Category: Insurance case law · Reviewed by Taylor Watts, Broker · New Business · Last reviewed June 2026
A reinsurer is not bound to follow the reinsured’s settlement of an underlying claim unless the claim, as settled, falls within the risks covered by the reinsurance contract on a true construction of its terms.
The dispute concerned a reinsurance contract under which Copenhagen Reinsurance Co Ltd had agreed to reinsure a portfolio of business written by or on behalf of Faraday Capital Ltd, a Lloyd’s managing agency. The underlying risks comprised liability and financial-lines business in which Faraday’s syndicate had taken a participation. When losses arose under the original policies, the reinsured agreed settlements with its insureds and presented those settlements to the reinsurer for indemnity under the reinsurance.
The reinsurance contract contained provisions governing the conduct of claims, including (it was alleged) a “follow the settlements” clause of the kind familiar in the London market. Such clauses, depending on their precise wording, oblige the reinsurer to follow settlements made by the reinsured in a businesslike manner, subject to the qualifications established by the line of authority running from Insurance Co of Africa v Scor through Hill v Mercantile & General Re and Hiscox v Outhwaite. The contract also contained aggregation language defining how multiple original losses were to be combined for the purposes of applying the limits and retention.
Copenhagen Reinsurance declined to indemnify the full amount claimed by Faraday. The reinsurer contended that, properly construed, the settled claims either did not fall within the scope of the reinsurance at all, or fell to be aggregated in a manner more favourable to the reinsurer than the reinsured asserted, with the result that a smaller sum was recoverable. The reinsured argued that the follow-the-settlements provision required the reinsurer to accept the settlements as binding on the question of liability under the original policies, and that the aggregation language operated in the way Faraday contended.
The proceedings came before the Commercial Court for determination of these issues of construction and their application to the settlements that had been made.
The court was required to determine: (i) the proper construction of the follow-the-settlements provision in the reinsurance contract, and in particular whether it bound the reinsurer to indemnify settlements made by the reinsured in respect of the underlying claims; (ii) whether, even on a follow-the-settlements basis, the claims as settled fell within the risks covered by the reinsurance as a matter of contractual scope; (iii) the proper construction of the aggregation language in the reinsurance, and whether the underlying losses constituted a single event, occurrence or cause for the purposes of applying limits and retentions; and (iv) the consequences of those constructions for the quantum recoverable under the reinsurance.
A subsidiary issue was the application of the principle, established in the Scor line of cases, that follow-the-settlements clauses do not require the reinsurer to indemnify claims falling outside the scope of the reinsurance on a true construction, and the related principle that the reinsured must show that the settlement was reached in a businesslike manner.
The Commercial Court considered the terms of the reinsurance contract, the nature of the underlying settlements and the relevant market authorities. The judge applied the established principle that a follow-the-settlements clause, in its conventional London-market form, requires the reinsurer to accept the reinsured’s bona fide and businesslike determination of liability under the original policy, but does not extend the scope of the reinsurance beyond the risks contractually assumed.
The court accordingly examined whether the settled claims, viewed in light of how they had been characterised and resolved at the original layer, came within the perils, types of loss and other definitions contained in the reinsurance. The judge also construed the aggregation language by reference to the wording used and to authorities including Axa Reinsurance v Field on “originating cause” and Lloyds TSB v Lloyds Bank Group Insurance on aggregation of losses.
The outcome turned on the particular wording of the reinsurance contract in suit and on the factual characterisation of the underlying losses, and the judge gave a reasoned decision on each disputed point. The decision reaffirmed the conventional position that follow-the-settlements provisions do not override the contractual scope of the reinsurance and that aggregation clauses must be construed on their own terms by reference to the unifying factor specified — be it “event”, “occurrence”, “originating cause” or otherwise.
A follow-the-settlements clause in a reinsurance contract binds the reinsurer to accept the reinsured’s bona fide and businesslike settlement of an original claim, but only in respect of risks falling within the scope of the reinsurance on a true construction of its terms. The clause does not extend cover to losses outside that scope, nor does it relieve the reinsured of the burden of demonstrating that the settled claim, properly characterised, falls within the reinsurance. Aggregation provisions are to be construed by reference to the unifying language used (event, occurrence, originating cause, etc.), and the appropriate level of generality at which to identify that unifying factor is a question of construction informed by the natural and ordinary meaning of the words employed.
Faraday Capital v Copenhagen Re sits within a long line of Commercial Court authority on the operation of follow-the-settlements and aggregation provisions in the London reinsurance market, and is of practical significance for several reasons.
First, it reinforces the consistent message from English courts that follow-the-settlements is not a blanket obligation: the reinsurer remains entitled to insist that the claim, as settled, falls within the scope of the reinsurance. Reinsureds therefore cannot assume that a settled claim will automatically be recoverable upwards, and brokers placing reinsurance must take care that the reinsurance scope tracks the underlying cover.
Second, the case contributes to the body of authority on aggregation that practitioners use when advising on programme design, particularly for portfolios exposed to series-of-events losses (financial-lines claims arising from a common practice, or liability claims arising from a common product or event). The construction of aggregation language remains one of the most heavily litigated issues in reinsurance, and judgments such as Faraday provide useful comparators alongside the leading authorities.
Third, the decision is of interest to managing agents and to syndicates in run-off, where careful matching of reinsurance scope and aggregation to underlying exposures can materially affect ultimate net loss. It is regularly cited in counsel’s opinions on the operation of follow clauses and on aggregation methodology.
By Matt Bartlett, Director, on 2026-06-06. Next review: 2026-12-06.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-06. Apex Insurance Brokers Limited, FCA FRN 724952, Companies House 07014570. Not regulated advice — consult your broker on your specific position.
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