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Chapter 7 Contract wordings 7/27

Question 7.5
With a £5m excess of £5m reinsurance, what is recoverable from the reinsurer in respect of indemnity claims of i.
£5m, ii. £8m; and iii. £10m, respectively, each with associated costs and expenses of £1m, where those expenses:
A. form part of the UNL, or
B. are recoverable pro rata in addition to the limit?

• The UNL will not include ex gratia payments, literally, payments as a favour rather than from an
The UNL will not
obligation. For the avoidance of doubt, ex gratia payments are usually defined as not including the include ex gratia
settlement of losses arguably within the contemplation of coverage under the policies reinsured, or payments
made to avoid coverage dispute resolution costs under those policies.
• The agreed deductions are typically all recoveries, salvages, subrogations and claims on other
reinsurances. The treaty will not, for whatever reason, cover the failure to recover from a particular
reinsurance.
• The clause enables recovery by the reinsured from the reinsurer in advance of the claim being finally
ascertained (see paragraph two in the example wording below). Otherwise, the reinsured would
potentially be out of pocket for a significant period while, for example, a recovery action was being
pursued in the courts.
• Payments into court or the overseas equivalent are usually expressly recoverable from liability
reinsurers as a loss settlement of the reinsured, provided they fall within the terms and conditions of
the policies protected. The clause should also address how interest earned on the monies deposited
with the court are to be distributed.

For example:
‘Ultimate Net Loss’ shall mean the sum actually paid by the Reinsured in settlement of losses or liability
(including the amount of any appropriate Extra Contractual Obligation awards and any appropriate Excess
of Policy Limits awards as defined in the relevant Articles of this Agreement) after making deductions for
all recoveries, all salvages and all claims upon other reinsurances, whether collected or not, and shall
include all legal costs and expenses of litigation and all costs and adjustment expenses arising from the Reference copy for CII Face to Face Training
settlement of claims, other than the salaries of employees and the office expenses of the Reinsured but
including the fees of ‘in house’ assessors used in connection with the adjustment of any losses hereunder.
All salvages, recoveries or payments recovered or received subsequent to any loss settlement under this
Agreement shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary
adjustments shall be made by the parties hereto. Nothing in this clause shall be construed to mean that a Chapter
recovery cannot be made hereunder until the Reinsured’s Ultimate Net Loss has been ascertained.
Underlying recoveries under any other Excess of Loss Reinsurance Agreements (as far as applicable) are 7
for the sole benefit of the Reinsured and shall not be taken into account in computing the Ultimate Net Loss
or Losses in excess of which this Agreement attaches, nor in any way prejudice the Reinsured’s right of
recovery hereunder.

D3A Other (or specified) reinsurances
The impact of other reinsurances on the UNL can be clearly seen in the last paragraph (above), and it is
imperative in any wording to be clear how related reinsurances protecting the reinsured in one way or
another interact, if at all.

The last paragraph of the above example may be read as qualifying that part of the first paragraph,
requiring the deduction of ‘all recoveries, all salvages and all claims upon other reinsurances’.
Accordingly, in this particular instance, underlying recoveries are not agreed deductions from the UNL.
The reinsured is stated to be the sole beneficiary of any underlying recoveries. If for the benefit of both
parties, any underlying recoveries would be deducted from the UNL and the reinsured’s retention would,
in effect, be increased by the extent of those recoveries.
By way of further example, the following addition to the UNL clause would be required if, for example,
the reinsured wished to retain the sole benefit of a quota share reinsurance purchased to protect its net
retention.

Notwithstanding the foregoing, it is agreed that any Quota Share reinsurance arranged by the Reinsured to
protect their net account shall be for the sole benefit of the Reinsured and shall be disregarded for the
purpose of calculating the net retention hereunder.