The World Health Organization classified the coronavirus (COVID-19) as a pandemic on 11 March 2020 and, since that time, the pandemic has caused unprecedented socio-economic disruption across the globe with a profound impact on businesses and civil liberties. In such times of dramatic economic instability, it is natural that companies and individuals are now more than ever seeking coverage under their insurance policies.
This increased exposure for insurers will inevitably give rise to significant reinsurance claims. While most classes of insurance will experience some COVID-19-related claims, event/contingency, travel, health and business interruption are the most likely to be affected, at least in the short to medium term.
It is likely that difficult legal issues will arise when claims begin to be made on reinsurance policies, the most important of which are those relating to (i) follow-the-settlement clauses; and (ii) aggregation.
In this first of two blogs on these issues, we will consider follow-the-settlements clauses. A second blog covering aggregation issues will be published next week.
Follow-the-settlement clauses are common in reinsurance policies. These clauses restrict the ability of reinsurers to reject liability under a policy of reinsurance on the grounds that the reinsured was not liable to the original insured (or liable in the amount settled). In essence, the clauses are designed to remove, or at least relax, the obligation on the reinsured to prove that the loss falls within the terms of the inwards underlying insurance policy.
Follow clauses fall into two broad categories, the Scor-type (or “full follow”) clauses and double proviso clauses, each of which are addressed below.
In Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd  1 Lloyd’s Rep. 312, the Court of Appeal considered a follow clause in the following terms: “Being a Reinsurance of and warranted same…terms and conditions as and to follow the settlements of the Insurance Company of Africa.” Although the precise formulations of the clause vary, clauses of this type are now commonly referred to as Scor-type or full-follow clauses.
In order to rely upon a Scor-type clause, a reinsured must demonstrate that
- the claim, as recognised by the reinsured, arguably falls, as a matter of law, within the risks covered by the reinsurance policy; and
- it acted honestly and “in a proper and business-like” manner in investigating and settling the claim.
The operation of Scor-type clauses is not without controversy, but broadly, at least where the insurance and reinsurance cover is back-to-back, the scope for a reinsurer to challenge a settlement (in the absence of bad faith) is now limited; on one view, a reinsurer will only be permitted to challenge the settlement where a reinsured, in settling a claim with its original insured, has entirely disregarded a potential coverage defence or settled a claim which it knew was not covered.
Double proviso clauses
The classic formulation of the double proviso clause was considered in Hill & Ors v Mercantile & General Reinsurance Co  1 WLR 1239 (HL), as follows: “All loss settlements…shall be binding upon reinsurers, providing such settlements are within the terms and conditions of the original policies and/or contracts…and within the terms and conditions of the [reinsurance] policy”.
The double proviso clause places a heavier burden on the reinsured (compared to a Scor-type clause) when seeking to bind a reinsurer to a settlement. Here, the reinsured must show, on the balance of probabilities, that the settlement fell, as a matter of law, within the terms and conditions of both the reinsurance and the underlying insurance policy.
Issues raised by COVID-19
It seems highly likely that the proper application of follow clauses of all types will be tested by the response of insurers to claims arising from COVID-19. In a fast moving situation, it is difficult to know with certainty which issues will lead to disputes in the reinsurance market, but potentially difficult questions may arise from the suggestion that various governments (and various US states) are considering the introduction of legislation that would impose legal liability on insurers to respond to coronavirus claims (particularly business interruption claims), where, under the terms of the contract, there was no liability. If a settlement is entered into as a result of such legislation, can Scor-type or double proviso clauses be relied upon to bind the reinsurer? Would the answer be different if the reinsurance was governed by a different system of law? Would an insurer which settles claims in anticipation of legislation find itself in a worse position? There are not necessarily obvious answers to all of these questions.
Perhaps more troubling for insurers are the issues which may arise if, absent formal legislative or regulatory action, it is nonetheless the case that the intense political pressure to pay claims will lead some insurers to make payments without a thorough investigation of the facts or without all valid defences being raised (or at least considered), in order to preserve goodwill with their policyholders. Where a reinsurance policy contains a Scor-type clause, the question will be whether settlements of this nature “arguably” fall within the risks covered by the reinsurance policy as a matter of law. Similar (and perhaps more difficult from the perspective of the reinsured) questions will arise under a double proviso clause.
It is likely that reinsureds and reinsurers will have to answer these questions, and others like them, in the months and years to come.