reinsurance policy contains a
REINSURANCE
Section 97. A contract of reinsurance is one by which
an insurer procures a third person to insure him
against loss and liability by reason of such original
insurance.
It is an agreement between two parties, called the
reinsured and the reinsurer, respectively, whereby the
reinsurer agrees to accept a certain fixed share of the
reinsured’s risk upon terms set out in the agreement.1
§ The original insurer, who, having issued a policy
to an insured to cover a certain risk, desires to
relieve itself of part thereof.
§ Note: It cannot exist without an original
insurance coverage.
§ Reinsurance is required by law in certain cases.2
Nature (99)
A reinsurance is presumed to be a contract of indemnity
against liability, and not merely against damage.
§ The peril insured against is the risk that the
insurer will suffer a loss when it will be required
to pay the original insured.
§ The risk of damage to the property insured by
the insurer (reinsured) is not assumed by the
reinsurer although the same damage triggers the
liability of the reinsurer.
§ In reinsurance, the insurer agrees to indemnify
the insurer, not against actual payment made but
against liabilities incurred. THEREFORE, it is by
no means necessary that the insurer shall first
have paid a loss accruing, as a condition
precedent to his demanding payment of the
reinsurer.
PARTIES
1. Original insurer – reinsured; also called the
ceding company or direct-writing company
2. Reinsurer
§ No privity between original insured and
reinsurer (100). To wit: The original insured has
no interest in a contract of reinsurance. Thus,
the original insured cannot file an action to
recover from the reinsurer even if he has
difficulty in recovering from the original insurer.
o The insured, unless the contract so
provides, has no concern with the
contract of reinsurance, and the
reinsurer is NOT liable to the insured
either as surety or otherwise.
o The original insured may be allowed to
directly sue the reinsurer if the
1
According to De Leon: It is a contract whereby one
party, the reinsurer, agrees to indemnify another, the
reinsured, either in whole or in part, against loss or liability
which the latter may sustain or incur under a separate
and original contract of insurance with a third party, the
original insured.
2
Section 221, par. 1, Insurance Code.
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stipulation pour atrui3 in favor of the
original insured.
§ Direct recourse against reinsurer. The original
insured’s right to sue the original insurer
(reinsurer) directly and solely would NOT be
affected or curtailed in any way, without
prejudice to the insurer in turn filing a third party
complaint against the insurer.
§ Since the basis of the policy of reinsurance is the
original policy, the reinsurer is NOT liable to the
original insured or for an amount more than the
sum actually paid to the insured.
§ Reinsurer NOT a party in an action against
the insurer. Since the reinsurer is NOT a party
to the original insurance contract, the reinsurer
CANNOT intervene as matter of right.
§ Assignment. The original insured may likewise
directly sue the reinsurer if the insurer-reinsured
assigns the proceeds of the reinsurance policies
to the original insured.
REASON BEHIND REINSURANCE
The primary function of reinsurance is to absorb those
surplus amounts on each risk accepted by the reinsured
which go beyond what it can safely retain for its own
account.4
I. From the standpoint of the insurer – When an
insurer finds that a single risk is so great
that the happening of the peril insured
against would render him insolvent, or
seriously cripple his efficiency, it is
customary for him to reinsure such risk, or a
portion thereof with one or more insurers.
II. From the standpoint of the insuring public –
Contracts or treaties of reinsurance are
plainly beneficial to the public, inasmuch as
they promote both efficiency and stability in
the conduct of the insurance business.
III. From the standpoint of the insured –
a. It gives insurance companies that
practice of greater financial stability and
thus makes the insured’s individual
policy more reliable.
b. If a large amount of insurance is
needed, the insured may obtain it
without negotiating with numerous
companies.
c. It enables the insured to obtain
protection promptly, without the delay
that would be required to divide and
distribute the amount among many
companies.
3
Article 1311 (2): If a contract should contain some
stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to
the obligor before its revocation. A mere incidental benefit
or interest of a person is not sufficient. The contracting
parties must have clearly and deliberately conferred a
favor upon a third person.
4
