Lloyd's Maritime and Commercial Law Quarterly
THE USE OF AGGREGATE EXTENSION CLAUSES IN EXCESS OF LOSS REINSURANCE AGREEMENTS
John S. Butler*
A standard form clause known as the “aggregate extension” clause came into use in the London reinsurance market in the early 1940s and 1950s. The reasons why the clause was adopted are not clear and the purpose it was intended to fulfil is not readily discernible from the wording. The provision itself is stated to apply to “risks covering on an aggregate basis” and the exact meaning of these words has long been a matter of contention between reinsurers and reinsureds. Although the recent decision of the Court of Appeal in Yasuda does not provide a direct answer to this question it does at least indicate that, where the application of retentions and limits to a claim has to be determined by reference to specified criteria, cover cannot be said to have been given on an aggregate basis.
1. Background
The joined appeals to the Court of Appeal in Yasuda v. Lloyd’s Syndicates Nos 209, 366 and others and Denby v. English and Scottish Maritime Insurance Co. Ltd
1 constituted the first detailed appellate consideration of aggregate extension clauses in England. The analysis is, regrettably, far from satisfactory. The decision indicates when an aggregate extension clause does not apply, but is far from clear in setting out the precise circumstances in which such a clause will be relevant. In addition, the decision apparently fails to take into account all of the relevant contractual provisions. In order to place this decision in its context and to explain its significance, it is necessary first to say a few words about the development of excess of loss reinsurance, which was the particular form of reinsurance involved in this case, and the apparent function of the aggregate extension clause at issue.
Excess of loss reinsurance appears to have been originally devised by underwriters in the Lloyd’s market towards the end of the last century2 as a means of reinsuring large conflagrations and other catastrophic natural occurrences in the United States.3 This basic
* Barrister, Consultant to Barlow Lyde & Gilbert, Honorary President of the Association Internationale de Droit des Assurances (AIDA).
1. [1998] Lloyd’s Rep. I.R. 343.
2. See Harold E. Raynes, “A History of British Insurance” 2nd edn, at pp. 328-329 and D.E.W. Gibb “Lloyd’s of London” (1956) at pp. 218–219.
3. The San Franciso earthquake of 1906 is always cited as an example of the kind of catastrophe envisaged but the need to cover conflagrations in cities largely built of wood often with inadequate water supplies and primitive fire fighting services must obviously have played a large part in the creation of excess of loss reinsurance which was soon extended to provide cover for most other classes of insurance including accident or casualty insurance which is the context in which aggregate extension clauses are found.
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