3 The Reinsurance Contract—Construction and Terms

Reinsurance contracts are commercial contracts which are subject to the same general principles of contractual construction as apply to contracts outside the reinsurance arena. When constructing a contract, the court must do so objectively having regard to the material background circumstances of which both parties can be presumed to have been aware. The factual matrix of a reinsurance contract will include any special or peculiar trade meaning arising from the underlying insurance market that would have been known to or reasonably available to the parties at the relevant time. The chapter then identifies different approaches to the construction of reinsurance contracts that may be particularly pertinent to the reinsurance practitioner. It also considers incorporation and implied terms.

2 The Formation of the Reinsurance Contract

This chapter discusses the formation of the reinsurance contract. A reinsurance contract is formed according to normal contractual principles. There needs to be an offer and an acceptance of that offer to form an agreement, with consideration for the bargain and an intention by the parties to create legal relations between them. The relationship between reinsurer and reinsured may be one of utmost good faith when concluding the contract, but the essential requirements for the formation of a contract are the same. The final offer and acceptance are the mechanisms for the formation of a reinsurance contract. A broker is normally (at least for most purposes) the agent of the reinsured for the purposes of the placement of the reinsurance. Ultimately, it is always important to look at the reality of the legal relationships and not rely on the superficial appearance of who is making an offer to whom. The chapter then looks at the Market Reform Contract (MRC) slip.

6 Denying Liability

This chapter focuses on the duty of fair presentation and the duty of utmost good faith. Before any reinsurance contract is concluded, the reinsured has to make a fair presentation of the risk to the reinsurer. A reinsured must disclose every material circumstance which the reinsured knows or ought to know or, at least, circumstances which would put a prudent reinsurer on notice that it needs to make further enquiries. That disclosure must be in a manner which would be reasonably clear and accessible to a prudent underwriter. A failure to give a fair presentation, if established, may entitle the reinsurer to avoid the contract without returning the premium where the reinsured has been deliberate or reckless or with a return of premium if the insurer would not have entered into the contract on any terms had the information provided been accurate and complete or where the parties have contracted out of the regime imposed by the Insurance Act 2015. The genesis of the duty of utmost good faith was a protection for insurers and reinsurers because the proposer knew everything about the risk and the underwriter knew nothing.

1 Functions, Definitions, and Types of Reinsurance

This chapter provides an overview of reinsurance. The broad purpose of reinsurance is for the direct insurer to be covered in respect of their liability under an original insurance policy, pursuant to which the original insured is entitled to recover from them. The functions of reinsurance, however, are not only protective—there are significant business advantages to be gained by an insurer that can obtain reinsurance. Primarily, reinsurance provides capacity to an insurer, thereby enabling the insurer to insure a volume, type, or size of risk that it would not be able to cover in the absence of reinsurance. In effect, the reinsurer enlarges the direct insurer’s underwriting capacity by accepting a share of the risks and by providing part of the necessary reserves for losses. Reinsurance also increases the capital available to the direct insurer which would otherwise be earmarked to cover potential losses. Reinsurance is essentially a contract under which an insurer agrees to pass a defined part of an insurance risk to a reinsurer. The distinction between the two main types of reinsurance is in the way that this part is defined—proportional or non-proportional.

4 Obligations of the Reinsurer

This chapter evaluates the obligations of the reinsurer. A reinsurer is obliged to indemnify its reinsured where a loss falls within the cover of the policy reinsured and within the cover created by the reinsurance. In the absence of any express provision in the reinsurance policy to the contrary, the burden of proof is on the reinsured to prove that the underlying insured’s loss fell as a matter of law within the risks covered and that it was as a matter of fact liable to the underlying insured in respect of that loss. A reinsurer is not obliged to pay its reinsured more than the reinsured has paid its underlying insured. Over the years, insurers have sought (with varying degrees of success) to relieve themselves of the responsibility of proving that they were as a matter of fact liable to their underlying insured and of proving the quantum of such liability by inserting in policies of reinsurance a clause requiring the reinsurer to follow the settlements or fortunes of the reinsured.

5 Rights of the Reinsurer

This chapter details the rights of the reinsurer, one of which is the payment of premium. The premium is the consideration for the contract which proceeds from the reinsured to the reinsurer in return for coverage according to the policy terms. A reinsurer has the right to treat the contract of reinsurance as discharged upon non-payment of the premium if the contract contains an express right to cancel for non-payment of premium. In the absence of such an express clause, cancellation may be justified if it is an implied condition of the contract that the premium would be paid in advance or on the grounds that the reinsured has repudiated the contract by evincing an intention not to pay the premium. Meanwhile, a reinsurer can circumscribe the power of the reinsured to make settlements or other decisions which are binding on it by the use of a claims co-operation clause. A claims control clause gives a reinsurer even more influence in the handling of the original claim by the underlying insured. The chapter then looks at the right of the reinsurer to inspect the reinsured’s records; to declaratory relief; and to subrogation.

7 Applicable Law and Jurisdiction

This chapter explores the law applicable to reinsurance. Section 2(1) of the Contracts (Applicable Law) Act 1990 provides for the incorporation of the 1980 Rome Convention on the law applicable to contractual obligations into the law of the United Kingdom. Article 1(4) of the Convention expressly provides that reinsurance contracts, unlike contracts of insurance, are subject to the rules of the Convention. However, the Convention does not have retrospective effect and therefore only applies to contracts entered into after April of 1991 when the Convention came into force. For a contract concluded before that date, the determination of its proper law depended and still depends on common law principles. At common law, the starting point is to investigate whether the parties have expressly selected a body of law at the time of contracting or whether such selection can be implied from the express terms of the contract. If the court is unable to ascertain the governing law from the contract it will then look to determine with which system of law the contract has the closest connection.