The Law of Reinsurance
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A fact is material if it would affect the judgment of a prudent reinsurer in the market at the time. However, in order to secure any remedy for breach of duty, the reinsurers must go on to prove that the breach had the subjective effect of inducing the reinsurers to enter into the policy on the terms finally agreed. The duty fair presentation consists of the twin principles that the reinsured must not make false statements to the reinsurers and must disclose all material facts to the reinsurers.
In a typical facultative placement the reinsurers will receive the same information in respect of the direct risk as had been presented to the reinsured. Typically the documents used to place the insurance will be forwarded to the reinsurers, and in the event that they contain false information material to the direct risk then the reinsured will be in breach of its duty of fair presentation.
All information must be presented in a clear and unambiguous fashion. The reinsured cannot, however, be in breach of duty if it fails to disclose material facts of which it was unaware and which affect the direct risk, on the principle that a proposer is only required to disclose what the proposer actually knows. Thus an insurer which has written a fidelity policy for a bank in Colombia and which is aware of press reports alleging that the president of the bank has been accused of fraud is required to inform the reinsurers of that fact Brotherton v Aseguradora Colseguros SA No 3 However, under the Insurance Act , the reinsured is under a duty to make a reasonable search of information in its possession and in that of its employees and agents.
Representations made in negotiations for one contract will not automatically apply to the new contract made upon renewal. Virtually all reinsurance written in London is placed by brokers. Under the Act it was the independent duty of a broker to disclose all facts which were known to the reinsured and also all facts which were known to the broker in the capacity of brokers for the reinsured.
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The broker's duty of disclosure has been repealed by the Insurance Act and replaced by the rule that all information known to the broker is deemed to be known to the reinsured, so that the duty of disclosure, and the consequences of its breach, are borne by the reinsured. However, there is no imputation of knowledge where the information in the broker's possession was obtained under a duty of confidentiality e.
In the event of any breach of duty by the reinsured itself or by brokers acting on behalf of the reinsured, the remedy under the Act was avoidance. Under the Insurance Act the remedy depends upon the reinsured's state of mind. If the reinsured acted deliberately or recklessly, the reinsurer has the right to avoid and the agreement is voidable. If, by contrast, there reinsurers cannot prove deliberate or reckless behaviour, they are entitled only to a proportional remedy based on what the outcome would have been had the duty of fair presentation not been broken.
If the reinsurers can prove that they would not have contracted on any terms, they retain the right to avoid. By contrast, if they can prove only that they would have added additional terms to the agreement then they have the right to rely upon such terms, and if they can prove that a higher premium would have been charged then a proportion of the claim - representing the proportion of premium paid - remains due. However, the right to a remedy may be waived by the reinsurers.
This possibility arises where the reinsurers are aware of a breach of duty by or on behalf of the reinsured and they have unequivocally represented by word or deed that they have the requisite knowledge but do not intend to rely upon the breach.
This may arise in particular where reinsurers assert their rights under the contract by, for example, insisting upon an inspection of the reinsured's books and records without any reservation of rights Iron Trades Mutual v Imperio as this is inconsistent with the assertion of any right to avoid. Any fact which is material to the direct risk is also material at the reinsurance level. Recent examples of this type include:. In addition to facts relating to the direct risk, there may be material facts which concern the reinsured itself.
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Such material facts may include:. Facts of which the reinsurers were aware or ought to have been aware are immaterial. So too are facts which could have been discovered by the reinsurers had they chosen to follow up ambiguities or lack of clarity in the reinsured's responses.
The duty of utmost fair presentation is modified in the case of a treaty, given that this form of reinsurance business involves an initial framework agreement the treaty itself, a contract for reinsurance and subsequent individual contracts of reinsurance which fall within the scope of the treaty. Where the treaty is obligatory or facultative-obligatory, in that the reinsurers have no right to reject any risk accepted by the reinsured which is either automatically allocated to the treaty obligatory or declared to it facultative-obligatory , there does not appear to be any room for disclosure in respect of each risk.
In these cases the duty of fair presentation probably applies to the treaty as a whole rather than to individual declarations under it, so that the duty is spent as soon as the treaty has been executed. By contrast, if the treaty is facultative, in that the reinsurers have the right to reject any risk declared to them by the reinsured, then each declaration attracts a duty of fair presentation and the reinsurers have the right to avoid any declaration which is not accompanied by full disclosure.
The treaty itself, and other declarations to the treaty, are unaffected in this event. Reinsurance treaties contain express terms which set out the classes of business covered, premium provisions, the obligations of the reinsured during the currency of the treaty and the methods of calculating losses. By contrast, the terms of facultative reinsurance contracts are found both in the slip and also in the direct policy.
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It is the usual practice to include in the slip a "full reinsurance" clause which provides that the terms of the reinsurance are "as original". By this means the terms of the direct policy are intended to be incorporated into the reinsurance. The main issue which arises here is the effectiveness of incorporation. The principles relating to the construction of slip terms and incorporated terms, and the effects of any breach by the reinsured of its obligations, are the same as for direct insurance. There are numerous cases on the incorporating effect of the full reinsurance clause, and it is now settled that a term may be incorporated from a direct policy into a reinsurance agreement only if:.
In practical terms, the effect of the words "as original" in the full reinsurance clause is that they will:.
With respect to the last point, other clauses such as claims provisions or waiver of disclosure terms may be incorporated in an "unmanipulated" form, so that they set out in the reinsurance agreement the circumstances in which the reinsured will face liability to the insured, but they will not be incorporated in a manipulated form which transposes those provisions to the reinsurance level.
This meant that the reinsurers were accepting an obligation to indemnify the reinsured in the event that the reinsured was required to make payment by reason of the waiver of defences clause. However, other defences open to the reinsurers remained intact. Had the clause been incorporated in a manipulated form, the reinsurers themselves would have agreed to waive all defences against the reinsured.