Reinsurance is a method whereby an original insurer
distributes its risk by giving off the whole or some portion
thereof to another insurer, with the object of reducing the
amount of its possible loss.
1
 d. All the insurance can be written under a. Quota-share Treaty – the insurer and
identical contract provisions, whereas the reinsurer agree to share losses and
otherwise these might vary with the premiums based on some proportion.
different companies among whom the b. Surplus-share Treaty – the reinsurer
insurance is divided. accepts in excess of the ceding
e. Small companies are encouraged to company’s retention limit up to a
divide large exposures for safety and maximum amount.
enabled to accept a wide variety of c. Excess-of-Loss Treaty – losses in
applicants. excess of the retention limit are paid by
the reinsurer up to some maximum
DOUBLE INSURANCE REINSURANCE limit. This is often used for catastrophic
Insurer remains in such Insurer becomes an loss.
capacity only. insured (reinsured) in the d. Reinsurance Pool – an organization of
reinsurance policy. insurer that underwriter reinsurance on
There is only one insured. There are two separate a joint basis.
insured.
The subject matter is the The subject matter is the Advantage: Avoidance of delay in its issuance.
property insured. liability of the insured.
The same interest is Involves separate interests. NOTES:
insured. § Like all types of insurance contracts, the
Same peril is insured Different perils are insured presence of insurable interest is indispensable in
against in separate against separate policies. reinsurance. The requirement of insurable
policies. interest is complied with by the fact that the
reinsured has issued the original policy and
REINSURANCE CO-INSURANCE accepted liability to its original insured.
§ The reinsurer is obligated to pay the insurer or
Two separate contracts are There is only one contract.
ceding company the moment the latter is
involved.
exposed to liability.
The liability is fixed in a The obligation on the part
§ Measure of Liability. The extent of liability of
separate contract between of the insured is fixed by
the reinsurer is measured by the extent of liability
different parties. law or in a clause
of the reinsured under the original policy and the
stipulated upon.
amount of the reinsurance.
The insured will not The insured will share in
shoulder part of the loss the loss contemplated by
DUTY TO DISCLOSE (98)
contemplated by the the original contract.
reinsurance contract.
Not mandated by law in Co-insurance is provided Where an insurer obtains reinsurance, except under
marine insurance. by law in marine insurance. automatic reinsurance treaties, he must
communicate all the representations of the original
KINDS insured, and also all the knowledge and information
1. FACULTATIVE 5 – an optional, case-by-case he possesses, whether previously or subsequently
method used when the ceding company receives acquired, which are material to the risk.
an application for insurance.
Notes:
§ The reinsurer is NOT obligated to These obligations arise from the fact that reinsurance is
accept the insurance. also a contract uberrimae fidae.
§ This is NOT equivalent to a facultative
obligation under Art. 1206, CC. There is FACULTATIVE TREATY (Automatic)
NO alternative nor substitute prestation
The insurer in this kind of The reinsurer will NO
in reinsurance.
reinsurance must longer decide WON to
§ The advantage: receives the insurer’s
communicate: accept the insurance.
underwriting opinion before the policy
1. Representations of Hence, representations
is issued.
the original insured or other information need
2. AUTOMATIC – involves a PRIOR agreement
2. Knowledge and not be disclosed by the
between the insurer and the reinsurer that the
information he insurer because the
reinsurer is compelled to accept what is being
possesses whether reinsurer is compelled to
ceded by the insurer.
previously or accept what is being
subsequently ceded.
acquired.

5
The right of the reinsurer to accept or not to accept BORDEREAU
participation in the risk insured. BUT once the share is A form in which the policy form shows loss history and
accepted, the obligation is absolute and the liability premium history with respect to specific risks. The
reinsurer uses this information to establish the
assumed thereunder can be discharged by one and only
way – payment of the share of the losses. reinsurance premium.

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CANCELLATION
Reinsurance policies may be cancelled on the same
grounds as ordinary insurance policies.
§ NOTE: Cancellation of the reinsurance treaty
does not automatically result in the cancellation
of the reinsurance contracts entered into
pursuant thereto.

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