HHJ Keyser KC determined four key issues arising from a reinsurance dispute involving worldwide general third-party liability cover provided by RSA to a manufacturing company and its subsidiaries between 1981 and 1985.

Royal & Sun Alliance Insurance Ltd v Equitas Insurance Ltd [2025] EWHC 2704 (Comm)

Background

From the mid-1980s, the manufacturing company faced substantial bodily injury claims in the USA relating to asbestos and welding products. RSA sought recovery of approximately £3.76 million (before interest) from its Reinsurer under excess of loss reinsurance policies written back-to-back with the master policies.

The issues

1. Is the excess eroded by indemnity payments only, or also by defence costs?

The Court sided with the Reinsurer. The £4 million excess and £16 million cover reflected the £20 million indemnity limit in the master policy, relating to indemnity cover only. Defence costs sat alongside the indemnity, payable without financial limit but contingent on the indemnity limit remaining unexhausted. This was consistent with the structure of a back-to-back facultative reinsurance.

2. Does the claims co-operation clause override the follow the settlements obligation?

No. The Reinsurer argued that the clause required its approval before any settlement could bind it. The Court disagreed, drawing a clear distinction from a case where the clause expressly prohibited settlement without reinsurer consent. Here, the prohibition went to litigation, not settlement. Absent an express settlement veto, the follow settlements clause operated in full.

3. Did RSA take proper and businesslike steps in entering into the Settlement Agreement?

Yes. Once RSA established that the settled claims fell within the reinsurance cover, the burden shifted to the Reinsurer to prove a failure to take proper and businesslike steps; essentially an allegation of professional negligence. The Reinsurer failed to discharge that burden. The allocation methodology adopted was a genuinely uncertain legal question, and the legal advice relied upon was defensible.

4. What interest was RSA entitled to?

Simple interest at 2% above the Bank of England base rate, running from the date of each respective loss. The Court rejected the Reinsurers argument that prolonged non-quantification should delay the start date, particularly given that the Reinsurer had denied liability on principle throughout. On compound interest, the Court confirmed that being an insurer is not, of itself, sufficient, specific evidence of actual loss measured by compound interest is required.

What this means for insurers

• Review your excess structures – Where defence costs are payable in addition to indemnity limits, do not assume they will erode the excess and bring forward access to reinsurance cover. Check the programme structures carefully.
• Claims co-operation clauses must expressly restrict settlement – If reinsurers wish to retain a veto over settlements, the wording must say so explicitly. A clause that restricts the right to litigate (but not to settle) will not displace the follow settlements obligation.
• Reinsures should be prompt to act – Challenging a settlement as not "proper and businesslike" years later in litigation is an uphill task. Reinsurers who wish to influence claims handling should engage actively at the time.
• Interest runs from the date of loss – even in long-running disputes – Wholesale denials of liability will not provide shelter from long-dated interest obligations. The financial cost of sustained coverage denials should be factored into reserving decisions.
• Compound interest requires evidence, not assumptions – Claimants must plead and prove specific facts such as borrowing costs, in order to obtain compound rather than simple interest. Market participation alone will not suffice.

Whether you are reviewing your are assessing exposure on a legacy claims portfolio, or navigating a live dispute with a reinsurer, our legal experts can provide clear, commercially focused advice for coverage disputes.