Settlement considerations for insurers and reinsurers

In October 2025, the High Court provided clarification on various key issues in reinsurance disputes as it ruled on Royal & Sun Alliance Insurance & Ors v Equitas Insurance.

We break down the key points that hold implications for insurers and reinsurers, including excess erosion by underlying defence costs, the relationship between the 'claims co-operation' clause and the 'follow the settlements' clause, whether the reinsured had taken ‘proper and businesslike’ settlement steps, and the principles for claiming interest.

Case background

In the 1980s, Royal & Sun Alliance Insurance (RSA) provided worldwide general third-party liability insurance to BOC Group Plc and its subsidiaries. Claims for bodily injury arose in USA from toxic exposure, resulting in substantial damages and extensive defence costs.

RSA settled with BOC Group under the insurance and sought recovery from Equitas, its reinsurer, under excess of loss policies with a £4m excess and £16m of cover. Equitas disputed the claim on multiple grounds.

Excess erosion: Defence costs v indemnity 

The first issue concerned whether the £4m excess in the reinsurance was eroded by indemnity payments alone, or by both indemnity payments and defence costs. The court held that only indemnity payments counted towards the reinsurance excess. This was because the original insurance policy provided £20m of indemnity cover, with defence costs payable as an additional layer without a separate financial limit. 

The reinsurance was ‘back to back’ with the underlying insurance and followed this structure, so only indemnity payments counted towards the £4m excess in the reinsurance.  Reinsurers liability for defence costs arose when the £4m excess for indemnity costs was exhausted and ended when the £16m limit for indemnity costs was reached.

Settlement without reinsurer consent 

Equitas argued that RSA should not have settled without consulting them, relying on the claims co-operation clause (CCC). The CCC stated:

“The primary insurers shall in the event of an occurrence or series of occurrences consequent upon one original cause which may be the subject of a claim under the policy and where the potential cost may exceed £4m, or in the event of the potential cost of such an occurrence or series of occurrences reac[h]ing £4m give notice to re-insurers as soon as practically possible and furnish all available information respecting such occurrence or occurrences if required.

"In either such event the course to be adopted by the primary insurers shall be determined by agreement between the primary insurers and re-insurers and the primary insurers shall not without the consent of re-insurers litigate with regard to such loss but such consent shall not be unreasonably withheld.

"In the event of a difference of opinion between the primary insurers and re-insurers in respect of an opportunity whereby settlement of a loss can be obtained by the acceptance of a standing judgment or transaction agreed by the claimant reinsurers retain the right to pay to the primary insurers the amount the equivalent to their liability under this policy according to such standing judgment or transaction and shall thereafter be under no further liability under this policy in respect of the loss.”

However, the court distinguished this case from the leading decision in ICA v Scor, finding that the wording of this CCC only restricted RSA's ability to litigate without consent, not to settle. The clause did not explicitly prohibit settlement without approval and interpreting it that way would undermine the follow the settlements clause and principle. RSA was therefore entitled to settle without prior agreement of Equitas.

Proper and businesslike steps 

Following the decision in ICA v Scor, it is settled law that the effect of a follow the settlements clause is that reinsurers are bound by settlements entered into by the reinsured provided that the claim, as recognised by the reinsured, falls within the risks covered by the reinsurance as a matter of law, and that the reinsured has acted honestly and taken all ‘proper and businesslike’ steps in making the settlement. 

Equitas contended that RSA had acted unreasonably in settling at 47% of defence and indemnity costs, when the allocation could have been as low as 23%. The dispute turned on complex questions of New Jersey law regarding allocation methodology. 

The court held that RSA had acted properly by obtaining professional legal advice, even though the law was uncertain. The legal advice was not:

The lawyer had reached a reasonable interpretation on a question where opinions may differ and formed a view of RSA’s prospects of success. 

The test is not whether the insurer achieved the optimal outcome, but whether it acted reasonably and took ‘proper and businesslike’ steps, which RSA did.

Principles for claiming interest

The judge held that the basic rule is that interest runs from the date of loss, not from when proceedings commenced. This reflects the reinsurer's obligation to hold the insured harmless and compensates for the delay in payment.

Equitas argued that interest should not run before RSA had properly particularised its claim, and that a standstill period between the parties should reduce the interest period. The court rejected both arguments, finding that Equitas's failure to pay was not caused by lack of particularisation. Equitas had disputed liability on principle, not due to insufficient information.

On compound interest, the judge clarified that there is no default rule in commercial cases. Compound interest will only be awarded if the claimant pleads and proves facts demonstrating that such an award reflects its actual loss. It is not sufficient simply to assert that the claimant operates in the insurance market. RSA had not pleaded sufficient facts and was therefore awarded simple interest at 2% above the Bank of England base rate from the date of each respective loss.

Implications for insurers and reinsurers

Insurers are not required to achieve perfection in settlements when seeking to bind their reinsurers to them under a follow the settlements clause. Acting on reasonable professional advice in uncertain legal circumstances will satisfy the proper and businesslike steps test. 

Reinsurers seeking to control settlement decisions must use explicit language in their claims co-operation clause in order to prohibit settlement without consent.

The structural treatment of defence costs in underlying policies will be mirrored in reinsurance arrangements, assuming the policies are shown to be ‘back to back’, affecting how excesses are calculated. 

Finally, insurers seeking compound interest must carefully plead the factual basis for their claim, demonstrating actual loss rather than simply asserting market practice. Without such pleading, courts will default to simple interest from the date of loss, not the date that proceedings were commenced.