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Chapter 8 Legal issues relating to reinsurance 8/17

Follow the fortunes clause
A typical example of a follow the fortunes clause is as follows:

‘It is the intention of this Agreement that, in all matters falling within its scope, the reinsurers shall, to the
extent of their interest, follow the fortunes of the reinsured in every respect’.

Such clauses are common in proportional reinsurances where reinsurers are much less concerned about Refer to chapter 7,
section B4C for
second guessing their reinsureds, and are complemented by errors and omissions clauses. errors and
omissions clause

D Implied terms

Contract terms may be implied:
• by common law;
For the courts to imply a term by law, a party must show that such a term is necessary to give business
efficacy to the contract, is consistent with the express terms of the contract and would have been
agreed by the parties (see Reinsurance Practice and the Law chapter 10, Clyde & Co LLP).
• by statute law;
• by previous dealings between the parties; or
• by trade custom or usage.
The requirements for a term to be implied by trade custom or usage are that the custom or usage must
Consistent with the
be notorious, certain and reasonable, universal in the context of the particular trade, business or express terms of the
market, and consistent with the express terms of the contract. contract

D1 Inspection
In Phoenix General v. Halvanon (1985), Hobhouse, J, implied a right of inspection into a facultative
obligatory reinsurance treaty where no wording had been agreed. However, absent special Reference copy for CII Face to Face Training
circumstances, it may be that there is no general implied right of inspection.

In a case where the wording had been agreed, Hoffmann, LJ said:
reinsurers are free to stipulate for whatever rights of inspection they please. This is a matter of commercial
negotiation between the parties. If they are not entitled to inspection as a matter of contractual right and a
dispute arises, English law gives them no procedural means of inspection unless….

This may mean that reinsurers are unable to uncover defences which greater rights of inspection would
have revealed, but this is a commercial risk which they accept at the time when the contract is made
(Sail v. Farex (1995)). In short, the wording reflected the parties’ bargain and, if required, could have
included an inspection clause and a price set for the right. Chapter

D2 Costs and expenses 8

In Colin Baker v. Black Sea & Baltic Insurance (1996), the courts were asked to consider whether, in
relation to a proportional reinsurance, there existed an implied obligation on reinsurers to indemnify the
reinsured in respect of its proportion of the latter’s own costs and expenses. In addition to original
indemnity costs and expenses, the costs and expenses at issue had been incurred investigating, settling
and defending claims.

According to Millett, LJ:
what was needed was evidence of a universal and acknowledged practice of the market for reinsurers to
pay such costs whether this is expressly provided for in the treaty or not; or (to put it another way) that it is
well understood by underwriters that if it is not intended that the indemnity should extend to the legal costs
and expenses of the reinsured, these need to be expressly excluded. There is no such evidence.

Be aware
Later, the House of Lords upheld the Court of Appeal’s decision but said that it was not clear that no such evidence
of a universal practice was available.