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8/10 M97/February 2018 Reinsurance

Warranty
A warranty is a contractual promise made by a reinsured as to past or existing facts (or ‘state of affairs’),
Contractual promise
made by a reinsured or to its own future conduct. Under the Insurance Act 2015, a breach of warranty causes the reinsurance
as to past or existing cover to be suspended until remedied (if it can be). The former rule that the reinsurer is automatically
facts or to its own
future conduct and permanently discharged from liability under the contract from the date of breach has been repealed.
The Insurance Act 2015 states:

10(2) An insurer has no liability under a contract of insurance in respect of any loss occurring, or
attributable to something happening, after a warranty (express or implied) in the contract has been
breached but before the breach has been remedied.

The Act identifies two types of warranties:

‘Time warranty’ A warranty that requires that, by a particular ascertainable time, something is or is not
to be done, or a condition is to be fulfilled, or something is or is not to be the case. The
breach of such a warranty will be remedied if the risk to which the warranty relates later
becomes essentially the same as that originally contemplated by the parties.
For example, if there is a breach of a warranty in a facultative reinsurance contract to
have a new fire detection system installed by inception, this will be remedied on the date
on which it is installed. This is because on that date the fire risk will essentially be as
originally contemplated by the parties.
‘Any other case’ The breach of any other warranties will be remedied ‘if the insured ceases to be in
breach of warranty’.

The use of the word ‘warranty’ has been said to be indicative but by no means decisive. Examples of
The use of the word
‘warranty’ is warranties in common use in reinsurance contracts include retention and premium payment warranties.
indicative but by no However, unless amended to exclude the Act or address its impact, pure premium payment warranties
means decisive
may now only serve to exclude losses occurring before payment is made rather than all losses.
Condition precedent Reference copy for CII Face to Face Training
A condition precedent is a contractual promise which must be performed to bring a valid contract into
force or, once in force, to make the reinsurer liable under that contract. Examples of the latter type of
condition precedent include claims notification, cooperation and control clauses. In this context, on
breach, the reinsurer is discharged from liability to pay a particular claim. The breach has no impact on
future claims under the contract.
Additionally, until Charter Re v. Fagan (1996), it had been thought that ultimate net loss (UNL) clauses,
which referred to ‘the sum actually paid by the reinsured in settlement of losses or liability’ imported a
condition precedent into the reinsured’s right of recovery from the reinsurer that it must have made
payment of the inwards claim by way of actual transfer of funds to its original insured. Here, the House of
Lords decided that the clause and policy worked perfectly well when understood as requiring the
satisfaction of only two pre-conditions: (1) an insured event had occurred within the policy period; and
8 (2) the event had created a loss of sufficient amount to impact the particular layer/contract in question.
Chapter The purpose of the words ‘actually paid’ was to emphasise that the ultimate outcome of the net loss
calculation was the final liability of the reinsurers under the policy and not impose a condition
precedent.
Condition
A condition is a contractual promise under which the reinsured promises to perform some action.
Reinsured promises
to perform some Importantly, a reinsured’s right of recovery is not dependent on the act being completed. A reinsurer is
action entitled to claim damages for loss caused by the breach. By way of example, a failure to notify a claim in
breach of an ordinary notification clause would entitle a reinsurer to claim damages. In practice, the
extent of those damages would depend upon the reinsurer being able to show significant prejudice
resulting from non-compliance.
Innominate terms
An innominate term is another contractual promise where the remedy for breach depends upon the
seriousness of the breach (Phoenix General Ins. Co. v. Halvanon Ins. Co. (1985)). Where the breach is
serious, a reinsurer may be entitled to repudiate the contract (that is, treat the contract as terminated).
Where it is minor, the remedy would be in damages only.