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8/2 M97/February 2018 Reinsurance

Introduction

A reinsurance transaction is the buying and selling of contractual promises. In this chapter, we examine
the reinsurance contract with particular reference to its formation, its interpretation, and its express and
implied terms. We also look at the issues of choice of law and jurisdiction, and limitation. Please note:
we look only at the law of England and Wales and relevant case and statute law is included where
appropriate.

Key terms
This chapter features explanations of the following terms and concepts:
Aggregation clauses Condition precedent Consideration Contra proferentem

Fair presentation Follow clauses Implied terms Incorporation
Indemnity Innominate terms Insurable interest Limitation
Loss settlement clause Material circumstances Rules of construction Utmost good faith
Warranty

A The law applicable to reinsurance contracts

In law, a reinsurance contract may be defined as an agreement in which one party, known as the
reinsurer, undertakes to indemnify the other party, known as the reinsured, either wholly or partly, for
liabilities it may incur under a contract (or contracts) of insurance. Reinsurance has been described (in
Reinsurance in Practice by Robert and Stephen Kiln) as ‘insurance between consenting adults’ and,
although perhaps more descriptive of the practical realities of reinsurance, the quotation helps to
illustrate a number of important legal points about reinsurance contracts.

Firstly, a contract of reinsurance is an entirely distinct and separate contract from the underlying contract
Contracts of
insurance and of insurance. The contracts of insurance and reinsurance are mutually exclusive, ordinarily the original Reference copy for CII Face to Face Training
reinsurance are insured having no legal interest in the reinsurance contract and the reinsurer having no legal interest in
mutually exclusive
the insurance contract.
Typically, the original insured and the reinsurer have no rights or obligations against or to each other.

Secondly, a contract of reinsurance is also a contract of insurance or, according to Lord Mansfield in Delver v.
Barnes (1807):
a new assurance, effected by a new policy, on the same risk which was before insured in order to
indemnify the underwriters from their previous subscriptions; and both policies are in existence at the
same time.

8 Furthermore, as a contract of insurance, the subject matter of the reinsurance contract is considered to
Chapter be identical to that of the original insurance (the risk in the goods or whatever might be insured). In legal
theory, it is not the liability of the insurer to the insured under that original insurance; reinsurance is not
liability insurance (WASA v. Lexington (2009)).
A reinsurance contract is, therefore, subject to the general rules governing contracts and the special
rules governing insurance contracts.

Be aware
For the avoidance of doubt, it has been confirmed, in the case of Re NRG Victory Reinsurance Limited (1995), that
a retrocessional contract is also a contract of reinsurance and hence a contract of insurance.

While the law of reinsurance is primarily concerned with the contractual relationship between the
parties, it may also address their relationship with their agents, either brokers or underwriting agents
and, to a lesser extent, the way in which regulatory bodies control the practice of reinsurance.

This section concentrates on the contractual relationship between the parties, in particular, the
formation and the construction or interpretation of the contract. All with reference to English law only.