A major court ruling has given all reinsurers a legal right to challenge settlement of any claim by an insurer, overturning a previous decision in the Commercial Court.
The Court of Appeal came to a unanimous decision in favour of GAN, a reinsurer in a claim involving a fire in Taiwan, in which insurer Tai Ping had settled with the client.
GAN had a 2% facultative reinsurance of Tai Ping's 35% share of the fire risk of a microchip fabrication plant through a London Market slip.
There was both a follow and settlements clause and a claims cooperation clause (CCC) in the widely used "SCOR" form, in which the insurer can settle and the reinsurers will pay up.
However, there is a SCOR clause that states that "no settlement and/or compromise shall be made and liability admitted without the prior approval of reinsurers".
The court rejected the idea that GAN had to be able to show it had reasonable grounds for refusing its consent, but a reinsurer had a duty "not to act arbitrarily or capriciously".
Moreover, the court said it would not strike down GAN's decision because it had only a small share – just over £1m -– or because other reinsurers with a greater share had approved the settlement.
Tim Brentnall, partner at City law firm Elborne Mitchell which represented GAN, said current outstanding claims could be affected. He said: "It could happen because these clauses are widespread. It could affect the existing claims situation and it could also delay claims."