One particular difficulty arising from incorporation of terms is that the insurance and reinsurance contracts may be governed by different applicable laws, so that the same words may bear different meanings in the two contracts. The presumption of back-to-back cover means that the English courts will, wherever possible, interpret an English law reinsurance contract in accordance with the principles of construction used under the law applicable to the direct policy.
The same warranty was incorporated into a facultative reinsurance governed by English law. The House of Lords held that, in order to give effect to the principle of back-to-back cover, the reinsurers could not rely upon the English law principle that breach of a warranty automatically terminates the risk, and that the warranty had to be construed in accordance with Norwegian law. However, more recently it has been held that a duration clause in a reinsurance contract is of fundamental importance and is not to be overridden by a duration clause in the direct policy Wasa International Insurance Co v Lexington Insurance Co It should now be noted that the effect of section 10 of the Insurance Act is to remove the principle that a breach of warranty automatically brings the risk to an end.
Under section 10, the reinsurer is not liable for any loss occurring during the period when the reinsured is in breach of warranty. Further, if there is a loss in the period when the reinsured is in breach of warranty, the reinsurer may, by reason of section 11 of the Insurance Act rely upon the warranty only where the breach was related to the loss. If the facts of Vesta and Groupama were to arise now, the matter could be disposed of simply by saying that the breaches were unrelated to the loss and that the reinsurer would have no defence under English law.
The elaborate reasoning in those cases is thus no longer necessary. As in general contract law, a term may be implied into a reinsurance agreement if it is necessary to give the agreement business efficacy and does not contradict any express terms.
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Accordingly the reinsurers had no right to object to the fact that the reinsured was writing loss-making business with the losses being made good by reinsurance recoveries. Reinsurers are under an obligation to indemnify the reinsured for any loss suffered by it as long as the loss falls within the terms of the direct policy and also within the terms of the reinsurance.
A reinsurance contract resembles a liability policy in that, subject to contract, the reinsured is entitled to recover as soon as its liability to the insured has been established and quantified, and not at the later date when the reinsured has made payment to the insured. The reinsured's liability can be established and quantified by means of a judgment or arbitration award against it, or by means of a binding settlement it has entered into with the insured.
However, many contracts do provide that reinsurers will "follow the settlements" of the reinsured. It is also usual for reinsurers to impose some form of restriction on the reinsured's ability to enter into binding settlements.
The reinsured is entitled to be indemnified as soon as its liability to the insured has been established and quantified by judgment, arbitration award or binding settlement. It is open to reinsurers to postpone their obligation until the reinsured has made actual payment to the insured, by means of a "pay to be paid" or equivalent provision. Reinsurers on the whole have accepted that their obligation to indemnify the reinsured arises when the reinsured has proved its loss and not when the reinsured actually makes payment to the insured.
Where the reinsured's liability is established and quantified by a judgment or arbitration award, that judgment or award is not necessarily conclusive, so that the reinsurers retain the right to argue that the judgment or award is incorrect. That principle may be confined to overseas judgments and awards, although the position is uncertain. In the case of a settlement, the reinsurers are free to argue that the reinsured ought not to have entered into any agreement with the insured or at least that the amount of the settlement was unreasonable.
If the reinsurers refuse to accept a settlement, it is necessary for the reinsured to show that, as a matter of law, it would have faced liability to the insured for at least the amount of the settlement, failing which the reinsured has not proved its loss and cannot recover. In Teal Assurance Co Ltd v WR Berkley Insurance Europe Ltd the Supreme Court held that claims against a liability insurer and, by analogy, against a reinsurer are to be satisfied in the order in which the claims against the insurer or reinsurer are established and quantified by judgment, award or settlement.
In Teal itself it was confirmed that a reinsured cannot select the order in which a series of claims are to be applied to a reinsurance programme, in order to maximise recovery from reinsurers. The rule that a settlement is not binding on reinsurers is in practice generally reversed by the second part of the "full reinsurance" clause, under which the reinsurers agree to "follow the settlements". This wording has been held to mean that the reinsured has established its loss under the direct policy by a settlement unless the reinsurers can show that the settlement was not entered into in a "bona fide and businesslike" fashion Insurance Co of Africa v Scor UK Reinsurance The follow-the-settlements clause requires the reinsured to establish the facts surrounding the loss, and then to take expert legal and technical advice on whether the facts bring the loss within the terms of the direct policy Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd No 3 The clause is concerned only with the reinsured's ability to establish that it was liable to indemnify the insured.
However, as seen above, the first part of the full reinsurance clause states that the terms of the reinsurance are "as original", and it follows that if the reinsured is liable under the terms of the insurance then the reinsurers are themselves automatically liable under those terms as incorporated into the reinsurance as long as the risk as recognised by the reinsured falls or arguably falls within the terms of the reinsurance Assicurazioni Generali Spa v CGU International Insurance plc If the reinsured has simply accepted liability without attempting to classify the nature of the claim, the reinsurers are not liable Aegis Electrical and Gas International Services Co Ltd v Continental Casualty Co In that case the court also approved the use of actuarial models to prove underlying losses on the balance of probabilities.
The policyholder is entitled to damages for all loss that was within the contemplation of the parties at the date of the contract.
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Reinsurers therefore face liability if they delay in making payment to the reinsured. Further, if the reinsured is found liable in damages, it will be a matter of the proper construction of the reinsurance agreement to determine whether such damages are recoverable from the reinsurer: given that damages are contractual rather than extra-contractual, wordings will have to be devised to restrict the liability of reinsurers for sums paid by the reinsured other than in respect of the insured loss itself.
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