Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852
Citation
- Full case name: Forsikringsaktieselskapet Vesta v J N E Butcher, Bain Dawes Ltd and The Aquacultural Insurance Service Ltd
- Reported at: [1989] AC 852
- Court: House of Lords (on appeal from the Court of Appeal, judgment 30 October 1987)
- Judgment: 1988 (pre-neutral citation)
- Subject: reinsurance; back-to-back construction; warranties; conflict of laws; contributory negligence in contract
Facts
Vesta, a Norwegian insurance company, insured a Norwegian fish farm. It reinsured the risk in the London market through brokers.
Both the insurance and the reinsurance warranted that a twenty-four hour watch would be kept over the site, and both provided expressly that failure to comply with the warranty would render the policy null and void. No watch was in fact kept. The fish farm was then destroyed by a storm — not by the absence of the watch.
The original insurance was governed by Norwegian law, under which there had to be a causal nexus between the failure to comply with a warranty and the loss before the insurer could rely on it. English law, which governed the reinsurance, would have given the “null and void” wording its literal effect. Vesta was therefore liable to the fish farm owners under Norwegian law, and the question was whether it could recover from its reinsurers.
Decision and ratio
The House of Lords held that Vesta could recover under the reinsurance. The warranty in the reinsurance was to be given the same meaning and effect as the identical wording in the original insurance, interpreted as a matter of Norwegian law.
Lord Templeman put the principle at page 892:
“… in the absence of any express declaration to the contrary in the reinsurance policy, a warranty must produce the same effect in each policy. The effect of a warranty in the reinsurance policy is governed by the effect of the warranty in the insurance policy because the reinsurance policy is a contract by the underwriter to indemnify Vesta against liability under the insurance policy.”
Lord Griffiths added, at page 895, that a reinsurer could of course make a special contract agreeing to reinsure only some of the risks covered by the insurance, but that such a contract would be wholly exceptional, a departure from the natural back-to-back nature of reinsurance, and would need to be spelt out in clear terms.
Lord Lowry explained the mechanism without treating the reinsurance as partly governed by Norwegian law: the parties are deemed to have used the same dictionary — here a Norwegian legal dictionary — to ascertain the meaning of the terms and conditions in the wording used in both contracts.
Limits of the presumption
The presumption is strong but not absolute. In Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40 the House of Lords declined to allow the back-to-back principle to displace the plain period of cover in a reinsurance contract, where the original policy had been construed many years later under a foreign law which had not been settled when the reinsurance was written.
The two cases together frame the modern position. Identical wording will normally be read identically, but the presumption cannot rewrite a term of the reinsurance that the parties plainly agreed on its own terms.
A second point: contributory negligence
The Court of Appeal’s judgment in the same litigation is also a leading authority on when contributory negligence is available as a defence to a claim for breach of contract. It classified contractual duties into categories and held that the statutory apportionment defence is available where the contractual duty of care is concurrent with a duty in tort — which is the ordinary position in professional negligence — but not where the duty broken is a strict contractual obligation.
Why it matters for insurance
Vesta is the reason the London market can write proportional reinsurance on the strength of a slip that says very little, and still expect it to answer whatever the original policy answers. That is a commercial convenience with a hard edge: the moment the reinsurance wording departs from the original, the difference sits with the reinsured.
For UK commercial buyers the practical read-across is to any programme where more than one contract has to respond to a single loss — international programmes with local policies, fronted arrangements, and layered towers. Where a broker or an insurer says the layers are back to back, that is a statement about the documents, and the documents should be compared.
It is also a reminder that a warranty is a serious term. The Insurance Act 2015 has changed how warranties operate in contracts subject to it, but where an older wording, a foreign-law wording, or a marine or specialist contract is in play, the traditional consequences of breach can still bite.
See also
- Wasa v Lexington — where the back-to-back presumption stopped
- Hill v Mercantile and General — the loss must fall within both contracts
- Mann v Lexington — construing insurance and reinsurance covers together
- Hussain v Brown — the strict effect of a warranty in a direct policy
References
- Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852 (House of Lords)
- Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40
- Law Reform (Contributory Negligence) Act 1945
Frequently asked questions
What is the back-to-back presumption in reinsurance?
It is the presumption that proportional reinsurance covers the same risks on the same terms as the original insurance, so that identical wording in both contracts is given the same meaning and effect. Lord Griffiths described a reinsurance covering only some of the risks in the original as wholly exceptional and something that would need to be spelt out in clear terms.
Does the presumption apply if the two contracts are governed by different laws?
In Vesta it did. The reinsurance was governed by English law but the warranty was given the meaning it bore under Norwegian law, because that was the law under which the identical wording in the original insurance fell to be construed. Lord Lowry described the parties as having used the same dictionary.
Is the presumption absolute?
No. In Wasa v Lexington the House of Lords refused to let it displace the plain period of cover in the reinsurance. Identical wording will normally be read identically, but the presumption cannot rewrite a term the parties plainly agreed on its own terms.
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