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Chapter 7 Contract wordings 7/43

Key points

The main ideas covered by this chapter can be summarised as follows:
Main features of facultative and treaty wordings
• The parties to the contract are the insurer(s) and the reinsurer(s).
• The subject matter of the reinsurance contract is the reinsured’s interest in a particular insurance contract in the
case of facultative reinsurance or, a particular account or book of insurance business in the case of treaty
reinsurance.
• The reinsurance contract is a separate and distinct contract from the underlying insurance contract. This
reinsurance relationship is mutually exclusive from the relationship between the reinsured and the insured.
Clauses common to proportional and non-proportional wordings
• A proportional treaty is usually a continuous contract, that is, it continues until terminated on notice, by agreement
or otherwise. A fixed period is usual for a non-proportional treaty.
• The territorial scope clause defines the territorial or geographical scope of the reinsurance contract.
• The cancellation clause provides that one or both parties may terminate (or cancel) the agreement immediately if
there is a significant change during the currency of the agreement in the character of that other party, or in the
commercial and/or political background, from that at placement.
• Currency clauses set out the relationship between the currency of the original premium and/or claim transactions,
and the corresponding reinsurance (premium and/or claim) transactions.
• Late payments clause requires the defaulting (or debtor) party to pay interest on any amounts past due under the
contract.
• Law and jurisdiction clauses record the law governing the treaty and the courts having power and authority to
administer justice between the parties to the treaty.
• Dispute resolution clauses set out how the parties go about resolving any disputes between them, for example,
arbitration and/or mediation failing which litigation.
• The underwriting policy clause requires a reinsured to seek a reinsurer’s approval to significant change in its
underwriting policy.
• The errors and omissions clause seeks to ensure that any inadvertent errors, omissions or delay in complying with Reference copy for CII Face to Face Training
the terms and conditions of the treaty are remedied immediately upon discovery and without any impact to the
treaty beyond that of ordinary rectification.
• 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. Chapter
• An XPL clause extends the scope of the treaty to original loss in excess of the original policy limit, arising from the
reinsured’s bad faith or negligence in handling claims under policies subject to the treaty. In this case, the court has 7
set aside the original policy limit, awarding a claim amount in excess of that limit.
• The insolvency clause sets out the impact of the reinsured’s insolvency on the reinsurance contract.
• The offset clause allows the parties to offset any balance or amount due from one party to the other under a
particular reinsurance contract or any others between the parties, whether acting as reinsurer or reinsured.
• The co-reinsurance clause states the proportion that the reinsured agrees to retain ‘net and unreinsured’.
• ‘Boilerplate’ clauses are standard clauses with little reinsurance content and include the following clauses: notice,
intermediary, termination of intermediary, confidentiality, amendments and alterations, severability, entire
agreement, non-waiver and several liability.