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Court Clarifies Application of “Follow the Settlement” Clauses

Wiener Stadtische Versicherung AFG v. Infrassure Ltd., 2023 ONSC 5256

Reading time: 4 minutes (approx.)

By: Alexandre Doucet (Articled Clerk)

On February 6, 2011, a failure occurred in the north-east “tap block” in flash furnace 2 at the Vale Limited smelter in Sudbury, Ontario. That failure then led to a run-out of molten matte (a heavy molten material, usually copper or nickel) and the building was evacuated. A claim was settled with the lead insurer, Zurich Insurance Company Ltd, for $140 million. Wiener Stadtische Versicherung AG Vienna Insurance Group (the Plaintiff) was one of Zurich’s reinsurers and was a fronting reinsurer for Infrassure Ltd. (the Defendant) pursuant to a retrocession agreement between the parties (the Agreement). The Plaintiff retained a small portion of the risk for regulatory purposes while the remaining 99.89% went to the Defendant under the Agreement.

In March 2015, the Plaintiff paid $8,433,643.78, representing its portion of the settlement, to Zurich. In this action, the Plaintiff sought to recover 99.89% of the settlement funds from the Defendant, pursuant to the Agreement, and to recover its payment of $539,116.39 in loss adjustment costs. The Defendant denied liability for the Plaintiff’s claim, stating that it was not contractually required to follow the settlement entered into by Zurich.

Justice Conway began his analysis by reiterating established principles of contractual interpretation. Courts must read contracts as a whole, giving words their ordinary and grammatical meaning, consistent with surrounding circumstances. The factual matrix against which the contract is to be interpreted should also be considered, consisting of objective evidence such as the genesis and aim of the transaction and the market in which the parties operate.

The Agreement had a “follow the settlement” clause where if a reinsured party settled a claim with one or more policyholders, the reinsurer would honor those settlements. Justice Conway wrote that, given the explicit language of the follow the settlements clause and the fact that the Defendant deleted express language in its stamp that would otherwise have given it approval rights, the Defendant was bound to its contractual obligations despite attempting to remove itself from them.

The Defendant’s remaining arguments related to whether Zurich, in entering into the settlement, took proper and businesslike steps in entering into the settlement (i.e. reasonable steps within the context). Zurich’s retention of numerous technical experts, specialized legal counsel, and forensic calculators to assess the value of the claim are all indicators that proper and businesslike steps were taken.

Link: https://www.canlii.org/en/on/onsc/doc/2023/2023onsc5256/2023onsc5256.html?autocompleteStr=Wiener%20st&autocompletePos=2

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