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A2 Formation of the reinsurance contract
For the formation of a valid reinsurance contract, the general rules of contract law require, among others,
General rules of
contract law apply the following elements:

Valid
reinsurance
(1) contract (4)
Offer and Intention to create
acceptance legal relations

(2) (3)
Consideration Legality

In this section, we look at a number of issues raised by the first three elements.
A2A Offer and acceptance

For the formation of a valid reinsurance contract, there must be an offer and acceptance of that offer.
Offer
Refer to chapter 6, The offer in reinsurance is invariably made in writing. In the London Market, a Market Reform Contract
section C3B for MRC
(MRC) is generally used. This can be done direct or via a broker.
The offer having been made is open for acceptance by the reinsurer. Alternatively and more usually, the
reinsurer suggests amendment(s) to those terms and, in doing so, makes a counter-offer. In which case,
the original offer is implicitly rejected, and lapses; the original offeree becoming the counter-offeror. The
law requires an unreserved assent by the offeree to the exact terms proposed by the offeror.
Consider this… Reference copy for CII Face to Face Training
How else may an offer lapse?

Acceptance
Eventually, once the bargaining process has been successfully concluded and the slip has been
amended to express the various terms, conditions, limitations and exclusions of the parties’ bargain, a
reinsurer will stamp, initial and date the amended slip. At that moment, subject to any outstanding
conditions or other evidence to the contrary, the reinsurer’s subscription to the slip is the acceptance of
the offer and a binding contract comes into effect (Fennia Patria (1983)).
By way of illustration of problems that have arisen in this area, the Court of Appeal in The Zephyr (1983)
considered, in some depth, the practices of ‘signing down’ and giving ‘signing indications’. In this case,
a broker placed a risk with a number of underwriters. During placement, the broker advised, as was its
8 usual practice, that it intended to place approximately twice the order that it had been given and
Chapter subsequently to write down each reinsurer’s line. In other words, it intended to obtain twice the required

amount of reinsurance and then reduce each underwriter’s line to 50% of what they had promised.
Unfortunately, before it could complete the placing exercise, the insured vessel sank and claims were
made against the reinsurers who, at that time, had agreed to underwrite the risk. In court, one reinsurer
claimed that it should only be obliged to pay an amount based upon the line that it expected to have
after signing down.
The court held that it was obliged to pay the amount that it had actually agreed to pay and for which it
had signed. From the moment the slip is signed, a reinsurance contract is agreed and a reinsurer is
obliged to indemnify the reinsured according to its terms and in the amount specified in the slip until
such time as that slip is amended or otherwise modified.
In situations where reinsurance business is being concluded by fax, email or other non-instantaneous
means, a number of additional issues may arise, including the place and communication of the
acceptance.