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Chapter 8 Legal issues relating to reinsurance 8/7

Acceptance must be communicated to the other party or its representative and it may be necessary to
It must be
distinguish between the fact of the acceptance, and the communication of the acceptance. In law, both communicated to the
elements are essential for agreement. In other words, it must be communicated to the reinsured that its reinsured that its offer
has been accepted
offer has been accepted, otherwise there is no agreement. For example, a reinsurer in contact with the
reinsured (or its broker) by email alone, may have executed a document in order to accept a risk. But,
until that fact has been communicated to the reinsured (or its broker), the agreement is not complete.
If the negotiating parties are located in different countries, the place in which the contract was made
may determine the appropriate jurisdiction for any dispute. A contract concluded by fax or email is made
at the place where the offeror receives the offeree’s acceptance of the offer (Brinkibon v. Stahag
Stahl (1982)).

A2B Consideration
Consideration is that which is actually given or accepted in return for a promise. It need not be
Consideration is that
adequate. In this context, the reinsured pays a premium in return for a reinsurer’s promise of indemnity which is actually
in the event of a loss covered by the reinsurance contract. given or accepted in
return for a promise
A2C Legality
Contracts which are forbidden by statute or are contrary to common law or public policy are illegal and,
generally, without legal effect (or void).
The Financial Services and Markets Act 2000 provides that ‘no person may carry on a regulated activity
in the United Kingdom…unless he is an authorised person’. This is known as the general prohibition.
Further, at s.26(1): ‘an agreement made by a person in the course of carrying on a regulated activity in
contravention of the general prohibition is unenforceable against the other party’.
Accordingly, where the regulated activity is the effecting and carrying out contracts of reinsurance, an
unauthorised reinsurer may not enforce a reinsurance contract against a reinsured. The reinsured may,
however, at the discretion of the court, enforce the reinsurance contract (see s.28(3)). It remains to be
seen quite how the court will exercise its discretion in practice. In any case, under s.26(2), the reinsured
is entitled to recover the premium paid and compensation for any loss sustained as a result of having Reference copy for CII Face to Face Training
parted with that premium (presumably, interest in most cases).

Reinforce
Before you move on, ensure that you know the elements required for the formation of a valid reinsurance contract.

B Interpreting contractual documents – key issues and
case law

It is of vital importance for the effective and efficient operation of reinsurance contracts and for the
avoidance of disputes, that the rights and obligations of the parties under the contract accurately reflect Chapter
their intention. This will not always be the case and it is, therefore, necessary to have an understanding
of how the courts will interpret a wording, if asked to do so. 8

Construction and interpretation are used interchangeably in this section.

B1 Rules of construction

By way of introduction to this section and to the rules of construction and how terms are interpreted, Lord Steyn
said in Sirius International Ins. v. FAI (2004):
The aim of the inquiry is not to probe the real intentions of the parties but to ascertain the contextual
meaning of the relevant contractual language. The inquiry is objective: the question is what a reasonable
person, circumstanced as the actual parties were, would have understood the parties to have meant by the
use of specific language. The answer to that question is to be gathered from the text under consideration
and its relevant contextual scene.