The court required the reinsurer to contribute to a $140-million claim settlement
The Ontario Court of Appeal has upheld a trial decision confirming that a "follow settlements" clause in a retrocession agreement obligates a reinsurer to honour settlements under the primary policy unless explicitly excluded by an express term.
The case stemmed from a 2011 smelter incident at Vale Canada Limited's Sudbury facility, which caused significant business interruption losses. Following a 26-week shutdown of a flash furnace, Vale reached a $140 million settlement in 2014 with its primary insurer, Zurich Insurance. Zurich then sought contributions from its reinsurers, including Wiener Städtische Versicherung AG Vienna Insurance Group (VIG), which covered losses exceeding $63.465 million.
VIG paid its share of the settlement but sought indemnification from Infrassure Ltd., with whom it had a retrocession agreement. Infrassure refused, claiming the settlement did not bind it. The dispute centred on whether the retrocession agreement's "follow settlements" clause required Infrassure to contribute.
At trial, the judge ruled in favour of VIG, finding that the clause unambiguously obligated Infrassure to honour settlements made under the primary policy unless explicitly exempted. The court awarded VIG $8.97 million, including indemnity and loss adjustment costs.
Infrassure appealed, claiming the trial judge misinterpreted the contract and failed to consider whether the settlement fell within the primary policy's coverage. It also argued Zurich and VIG had not taken "proper and businesslike steps" to settle and pay the claim.
The Court of Appeal rejected Infrassure's arguments. It affirmed that the retrocession agreement required Infrassure to follow settlements unless an express exception applied. The court found no such exception in the agreement and noted that Infrassure had deliberately removed language that might have provided one during contract negotiations.
The court also upheld the trial judge's finding that the settlement was "arguably covered" under the primary policy and that Zurich had acted in good faith, taking proper and businesslike steps to evaluate and negotiate Vale's claim. Zurich's efforts included a three-year investigation, expert consultations, and risk assessments.
The appeal court also dismissed Infrassure's objections to VIG's payment handling, ruling that VIG met its obligations under the retrocession agreement. Ultimately, the court dismissed Infrassure's appeal.
