Lloyd's Maritime and Commercial Law Quarterly

A matter of Forms and substance

Alan Weir *

This article considers the interpretation of the facultative reinsurance in dispute between the parties in the Lexington litigation, in its market and historical context. Having outlined the difficulties of the much-publicized back-to-back presumption as an answer in such cases, the article takes the conventional course of examining the terms of this reinsurance. These included standard documents and phrases long in use in the London and United States markets. It indicates which market Form and Clause must apply in this instance (a point not clarified in the litigation) and examines how wording from, in particular, the Reinsurance Warranty Clause was variously construed by the House of Lords in Vesta v. Butcher. Having suggested a key distinction between that case and this, the article suggests that a practice of warranting a written description of the insurance within the reinsurance developed in the reinsurance market as an alternative to incorporation of the former into the latter, the incorporation method having been heavily criticized in the early years of the 20th century. The evidence for this warranty practice is set out and its viability considered both in the abstract and by reference to current case law. Having examined the applicability of such an analysis to this contract, a suggestion is offered as to how that dispute may be resolved by adhering to the chosen Form. The article closes by considering a couple of other issues touched upon by Gurses & Merkin at [2008] LMCLQ 366, in an article with which the author finds himself somewhat at odds.

1. Introduction

In the forthcoming AGF v. Lexington and Wasa v. Lexington appeals, the House of Lords will determine a preliminary issue on the interpretation of an antiquated reinsurance slip. This question has divided the Commercial Court and the Court of Appeal.1 Lexington, the reassured respondent company and part of the AIG group, seeks to recover, under a three-year facultative reinsurance placed in the 1970s, for a share of massive pollution remediation costs it has been adjudged liable to pay its assured, the Aluminium Company of America (ALCOA) under a “Difference in Conditions” (“DIC”) policy for the same



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