Nick Bradley finds a test case where syntax is all important.

Nicholas Bradley is a partner in the insurance and reinsurance unit at Davies Arnold Cooper.On 25 October, the Court of Appeal upheld by a majority of two to one a High Court ruling in the key insurance case of Charter Reinsurance Company v Patrick Feltrim Fagan in a standard form excess of loss reinsurance contract wording. Do the words "sum actually paid" used in a clause which sets out what the reassured could recover from his reinsurer, mean the reassured has to have physically transferred funds in settlement of the original liability before recovery can be made from reinsurers?

An insolvent reassured cannot physically pay underlying claims which may have been agreed, and which, but for the insolvency, would be paid. However, a liquidator, or a scheme administrator, has an obligation to collect in assets.

Usually an insurance company's only material assets are its potential reinsurance recoveries. If the reinsurer cannot be required to pay before the insolvent company has paid, then those insolvent companies may have no assets. The commercial question was whether a reinsurer can escape paying claims, because of the accident of the insolvency of his reassured. The matter was determined as a point of construction, pursuant to RSC Order 14A.

The case has produced four judgments which each take a different approach as to how a court should interpret words or phrases in documents. Justice Mance at first instance and Lord Justice Simon Brown in the Court of Appeal both took a pragmatic approach and were prepared to look beyond the obvious meaning of the words in order to make the contract accord with business common sense – with the words meaning "liable to pay" not physically paid.

Lord Justice Staughton in contrast, said he was not prepared to "bend the meaning" of the words used when in his view giving the words their literal meaning would not be unreasonable. Leave to appeal to the House of Lords has been granted. It is thought that £2 to £3 billion of gross claims depend upon the outcome.