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Chapter 7 Contract wordings 7/3

Key terms
This chapter features explanations of the following terms and concepts:
Arbitration Back-to-back Boiler plate clauses Cession clause
Commutation Continuous contract Hours clause Index clause
Interlocking clause Law and jurisdiction clause Letter of credit (LOC) Portfolio transfer
RAD/LOD Reinstatement clause Treaty exclusions Ultimate net loss (UNL)

A Main features of facultative and treaty wordings
All reinsurance wordings must record the answers to the following three questions:

1. Who are the parties?
2. What have they agreed to reinsure? In other words, what is the subject matter (or business) of the
reinsurance?
3. On what terms, conditions, limitations and exclusions have they agreed to reinsure that business?
Further, the London Market Principles (LMP) and its successor, the MRC standard, along with the
requirement that contract certainty is achieved by the complete and final agreement of all terms on
placement, apply equally to reinsurance wordings. Accordingly, this chapter is concerned almost entirely
with discussing the content of the risk details section of the MRC.
The parties
The parties to the contract are the insurer (or insurers) on the one hand, and the reinsurer (or reinsurers)
The parties to the
on the other hand. contract are the
insurer and the
Description reinsurer
Each of the parties to the contract should be clearly described and, if not individually stated, should be
readily identifiable from the definition provided. Otherwise, the entity risks the obvious consequences of
being omitted from the contract. Reference copy for CII Face to Face Training

Typically, an entity is described by its name and address, or by its relationship with another entity. The
name should be its full and official (or registered) name without abbreviation to avoid ambiguity, and
the address, its registered or head office or main place of business. Strictly, a company is defined in law
by its number not name, the latter being readily amended by resolution. While the number is rarely (if
ever) seen, it is common with, for example, US reinsurance companies to provide their National Chapter
Association of Insurance Commissioners (NAIC) Code or other regulatory or reporting codes.
To be provided with a complete list of reinsureds is rare and it is usual for a wording to contain a form of 7
words intended to incorporate all relevant entities into the contract.
For example:
• In the context of facultative reinsurance – ‘Insurers being members of [ ] mining pool’ or ‘Insurers
being subscribers to the [ ] lineslip’ or ‘Insurers being subscribers to Policy Number [ ]’.
• In the context of treaty reinsurance – ‘The [ ] Insurance Company Limited and/or their quota share
reinsurers’. Here, the treaty reinsurance is purchased for the benefit of the insurance company and its
quota share reinsurers. If no reference is made to the quota share reinsurers, how can the benefit of
the treaty extend to them? In the case of Kingscroft & Walbrook v. Nissan (1999), the High Court held
that quota share reinsurances between members of an underwriting agency were protected by the
specific reinsurance, even though the reinsurance treaty wording did not add the words ‘and or quota
share reinsurers’ to the name of the reinsured. The judge accepted extrinsic evidence as proof of the
intention of the reinsurance. The case showed, not only the value of extrinsic evidence, which in
different circumstances could lead to a different conclusion, but the importance of clearly defining
who is reinsured.
It should not be forgotten that a description such as ‘the [ ] Insurance Company Limited and its
associated and subsidiary companies and branches’ is set in time (at placement) and cannot be
effective to reinsure entities that, as the result of corporate activity or otherwise, may subsequently be
described as such.