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Chapter 8 Legal issues relating to reinsurance 8/11

In Alfred McAlpine v. BAI (2000), an insurer denied liability to its insured when the latter failed to comply
with a condition requiring written notification of a claim as soon as possible. The Court of Appeal found
that the notice clause was an innominate term, a breach of which was unlikely to amount to repudiation
of the contract as a whole. Further, according to Waller, LJ, a breach of which could entitle an insurer to
deny the claim. This view does not, however, represent the current state of the law following the case of
Friends Provident Life & Pensions Ltd v. Sirius International Insurance & Ors (2005), which further
rendered any remedy other than damages for breach of such a condition, unlikely. It was considered
important that the parties could have agreed otherwise if they had so wished.

C2 Incorporation clauses
The parties may use incorporation clauses to import the terms of the original insurance contract into the
reinsurance contract. Such practice remains a common way of avoiding the preparation of full wordings
for facultative reinsurances where cover is agreed ‘back-to-back’ with the original policy. Examples of
these clauses include:
• ‘as original’;
• ‘subject to the same terms and conditions as the original policy’; and
• ‘being a reinsurance of and warranted same gross rate and terms and conditions’.
These clauses can, however, raise a number of issues. The words of incorporation may be ambiguous,
The words of
for instance, what is meant by ‘as original’ in the context of multiple tiers of reinsurance? In addition, the incorporation may be
underlying terms and conditions may be inconsistent with the other terms of the reinsurance contract or ambiguous
inappropriate because they belong in a contract of insurance rather than one of reinsurance. Do the
words of incorporation bind reinsurers to not only terms defining the risk but also terms prescribing the
formal and procedural basis of the reinsurance contract, such as arbitration clauses, choice of law
clauses and terms relating to claims procedure? Further, is the effect of the clause to amend the
reinsurance cover to mirror all subsequent amendments to the contract of insurance? As a result, the
courts have been forced to rely on rules of construction and general common sense to give commercial
meaning to otherwise nonsensical situations.

In short, general words of incorporation are considered effective only to incorporate those terms and Reference copy for CII Face to Face Training
conditions of the original insurance cover which do not contradict or conflict with any express term of the
reinsurance contract (for example, an exclusion clause) and which are not clearly inappropriate in that
reinsurance context.
In Pine Top v. Unione Italiana Anglo-Saxon Re (1987), it was held that the incorporation of the ‘terms,
clauses and conditions as original’ was ineffective to incorporate an arbitration clause into a reinsurance
contract. Gatehouse, J, decided that the purpose of the incorporation clause was to ensure that the
terms defining the risk written matched in both the original cover and the reinsurance and, as this had
been accomplished elsewhere, the incorporation clause was unnecessary. Subsequent attempts by
reinsurers to incorporate arbitration agreements and also exclusive jurisdiction clauses in this way into
reinsurance contracts from an underlying policy have also failed.

In ARIG v. SASA (1998), Tuckey, J, said in relation to a reinsurance contract containing the words ‘policy wording as Chapter
original’: 8
A degree of transposition is permissible where the terms from one contract are expressly incorporated into
another. But I find it difficult…to accept that reinsurers writing a reinsurance on the London Market should
be taken to have intended to agree that the courts of the underlying insured’s domicile should have
exclusive jurisdiction over the contract of reinsurance.

Vesta v. Butcher (1989) concerned a facultative reinsurance of a Norwegian fish farm and contained the
words: ‘being a reinsurance of and warranted same gross rate and terms and conditions and to follow
the settlements of’ the insurer. A storm in the fjord resulted in thousands of fish escaping into the open
sea and, in breach of a 24-hour watch warranty, there was no night watchman. The evidence was that,
even if there had been, the watchman could have done little to prevent the loss of the fish.

Under Norwegian law, a breach of warranty only operated to void the contract if it caused the loss. Refer to section D4
for Insurance
Accordingly, the insurers were liable to the owners of the fish farm. Prior to the Insurance Act 2015, Act 2015
English law (which was considered to govern the reinsurance contract) deemed it irrelevant that the
breach was not causative of the loss. Reinsurers denied the claim by reason of the breach of warranty.
The House of Lords treated the contracts as back-to-back, enabling the reinsured to recover from the
reinsurer.