AGF and Wasa forced to pay pollution clean-up costs in follow-the-settlements case

Reaction has been swift after the UK’s Court of Appeal ruled in the long-awaited follow-the-settlement case of Wasa v Lexington and AGF v Lexington, leaving reinsurers disappointed and facing heavy extra costs.

In its ruling, the appeal court has reversed the first court’s decision, which had been in favour of the insurance and reinsurance market.

Lawyers are now warning a small period of cover may pave the way for many years of liability. And lawyers representing both AGF and Wasa are considering taking the case to the House of Lords.

Bill Perry, head of litigation and dispute resolution at Charles Russell LLP solicitors to AGF Insurance, explained in the early 1990s, the US Environmental Protection Agency compelled Alcoa to clean up 50-years worth of pollution at its sites.

“three specified years' cover will in fact mean paying out for 53 years of pollution

Bill Perry

Alcoa claimed for the clean-up costs on its insurance policies, of which Lexington's was one. Lexington's insurance contract with Alcoa had been from 1 July 1977 to 1 July 1980.

The Supreme Court of Washington found that Lexington was jointly liable with all the other insurances affected for the clean-up costs in respect of any pollution found at sites covered by its policy during those three years, whenever that pollution actually occurred.

AGF and Wasa had underwritten the policies in the London market and subject to English law reinsurance policies. Lexington then sought to recover from AGF and Wasa their share of the Alcoa settlement.

In the first decision, Mr Justice Simon held that AGF and Wasa were not liable, as the period of reinsurance was sacrosanct and the principle that you get only the cover you pay for in terms of time was fundamental.

“While expected, the decision will disappoint many London market reinsurers

Nigel Brook

But this has been reversed which means, Perry says, “for AGF, three specified years' cover will in fact mean paying out for 53 years of pollution. Any reinsurer who wishes to ensure that the period clause in his English law reinsurance means what it says will have to make it abundantly clear by adding phrases to exclude losses outside the period of cover and to disapply the terms or interpretation of the foreign law policy reinsured.”

Michael Green, a partner in the reinsurance practice at Addleshaw Goddard LLP, which acted for Wasa, added “We and our clients believe the decision is wrong and has potentially significant, adverse consequences for the London reinsurance market. A petition to the House of Lords is being considered.”

Nigel Brook, a partner at Clyde & Co LLP, said “Here, the American appeal court had made what insurers regarded as a perverse decision, ordering Lexington to pay for cleaning up 50 years of pollution under its three-year policy by a highly questionable analogy with asbestos liability cases.

“The Court of Appeal has decided that, because the insurance and reinsurance were "back to back", reinsurers are bound to respond on the same basis - they must accept the risk of unexpected decisions at the front end even though the reinsurance is governed by English law. While expected, the decision will disappoint many London market reinsurers.”