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A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

1st Edition, 2007

Chapter 7

CLAIMS
CONCLUSIONS
Reinsurers used to try and cultivate long-lasting business relationships with their clients and they would participate in the ceding
companys reinsurance programme for many years. In the current economic climate original insureds are happy to shop around for
the best cover for their properties and cars at the lowest price and this attitude has moved up the insurance chain to the insurance
companies who also have to be competitive and are content to move from reinsurer to reinsurer to negotiate the best possible terms.
The reinsurers too have become more commercially astute and are keen to axe unprofitable business and to fight claims where cover
is not strictly afforded under the reinsurance contract. This is also illustrated by the reinsurers keenness to carry out inspections and
audits of its clients business to ensure that claims which ought to be reported have been reported and to check that the reinsured is
applying appropriate reserves to the claims that have been reported.
Where there is a reinsurance contract the courts will look very closely at the substance of the contract and although they are happy
to look at the background circumstances of the contract the courts will only look at the parties negotiations prior to the contract
formation in very exceptional circumstances. The courts have made it clear in a number of decisions that the words in a reinsurance
contract are to be given their ordinary and everyday meaning. For example, in Charter Re v. Fagan [1997] A.C. 313 Staughton L.J.
in the Court of Appeal believed that the term actually paid should be given a literal meaning. In certain circumstances though the
courts have been content to adopt a technical interpretation of the terms as did the House of Lords in Charter Re. The courts have also
indicated a growing willingness to call expert evidence, especially to confirm what the common reinsurance market practice or
custom is, such as in Baker v. Black Sea and Baltic Insurance Company [1995] L.R.L.R. 261.
Many of the words used in reinsurance contracts have unclear meanings and this has presented the courts with difficulties. In
Caudle v. Sharp [1995] L.R.L.R. 433 the Court of Appeal construed the disastrous underwriting of 32 run-off reinsurance contracts to
amount to 32 events. Whereas in Municipal Mutual Insurance Company Limited v. Sea Insurance Company Limited [1996]
L.R.L.R. 265 numerous acts of vandalism were treated as one event. In the Kuwait Airways Corporation v. Kuwait Insurance
Company Limited [1996] 1 Lloyds Rep. 664 the occurrence was the invasion of Kuwait.
The reinsurance contract normally states the procedure for reporting claims and the reinsured has six years from the date when the
claim has been quantified in which to make a recovery from his reinsurers. The position in relation to the reinsureds litigation costs
is unclear. In Insurance Company of Africa v. SCOR [1985] 1 Lloyds Rep. 312 the Court of Appeal emphasised that the reinsurer
will only be responsible for the cost of defending coverage litigation if the reinsurance contract specifically says so. In Baker v. Black
Sea and Baltic Insurance Company [1995] L.R.L.R. 261 the possibility of sharing defence costs was raised but was not satisfactorily
resolved by the courts.
The reinsurance contract may be discharged if one of the parties fails to perform his obligations under the contract or if a party
makes it impossible for the other party to perform his side of the contract. Normally if the contract cannot be performed then the
innocent party will be awarded damages as compensation.

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With regard to the termination of the reinsurance contract the law seems to be weighted in the reinsureds favour. For example, the
reinsurer cannot terminate the contract simply because the reinsured has not paid the premium unless the contract specifically allows
the reinsurer to do so. Furthermore, the reinsurer must be very careful in the way it behaves since otherwise it may affirm the
contract, such as by demanding premium or by inspecting the reinsureds records without reserving its rights.
The duty of utmost good faith applies to insurance and reinsurance contracts and if it is breached then the other party will be able to
end the contract, although the remedy available will depend upon the circumstances of the case. The authorities make it clear that the
reinsured is under a duty not to misrepresent the facts before the underwriter accepts the risk and this duty continues as claims are
presented for payment, but terminates when the claim has been rejected by the reinsurer. With regard to misrepresentation, the
underwriter must have actually acted upon that misrepresentation to his detriment such as by accepting a risk which he would have
not accepted had he known all of the true facts. Where there has been a non-disclosure by the reinsured the reinsurer will be entitled
to rescind the contract, which means that the reinsurer simply returns the premium to the reinsured. This is a good result for the
reinsurer since he will lose nothing, but the reinsured may be left with a large number of losses for which there is no reinsurance
cover in place.
There is much evidence in the case law of the fact that reinsurers must make decisions promptly and must act in a professional and
business-like manner or they will be penalised by the courts. For example in Svenska Kreditfursakrings AB v. Munchener
Ruckversicherungs-Gesellschaft, Schweizeriche Ruckversicherungs-Gesellschaft and other Reinsurers (Swedish Arbitration,
Stockholm, 11 November 1998) the Arbitration Tribunal recognised that the reinsurers were content to rely upon Svenska Kredits
reputation and follow them blindly simply to acquire and retain the business. The Tribunal pointed out that reinsurers must react
swiftly and unambiguously when they detect failures on the part of their reinsureds or they run the risk of waiving any legal remedies.
In relation to inspections and audits the balance is very much in the reinsurers favour since most contracts contain an express
inspection clause, and even if it does not the courts will usually imply a right of inspection. The whole concept of inspections

