Hill v Mercantile and General Reinsurance Co plc [1996] 1 WLR 1239

Citation

• Full case name: Hill and others v Mercantile and General Reinsurance Co plc
• Reported at: [1996] 1 WLR 1239
• Court: House of Lords
• Judgment: 1996 (pre-neutral citation)
• Leading speech: Lord Mustill
• Subject: reinsurance; follow-the-settlements clauses; scope of the reinsurance cover

Facts

The dispute concerned whether reinsurers were bound by a loss settlement made by their reinsured. The reinsurance contained a settlements clause in what the market calls the dual proviso form, which the House of Lords considered in these terms:

“All loss settlements by the Reassured including compromise settlements and the establishment of Funds for the settlement of losses shall be binding upon the Reinsurers, providing such settlements are within the terms and conditions of the original policies and/or contracts … and within the terms and conditions of this Reinsurance.”

The wording therefore made the binding effect of a settlement conditional on two separate things: that the settlement was within the original cover, and that it was within the reinsurance.

Issue

How far does a follow-the-settlements clause displace the reinsurer’s entitlement to say that the loss was never covered? In particular, does such a clause prevent reinsurers from raising coverage points that arise under the reinsurance itself, as opposed to under the original policy?

Decision and ratio

Lord Mustill reduced the subject to two propositions, at page 1251:

“There are only two rules, and both obvious. First, that the reinsurer cannot be held liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. Second, that the parties are free to agree on ways of proving whether these requirements are satisfied.”

Follow-the-settlements clauses are an expression of the second rule, not an exception to the first. The standard form of such a clause relieves reinsurers of the need to prove that the loss fell within the original cover, as to both liability and amount. It does not relieve them of the need to establish that the loss falls within the cover created by the reinsurance.

The Court of Appeal later summarised the effect of the decision by saying that a follow-settlements provision does not bind reinsurers in respect of any cover, or any exclusion of cover, not included in the reinsurance.

Why it matters for insurance

Reinsurance is bought on the assumption that it will answer whatever the direct policy answers. Hill is the reminder that this is a drafting outcome, not a law of nature. Where the reinsurance wording differs from the original — a different exclusion, a different period, a different aggregation clause, an extension granted downstream but not upstream — the difference is the reinsured’s net retention, however generous the follow-the-settlements language looks.

The same logic runs down the chain to the buyers of direct insurance. If a broker or insurer relies on a back-to-back assumption when arranging layered or fronted programmes, master and local policies, or excess and primary wordings, the gaps between the contracts are where claims fail. Comparing the actual documents rather than the summaries is the only way to find them.

For a UK commercial buyer the takeaway is practical: ask how each layer of your programme responds to the same loss, and ask for the wordings rather than a schedule of limits.

See also

• Insurance Co of Africa v Scor — the classic statement of the standard follow-the-settlements clause
• Vesta v Butcher — the presumption that insurance and reinsurance are back to back
• Wasa v Lexington — the limits of that presumption
• Faraday v Copenhagen Re — follow-the-settlements in a modern reinsurance dispute

References

• Hill v Mercantile and General Reinsurance Co plc [1996] 1 WLR 1239 (House of Lords)
• Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312
• Assicurazioni Generali SpA v CGU International Insurance plc [2004] EWCA Civ 429

Frequently asked questions

What does a follow-the-settlements clause actually do?

It changes how a claim is proved rather than what has to be true. In its standard form it relieves the reinsured of having to prove that the loss fell within the original cover, as to both liability and amount. It does not relieve the reinsured of having to show that the loss falls within the cover created by the reinsurance itself.

Can reinsurers still raise coverage defences under a follow-the-settlements clause?

Yes, so far as those defences arise under the reinsurance contract. Lord Mustill's first rule is that a reinsurer cannot be liable unless the loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. A settlements clause does not override that.

Why does this matter to a direct insurance buyer?

Because the same reasoning applies wherever more than one contract has to respond to a single loss. Layered programmes, fronted arrangements and master and local policies all depend on the wordings lining up, and gaps between them are retained by somebody. Comparing the actual documents is the only way to see where.

This page is insurance information for UK businesses, not legal advice. It summarises a reported judgment and explains why insurance buyers and brokers refer to it; it is not a substitute for reading the judgment or taking advice on your own facts. Case summaries are necessarily short and omit detail. Position stated as at August 2026.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.