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Chapter 8 Legal issues relating to reinsurance 8/5

Avoidance remains a remedy for a deliberate or reckless breach of the duty. Otherwise, the remedy
depends upon what the reinsurer would have done had the risk been fairly presented (for example,
varying the terms of the policy, increasing premium or avoiding the policy).
Contracting out
In order to successfully contract out of the changes brought in by the Insurance Act, reinsurers will need
Reinsurers will need
to satisfy certain transparency requirements. They must ensure that any terms which would put the to satisfy certain
reinsured in a worse position than before the Act are clear and unambiguous as to their effect, and transparency
requirements
sufficiently drawn to the reinsured’s attention before the policy is entered into. In determining whether
this requirement has been met, the reinsured’s characteristics and the circumstances of the transaction
will be taken into account.
At the time of writing, the main focus of contracting-out provisions appearing in the marketplace is the
duty of fair presentation and, in particular, the remedy for failures which are neither deliberate nor
reckless as insurers reserve the right to elect to pay additional premium rather than have their claims
reduced proportionately.

Activity
Search for a copy of the Consumer Insurance (Disclosure and Representations) Act 2012 and compare a
consumer’s duties of disclosure on placement with those of a reinsured.

A1C Indemnity
All reinsurance contracts are contracts of indemnity. Indeed, indemnity has been said to be the
All reinsurance
‘controlling principle in insurance law’ (Castellain v. Preston (1883)) and will be implied if not expressly contracts are
provided for in the reinsurance contract. Simply, the reinsured may recover from reinsurers the amount contracts of indemnity
of its actual loss, provided that the loss falls within the original insurance contract and within the
relevant reinsurance contract.

Reinforce
Before you move on, check your understanding of the way in which indemnity works in practice – perhaps by
revisiting the topic from your earlier studies. Reference copy for CII Face to Face Training

A1D Insurable interest
Broadly, in this context, the rule is that the insurer must have a reinsurable interest in the subject matter
Insurer must have a
of the reinsurance contract. This interest will depend on the original insured having had an insurable reinsurable interest in
interest in the original risk and the insurer being liable, under the terms of the original policy, to the subject matter of
the reinsurance
indemnify the original insured against loss arising out of that risk. contract
Classically, the requirement is for the original insured to have an interest in the subject matter of the
(re)insurance contract, in its preservation so ‘as to have a benefit from its existence, prejudice from its
destruction’ (Lucena v. Crawford (1806)).
The rule has, however, been complicated by the Gambling Act 2005 which came into force on Chapter
1 September 2007 and which applies to contracts created on or after that date. Before the Act, wagers
were unenforceable and what distinguished (re)insurance from a wager was insurable interest. Now, the 8
Act may not require an insurable interest but, as the indemnity principle remains, its impact is rendered
largely academic.

A1E Form
There is no general requirement that a reinsurance contract takes any particular form to be valid, or even
that it is in writing. There are, however, specific requirements in relation to life and marine reinsurances,
ensuring that these contracts are written, not oral. Section 2 of the Life Assurance Act 1774 requires that
the person with the insurable interest be named in the policy, and s.22 of the Marine Insurance Act 1906
provides that a contract of marine insurance shall be inadmissible in evidence unless embodied in a
marine policy in accordance with the Act. Certainly, according to the responses published by the Law
Commission to its 2011 consultation on proposals to repeal s.22, the requirement for a formal marine
policy is largely ignored in practice and is ripe for abolition.
Be aware
In practice, reinsurance contracts are without exception written, avoiding the likely and significant evidential
difficulties associated with reconstructing the terms of an oral contract in the event of a dispute. As to their written
form, in addition to the traditional slip, contracts are also concluded via fax, email or other electronic means.