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Chapter 8 Legal issues relating to reinsurance 8/21

Express terms
• A warranty is a contractual promise made by a reinsured as to past or existing facts (or ‘state of affairs’), or to its
own future conduct. A breach causes the reinsurance cover to be suspended until remedied (if it can be).
• 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. On breach, the reinsurer is discharged from liability to
pay a particular claim. The breach has no impact on future claims under the contract.
• A condition is a contractual promise under which the reinsured promises to perform some action. A reinsured’s
right to recovery is not dependent on the act being completed. A reinsured is entitled to claim damages for loss
caused by the breach.
• An innominate term is another contractual promise where the remedy for breach depends on the seriousness of the
breach. Where the breach is serious, a reinsurer may be entitled to repudiate the contract. Where it is minor, the
remedy would be in damages only.
• The parties may use incorporation clauses to import the terms of the original insurance contract into the
reinsurance contract.
• A common issue for the parties to a reinsurance contract is whether original claims may be aggregated for the
purposes of a claim under that contract. The issue may be addressed specifically by aggregation clauses e.g. the
hours clause or alternatively, the parties must look to the reinsuring clause and to the basis of the limit and
retention.
• The meaning of an event or occurrence is:
– A unifying factor allowing a number of individual losses to be aggregated and treated as a single happening.
– An ‘event’ is what has happened as opposed to the reason for what has happened. It is something that happens
in a particular time, at a particular place and in a particular way.
– The individual losses must be sufficiently closely connected to the event by reference to the unities of time,
locality, cause and motive.
– The individual losses must have a causal connection to and must not be too remote from the aggregating event.
– The assessment is objective, to be made from the perspective of the informed observer and is a matter of
intuition and common sense.
• Follow clauses attempt to find a balance between, on the one hand, a reinsured wishing to avoid investigating and
agreeing a loss a second time, the first time when responding to a claim under an insurance contract and the
second time for the purpose of claiming under a reinsurance contract and, on the other hand, a reinsurer not Reference copy for CII Face to Face Training
wanting to be bound to respond to all of the reinsured’s original claim payments, of whatever nature.
• Follow the settlement clauses bind reinsurers where the claim as recognised by the reinsured falls within the risks
covered by the reinsurance contract as a matter of law, and the reinsured acted honestly and has taken all proper
and businesslike steps in settling the claim.
• Loss settlement binding clauses bind reinsurers provided the settlements are within the terms and conditions of the
original and reinsurance policies.

Implied terms
• Contract terms may be implied by common law, by statute law, by previous dealings between the parties, or by
trade custom or usage.
• Arbitration agreements are self-contained and ancillary to the commercial contracts to which they relate. An
express provision is required. Similarly, it is not possible to use general words of incorporation to incorporate the Chapter
arbitration agreement in an underlying contract into the overlying contract.
• The Insurance Act 2015 prohibits reinsurers from relying on a breach of a term which is entirely unconnected to the 8
actual loss to exclude, limit or otherwise avoid liability for that loss. Terms affected by this provision are those
which seek to reduce the risk of loss of a particular kind or at a particular location or time.
• The Insurance Act 2015 also imposes an obligation on reinsurers to pay any sums due under the contract within a
reasonable time. On breach, the reinsured is entitled to recover contractual damages.
Limitation
• Under English statute law, the limitation period relating to reinsurance contracts is six years. This allows a reinsurer
to reject claims made more than six years after the date on which the original right to make a claim came into
existence (or accrued).
• The limitation period may be extended by agreement between the reinsured and reinsurer.