Follow the settlements

The effects of a follow the settlements clause in a reinsurance contract are well known. The clause removes the need for the reinsured to prove actual liability at law to the assured. Instead, it suffices that the reinsured has acted in a bona fide and businesslike fashion in recognising the claim presented by the assured as falling within the scope of the policy and in settling the claim on that basis. This is the combined effect of Insurance Company of Africa v Scor (UK) Reinsurance Company Ltd [1985] 1 Lloyd’s Rep 312 and Assicurazioni Generali SpA v GCU International Insurance plc [2004] Lloyd’s Rep IR 457. It is of course possible for the parties to vary the terms of the follow the settlements clause so as to restrict the type of settlements covered. The question before Aikens J in Faraday Capital Ltd v Copenhagen Reinsurance Co Ltd [2006] EWHC 1474 (Comm) was whether the exclusion of ‘Without Prejudice and ex Gratia settlements’ was of significance. The ruling demonstrates that the inclusion of these words will preclude recovery by the reinsured in respect of a settlement in which liability is not admitted by the reinsured.