Robert Merkin

A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

1st Edition, 2007

suggests that reinsurers do not trust their clients. The case law shows that the reinsurer can copy what information it requires and it is
the obligation of the reinsured to ensure that he provides the reinsurer with all of the information, which the reinsurer requires for
inspection purposes. Furthermore, in recent years there has been a trend towards audits where the information gathered by the
reinsurer is very detailed. However, as Gerathewohl points out in Reinsurance Principles and Practice it is only reasonable that the
reinsured allows the reinsurer to review the business and check that everything is in order since the reinsurer does after all allow the
reinsured to underwrite, cede business and adjust claims which the reinsurer will be obliged to contribute towards.
On the limitation issue, the contract may specify a shorter period of time than the statutory six years, but most contracts rely upon
the six years period. The proposed changes to the limitation periods will mean that both reinsureds and reinsurers must act quickly to
recover monies under their reinsurance contracts.
As companies merge or business is no longer profitable companies move into run-off. Run-off is a growth area and can be
profitable business and the large number of run-off management agencies bears testimony to this fact.
A thorny issue between reinsurers and reinsureds is the jurisdictional issue. Reinsurers usually make sure that the law they wish to
apply is contained in the reinsurance contract and it is up to the reinsured to bargain before agreeing to the contract terms and if the
reinsurers do not get their favoured applicable law then they are keen to forum shop if a dispute does arise.
It is very clear that so much in reinsurance law depends upon the actual wording of the reinsurance contract. The huge number of
cases bear testimony to the fact that reinsurance contracts are often poorly drafted, ambiguous words are very often used, conflicting
clauses are included, and when disputes arise the courts frequently adopt conflicting approachessometimes they give words their
natural and everyday meaning and on other occasions a technical meaning. The golden rule is for the parties to agree upon a clear
and precise reinsurance wording when underwriting the business since the clearer the reinsurance contract is the less likely there will
be problems at a later stage. For example, the terms, inspection rights, position regarding premiums, or the non-payment of premium,
claims cooperation/claims control and claims payment, applicable jurisdiction and governing law and dispute resolution methods
should be made as clear as possible and then the courts can simply give effect to the parties agreement. However, the reality is that
reinsurance underwriters are often under time pressure to accept new business and combined with internal new business (bonus
driven) targets leads to underwriters accepting risks without fully understanding the terms as well as they should. Often it is weeks or
even months after the business has been incepted that the reinsurer receives the contract wording, sometimes after a claim has been
submitted by the reinsured for payment, and frequently the wording is unsigned with neither party really knowing what they have
actually agreed to. If the parties do not actually know what they have agreed to then how is it possible for a court to interpret their
intentions years later when a dispute has arisen between the parties?
It is important not to forget that reinsurers can add real value to the reinsureds claims handling. In view of the international nature
of reinsurance business reinsurers regularly see losses from a wide range of jurisdictions, so if a small European reinsured has a claim
in the USA/Asia or Latin America then he can look to his reinsurers for guidance on reserving, claims handling, and which loss
adjusters or lawyers he should appoint. Reinsurers are also in a good position to provide reinsureds with advice on which experts to
use on large claims since they may have experienced these experts in action in other cases. Reinsurers can also provide reinsureds
with advice on rehabilitation and fraud screening since many reinsurers have specific units dealing with these topics.
Reinsurers have experience of seeing many reinsureds claims operations in practice so can provide good advice on workflow,
processes and claims handling practices. The claims review/audit by a reinsurer can provide the reinsured with peace of mind if all is
well, and if it is not the reinsurer can provide constructive feedback to the reinsured which is external but not hostile.

TEST YOUR UNDERSTANDING


1. Fill in the blanks to state how a typical claims cooperation clause might read:
Notwithstanding anything contained herein to the contrary, it is a ________ ________ to any liability under this policy that
(1) the Reinsured shall upon ________ of any loss(es) and occurrence(s) which may give rise to a claim recoverable
hereunder advise the Reinsurers thereof as soon as reasonably practicable.
(2) the Reinsured shall furnish the Reinsurers with all information available respecting such loss(es) or occurrence(s) and
shall co-operate with the Reinsurers in the ________ and ________ thereof.

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2. In a claims control clause notification of a loss or an occurrence, which may give rise to a claim, should be advised:
(a) promptly,
(b) without delay,
(c) as soon as reasonably practicable,
(d) immediately.
3. Which of the following will not stop the limitation period fromrunning?
(a) the commencement of court proceedings,
(b) the appointment of an arbitrator,
(c) the entering into a standstill agreement by the parties,
(d) an honourable engagement clause.

Robert Merkin

A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

1st Edition, 2007

4. According to the Law Commissions proposed changes to limitation periods, how long would the Reinsured have in which to bring
a claim against his reinsurers?
(a) 1 year,
(b) 3 years,
(c) 6 years,
(d) 10 years.
5. If an insured grossly exaggerates a substantial part of theclaim, this would appear to permit the insurer to:
(a) do nothing and still pay the entire claim,
(b) refuse to pay only that part of the claim which was grossly exaggerated,
(c) to avoid the entire claim.
6. When does the duty of utmost good faith come to an end?
(a) when the proposal form has been signed and returned to the Insurer,
(b) on submission of a claim,
(c) when the Insurer rejects the claim,
(d) on commencement of court proceedings.
7. If a reinsurer suspects that there has been misrepresentation on the part of the reinsured, what should the reinsurer do first in order
to protect his legal position?
(a) request further information and documentation from the reinsured,
(b) express a full, written reservation of rights to the reinsured,
(c) perform a detailed inspection of the reinsureds records,
(d) instruct outside counsel to investigate.
8. The purpose of an honourable engagement clause is to:
(a) permit any disputes between the parties to be determined by arbitrators whose decision will not be in accordance with the
strict rules of law,
(b) permit any dispute to be determined by litigation applying the strict rules of law,
(c) permit any disputes to be determined by litigation applying market principles.
9. According to the ARIAS Rules, the general rule for the Tribunal is that there should be:

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(a) 1 arbitrator with 5+ years professional experience,


(b) 3 arbitrators, each with 5+ years professional experience,
(c) 3 arbitrators, each with 10+ years professional experience,
(d) 5 arbitrators, each with 10+ years professional experience.

Robert Merkin

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