

The sites were insured (inter alia) by Lexington.  Lexington had provided cover for just three years between 1977 and 1980.  However, in May 2000, the Washington Supreme Court found that joint and several liability attached to the remediation liabilities.  This left Lexington exposed to liabilities far beyond the three years for which they had provided cover.  They eventually settled the claim and paid out $103m.

Two English reinsurers (AGF and Wasa) had small percentages of this sum reinsured.  Nonetheless, their liability also ran into millions of dollars if they were required to back the payments under the insurance contract.  Insurance contracts and reinsurance contracts are usually “back to back” and the Court of Appeal had said that this was so in the present case.

However, the House of Lords have reversed the decision of the Court of Appeal.  Their Lordships have said that although the usual presumption is that clauses in the contract would operate back to back, it is always necessary to construe the intention of the parties under the reinsurance contract.  Here, that contract was subject to English law, and the ordinary rule of English law would be that the reinsurer would indemnify losses for the policy period.  The House of Lords thought that liabilities occurring long outside that period could not have been anticipated and planned for by the parties.

This result will come as welcome news to the London reinsurance market given the prospect of joint and several liability for pollution claims in the USA.  An analysis of the insurance issues arising in this case is available from Clyde & Co.

About the author

Professor Robert Lee

ERIC Director and Head of Birmingham Law School, Professor Robert Lee was co-director of the publicly funded Centre for Business Relationships, Accountability, Sustainability and Society at Cardiff University (BRASS). He is an expert on regulation, including environmental regulation and regulation of biotechnology and biomedicine. He previously worked for two top 10 UK law firms, and remains a professional-development consultant to one of the largest law firms in Europe, working on pan-European delivery of legal services.