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B4D Extra contractual obligations (ECO) and excess of policy limits (XPL) clauses
These clauses are typically found in wordings where the reinsured is domiciled in the USA.
ECO clause
An ECO clause extends the scope of the treaty to damages, arising from the reinsured’s bad faith or
negligence in handling claims under policies subject to the treaty. In this case, the court has made an
award against the insurer/reinsured outside of the insurance relationship. Reinsurers often insist on a
high degree of co-reinsurance in this cover to encourage greater care in future, perhaps up to 25%.

An example from the US Brokers and Reinsurance Market Association (BRMA) follows:
This Contract shall protect the Company within the limits hereof, where the ultimate net loss includes any
Extra Contractual Obligations. The term ‘Extra Contractual Obligations’ is defined as those liabilities not
covered under any other provision of this Contract and which arise from the handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by
the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud, or bad
faith in rejecting an offer of settlement or in the preparation of the defense or in the trial or any action
against its insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such
action.
The date on which any Extra Contractual Obligation is incurred by the Company shall be deemed, in all
circumstances, to be the date of the original disaster and/or casualty.

However, this Article shall not apply where the loss has been incurred due to fraud by a member of the
Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion
with any individual or corporation or any other organization or party involved in the presentation, defense
or settlement of any claim covered hereunder.

XPL clause
An XPL clause extends the scope of the treaty to original loss in excess of the original policy limit, arising
Extends scope of
treaty to original loss from the reinsured’s bad faith or negligence in handling claims under policies subject to the treaty.
in excess of original In this case, the court has set aside the original policy limit, awarding a claim amount in excess of
policy limit Reference copy for CII Face to Face Training
that limit.
It is similar to the ECO clause as both exposures arise out of the same claims handling conduct.
However, the difference is that the loss or liability in question, which is the subject of the XPL clause,
would be covered under the original policy but for the paucity of its limit, whereas the loss or liability
7 which is subject to the ECO clause falls outside the original policy and the other provisions of the
Chapter the liability of the insurer (or, in this context, the reinsured).
reinsurance agreement. As such, XPL is considered the excess liability of the original insured, and ECO

B4E Insolvency clause
This clause sets out the impact of the reinsured’s insolvency on the reinsurance contract. As a
Sets out the impact of
the reinsured’s reinsurance contract is an indemnity contract, the reinsured is usually required to pay the original claim
insolvency on the prior to seeking indemnification or reimbursement from the reinsurer. Of course, in an insolvency
reinsurance contract
situation, it is no longer possible for the reinsured to do so in full, as the funds are generally not
available, or within the usual time scale. The original (non-protected) policyholder would expect to
receive only a proportion of its claim by the irregular payment of dividends.
See also chapter 8, However, in the case of Charter Reinsurance Co Ltd v. Fagan (1996) it was held that, unless there is very
section C1
clear wording to the contrary, a reinsurance contract must respond to a claim following the
establishment and quantification of the reinsured’s liability to that claim and not to an actual payment
by the reinsured. So, if the reinsured becomes insolvent before having paid claims, and its liability to
pay those claims is established before or during the insolvency proceedings, the reinsurers are required
to make payment. Therefore, reinsurance wordings must be clear on this point.

In the absence of any specific provision to the contrary, reinsurers are legally required under English law
to pay claims that have been established and due for settlement by a reinsured that has entered into
insolvency procedures. The insolvency clause removes the requirement for the reinsured to actually pay
the original claim before collecting on its reinsurance contract. It also allows the parties to set-off sums
outstanding between the parties. In short, it states that, in the event of the insolvency of the reinsured,
the liability of the reinsurer shall be determined as if the reinsured had not gone into liquidation, subject
to any rights of set-off.